Download mango motors - NICKFESSLER.com HOME

ON THE FIRST DAY OF CLASS?
What is accounting?
What is an accountant?
What is accounting used for?
DESIGNATED DOODLE ZONE
Cost Handy Handbook
Page - 1 -
McGraw Second Edition
ON THE FIRST DAY OF CLASS?
How management accounting is different than
financial accounting, tax, or audit ???
Don’t be afraid to take a big step if one is indicated. You can’t cross a chasm in two small jumps.
DAVID LLOYD GEORGE (1863—1945), Statesman
Revenge is often like biting a dog because the dog bit you.
AUSTIN O’MALLEY (1858—1932), Physician and humorist
Cost Handy Handbook
Page - 2 -
McGraw Second Edition
ON THE FIRST DAY OF CLASS?
About Debits and Credits …
Choose always the way that seems best, however rough it may be; custom will soon render it easy and
agreeable.
PYTHAGORAS (c. 580—c. 500 B.C.), Philosopher and mathematician
DESIGNATED DOODLE ZONE
Cost Handy Handbook
Page - 3 -
McGraw Second Edition
ON THE FIRST DAY OF CLASS?
More Handy INFORMATION:
Management accounting information is unique in its ability to influence future decisions:
Budgets / forecasts
/ outlooks
Daily, weekly, monthly
operations
Cost models
Project funding
Product costs
Pricing decisions, CVP,
sales, production,
inventory, etc.
Differences between Financial and Managerial Accounting:
FINANCIAL
Measures value
Summarizes past
Audience outside organization –
stockholders, banks, etc.
Objective and verifiable
(so it can be audited)
Precision
Summarized data for organization
GAAP
Mandatory
MANAGERIAL
Adds value
Emphasis on future decisions
Audience inside organization –
managers
Relevance and flexibility
Timeliness
Detail!
No GAAP
Not mandatory
The most beautiful thing in the world is the conjunction of learning and inspiration.
WANDA LANDOWSKI (1879—1959), Musician
Shun idleness. It is a rust that attaches itself to the most brilliant of metals.
VOLTAIRE [François-Marie Arouet] (1694—1778), Humorist
“On with the dance, let joy be unconfined” is my motto, whether there’s any dance to dance or any joy to
unconfine.
MARK TWAIN [Samuel L. Clemens] (1835—1910), Humorist
The two powers which in my opinion constitute a wise man are those of bearing and forbearing.
EPICLETUS (c. 55—135), Philosopher
Cost Handy Handbook
Page - 4 -
McGraw Second Edition
On The First Day of Class?
Do This At Home:
1. Find the Institute of Management Accountants website.
2. On the website, find the document The Rights and Responsibilities of a Certified
Management Accountant (I found it on the page entitled After I Pass the Exams).
3. On this document, find the [four] standards of ethical conduct (this is really the
information you are after, and you might find it elsewhere on the site).
Place/copy/write that information here.
Cost Handy Handbook
Page - 5 -
McGraw Second Edition
ON THE FIRST DAY OF CLASS?
Nothing is particularly hard if you divide it into small jobs.
HENRY FORD (1863—1947), Founder of the Ford Motor Company
REVIEW / SELF-QUIZ
Do you know the answers to these questions??

What are the four Financial Statements?

How do you increase an Asset account?
… a Liability account?
… a Revenue account?
… an Expense account?

What is the Accounting Equation?

How is “profit” calculated (most simply)?

How does Managerial Accounting differ from Financial Accounting, Tax, and
Auditing?
Note:
We may or may not cover all of this material on this day of class, but we
should cover the material before the next exam. So, if we have not covered
this material, be sure to ask about it during the exam review.
Cost Handy Handbook
Page - 6 -
McGraw Second Edition
TERMS AND FLOWS
FOUR TYPES OF COSTS:
Variable Costs (in total & per unit)
Fixed Costs (in total & per unit)
Product Costs
Period Costs
Cost Handy Handbook
Page - 7 -
McGraw Second Edition
TERMS AND FLOWS
Three Categories of Product Costs:



The society that separates its scholars from its warriors will have its thinking done by cowards and
its fighting by fools.
THUCIDIDES (c. 455—c. 400 B.C.), Historian
The bravest are surely those who have the clearest vision of what is before them, glory and danger
alike, and yet notwithstanding, go out to meet it.
THUCIDIDES (c. 455—c. 400 B.C.), Historian
Cost Handy Handbook
Page - 8 -
McGraw Second Edition
TERMS AND FLOWS
Combinations of Product Costs:

Prime Costs

Conversion Costs
Youth is the best time to be rich and the best time to be poor.
EURIPIDES (c. 485—406 B.C.), Playwright
DESIGNATED DOODLE ZONE
Cost Handy Handbook
Page - 9 -
McGraw Second Edition
TERMS AND FLOWS
What is the most simple calculation of PROFIT (aka Income)?
Be not solitary, be not idle.
ROBERT BURTON (1577—1640), Cleric and scholar
If things are not going well with you, begin your effort at correcting the situation by carefully
examining the service you are rendering, and especially the spirit in which you are rendering it.
ROGER BABSON (1875—1967), Statistician
DESIGNATED DOODLE ZONE
Cost Handy Handbook
Page - 10 -
McGraw Second Edition
TERMS AND FLOWS
[Name of Company]
Absorption Costing Income Statement
[ ______________________________ ]
[Name of Company]
Variable Costing Income Statement
[ ______________________________ ]
[Name of Company]
Balance Sheet
[ ______________________________ ]
Cost Handy Handbook
Page - 11 -
McGraw Second Edition
TERMS AND FLOWS
The only way to get ride of a temptation
Is to yield to it.
OSCAR WILDE (1854—1900)
In the End, we will remember not the words of
our enemies, but the silence of our friends.
MARTIN LUTHER KING JR. (1929—1968)
You will soon break the bow if you
Keep it always stretched.
PHAEDRUS (c. 15 B.C. – 50 A.D.),
Fabulist
NOTE TO “SELF”!
See problem: ____________________________
On page _________ of the Handy Handouts
For an example of t-accounts and cost flows.
A certain amount of opposition is a great help to a person. Kites rise against, not with the wind.
JOHN NEAL (1793—1870), Writer
Cost Handy Handbook
Page - 12 -
McGraw Second Edition
Let’s Take Notes ... TERMS AND FLOWS
REVIEW / SELF-QUIZ
Do you know the answers to these questions??


What are Fixed Costs?
… Variable Costs?


What are Product Costs?
… Period Costs?


What are Prime Costs?
… Conversion Costs?



What is Revenue? Expense? Profit?
What is the Absorption Costing Income Statement format?
What is the Variable Costing Income Statement format?


What is Cost of Goods Manufactured?
What is Cost of Goods Sold?


What are the t-accounts down the left side?
What is true of all of them?


What are the t-accounts across the top?
What is true of all of them?



What are the t-accounts down the right side?
What is true of all of them?
What kind of account is COGS? I/S? DM? WIP? DL? MOH?


What phrase appears at the top of every Income Statement? Why?
… every Balance Sheet? Why?
Note:
We may or may not cover all of this material on this day of class, but we
should cover the material before the next exam. So, if we have not covered
this material, be sure to ask about it during the exam review.
Cost Handy Handbook
Page - 13 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 14 -
McGraw Second Edition
MANGO MOTORS
(Variable and Fixed Costs)
Mango Motors has incurred the following expenses during the 1996 calendar year.
Sales revenue
Fixed manufacturing costs
Fixed selling and administrative costs
Variable manufacturing costs
Variable selling and administrative costs
$810,000
60,000
50,000
540,000
67,500
Required:
Calculate net income using both the absorption costing and the variable costing income statement formats.
Cost Handy Handbook
Page - 15 -
McGraw Second Edition
SOMUCH STEREOS
(Variable and Fixed Costs)
As the chief financial officer of SoMuch Stereos, headquartered in Timbuktoo, Tennessee, you have
summarized the financial information for the fiscal year ending February 2000.
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Variable selling expense
Fixed selling expense
Fixed administrative expense
Sales revenue
$22,000
14,000
9,000
10,000
5,000
16,000
14,000
89,000
Required:
The CEO has asked you to provide her with income statements using both the absorption costing format and the
variable costing format.
Cost Handy Handbook
Page - 16 -
McGraw Second Edition
BOJANGLE DANCE SHOES
(Variable and Fixed Costs)
A partial list of sales and cost data is presented below for the Bojangle Dance Shoes Co. for the calendar year
2002.
Sales (18,000 units)
Manufacturing costs:
Prime costs
Variable MOH
Budgeted and actual fixed MOH
Operating expenses:
Variable selling expense
Fixed selling expense
Fixed administrative
$630,000
$252,000
84,000
100,000
54,000
45,000
90,000
Required:
Calculate Bojangle’s cost of goods sold, contribution margin, and net income using both the absorption costing
format and the variable costing format.
Cost Handy Handbook
Page - 17 -
McGraw Second Edition
MULESKINNER ATHETIC WEAR
(Cost Flows)
Below are summarized financial data of the Muleskinner Athletic Wear for the calendar year 2004.
Sales revenue
Raw material (beginning inventory)
Raw material (ending inventory)
Work in process (beginning inventory)
Work in process (ending inventory)
Finished goods (beginning inventory)
Finished goods (ending inventory)
Raw materials purchased
$940,000
60,000
70,000
120,000
115,000
150,000
165,000
250,000
Indirect material
Indirect labor
Depreciation on plant and equipment
Factory utilities
Other factory costs
Selling and administrative expenses
Direct labor
Raw materials requisitioned
$ 10,000
25,000
100,000
35,000
30,000
110,000
405,000
240,000
Required:
Calculate cost of goods manufactured, cost of good sold, and net income.
Cost Handy Handbook
Page - 18 -
McGraw Second Edition
MULESKINNER ATHETIC WEAR, INC.
Calculations …
Cost Handy Handbook
Page - 19 -
McGraw Second Edition
CATTLE COMPANY
(Cost Flows)
Below are summarized financial data of the Cattle Company for two consecutive years.
Administrative expenses
Beginning finished goods
Beginning work in process
Beginning direct materials
Sales
Ending finished goods
Ending work in process
Ending direct materials
Cost of goods manufactured
Direct materials requisitioned
Direct labor
Indirect materials
All other manufacturing overhead costs
1997
$135,000
45,000
71,000
96,000
566,000
445,000
190,000
130,000
15,000
104,000
1998
$161,000
82,000
65,000
108,000
812,000
69,000
84,000
102,000
562,000
235,000
170,000
18,000
158,000
Required:
a. Use T-accounts to show the flow of costs and revenues.
b. Prepare income statements for both years.
Cost Handy Handbook
Page - 20 -
McGraw Second Edition
CATTLE COMPANY
Calculations (1997) ...
Cost Handy Handbook
Page - 21 -
McGraw Second Edition
CATTLE COMPANY
Calculations (1998) ...
Cost Handy Handbook
Page - 22 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 23 -
McGraw Second Edition
JUDGE ELY JEANS
(Cost Flows)
The December 31, 1999 ledger account balances are presented below for Judge Ely Jeans. Beginning
inventories on January 1, 1999 were $37,600 for finished goods inventory, $49,600 for work in process
inventory, and $29,500 for direct materials inventory.
Sales
Insurance on production inventories
Factory supervision
Indirect materials
Office equipment depreciation
Utilities (60 percent factory)
Delivery expense for finished products
Direct labor
Direct materials purchased
Office fire insurance
Finished goods inventory
Indirect labor
Administrative and marketing salaries
Factory property tax
Advertising
Production equipment lease cost
Work in process inventory
Direct materials inventory
$715,200
7,200
44,800
4,800
7,200
36,000
4,000
118,400
98,400
2,640
52,000
10,400
123,200
15,200
15,300
35,200
62,400
32,300
Required:
Calculate cost of goods manufactured, cost of good sold, and net income.
Cost Handy Handbook
Page - 24 -
McGraw Second Edition
JUDGE ELY JEANS
Calculations ...
Cost Handy Handbook
Page - 25 -
McGraw Second Edition
SLEEP WARM, INC.
(Cost Flows)
The following data is available for Sleep Warm, Inc. for the month of August:
Beginning of August:
Direct Materials inventory
Work in Process inventory
Finished Goods inventory
$18,500
$12,000
$10,200
During August:
Direct Labor cost
Direct Materials purchases
Total Overhead cost
Sales Revenue
Selling & Admin. Exp.
$40,500
$80,000
$105,750
$400,000
$100,000
End of August:
Direct Materials inventory
Work in Process inventory
Finished Goods inventory
$16,800
$23,500
$9,100
Required:
Calculate the cost of goods manufactured, the cost of goods sold, and net income for Sleepwell, Inc. in August.
Cost Handy Handbook
Page - 26 -
McGraw Second Edition
SLEEP WARM, INC.
Calculations ...
Cost Handy Handbook
Page - 27 -
McGraw Second Edition
TRABER COMPANY
(Cost Flows)
The following data pertain to Traber Company for the year ended December 31, 2004.
December 31. 2003
Purchases of direct materials
Direct labor
Indirect labor
Factory Insurance
Depreciation—Factory
Repairs and maintenance—Factory
Marketing expenses
General and administrative expenses
Direct materials inventory
Work-in-process inventory
Finished goods inventory
$25,000
41,250
28,750
December 31, 2004
$75,000
56,250
31,250
15,000
100,000
18,750
82,500
68,750
43,750
43,750
25,000
Sales in 2004 were $625,000.
Required:
Prepare a schedule of cost of goods manufactured and a statement of net income (in good form) for the year
ended December 31, 2004.
Helpful Hint:
First prepare the calculations using t-accounts, and then prepare the required schedules using the information
from the t-accounts. Please turn in all your work (t-accounts and statements).
Cost Handy Handbook
Page - 28 -
McGraw Second Edition
TRABER COMPANY
Calculations…
Cost Handy Handbook
Page - 29 -
McGraw Second Edition
TRABER COMPANY
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 2004
Direct materials used:
Direct materials inventory, 1-1-2004
$
Add: Purchases of direct materials
____________
Total materials available
$
Deduct: Direct materials inventory, 12-31-2004
(___________)
Direct materials used in production
$
Direct labor
$
Manufacturing overhead

$



____________
Total manufacturing costs incurred
$___________
$
Add: Beginning work in process inventory
____________
$
Deduct: Ending work in process inventory
(___________)
Cost of Goods Manufactured
$
Cost Handy Handbook
Page - 30 -
.
McGraw Second Edition
TRABER COMPANY
Income Statement
For the Year Ended December 31, 2004
Sales
$
Cost of Goods Sold
Finished Goods Inventory, Beginning
Cost of Goods Manufactured
Total Goods Available for Sale
Finished Goods Inventory, Ending
$
____________
$
____________
Less: Cost of Goods Sold
(___________)
Gross Margin
$
Less: Selling and administrative expenses:

$

____________
Total Selling & Administrative Expenses
(___________)
Net Income
$
Cost Handy Handbook
Page - 31 -
.
McGraw Second Edition
HANNIBAL COMPANY
(Cost Flows)
The following information is available for Hannibal Company:
Raw materials purchased
Raw materials inventory, 1-1-1993
Raw materials inventory, 12-31-1993
Direct labor
Indirect labor
Factory rent
Depreciation, factory equipment
Factory utilities
Sales salaries
Sales commissions
Administrative costs
Sales revenue
Work in process inventory, 1-1-1993
Work in process inventory, 12-31-1993
Finished goods inventory, 1-1-1993
Finished goods inventory, 12-31-1993
$160,000
$23,400
$33,400
$100,000
$20,000
$21,000
$30,000
$5,978
$55,000
$38,000
$61,000
$600,000
$6,520
$7,498
$40,000
$57,050
Required:
Calculate the cost of goods manufactured, cost of goods sold, and net income for Hannibal Co.
Cost Handy Handbook
Page - 32 -
McGraw Second Edition
HANNIBAL COMPANY
Calculations ...
Cost Handy Handbook
Page - 33 -
McGraw Second Edition
BOB’S BEEF BOY
(Cost Flows)
Bob, the owner and sole proprietor of Bob’s Beef Boy, sells hamburgers for carry out or drive through only.
The restaurant is known for the high quality of the meat used in the burgers, and for the kaiser roll used in place
of the normal hamburger bun.
Each Hamburger sells for $3.99. Bob employs several part-time employees and a full-time manager. He leases
the building and hires a cleaning company to provide services on a weekly basis. The manager, who is paid a
monthly salary, carries out all administrative functions such as hiring, scheduling, and counting cash. Bob
purchases the ingredients needed to make hamburgers on a weekly basis to ensure its freshness; thus, there were
no inventory balances at the beginning or the end of the year.
During the year 1997 the following expenses were incurred:
Ground meat
Lettuce
Tomatoes
Kaiser rolls
Condiments
Part-time labor, cooks
Part-time labor, servers
Wrapping paper and bags
$54,000 (No accusations here about “Where’s the beef!?”)
6,750
Manager’s salary
$41,000
7,500
Utilities
22,500
9,250
Depreciation, grill
7,000
2,650
Depreciation, signs
3,250
66,400
Advertising
3,500
53,000
Rent
25,000
2,400
Cleaning services
6,800
Bob’s restaurant sold 120,000 hamburgers during 1997.
Required:
1. Classify each cost as being a product cost (specify either direct materials, direct labor, or manufacturing
overhead) or as being a period cost.
2. Use T-accounts to show the flow of costs and revenues for Bob’s Beef Boy.
3. Prepare an income statement for the year.
Cost Handy Handbook
Page - 34 -
McGraw Second Edition
BOB’S BEEF BOY
Calculations ...
Cost Handy Handbook
Page - 35 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 36 -
McGraw Second Edition
BILLY’S BOAT BONANZA, INC.
(Classifying Costs)
Billy’s Boat Bonanza, Inc. assembles custom sailboats from components supplied by various manufactures. The
company is very small and its assembly shop and retail sales store are housed in a Gig Harbor, Washington,
boathouse. Below are listed some of the costs that are incurred at the company.
Required:
For each cost, indicate whether it would most likely be classified as direct labor, direct materials, manufacturing
overhead, marketing and selling, or an administrative cost by placing an X in the appropriate box.
Direct
Labor
Direct
Materials
Mfg.
Overhead
Marketing
& Selling
Admin.
Cost
1. The wages of employees who
build the sailboats.
2. The cost of advertising in the
local newspapers.
3. The cost of an aluminum mast
installed in a sailboat.
4. The wages of the assembly
shop’s supervisor.
5. Rent on the boathouse.
6. The wages of the company’s
bookkeeper.
7. Sales commissions paid to the
company’s salespeople.
8. Depreciation on power tools.
Cost Handy Handbook
Page - 37 -
McGraw Second Edition
DUNCAN’S AVIONICS
(Classifying Costs)
Suppose that you have been given a summer job at Duncan’s Avionics, a company that manufacturers
sophisticated radar sets for commercial aircraft. The company, which is privately owned, has approached a bank
for a loan to help finance its tremendous growth. The bank requires financial statements before approving such
a loan. You have been asked to help prepare the financial statements and were given a list of costs.
Required:
Classify the following costs as either product (inventoriable) costs or period (noninventoriable) costs for
purposes of preparing the financial statements for the bank by placing an X in the appropriate box.
Product
Period
1. The cost of the memory chips used in a radar set.
2. Factory heating costs.
3. Factory equipment maintenance costs.
4. Training costs for new administrative employees.
5. The cost of the solder that is used in assembling the radar
sets.
6. The travel costs of the company’s salespersons.
7. Wages and salaries of factory security personnel.
8. The cost of air-conditioning executive offices.
9. Wages and salaries in the department that handles billing
customers.
10. Depreciation on the equipment in the fitness room used by
factory workers.
11. Telephone expenses incurred by factory management.
12. The costs of shipping completed radar sets to customers.
13. The wages of the workers who assemble the radar sets.
14. The president’s salary.
15. Health insurance premiums for factory personnel.
Cost Handy Handbook
Page - 38 -
McGraw Second Edition
GLOBAL, INC.
(Classifying Costs)
Below are a number of costs that are incurred by Global, Inc., a corporation involved in several industries.
Required:
In the following table, place an X in the appropriate column for each cost to indicate whether the cost involved
would be variable or fixed with respect to the goods and services produced by the organization.
Cost Behavior
Cost
1. Small glass plates used for lab tests in a hospital.
Variable
Fixed
2. Straight-line depreciation of a building.
3. Top-management salaries.
4. Electrical costs of running machines.
5. Advertising of products and services.
6. Batteries used in manufacturing trucks.
7. Commissions to salespersons.
8. Insurance on a dentist’s office.
9. Leather used in manufacturing footballs.
10. Rent on a medical center.
Cost Handy Handbook
Page - 39 -
McGraw Second Edition
MOORE COMPUTERS
(Variable and Fixed Costs)
A partial list of sales and cost data is presented below for the Moore Computers for the calendar year 2003.
Sales
Direct materials (Used)
Direct labor
Indirect labor (Fixed)
Factory insurance (Fixed)
Depreciation—Factory
Repairs and maintenance—Factory (Variable)
Marketing expenses (Variable)
General and administrative expenses (Fixed)
$500,000
$60,000
$45,000
$25,000
$12,000
$80,000
$15,000
$66,000
$55,000
Required:
Calculate Moore Computer’s net income using both the absorption costing format and the variable costing
format.
Cost Handy Handbook
Page - 40 -
McGraw Second Edition
MOORE COMPUTERS
Calculations…
Cost Handy Handbook
Page - 41 -
McGraw Second Edition
PACIFIC COAST HOME FURNISHINGS
(Cost Flows)
Consider the following information for Pacific Coast Home Furnishings for the year ended December 31, 2006:
Depreciation expense—Administrative office
Depreciation expense—Plant and equipment
Direct labor—Wages
Direct materials inventory, Dec. 31, 2006
Direct materials inventory, Jan. 1, 2006
Direct materials purchases
Finished goods inventory, Dec 31, 2006
Finished goods inventory, Jan. 1, 2006
Heat, light, & power—Plant
Indirect labor
Property taxes—Plant
Sales representatives’ salaries
Sales revenue
Factory Supervisor’s salary
Supplies—Administrative office
Supplies—Plant
Work-in-Process inventory, Dec. 31, 2006
Work-in-Process inventory, Jan. 1, 2006
$42,900
$114,400
$633,100
$32,500
$23,400
$201,500
$49,400
$19,500
$57,200
$32,500
$44,200
$188,500
$1,950,000
$85,800
$20,800
$37,700
$11,700
$29,900
Required:
Prepare a schedule of cost of goods manufactured and a statement of net income (in good form) for the year
ended December 31, 2006.
Helpful Hint:
First prepare the calculations using t-accounts, and then prepare the required schedules using the information
from the t-accounts. Please turn in all your work (t-accounts and statements).
Cost Handy Handbook
Page - 42 -
McGraw Second Edition
PACIFIC COAST HOME FURNISHINGS
Calculations…
Cost Handy Handbook
Page - 43 -
McGraw Second Edition
PACIFIC COAST HOME FURNISHINGS
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 2006
Direct materials used:
Direct materials inventory, 1-1-2006
$
Add: Purchases of direct materials
____________
Total materials available
$
Deduct: Direct materials inventory, 12-31-2006
(___________)
Direct materials used in production
$
Direct labor
$
Manufacturing overhead

$





____________
Total factory overhead
$___________
Total manufacturing costs incurred
$
Add: Beginning work in process inventory
____________
Total manufacturing costs to account for
$
Deduct: Ending work in process inventory
(___________)
Cost of Goods Manufactured
$
Cost Handy Handbook
Page - 44 -
.
McGraw Second Edition
PACFIC COAST HOME FURNISHINGS
Income Statement
For the Year Ended December 31, 2006
Sales
$
Cost of Goods Sold
Finished Goods Inventory, Beginning
Cost of Goods Manufactured
Total Goods Available for Sale
Finished Goods Inventory, Ending
$
____________
$
____________
Less: Cost of Goods Sold
(___________)
Gross Margin
$
Less: Selling and administrative expenses:

$


____________
Total Selling & Administrative Expenses
(___________)
Net Income
$
Cost Handy Handbook
Page - 45 -
.
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 46 -
McGraw Second Edition
BREAKEVEN (C-V-P)
What is the GOAL of any business?
How does a business accomplish this GOAL?
C-V-P analysis seeks the most profitable combination of …
Love itself is love’ chief nourishment.
SEXTUS PROPERTIUS (c. 50—16 B.C.), Poet
Cost Handy Handbook
Page - 47 -
McGraw Second Edition
BREAKEVEN (C-V-P)
How do costs behave … In Total
How do costs behave … Per Unit
Cost Handy Handbook
Page - 48 -
McGraw Second Edition
BREAKEVEN (C-V-P)
The Relevance of the Relevant Range
DESIGNATED DOODLE ZONE
There will always be a conflict between “good” and “good enough”.
HENRY MARTYN LELAND (1843—1932), Engineer
Cost Handy Handbook
Page - 49 -
McGraw Second Edition
BREAKEVEN (C-V-P)
What kind of Cost is this?
Chance favours only those who know how to court her.
CHARLES NICHOLLE (1866—1936), Physician and Scientist
Cost Handy Handbook
Page - 50 -
McGraw Second Edition
BREAKEVEN (C-V-P)
Variable Costing information is necessary for breakeven calculations!
Variable Costing Income Statement:
VC Ratio =
CM Ratio =
Do the common thing in an uncommon way.
BOOKER T. WASHINGTON (1856—1943), Educator
Cost Handy Handbook
Page - 51 -
McGraw Second Edition
BREAKEVEN (C-V-P)
C-V-P Intuition:
Cost Handy Handbook
Page - 52 -
McGraw Second Edition
BREAKEVEN (C-V-P)
Let us think about this a little more!
What is the effect on Breakeven of …
1. A change in _________________________ ?
2. A change in _________________________ ?
3. A change in _________________________ ?
DESIGNATED DOODLE ZONE
Every creative act of ours in relation to other people—an act of love, of help, of peacemaking—not
merely has a future, but is eternal.
NIKOLAY BERDYAYEV (1874—1948), Philosopher
Cost Handy Handbook
Page - 53 -
McGraw Second Edition
BREAKEVEN (C-V-P)
Margin of Safety, and more!
Margin of Safety =
A Handful of Handy Formulas:
MS($) = Actual Revenue – Breakeven Revenue
MS Ratio = (Actual Revenue – Breakeven Revenue)
Actual Revenue
________ is GOOD!
Operating Leverage = Contribution Margin / Profit
MS Ratio = 1 / Operating Leverage
DESIGNATED DOODLE ZONE
You have your way. I have my way. As for the right way, the correct way, and the only way, it does
not exist.
FRIEDRICH NIETZCHE (1844—1900), Philosopher
Cost Handy Handbook
Page - 54 -
McGraw Second Edition
BREAKEVEN (C-V-P)
The Effect of Taxes …
When including desired profit in a “breakeven” calculation,
is this desired profit before/after tax??
A Handy of Formula:
NIBT = NIAT .
(1 – Tax Rate)
DESIGNATED DOODLE ZONE
When we have done our best, we may await the result without anxiety.
JOHN BULLOCK (1834—1913), Financier and naturalist
Cost Handy Handbook
Page - 55 -
McGraw Second Edition
BREAKEVEN (C-V-P)
Multi-Product Breakeven
NOTE TO “SELF”!
[Cost Acccounting Students Only]
See problem: ____________________________
On page _________ of the Handy Handouts
For an example of multi-product breakeven.
My mother read me bedtime stories until I was six years old. It was a sneak attack on her part. As
soon as I really got to like the stories, she said, “Here’s the book, now you read.”
OCTAVIA BUTLER (1947—2006), Novelist
When [my mother] was dying, talking to me, she said: “Always try to be kind and nice to people. And if
you do that, somebody will always speak up for you.” And I’ve found that to be a fact. They really do.
B. B. KING, Musician
Cost Handy Handbook
Page - 56 -
McGraw Second Edition
BREAKEVEN (C-V-P)
What would you describe as the theme of these quotes?
The harder you work, the harder it is to surrender.
VINCE LOMBARDI
I pray hard, work hard, and leave the rest to God.
FLORENCE GRIFFITH JOYNER
Work is a good word. When we work hard at something we enjoy and feel good about it, we feel good
about ourselves again and again and again.
MIKE KRZYZEWSKI
Work Hard. There is no short cut.
ALFRED P. SLOAN, JR. (1875-1966), Business leader and philanthropist
Nothing will work unless you do.
JOHN WOODEN
The road to happiness lies in two simple principles: find what it is that interests you and that you can
do well, and when you find it, put your whole soul into it, every bit of energy and ambition and natural
ability you have.
JOHN D. ROCKEFELLER, III
If the power to do hard work is not talent, it is the best possible substitute for it.
JAMES A. GARFIELD
Cost Handy Handbook
Page - 57 -
McGraw Second Edition
BREAKEVEN (C-V-P)
REVIEW / SELF-QUIZ
Do you know the answers to these questions??





Can you draw a graph of Fixed Costs in total?
… Fixed Costs per unit?
… Variable Costs in total?
… Variable Costs per unit?
… Mixed Costs in total?

What formula can we use to draw a line in XY space?

What is the Variable Costing income statement format?






How does one calculate the VC Ratio in total?
… per unit?
How does one calculate the CM Ratio in total?
… per unit?
Does is CM calculated in total?
… per unit?

The following formulas are important:
(why don’t you fill them in here)

BE(units) =

BE($) =

SPU(x) =

TR =

MS($) =

MS Ratio =

NIBT =
Cost Handy Handbook
Page - 58 -
McGraw Second Edition
STONE MONUMENT COMPANY (A)
(Breakeven)
Stone Monument Company is a premier manufacturer of headstones. The following are the estimated costs of
Stone Monument Company.
Variable manufacturing costs
Selling & general variable costs
Total variable costs
The company’s annual fixed costs are:
Manufacturing overhead
Selling & general administrative
Total
$800 per headstone
200 per headstone
$1,000 per headstone
$4,500,000
1,500,000
$6,000,000
The company plans to sell its single product at $2,000 per headstone. Normal capacity of the manufacturing
facility is 20,000 headstones per year.
Required:
1. Determine the breakeven point in units and dollars.
2. What is Stone Monument Co.’s breakeven point as a percentage of normal capacity?
Cost Handy Handbook
Page - 59 -
McGraw Second Edition
STONE MONUMENT COMPANY (B)
(Breakeven)
Stone Monument Company is a premier manufacturer of headstones. The following are the estimated costs of
Stone Monument Company.
Variable manufacturing costs
Selling & general variable costs
Total variable costs
The company’s annual fixed costs are:
Manufacturing overhead
Selling & general administrative
Total
$800 per headstone
200 per headstone
$1,000 per headstone
$4,500,000
1,500,000
$6,000,000
The company plans to sell its single product at $2,000 per headstone. Normal capacity of the manufacturing
facility is 20,000 headstones per year.
Required:
1. How many units must be sold to earn a net income of $1,400,000?
2. What dollar value of sales must be earned to earn a net income of $1,400,000?
Cost Handy Handbook
Page - 60 -
McGraw Second Edition
STONE MONUMENT COMPANY (C)
(Breakeven)
Stone Monument Company is a premier manufacturer of headstones. The following are the estimated costs of
Stone Monument Company.
Variable manufacturing costs
Selling & general variable costs
Total variable costs
The company’s annual fixed costs are:
Manufacturing overhead
Selling & general administrative
Total
$800 per headstone
200 per headstone
$1,000 per headstone
$4,500,000
1,500,000
$6,000,000
The company plans to sell its single product at $2,000 per headstone. Normal capacity of the manufacturing
facility is 20,000 headstones per year.
Required:
1. How many units must be sold to earn a net income of 25 percent of sales?
2. What dollar value of sales must be earned to earn a net income of 25 percent of sales?
Cost Handy Handbook
Page - 61 -
McGraw Second Edition
STONE MONUMENT COMPANY (D)
(Breakeven)
Stone Monument Company is a premier manufacturer of headstones. The following are the estimated costs of
Stone Monument Company.
Variable manufacturing costs
Selling & general variable costs
Total variable costs
The company’s annual fixed costs are:
Manufacturing overhead
Selling & general administrative
Total
$800 per headstone
200 per headstone
$1,000 per headstone
$4,500,000
1,500,000
$6,000,000
The company plans to sell its single product at $2,000 per headstone. Normal capacity of the manufacturing
facility is 20,000 headstones per year.
Required:
1. How many units must be sold to earn a net income of $400 per unit?
2. What dollar value of sales must be earned to earn a net income of $400 per unit?
Cost Handy Handbook
Page - 62 -
McGraw Second Edition
STONE MONUMENT COMPANY (E)
(Breakeven)
Stone Monument Company is a premier manufacturer of headstones. The following are the estimated costs of
Stone Monument Company.
Variable manufacturing costs
Selling & general variable costs
Total variable costs
The company’s annual fixed costs are:
Manufacturing overhead
Selling & general administrative
Total
$800 per headstone
200 per headstone
$1,000 per headstone
$4,500,000
1,500,000
$6,000,000
The company plans to sell its single product at $2,000 per headstone. Normal capacity of the manufacturing
facility is 20,000 headstones per year.
Required:
At what price per unit must the headstones be sold in order for the Stone Monument Company to earn a net
income of $21,000,000?
Cost Handy Handbook
Page - 63 -
McGraw Second Edition
STONE MONUMENT COMPANY (F)
(Breakeven)
Stone Monument Company is a premier manufacturer of headstones. The following are the estimated costs of
Stone Monument Company.
Variable manufacturing costs
Selling & general variable costs
Total variable costs
The company’s annual fixed costs are:
Manufacturing overhead
Selling & general administrative
Total
$800 per headstone
200 per headstone
$1,000 per headstone
$4,500,000
1,500,000
$6,000,000
The company plans to sell its single product at $2,000 per headstone. Normal capacity of the manufacturing
facility is 20,000 headstones per year.
Required:
1. If Stone Monument Company has a “Normal” year, what is the company’s margin of safety?
2. If Stone Monument Company has a “Normal” year, what is the company’s margin of safety ratio?
Cost Handy Handbook
Page - 64 -
McGraw Second Edition
STONE MONUMENT COMPANY (G)
(Breakeven)
Stone Monument Company is a premier manufacturer of headstones. The following are the estimated costs of
Stone Monument Company.
Variable manufacturing costs
Selling & general variable costs
Total variable costs
The company’s annual fixed costs are:
Manufacturing overhead
Selling & general administrative
Total
$800 per headstone
200 per headstone
$1,000 per headstone
$4,500,000
1,500,000
$6,000,000
The company plans to sell its single product at $2,000 per headstone. Normal capacity of the manufacturing
facility is 20,000 headstones per year.
Required:
Net income taxes for Stone Monument Company have been averaging 30 percent and are not expected to
change.
1. How many units must Stone Monument Co. sell to earn an after-tax profit of $1,400,000?
2. What dollar value of sales must Stone Monument Co. earn to earn an after-tax profit of $1,400,000?
Cost Handy Handbook
Page - 65 -
McGraw Second Edition
EAST MEETS WEST COMPANY (A)
(Breakeven)
East Meets West Company plans to start manufacturing a new compass. The firm has been able to determine
that fixed costs are $20,000 per year and the variable cost is $6 per compass. The company expects to set
selling price at $10 per unit.
Required:
1. Determine the breakeven point in units and dollars.
2. If East Meets West Company wants to earn a $15,000 profit on the sale of its compasses, find the
number of units and sales revenue required to achieve this goal.
Cost Handy Handbook
Page - 66 -
McGraw Second Edition
EAST MEETS WEST COMPANY (B)
(Breakeven)
East Meets West Company plans to start manufacturing a new compass. The firm has been able to determine
that fixed costs are $20,000 per year and the variable cost is $6 per compass. The company expects to set
selling price at $10 per unit.
Management has decided that the number calculated in (A) is not realistic. That is, demand for the compasses
is not strong enough and competition is too strong to allow East Meets West Company to sell 8,750 units.
Instead, management wants to determine how many units would be required to achieve a profit of 15 percent of
sales revenue. Notice above that variable cost is 60 percent of selling price and that management wants profit to
be 15 percent of sales revenue.
Required:
Calculate the number of units and the sales revenue necessary to reach management’s goal.
Cost Handy Handbook
Page - 67 -
McGraw Second Edition
EAST MEETS WEST COMPANY (C)
(Breakeven)
East Meets West Company plans to start manufacturing a new compass. The firm has been able to determine
that fixed costs are $20,000 per year and the variable cost is $6 per compass. The company expects to set
selling price at $10 per unit.
East Meets West Company is faced with $.80 per unit increase in labor cost and wants to compensate for this by
decreasing its fixed cost. It decides to give up some rented space and move all of its operations into its own
plant, reducing fixed cost by $2,000. At the same time management believes that increasing the selling price of
each unit by $.40 will not adversely affect demand for its product, and that a target profit of $9,000 can be
maintained.
Required:
If all these changes are incorporated in the analysis, what is the number of units that must be produced and
sold?
Cost Handy Handbook
Page - 68 -
McGraw Second Edition
EAST MEETS WEST COMPANY (D)
(Breakeven)
East Meets West Company plans to start manufacturing a new compass. The firm has been able to determine
that fixed costs are $20,000 per year and the variable cost is $6 per compass. The company expects to set
selling price at $10 per unit.
Income taxes are a percentage of net income. East Meets West is subject to a 30 percent tax rate and
management seeks an after-tax profit of $8,400.
Required:
1. Determine the breakeven point in units and dollars.
2. Determine the unit sales and revenue necessary to earn an after-tax income of $8,400.
Cost Handy Handbook
Page - 69 -
McGraw Second Edition
EAST MEETS WEST COMPANY (E)
(Breakeven)
East Meets West Company plans to start manufacturing a new compass. The firm has been able to determine
that fixed costs are $20,000 per year and the variable cost is $6 per compass. The company expects to set
selling price at $10 per unit.
The company’s managers want to determine the level of operations required to earn a profit of $12,000 before
taxes. They also want to know if it would be more profitable to change the method of operations by automating
part of the compass assembly and eliminating some of the direct labor currently required.
The company faces two alternatives: maintain its current production operations or use the more automated
production process. Selling price of the compass is $10 and East Meets West Company’s management has no
plans to change the price. By changing the production process, the company would incur fixed costs of $27,500
per year and variable costs of $5 per compass.
Required:
Determine which of the two production alternatives is preferable by examining the margin of safety ratio for
both alternatives.
Cost Handy Handbook
Page - 70 -
McGraw Second Edition
SADLY CORPORATION
(Breakeven)
The following data are expected for Sadly Corporation’s in 2003:
Sales price (SP) per unit
Fixed costs (FC)
Contribution margin (CM)
$10
$300,000
50% of sales
Required:
1. Determine the breakeven point in units.
2. Determine the breakeven point in dollars.
Cost Handy Handbook
Page - 71 -
McGraw Second Edition
THE HAT SOURCE
(Breakeven)
The Hat Source operates a chain of women’s hat stores around the country. The stores carry many styles of hats
that are sold at the same price. Sales personnel in the shops are paid a substantial commission on each hat sold
(in addition to a small base salary) in order to encourage them to be aggressive in their sales efforts.
The following cost and revenue data relate to Store 47 in Kansas City and are typical of one of the company’s
many outlets:
Per Hat
$ 30.00
Sales price
Variable expenses:
Invoice cost
Sales commission
Total variable expenses
$ 13.50
4.50
$ 18.00
Annual
Fixed expenses:
Advertising
Rent
Salaries
Total fixed expenses
$ 30,000
20,000
100,000
$150,000
Required:
1. Calculate the annual break-even point in dollar sales and unit sales for Store 47.
2. Suppose the manager of Store 47 wants to make $30,000 of net income. How does this the change the
breakeven calculation?
Cost Handy Handbook
Page - 72 -
McGraw Second Edition
JOLLY ROGER CANDIES
(Breakeven)
The following information is available for Jolly Roger Candies and the Ocean Blue Candy production process.
Price of item
Variable costs
Contribution margin
Total fixed costs
Per Unit
$4
3
$1
$400
Required:
1. How many units must be sold in order to make a profit before taxes of $300?
2. What would the profit before taxes be if the sale volume increased 20% above the breakeven point?
3. If the variable costs (VC) increase to $3.50 per unit, how many units must be sold to make a profit
after taxes of $300 (assume a 40% tax rate).
Cost Handy Handbook
Page - 73 -
McGraw Second Edition
HOWARD'S LIMITED
(Breakeven)
The management of Howard's Ltd. is involved in the preliminary analysis of a potential new product. The
product will sell for $35 per unit and requires variable costs of $20 per unit. Fixed costs are anticipated to be
$30,000 per month.
Required:
Answer each of the following independent questions:
1. What is the breakeven point in units? In dollars?
2. What annual dollar sales volume would be needed to earn $510,000 before taxes?
3. What is the margin of safety ratio for question 2?
4. How many units must be sold each month to earn an annual after tax profit of $864,000? The tax rate is
40%.
Cost Handy Handbook
Page - 74 -
McGraw Second Edition
CLEAR TOYS
(Breakeven)
Clear Toys is preparing next year's budget for one of their stores. The store has a contribution margin ratio of
60% and its fixed costs are $18,000.
Required:
(Treat each part separately)
1. If sales increase by $12,000 above the breakeven point, how much will income increase?
2. If the advertising budget is increased by $6,000, it is estimated that sales will increase by $9,000. Should the
additional advertising be purchased?
3. If salaries are increased by $3,000, how much must sales be increased to cover the increased cost?
4. It is estimated that sales will increase from 12,000 to 18,000 units if the unit sales price is reduced from $10
to $8 and advertising is increased by $2,000. Is it profitable to do so?
Cost Handy Handbook
Page - 75 -
McGraw Second Edition
CASSIDY COMPANY
(Breakeven)
Cassidy Company makes a deluxe product CASS for special orders. The following are the actual results of
operations in 1996.
Sales revenue
Direct materials used
Direct labor costs
Variable overhead cost
Contribution margin
Gross margin
Total fixed costs
Fixed overhead
Variable selling and administrative costs
$ 500,000
210,000
140,000
30,000
100,000
70,000
110,000
?
?
Required:
1. Determine the total variable costs of production.
2. Determine the full manufacturing costs for 1996.
3. What is the total variable selling and administrative costs?
4. What is the fixed overhead costs for 1996?
5. Determine the breakeven sales dollars for 1996.
6. What is the operating leverage for 1996?
Cost Handy Handbook
Page - 76 -
McGraw Second Edition
CASSIDY COMPANY
Calculations ...
Cost Handy Handbook
Page - 77 -
McGraw Second Edition
DEERING BANJO COMPANY
(Multiple-Product Breakeven)
Deering Banjo Company manufactures two basic models of banjos: the Boston and the Deluxe. The Deluxe is
Deering's professional model of banjo and uses higher quality materials and is more carefully crafted. More
information on these products is provided below.
Boston
Deluxe
Selling
Price
$1,200
$5,000
Variable
Costs
$700
$2000
Fixed costs of $3,000,000 are incurred annually.
The expected mix of the banjos is 60% Boston and 40% Deluxe.
Required:
1. Calculate breakeven in units for the Deering Banjo Company.
2. Calculate breakeven revenue for the Deering Banjo Company.
Cost Handy Handbook
Page - 78 -
McGraw Second Edition
ALCATRAZ ARTIFACTS
(Multiple-Product Breakeven)
Alcatraz inmates produce three artifacts, the “Al”, the “Cat”, and the “Raz”. More information is provided
below.
Sales in units
Selling price per unit
Variable cost per unit
Total fixed cost
“Al”
2,000
$20
$16
Artifacts
“Cat”
3,000
$50
$36
“Raz”
5,000
$40
$28
Total
10,000
$77,000
Required:
1. Calculate the breakeven point in units and dollars.
2. What is the breakeven point if the sales mix of artifacts “Al” and “Cat” is 40% each, leaving “Raz”
with 20% of total sales?
Cost Handy Handbook
Page - 79 -
McGraw Second Edition
PHONY PHONES COMPANY
(Multiple-Product Breakeven)
Phony Phones Company sells landline telephones. Phony Phones has three products, Corded, 2.4 GHz, and 5.8
GHz. Relevant information for these products are as follows:
Last period’s sales
Percent of sales
Price
Unit variable cost
Contribution margin
Corded
$750,000
50%
$30
24
$ 6
2.4 GHz
$600,000
40%
$32
24
$ 8
Total fixed cost
5.8 GHz
$150,000
10%
$40
36
$ 4
Total
$1,500,000
100%
$165,000
Required:
1. Calculate the breakeven point in units and dollars.
2. What sales level will the store need to reach a target after-tax profit of $59,400? Assume a tax rate of
40%.
Cost Handy Handbook
Page - 80 -
McGraw Second Edition
PHONY PHONES COMPANY
Calculations ...
Cost Handy Handbook
Page - 81 -
McGraw Second Edition
[Based on a homework problem that Dr. Fessler completed as a cost accounting student (CMA, adapted)]
ABTEX ELECTRONICS
(Multiple-Product Breakeven)
Abtex Electronics manufactures two products -- tape recorders and electronic calculators -- and sells
them nationally to wholesalers and retailers. Abtex management is very pleased with the company’s
performance for the current fiscal year. Projected sales through December 31, 1997, indicate that 70,000 tape
recorders and 140,000 electronic calculators will be sold this year. The projected earnings statement, which
appears below, shows that Abtex will exceed its earnings goal of 9% on sales after taxes.
ABTEX ELECTRONICS
Projected Earnings Statement for the Year Ended December 31, 1997
TAPE
ELECTRONIC
RECORDERS
CALCULATORS
Total
Total
Amount
Per
Amount
Per
(000s)
Unit
(000s)
Unit
Sales
$1,050
$15.00
$3,150
$22.50
Production Costs:
Materials
$ 280
$ 4.00
$ 630
$ 4.50
Direct labor
140
2.00
420
3.00
Variable overhead
140
2.00
280
2.00
Fixed overhead
70
1.00
210
1.50
Total prod. costs
$ 630
$ 9.00
$1,540
$11.00
Gross margin
$ 420
$ 6.00
$1,610
$11.50
Fixed selling and admin.
NI before income taxes
Income taxes (55%)
Net income
Total
(000s)
$4,200.0
$ 910.0
560.0
420.0
280.0
$2,170.0
$2,030.0
1,040.0
$ 990.0
544.5
$ 445.5
The tape recorder business has been fairly stable the last few years, and the company does not intend to
change the tape recorder price. However, the competition among manufacturers of electronic calculators has
been increasing. Abtex’s calculators have been very popular with consumers. In order to sustain this interest in
its calculators and to meet the price reductions expected from competitors, management has decided to reduce
the wholesale price of its calculator from $22.50 to $20.00 per unit effective January 1, 1998. At the same time
the company plans to spend an additional $57,000 on advertising during fiscal year 1998. As a consequence of
these actions, management estimates that 80% of its total revenue will be derived from calculator sales as
compared with 75% in 1997. As in prior years, the sales mix is assumed the same at all volume levels. (That
is, the sales mix in units will not necessarily be the same as in 1997; however, the sales mix in 1998 will be
constant no matter what volume levels occur.)
The total fixed overhead costs will not change in 1998, nor will the variable overhead cost rates
(applied on a direct-labor-hour base). However, the cost of materials and direct labor is expected to change.
The cost of solid state electronic components will be cheaper in 1998. Abtex estimates that material costs will
drop 10% for the tape recorders and 20% for the calculators in 1998. However, direct labor costs for both
products will increase 10% in the coming year. Variable overhead rates will be unchanged at $2.00 per unit.
Required:
1. How many tape recorder and electronic calculator units did Abtex Electronics have to sell in 1997 to
break even?
2. How many tape recorder and electronic calculator units will Abtex have to sell in 1998 to break even?
Cost Handy Handbook
Page - 82 -
McGraw Second Edition
ABTEX ELECTRONICS
Calculations ...
Cost Handy Handbook
Page - 83 -
McGraw Second Edition
ABTEX ELECTRONICS
Calculations ...
Cost Handy Handbook
Page - 84 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 85 -
McGraw Second Edition
BAGS AND MORE
(Breakeven)
Bags And More is the exclusive distributor for a revolutionary bookbag. The product sells for $60 per unit and
has a CM ratio of 40%. The company’s fixed expenses are $360,000 per year.
Required:
1. What are the variable expenses per unit?
2. Using the equation method:
a. What is the break-even point in units and in sales dollars?
b. What sales level in units and in sales dollars is required to earn an annual profit of $90,000?
c. Assume that through negotiation with the manufacturer Bags And More is able to reduce its variable
expenses by $3 per unit. What is the company’s new break-even point in units and in sales dollars?
Cost Handy Handbook
Page - 86 -
McGraw Second Edition
BAGS AND MORE
Calculations…
Cost Handy Handbook
Page - 87 -
McGraw Second Edition
LANDIS PLAYHOUSES
(Breakeven)
Susan Landis has a small plant that makes playhouses. She sells them to local customers at $3,000 each.
Her costs are as follows:
Costs
Direct material -------------------------------Direct labor -----------------------------------Variable overhead --------------------------Variable selling ------------------------------Fixed production overhead ----------------Fixed selling and administrative -----------
Per Unit
$1,200
$ 400
$ 150
$ 50
Total
$200,000
$80,420
Susan is in a 35 percent tax bracket.
Required:
1. How many playhouses must she sell to earn $495,014 after taxes?
2. What level of revenue is needed to yield an after-tax income equal to 20 percent of sales?
Cost Handy Handbook
Page - 88 -
McGraw Second Edition
LANDIS PLAYHOUSES
Calculations…
Cost Handy Handbook
Page - 89 -
McGraw Second Edition
GREEN SODA
(Breakeven)
One of the products produced by Green Soda is Lime Blast. The selling price per half-gallon is $4.50, and
variable cost of production is $2.70. Total fixed costs per year are $316,600. The company is currently selling
200,000 half-gallons per year.
Required:
1. What is the margin of safety in dollars?
2. What is the degree of operating leverage?
3. If the company can increase sales in units by 30 percent, what percentage increase will it experience in
income? Prove your answer using the income statement approach.
4. If the company increases advertising by $41,200 sales in units will increase by 15 percent. What will be the
new break-even point in units and in dollars? The new degree of operating leverage?
Cost Handy Handbook
Page - 90 -
McGraw Second Edition
GREEN SODA
Calculations…
Cost Handy Handbook
Page - 91 -
McGraw Second Edition
BAREFOOT BOOKS
(Multiple-Product Breakeven)
Barefoot Books is a small book store that rents space in a neighborhood shopping mall for $19,200 a
year. Its utilities add another $7,680 yearly. The total staff salaries and benefits projected for next year equal
$56,000. Barefoot Books also spends $900 on advertising and $2,400 on professional services. Other overhead
expenses total $11,500.
John Couch, the company’s owner, would like to make a $26,640 profit after taxes next year, when her
tax rate will be 40 percent. The store sells hardbound books, paperback books, and magazines. The average
variable cost of each category of items and Barefoot’s markup on variable cost is $12.00 and 50 percent,
hardbacks; $2.40 and 25 percent, paperbacks; and $2.00 and 60 percent, magazines.
In past years, 70 percent of the store’s sales revenue came from hardback books, 20 percent from
paperbacks, and the remaining 10 percent from magazines.
Required:
1. What is the contribution margin of each sales item?
2. What are the store’s projected fixed costs for next year?
3. What is the breakeven point (in dollars) for Barefoot Books to achieve zero profit?
4. What sales level will the store need to reach the target after-tax profit?
Cost Handy Handbook
Page - 92 -
McGraw Second Edition
BAREFOOT BOOKS
Calculations…
Cost Handy Handbook
Page - 93 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 94 -
McGraw Second Edition
RELEVANT COSTS
Relevant Cost
Sunk Cost
Opportunity Cost
Incremental Cost
The main idea in golf as in life, I suppose, is to learn to accept what cannot be altered, and to keep on
doing one’s reasoned and resolute best whether the prospect be bleak or rosy.
BOBBY JONES (1902—1971), Professional golfer
Cost Handy Handbook
Page - 95 -
McGraw Second Edition
RELEVANT COSTS
Handy Notes:
Examples of Decisions made using Relevant Cost thought:
1. Machine replacement
2. Make or buy
3. Keep or drop (a product line)
4. Special orders
5. Scarce resources
6. Sell now or process further
IN A NUTSHELL …
I believe that every right implies a responsibility; every opportunity, an obligation; every possession, a
duty.
JOHN D. ROCKEFELLER, JR. (1874—1960), Business executive and philanthropist
Cost Handy Handbook
Page - 96 -
McGraw Second Edition
RELEVANT COSTS
Some Relevant Quotes (pun intended):
Bankers, being human, are reluctant to admit mistakes…. One way to hide a
little mistake is to bury it under a bigger one. So Bankers cure a problem loan
by lending more money to the source of the problem….
-- Bill Dutcher,
“Confessions of a Penn Square Borrower”
The Wall Street Journal
August 15, 1985, p. 24
To terminate a project in which $1.1 billion has been invested represents an
unconscionable mishandling of taxpayers’ dollars.
-- Senator Denton,
November 4, 1981
Completing Tennessee-Tombigbee [Waterway Project] is not a waste of taxpayer
dollars. Terminating the project at this stage of development would, however,
represent a serious waste of funds already invested.
-- Senator Sasser,
November 4, 1981
When it comes down to it, no one with any sense would abort a $2.5 billion
construction project. And, by extension, no administration would abort a $200
billion national investment in nuclear energy. So the trick for the industry is to
get more new plants under construction without the (anti-nuclear) movement
knowing about it. By the time they get around to demonstrating and
challenging the license, we’ll have a million tons of steel and concrete in the
ground, and no one in their right mind will stop us.
-- M. Dowie,
“Atomic Psyche-Out”
Mother Jones, 6, p. 23 (1981)
Cost Handy Handbook
Page - 97 -
McGraw Second Edition
RELEVANT COSTS
REVIEW / SELF-QUIZ
Do you know the answers to these questions??





What is a Relevant Cost?
What is a Sunk Cost?
Are sunk costs relevant?
What is an Opportunity Cost?
Are opportunity costs relevant?

What types of decisions can be/are made using relevant cost thought?






Vitality shows in not only the ability to
persist but the ability to start over.
F. SCOTT FITZGERALD (1896—1940), Writer
Unshared joy is an unlighted candle.
SPANISH PROVERB
Cost Handy Handbook
Page - 98 -
McGraw Second Edition
JOE SLOW
(Classifying Relevant and Irrelevant Items)
Joe Slow is a salesperson for Forrester Fine Foods. He is considering a 250-mile trip to visit a potential
customer, Finding Foodstore. Following are factors he is pondering. Hmmm.
1.
__________ The cost of traveling the 250 miles to Finding Foodstore.
2.
__________ The time he will spend on the road.
3.
__________ The time he will spend visiting with Finding Foodstore executives.
4.
__________ The amount of time already devoted to Finding Foodstore.
5.
__________ The revenue potential from Finding Foodstore.
6.
__________ The cost of his last visit to Finding Foodstore.
7.
__________ The probability that his visit will result in new sales.
8.
__________ The cost of lunch for himself if he visits Finding Foodstore.
9.
__________ The cost of lunch he would buy for Finding Foodstore executives.
Required:
For each item listed, indicate whether it is relevant (R) or irrelevant (I).
Cost Handy Handbook
Page - 99 -
McGraw Second Edition
JUDE LAW & ASSOCIATES
(Relevant Costs)
MACHINE REPLACEMENT
Jude Law & Associates, a local law firm, purchased and installed a new computer system two weeks ago at a
cost of $35,500. Later Jude’s brother, John, stopped by the law office to say hello. While there, he noticed the
new system. He remarked that it is too bad the system was not the latest and quickest because, if it were, the
data input time would be cut in half. John suggested that Jude consider updating his system. Jude responded
that he cannot because he just purchased the system two weeks ago. Perhaps Jude should reconsider.
Both systems have a useful life of 5 years.
Old
System
New
System
Start up:
Cost of system
$35,500
$76,000
Operating:
Annual depreciation
Annual labor cost
Annual maintenance cost
$ 7,000
36,000
1,000
$15,000
18,000
1,000
Shutdown:
Residual value of system
Current sale price of old system
$ 500
10,000
$ 1,000
Required:
Should Jude Law keep the old system or purchase the new one?
Cost Handy Handbook
Page - 100 -
McGraw Second Edition
TIGÉR BOATS
(Relevant Costs)
SPECIAL ORDER
Tigér Boats has been in business in Abilene, Texas, since 1995. Tigér Boats sells to boat stores around the
world. A representative for Boats Inc., the largest chain of boat retail stores in the U.S., approached the owner
of Tigér Boats, Bill Bird, interested in purchasing 1,000 boats for $12,500 each. The largest previous order was
for 100 boats, so this large order requires special consideration.
The $12,500 offer from Boats Inc. is much less than Tigér Boat’s normal selling price of $16,000 per boat. In
fact, the boats cost $13,000 to produce, so the company would lose $500 per boat if it accepts the offer by Boats
Inc.
Expected sales (5,500 units at $16,000 each)
Less: Cost of goods sold (see detail below)
Expected gross margin
$88,000,000
(71,500,000)
$16,500,000
Detailed calculation of cost of goods sold:
Number of units
Direct material
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total cost of goods sold
Per Unit
1
Total
5,500
$ 5,000
5,500
1,000
1,500
$13,000
$27,500,000
30,250,000
5,500,000
8,250,000
$71,500,000
Required:
Should Bill Bird accept or reject the offer?
Cost Handy Handbook
Page - 101 -
McGraw Second Edition
APPLE APPLIANCES
(Relevant Costs)
MAKE OR BUY
You are the production manager at Apple Appliances, a company that produces convection ovens. A vendor
has approached you about supplying the timer assemblies for the convection ovens for $12 each. Apple
currently makes its own timers; your research reveals that the company uses 80,000 timers each year and they
cost $14 each to produce in-house.
Number of timers produced each year
Direct material
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total cost of goods sold
80,000
Per Unit
$ 5
4
1
4
$14
Total
$ 400,000
320,000
80,000
320,000
$1,120,000
Required:
Should you accept or reject the offer?
Cost Handy Handbook
Page - 102 -
McGraw Second Edition
TINA’S BEST CHOCOLATE (A)
(Relevant Costs)
SELL NOW OR PROCESS FURTHER
Among its many products, Tina Noel’s privately held company imports cocoa beans and processes them into
cocoa powder and cocoa butter. A portion of the cocoa powder is used in the production of chocolate candy;
the remainder of the cocoa powder is sold to Jerry & Ed’s Ice Cream for use in ice cream production.
Tina is considering the possibility of processing the remaining cocoa powder into an instant cocoa mix that she
will sell under the Tina’s Best brand.
Cocoa butter sales value:
$750 for ¾ ton
Purchase Cocoa Beans:
$500 per ton
Joint production costs:
$600 per ton
Total joint costs:
$1,100 per ton
Cocoa powder
sales value:
$500 for ¼ ton
Additional processing cost:
$800 for ¼ ton
Instant cocoa
sales value:
$2,000 for ¼ ton
Required:
Should Tina sell the cocoa powder to Jerry & Ed’s or process further and sell as an instant cocoa mix?
Cost Handy Handbook
Page - 103 -
McGraw Second Edition
TINA’S BEST CHOCOLATE (B)
(Relevant Costs)
SCARCE RESOURCES
Tina’s production facility in Hillsboro, Kansas, makes two candy products, The Light and The Dark. Plant
capacity is limited by its available machine time, only 700 hours are available in the plant each month. The
company can sell as many cases of each candy as it produces.
Cost per Case:
The Light
The Dark
Machine hours required per case …………………
.02 MH ……… .05 MH
Sales price ………………………………………..
Less: Variable costs:
Direct material …………………………………
Direct labor
Variable overhead ……………………………..
Variable S&A
Total variable costs
Contribution margin per case
Less: Fixed costs (allocated at 25% of sales) ……..
Net income per case
$10.00 ………. $14.00
$ 3.00 ……… $ 3.75
2.00
2.50
3.00 ………
3.75
1.00
2.00
$ 9.00
$12.00
$ 1.00
$ 2.00
.25 ………
.50
$ 0.75
$ 1.50
Required:
Which product should Tina produce and sell?
Cost Handy Handbook
Page - 104 -
McGraw Second Edition
FUNK AND WAGNALL
(Classifying Relevant and Irrelevant Items)
Funk and Wagnall, attorneys at law, have been asked to represent a local client in proceedings to be held in San
Francisco, California. Required: Classify each of the following items on the basis of their relationship to this
engagement. Items may have multiple classifications.
Relevant Costs
Opportunity
Outlay*
1.
The case will require three attorneys to
stay four nights in a San Francisco hotel.
The predicted hotel bill is $1,200.
2.
Funk and Wagnall’s professional staff is
paid $800 per day for out-of-town
assignments.
3.
Last year, depreciation on Funk and
Wagnall’s office was $12,000.
4.
Round-trip transportation to San
Francisco is expected to cost $600 per
person for the engagement.
5.
The firm has recently accepted an
engagement that will require partners to
spend two weeks in Dallas. The
predicted out-of-pocket costs of this
engagement are $8,500.
6.
The firm has a maintenance contract on
its word processing equipment that will
cost $2,200 next year.
7.
If the firm accepts the engagement in
San Francisco, it will have to decline a
conflicting engagement in Orlando that
would have provided a net cash inflow
of $7,200.
8.
The firm’s variable overhead is $40 per
client-hour.
9.
The firm pays $150 per year for Mr.
Funk’s subscription to a law journal.
Irrelevant Costs
Outlay*
Sunk
10. Last year the firm paid $7,500 to
increase the insulation in its building.
* An outlay cost is a cost that requires a cash disbursement sooner or later.
Cost Handy Handbook
Page - 105 -
McGraw Second Edition
FRODO COMPANY
(Relevant Costs)
MACHINE REPLACEMENT
Frodo Company is trying to determine whether or not to replace an old machine with a brand new machine with
lower annual operating costs.
Book value/cost
Salvage value in 5 yrs.
Annual operating cost
Current resale value
Remaining life
Old Machine
New Machine
$30,000
$40,000
$0
$0
$15,000
$4,000
$2,000
N/A
5 yrs.
5 yrs.
Required:
Should Frodo Company keep the old machine or purchase the new one?
Cost Handy Handbook
Page - 106 -
McGraw Second Edition
TOLEDO TORPEDO COMPANY
(Relevant Costs)
MACHINE REPLACEMENT
Toledo Torpedo Company is considering replacement of an existing machine used for finishing products.
Annual revenue of $100,000 will not change regardless of the decision. Summary data on the existing machine
and the new machine are as follows:
Existing Machine
1. Initial cost of $120,000 (purchase made eight years ago)
2. Current book value of $40,000 ($120,000 minus accumulated depreciation of $80,000 using the
straight-line method
3. Current disposal value of $4,000
4. Estimated remaining useful life of four years with zero terminal disposal value
5. Variable operating costs per year of $80,000
New Machine
1. Current purchase price of $60,000
2. Estimated useful life of four years with zero terminal disposal value
3. Variable operating costs per year of $56,000
Required:
Should Toledo Torpedo Company keep the old machine or purchase the new one?
Cost Handy Handbook
Page - 107 -
McGraw Second Edition
HASSLE COMPANY
(Relevant Costs)
MAKE OR BUY
Hassle Company produces ceramic teapots with wooden handles, and its production facility in Patchogue, NY
has idle capacity (i.e., no opportunity cost). The 1998 budget specifies that 20,000 wooden handles will be
required so the company can produce the same number of teapots.
Costs to manufacture the handles are as follows:
Direct Material
$ .60
Direct Labor
$ .40
Variable Mfg. Overhead $ .10
Fixed Mfg. Overhead
$ .20
Total
$1.30
Superb Handle Co. specializes in the production of wooden handles for ceramic teapots. Superb has offered to
supply handles for $1.25 each.
Required:
Should Hassle Company MAKE the handles for use in teapot production, or BUY them from Superb Handle
Co.?
Cost Handy Handbook
Page - 108 -
McGraw Second Edition
CALIFORNIA TEXTBOOKS (A)
(Relevant Costs)
MAKE OR BUY
California Textbooks produces high-quality textbooks, and incurs the following costs for making the book
covers.
Direct materials
Direct labor
Variable overhead applied
Fixed overhead applied
Total costs
COST OF MAKING COVERS
Total Costs for
Costs
10,000 units
Per Unit
$ 10,000
$ 1
80,000
8
40,000
4
50,000
5
$180,000
$18
Textbook-Covers-R-Us has offered to produce the textbook covers for a price of $16 each.
If the textbook covers are purchased, $20,000 of fixed costs will be saved.
Required:
Should California Textbooks make or buy the textbook covers?
Cost Handy Handbook
Page - 109 -
McGraw Second Edition
CALIFORNIA TEXTBOOKS (B)
(Relevant Costs)
MAKE OR BUY
California Textbooks produces high-quality textbooks, and incurs the following costs for making the book
covers.
Direct materials
Direct labor
Variable overhead applied
Fixed overhead applied
Total costs
COST OF MAKING COVERS
Total Costs for
Costs
10,000 units
per Unit
$ 10,000
$ 1
80,000
8
40,000
4
50,000
5
$180,000
$18
Textbook-Covers-R-Us has offered to produce the textbook covers for a price of $16 each.
If the textbook covers are purchased, $20,000 of fixed costs will be saved.
Additionally, if the textbook covers are purchased, the released production facilities can be used to manufacture
other products with a contribution margin of $19,000 or can be rented out for $5,000. California Textbooks
now has four options: (1) Make, (2) Buy and leave facilities idle, (3) Buy and use facilities for other products,
or (4) Buy and rent.
Required:
Which option is best for California Textbooks?
Cost Handy Handbook
Page - 110 -
McGraw Second Edition
ADAMS’ COMPANY
(Relevant Costs)
SCARCE RESOURCES
Adams’ Company specializes in manufacturing titanium into bicycle frames and golf clubs, their only two
product lines. A recent strike in Russia has stopped all production of this rare metal, but Adams’ foresaw this
event occurring and has stockpiled 80,000 lbs. of titanium in inventory. No more titanium can be purchased for
the foreseeable future and the managers at Adams’ Company must decide whether to use their titanium
inventory to produce bicycle frames or to produce golf clubs.
Bicycle Frames ------ $40/unit contribution margin, each frame requires 8 lbs. of titanium to produce
Set of Golf Clubs ---- $32/unit contribution margin, each set of clubs requires 4 lbs. of titanium to produce
Fortunately for Adams’ Company, everything they make can be sold regardless of which product they produce.
Required:
How many of each product should Adams’ Company make to maximize Income?
Cost Handy Handbook
Page - 111 -
McGraw Second Edition
SAM ENTERPRISES
(Relevant Costs)
SCARCE RESOURCES
Sam Enterprises manufactures two products, Cans and Can-ettes. More information regarding these two
products can be found below.
Selling price per unit
Variable expenses per unit
Contribution margin per unit
Contribution-margin ratio
Cans
$10
7
$ 3
30%
Can-ettes
$15
9
$ 6
40%
Additionally, as the owner of Sam Enterprises, you know that you only have 1,000 hours of production capacity
available. You can produce three Cans per hour but only one Can-ette per hour.
Required:
Which product should you choose to produce, Cans or Can-ettes? Show all supporting calculations.
Cost Handy Handbook
Page - 112 -
McGraw Second Edition
MOEHRLE MANUFACTURING
(Relevant Costs)
SPECIAL ORDER
Moehrle Manufacturing makes computer monitors which sell for $150 each. Steve, the CEO of Moehrle
Manufacturing, has received a special order to produce monitors with a special logo. The special logo would
increase the production cost of each monitor by $5.00 over and above the normal costs to manufacture these
computer monitors, as detailed below. Moehrle Manufacturing has excess capacity and so can fill this order
without disturbing production for other customers.
Costs to manufacture:
Direct materials
Direct labor
Variable mfg. overhead
Fixed mfg. overhead
Total
$45
$30
$30
$22
$127
Required:
What is the minimum selling price Steve should accept for this order?
Cost Handy Handbook
Page - 113 -
McGraw Second Edition
TILLAMOOK CHEESE CO.
(Relevant Costs)
SELL NOW OR PROCESS FURTHER
Tillamook Cheese Co. (TCC) produces not only cheese but also ice cream and butter in its facility in Tillamook,
Oregon. Raw milk is the primary direct material used to produce all three products. Currently 40% of the
TCC’s production is cheese, 50% is ice cream, and 10% is butter. You were recently hired as an accountant and
were asked to determine if it would be more profitable instead to sell any of the raw milk as milk rather than use
it to produce cheese, ice cream, or butter.
Which products should be processed further??
Product:
Sales value at split off (i.e., raw milk)
Sales value if processed further
Cost of further processing
Cheese
$400,000
$450,000
$ 17,000
Ice Cream
$500,000
$679,000
$103,000
Butter
$100,000
$110,000
$ 14,000
Joint costs (milk truck)
$150,000
Joint costs are allocated by the sales value at split off
Required:
What product or products should Tillamook Cheese Co. continue to produce?
Cost Handy Handbook
Page - 114 -
McGraw Second Edition
TILLAMOOK CHEESE CO.
Calculations ...
Note: Tillamook Cheese Co. is the name of a real company, but all of the data in this problem are purely fictional.
Cost Handy Handbook
Page - 115 -
McGraw Second Edition
ANDRETTI COMPANY
(Relevant Costs)
Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks
each year at a selling price of $32 per unit. The company's unit costs at this level of activity are given below:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Variable selling expenses
Fixed selling expenses
Total cost per unit
$10.00
4.50
2.30
5.00
1.20
3.50
$26.50
($300,000)
($210,000)
Required:
A number of questions relating to the production and sale of Daks are given below. Each question is
independent.
1.
Assume that Andretti Company has sufficient capacity to produce 90,000 Daks each year. The company
could increase sales by 25 percent above the present 60,000 units each year if it were willing to increase the
fixed selling expenses by $80,000. Would the increased fixed expenses be justified?
2.
Assume again that Andretti Company has sufficient capacity to produce 90,000 Daks each year. A
customer in a foreign market wants to purchase 20,000 Daks. Import duties on the Daks would b $1.70 per
unit, and costs for permits and licenses would be $9,000. The only selling costs that would be associated
with the order would be $3.20 per unit shipping cost. You have been asked by the president to compute the
per unit break-even price on this order.
3.
The company has 1,000 Daks on hand that have some irregularities and are therefore considered to be
"seconds". Due to the irregularities, it will be impossible to sell these units at the regular price. If the
company wishes to sell them through regular distribution channels, what unit cost figure is relevant for
setting a minimum selling price?
4.
Due to a strike in its supplier's plant, Andretti Company is unable to purchase more material for the
production of Daks. The strike is expected to last for two months. Andretti Company has enough material
on hand to continue to operate at 30 percent of normal levels for the two-month period. As an alternative,
Andretti could close it plant down entirely for the two months. If the plant were closed, fixed overhead
costs would continue at 60 percent of their normal level during the two-month period; the fixed selling
costs would be reduced by 20 percent while the plant was closed. What would be the dollar advantage or
disadvantage of closing the plant for the two month period?
5.
An outside manufacturer has offered to produce Daks for Andretti Company and to ship them directly to
Andretti's customers If Andretti Company accepts this offer, the facilities that is uses to produce Daks
would be idle; however, fixed overhead costs would be reduced by 75 percent from their present level.
Since the outside manufacturer would pay for all the costs of shipping, the variable selling costs would be
only two-thirds of their present amount. Compute the unit cost figure that is relevant for the comparison
against whatever quoted price is received from the outside manufacturer.
Cost Handy Handbook
Page - 116 -
McGraw Second Edition
ANDRETTI COMPANY
Calculations ...
Cost Handy Handbook
Page - 117 -
McGraw Second Edition
ANDRETTI COMPANY
Calculations ...
Cost Handy Handbook
Page - 118 -
McGraw Second Edition
FABULOUS FURNITURE
(Identifying Relevant Costs)
A number of costs are listed below that may be relevant in decisions faced by the management of Fabulous
Furniture, a furniture manufacturer:
Case 1
Relevant
Not
Relevant
Case 2
Relevant
Not
Relevant
a. Sales revenue
b. Direct materials
c. Direct labor
d. Variable manufacturing overhead
e. Book value-Model A3000 machine
f. Disposal value-Model A3000 machine
g. Depreciation-Model A3000 machine
h. Market value-Model B3800 machine (cost)
i. Fixed manufacturing overhead (general)
j. Variable selling expense
k. Fixed selling expense
l. General administrative overhead
Required:
Place an X in the appropriate column to indicate whether each item is relevant in the following situations.
Requirement 1 relates to Case 1 above, and requirement 2 relates to Case 2. Consider the two cases
independently.
Case 1:
The company chronically runs at capacity and the old Model A3000 machine is the company’s constraint.
Management is considering the purchase of a new Model B3800 machine to use in addition to the company’s
present Model A3000 machine. The old Model A3000 machine will continue to be used to capacity as before,
with the new Model B3800 being used to expand production. The increase in volume will be large enough to
require increases in fixed selling expenses and in general administrative overhead, but not in the general fixed
manufacturing overhead.
Case 2:
The old Model A3000 machine is not the company’s constraint, but management is considering replacing it
with a new Model B3800 machine because of the potential savings in direct materials cost with the new
machine. The Model A3000 machine would be sold. This change will have no effect on production or sales,
other than some savings in direct materials costs due to less waste.
Cost Handy Handbook
Page - 119 -
McGraw Second Edition
BOHR, INC.
(Relevant Costs: Make or Buy)
Bohr Inc. manufacturers machine parts for aircraft engines. CEO Billy Bohr is considering an offer from a
subcontractor to provide 2,000 units of product OP89 for $124,000. If Bohr does not purchase these parts from
the subcontractor, it must continue to produce them in-house with these costs:
Costs per Unit
$28
18
6
4
Direct materials
Direct labor
Variable manufacturing overhead
Fixed overhead
In addition to these costs, Bohr would also incur a retooling and design cost of $8,000 to produce part OP89.
Required:
Should Bohr, Inc. accept the offer from the subcontractor? Why or why not?
Cost Handy Handbook
Page - 120 -
McGraw Second Edition
PAULEY’S PARTS COMPANY
(Relevant Costs: Disposal of Assets)
Pauley’s Parts Company has an inventory of 2,000 different parts for a line of cars that has been discontinued.
The net book value of inventory in the accounting records is $50,000. The parts can be either remachined at a
total additional cost of $25,000 and then sold for $30,000 or sold as is for $2,500.
Required:
What should Pauley’s Parts Company do with these 2,000 car parts?
Cost Handy Handbook
Page - 121 -
McGraw Second Edition
GILLIGAN’S BOAT RENTALS
(Relevant Costs: Asset Replacement)
An uninsured boat costing $90,000 was wrecked the first day it was used. It can be either sold as is for $9,000
cash and replaced with a similar boat costing $92,000 or rebuilt for $75,000 and be brand new as far as
operating characteristics and looks are concerned.
Required:
Should Gilligan’s Boat Rentals replace or fix the old boat?
Cost Handy Handbook
Page - 122 -
McGraw Second Edition
EARL CORPORATION
(Relevant Costs: Sell Now or Process Further)
Earl Corporation manufacturers products A, B, and C from a joint process. Joint costs are allocated on the basis
of relative sales value at the end of the joint process. Additional information for Earl Corporation follows:
Units produced …………………………....
Joint costs ………………………………....
Sales value after joint processing …...……
Additional costs for further processing …...
Sales value if processed further ………......
A
12,000
$144,000
$240,000
$ 28,000
$280,000
B
8,000
$60,000
$100,000
$20,000
$120,000
C
4,000
$36,000
$60,000
$12,000
$80,000
Total
24,000
$240,000
$400,000
$ 60,000
$480,000
Required:
Should product A, B, or C be processed further and then sold?
Cost Handy Handbook
Page - 123 -
McGraw Second Edition
STEWART COMPANY
(Relevant Costs: Make or Buy)
Stewart Company needs 20,000 units of a part to use in producing one of its products. If Stewart buys the part
from Woodrow Company for $85 instead of making it, Stewart could not use the released facilities in another
manufacturing activity. Fifty percent of the fixed overhead will continue regardless of CEO David Stewart’s
decision. The cost data are as follows:
Costs per Unit
$35
11
19
20
$85
Direct materials
Direct labor
Variable overhead
Fixed overhead
Required:
Determine which alternative is more attractive to Stewart and by what amount.
Cost Handy Handbook
Page - 124 -
McGraw Second Edition
GAMERS, INC.
(Relevant Costs: Scarce Resources)
Gamers Inc. produces two basic types of video games, Bash and Gash. Pertinent data for Gamers Inc. follows:
Sales price
Costs
Direct materials
Direct labor
Variable factory overhead*
Fixed factory overhead*
Marketing costs (all variable)
Total costs
Operating income
BASH
$200
GASH
$140
56
30
50
20
28
$184
$16
26
50
25
10
20
$131
$9
*Based on labor hours.
The video craze is at its height so that either BASH or GASH alone can be sold to keep the plant operating at
full capacity. However, labor capacity in the plant is insufficient to meet the combined demand for both games.
BASH and GASH are processed through the same production departments.
Required:
Which product should be produced? Briefly explain your answer.
Cost Handy Handbook
Page - 125 -
McGraw Second Edition
FOSTER’S BAR-B-QUE
(Relevant Costs: Special Orders)
Foster’s Bar-B-Que is a popular lunch-time spot. Foster is conscientious about the quality of his meals, and he
has a regular crowd of 600 patrons for his $5 lunch. His variable cost for each meal is about $2, and he figures
his fixed costs, on a daily basis, at about $1,200. From time to time, bus tour groups with 50 patrons stop by. He
has welcomed them since he has capacity to seat about 700 diners in the average lunch period, and his cooking
and wait staff can easily handle the additional load. The tour operator generally pays for the entire group on a
single check to save the wait staff and cashier the additional time. Due to competitive conditions in the tour
business, the operator is now asking Foster to lower the price to $3.50 per meal for each of the 50 bus tour
members.
Required:
Should Foster accept the $3.50 price? Why or why not? What I the tour company were willing to guarantee 200
patrons (or four bus loads) at least once a month for $3.00 per meal?
Cost Handy Handbook
Page - 126 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 127 -
McGraw Second Edition
JOHNSON COUNTY SENIOR SERVICES
(Relevant Costs: Dropping or Retaining a Segment)
Johnson County Senior Services is a nonprofit organization devoted to providing essential services to seniors
who live in their own homes within the Johnson County area. Three services are provided for seniors—home
nursing, meals on wheels, and housekeeping. In the home nursing program, nurses visit seniors on a regular
basis to check on their general health and to perform tests ordered by their physicians. The meals on wheels
program delivers a hot meal once a day to each senior enrolled in the program. The housekeeping service
provides weekly housecleaning and maintenance services. Data on revenue and expenses for the past year
follow:
Revenues…………………………
Less variable expenses…………..
Contribution margin……………..
Less fixed expenses:
Depreciation……………………
Liability insurance……………..
Program administrators’ salaries
General administrative overhead*
Total fixed expenses………………
Net operating income (loss)………
Total
$900,000
490,000
410,000
Home
Nursing
$260,000
120,000
140,000
Meals on
Wheels
$400,000
210,000
190,000
Housekeeping
$240,000
160,000
80,000
68,000
42,000
115,000
180,000
405,000
$ 5,000
8,000
20,000
40,000
52,000
120,000
$ 20,000
40,000
7,000
38,000
80,000
165,000
$ 25,000
20,000
15,000
37,000
48,000
120,000
$(40,000)
*Allocated on the basis of program revenues
The head administrator of Johnson County Senior Services, Marsha Davis, is concerned about the
organization’s finances and considers the net operating income of $5,000 last year to be razor-thin. (Last year’s
results were very similar to the results for previous years and are representative of what would be expected in
the future.) She feels that the organization should be building its financial reserves at a more rapid rate in order
to prepare for the next inevitable recession. After seeing the above report, Ms. Davis asked for more
information about the financial advisability or perhaps discontinuing the housekeeping program.
The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their
equipment from job to job. If the program were discontinued, the van would be donated to a charitable
organization. Depreciation charges assume zero salvage value. None of the general administrative overhead
would be avoided if the housekeeping program was dropped, but the liability insurance and the salary of the
program administrator would be avoided.
Required:
1. Should the housekeeping program be discontinued? Explain. Show computations to support your answer.
2. Recast the about data in a format that would be more useful to management assessing the long-run financial
viability of the various services.
Cost Handy Handbook
Page - 128 -
McGraw Second Edition
JOHNSON COUNTY SENIOR SERVICES
Calculations…
Cost Handy Handbook
Page - 129 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 130 -
McGraw Second Edition
JOB-ORDER COSTING
The Cost/Managerial Accounting Problem:
DESIGNATED DOODLE ZONE
Cost Handy Handbook
Page - 131 -
McGraw Second Edition
JOB-ORDER COSTING
Why are manufacturing costs accumulated in inventory?
Why is the absorption costing income statement format GAAP??
Be willing to make decisions. That’s the most important quality in a good leader. Don’t fall victim to
what I call the “ready-aim-aim-aim-aim syndrome.” You must be willing to fire.
T. BOONE PICKENS, Financier
I owe all of my success in life to having been always a quarter of an hour beforehand.
HORATIO NELSON (1758—1805), Vice Admiral of the Royal Navy
Cost Handy Handbook
Page - 132 -
McGraw Second Edition
JOB-ORDER COSTING
Two Income Statement Formats:
Absorption Costing Income Statement
Variable Costing Income Statement
DESIGNATED DOODLE ZONE
Cost Handy Handbook
Page - 133 -
McGraw Second Edition
JOB-ORDER COSTING
How Can Unit Costs Be Calculated?
Cost Handy Handbook
Page - 134 -
McGraw Second Edition
EGG YOLK YUMMIES
(Applying Overhead)
Egg Yolk Yummies manufactures hard yellow candies. The company’s production process is largely
automated, and the company incurs monthly expenses of $25,000 for depreciation and factory leases. In
addition, on January 1st, 1999, Egg Yolk paid $48,000 for fire insurance covering the entire production facility
for the months January 1st through December 31st, 1999. Also, Egg Yolk paid $36,000 on December 15 th to
maintain and refurbish the production machines and facilities.
Required:
When calculating monthly net income, how much manufacturing overhead expense should Egg Yolk Yummies
use for each of the months of 1999, January through December?
Jan.
Feb. Mar.
Apr.
May
June
July
Aug.
Sept. Oct.
Nov.
Dec.
Total
$384,000
Cost Handy Handbook
Page - 135 -
McGraw Second Edition
Job-Order Costing & APPLYING OVERHEAD
PDOR =
Applied MOH =
DESIGNATED DOODLE ZONE
As I think back and look forward, I see how nothing is unambiguous; nothing is without risk. Salvation
does not come through simplicities.
A. BARTLETT GIAMATTI (1938—1989), Educator and baseball executive
Cost Handy Handbook
Page - 136 -
McGraw Second Edition
Job-Order Costing & APPLYING OVERHEAD
Question: Why Allocate?
Handy Notes:
Answer: To match revenues and expenses!
For example: factory insurance may be paid annually, but managers want
monthly information for decision making
Helpful for bidding on new jobs.
Examples of allocation bases:
 DLH -- 31%
 DL$ -- 31%
 MH -- 12%
 DM$ -- 4%
 Units -- 5%
 Other -- 17%
(e.g., EDS used total expenses)
It’s easier to hide your light under a bushel than to keep your shady side dark.
HELEN ROWLAND (c. 1875—1950), Journalist and humorist
Cost Handy Handbook
Page - 137 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 138 -
McGraw Second Edition
THE BAIZE COMPANY
(Applying Overhead)
The Baize Company allocates manufacturing overhead to production based on direct labor hours. The
following information is available for The Baize Company:
Estimated manufacturing overhead
Actual manufacturing overhead
Estimated direct labor hours
Actual direct labor hours
$403,200
$378,000
21,000
20,000
Required:
1. Compute the manufacturing overhead rate for The Baize Company.
2. Compute the amount of applied manufacturing overhead.
3. Compute the amount of underapplied or overapplied overhead for the year.
Cost Handy Handbook
Page - 139 -
McGraw Second Edition
ROBIN HOOD, INC.
(Applying Overhead)
Robin Hood, Inc., allocates manufacturing overhead to production based on machine hours. The following
information is available:
Estimated manufacturing overhead
Actual manufacturing overhead
Estimated machine hours
Estimated direct labor hours
Actual machine hours
Actual direct labor hours
$2,000,000
$2,400,000
125,000
210,000
140,000
200,000
Required:
1. Compute the manufacturing overhead rate for Robin Hood, Inc.
2. Compute the amount of applied manufacturing overhead.
3. Compute the amount of underapplied or overapplied overhead for the year.
Cost Handy Handbook
Page - 140 -
McGraw Second Edition
HALO PRODUCTS COMPANY
(Applying Overhead)
The Halo Products Company uses direct labor hours as the basis for applying overhead to products. Estimated
manufacturing overhead costs for 1997 are $200,000, and estimated direct labor hours for the year are 32,000
hours. During 1997, 36,400 actual direct labor hours were worked and the Manufacturing Overhead Control
account had a year end balance of $256,200.
Required:
1. Compute the manufacturing overhead rate for 1997.
2. Compute the amount of applied manufacturing overhead for 1997.
3. Compute the amount of underapplied or overapplied overhead for the year.
4. Compute the actual overhead cost per direct labor hour.
Cost Handy Handbook
Page - 141 -
McGraw Second Edition
NARCISSUS NEEDLES
(Applying Overhead)
Narcissus Needles allocates overhead on the basis of direct labor hours (DLH). The management of Narcissus
has estimated the following costs for the 1997 fiscal year, all related to factory and production processes:
Factory Utilities
Depreciation on factory equipment
Supervisors' salaries
Janitorial supplies
Factory Insurance
$10,000
15,000
30,000
6,000
9,000
Management has also estimated that 3,500 direct labor hours will be worked during the year.
Required:
1. What is the predetermined overhead rate (PDOR) that Narcissus should use to apply overhead?
2. If 3,600 direct labor hours were actually worked during the fiscal year, what would be applied overhead?
3. If 3,600 direct labor hours were worked and actual costs incurred were as follows, how much overhead was
overapplied or underapplied?
Factory Utilities
$10,500
Depreciation on factory equipment
15,000
Supervisors' salaries
30,000
Janitorial supplies
5,200
Factory Insurance
8,500
Cost Handy Handbook
Page - 142 -
McGraw Second Edition
McKAY MILLS
(Applying Overhead)
Suppose McKay Mills at the beginning of the year expected to incur $1,335,000 of overhead expenses in 1995.
McKay has a policy of allocating overhead on the basis of direct labor hours using a plant-wide rate. McKay
has three departments -- Yarn, Fabric and Clothing -- which expect to incur 500, 410 and 735 hours
(respectively) of direct labor hours in 1995.
Required:
What predetermined overhead rate (PDOR) should McKay Mills use?
McKay Mills departments actually incurred direct labor hours as follows: Yarn (455), Fabric (420) and
Clothing (750).
Required:
How much overhead should be applied to each department when $1,372,000 of overhead costs
were actually incurred?
Cost Handy Handbook
Page - 143 -
McGraw Second Edition
BUFFALO BROILERS
(Applying Overhead)
Buffalo Broilers is the manufacturer of a countertop oven-broiler and estimates overhead costs of $500,000 for
1992. Three possible overhead application bases are being considered by management; they are direct labor
hours, direct labor cost, and machine hours. Estimated 1992 activity levels for each of the potential application
bases are given below:
Direct labor hours
Direct labor cost
Machine hours
100,000 hours
$800,000
80,000 hours
The broiler requires two direct labor hours, $18.00 of direct labor cost, and 1.2 hours of machine time. The
balance in the manufacturing overhead account was $576,000 on December 31, 1992. During 1992, 120,000
direct labor hours were worked at a cost of $930,000, and 90,000 machine hours were used. There were 60,000
oven-broilers manufactured in 1992.
Required:
1. Compute the 1992 manufacturing overhead rate using each of the three potential application bases.
2. Compute the underapplied or overapplied overhead that would have occurred in 1992 using each of the
application bases.
3. Assume direct labor hours was used as the application base. Compute the unit cost of overhead using
actual overhead cost and actual activity for the year.
Cost Handy Handbook
Page - 144 -
McGraw Second Edition
BUFFALO BROILERS
Calculations ...
Cost Handy Handbook
Page - 145 -
McGraw Second Edition
HOWDY COMPANY
(Applying Overhead)
Morris Company manufactures products to customer specifications and employs a job-order costing system.
Predetermined overhead rates are used to apply manufacturing overhead cost to jobs. The predetermined
overhead rate in department A is based on machine hours, and the rate in department B is based on direct labor
cost. At the beginning of 1995, the company's management made the following estimates:
Department
A
12,000
70,000
$510,000
$130,000
$602,000
Direct labor-hours
Machine-hours
Direct materials cost
Direct labor cost
Manufacturing overhead cost
B
60,000
8,000
$650,000
$420,000
$735,000
Job 205 was initiated into production on August 1 and completed on August 10. The company's cost records
show the following information on the job:
Department
A
30
110
$470
$290
Direct labor-hours
Machine-hours
Direct materials cost
Direct labor cost
B
85
20
$332
$680
Required:
1. Compute the predetermined overhead rate that should be used during the year in department A. Compute
the rate that should be used in department B.
2.
Compute the total overhead cost applied to job 205.
3.
What would be the total cost of job 205? If the job contains 50 units, what would be the cost per unit?
4.
At the end of 1995, the records of Morris Company revealed the following actual cost and operating data
for all jobs worked on during the year. What was the amount of under- or overapplied overhead in each
department at the end of 1995?
Department
A
B
Direct labor-hours
10,000
62,000
Machine-hours
65,000
9,000
Direct materials cost
$430,000
$680,000
Direct labor cost
$108,000
$436,000
Manufacturing overhead cost
$570,000
$750,000
Cost Handy Handbook
Page - 146 -
McGraw Second Edition
HOWDY COMPANY
Calculations ...
Cost Handy Handbook
Page - 147 -
McGraw Second Edition
HOWDY COMPANY
Calculations ...
Cost Handy Handbook
Page - 148 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 149 -
McGraw Second Edition
AXIOM PRODUCTS
(Applying Overhead)
Axiom Products is a manufacturing company that operates a job-order costing system. Overhead costs are
applied to jobs on the basis of machine-hours. At the beginning of the year, management estimated that the
company would incur $170,000 in manufacturing overhead costs for the year and work 85,000 machine-hours.
Required:
1. Compute Axiom’s predetermined overhead rate.
2. Assume that during the year the company actually worked 80,000 machine hours and incurred the costs
indicated in the Manufacturing Overhead and Work in Process t-accounts below. Compute the amount of
overhead cost that would be applied to Work in Process for the year, and make the entry in the t-accounts.
3. Compute the amount of under- or overapplied overhead for the year, and show the balance in your
Manufacturing Overhead t-account. Prepare a journal entry to close out the balance in this account to Cost
of Goods Sold.
4. Explain why the manufacturing overhead was underapplied or overapplied for the year.
Manufacturing Overhead
(Utilities)
(Insurance)
(Maintenance)
(Indirect materials)
(Indirect labor)
(Depreciation)
$14,000
9,000
33,000
7,000
65,000
40,000
____________
Work in Process
(Direct materials)
(Direct labor)
(Overhead)
$530,000
85,000
_________
Balance
Cost Handy Handbook
Page - 150 -
McGraw Second Edition
AXIOM PRODUCTS
Calculations…
Cost Handy Handbook
Page - 151 -
McGraw Second Edition
HOLMAN COMPANY
(Applying Overhead)
Holman Company is a furniture manufacturing firm in a suburb of Billings, Montana. It uses a job-order costing
system. It applies factory overhead costs on the basis of direct labor-hours. At the beginning of 2004,
management estimated that the company would incur $284,000 of factory overhead costs for the year and work
71,000 direct labor-hours.
During the year, the company actually worked 75,000 direct labor-hours and incurred these factory overhead
costs:
a.
b.
c.
d.
e.
f.
g.
h.
Paid $75,400 cash for utilities, power, and other miscellaneous items for the manufacturing plants.
Recognized $58,000 depreciation on manufacturing property, plant, and equipment for the year.
Paid $25,000 cash for the insurance premium on manufacturing property and plant.
Incurred advertising costs, $10,000.
Incurred indirect labor costs, $54,600.
Incurred indirect material costs, $53,000.
Paid the $55,000 salary of the factory superintendent.
Accrued sales and administrative salaries, $85,000.
Required:
1. Compute the firm’s predetermined overhead rate.
2. Compute the amount of factory overhead that should be applied to the Work-in-Process Inventory account
for the year.
3. Compute the amount of overapplied or underapplied overhead to be closed into the Cost of Goods Sold
account at the end of the year.
Cost Handy Handbook
Page - 152 -
McGraw Second Edition
HOLMAN COMPANY
Calculations…
Cost Handy Handbook
Page - 153 -
McGraw Second Edition
EVERYTHING INCORPORATED
(Process Costing and Job-Order Costing)
Everything Incorporated has many industries in which it is involved. The following is a list of some its
diversified businesses:
Business
Job-Order Costing
Process Costing
Custom yacht builder.
Golf course designer.
Potato chip manufacturer.
Business consultant.
Plywood manufacturer.
Soft-drink bottler.
Film studio.
Bridge construction company.
Manufacturer of fine custom jewelry.
Made-to-order garment factory.
Factory making one personal computer model.
Fertilizer factory.
Required:
In each of the previous businesses, place an X in the appropriate column to indicate whether job-order costing
or process costing is more appropriate.
Cost Handy Handbook
Page - 154 -
McGraw Second Edition
[EVEN MORE] JOB-ORDER COSTING
** NOTE TO “SELF”! **
See this problem ____________________________
On page _________ of the Handy Handouts
For an example of cost flows with applied MOH.
Cost Handy Handbook
Page - 155 -
McGraw Second Edition
Knowledge is food for the soul.
PLATO (c. 427—347 B.C.), Philosopher
Saddle your dreams afore you ride ‘em.
MARY WEBB (1881—1927), Novelist
Cost Handy Handbook
Page - 156 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 157 -
McGraw Second Edition
ARC LIGHT & SOUND
(Job-Order Costing)
Arc Light & Sound uses a job-order costing system. The company’s inventory balances on April 1, the start of
the fiscal year, were as follows:
Raw materials
Work in process
Finished goods
$32,000
$20,000
$48,000
During the year, the following transactions were completed:
1.
2.
Raw materials were purchased on account, $170,000.
Raw materials were issued from the storeroom for use in production, $180,000 (80% direct and 20%
indirect).
3. Employee salaries and wages were accrued as follows: direct labor, $200,000; indirect labor, $82,000; and
selling and administrative salaries, $90,000.
4. Utility costs were incurred in the factory, $65,000.
5. Advertising costs were incurred, $100,000.
6. Prepaid insurance expired during the year, $20,000 (90% related to factory operations, and 10% related to
selling and administrative activities).
7. Depreciation was recorded, $180,000 (85% related to factory assets, and 15% related to selling and
administrative assets).
8. Manufacturing overhead was applied to jobs at the rate of 175% of direct labor cost.
9. Goods that cost $700,000 to manufacture according to their job cost sheets were transferred to the finished
goods warehouse.
10. Sales for the year totaled $1,000,000 and were all on account. The total cost to manufacture these goods
according to their job cost sheets was $720,000.
Required:
1. Using t-accounts, compute Cost of Goods Manufactured, Cost of Goods Sold, and Net Income.
2. Prepare an Income Statement for the year, in good form.
Cost Handy Handbook
Page - 158 -
McGraw Second Edition
ARC LIGHT & SOUND
Calculations ...
Cost Handy Handbook
Page - 159 -
McGraw Second Edition
MARIE MANUFACTURING COMPANY
(Job-Order Costing)
The following data pertain to the Marie Manufacturing Company for the year ended December 31, 2004. The
company used 51,000 direct labor hours during 2004.
Beginning direct material inventory
Ending direct material inventory
Beginning work-in-process inventory
Ending work-in-process inventory
Beginning finished goods inventory
Ending finished goods inventory
Direct material purchased
Indirect material used in production
Factory supplied used
Depreciation on the factory
Depreciation on the sales office
Depreciation on the administrative office
Sales salaries
Sales revenue
Assembly-line labor cost
Factory security guard cost
Factory supervision
Depreciation on production equipment
Depreciation on sales office equipment
$
42,000
48,000
84,000
93,000
124,000
133,000
850,000
4,000
6,200
60,000
4,000
3,000
120,000
3,335,000
820,000
12,000
82,600
560,000
22,200
Additional Information:
The overhead is applied using a budgeted rate that is set every December by forecasting the following
year's production (in units) and relating it to forecast direct labor hours. The budget for 2004 called for
50,000 direct labor hours and $750,000 of factory overhead.
Required:
1. Materials requisitioned during 2004
2. Overhead applied during 2004
3. Overapplied or underapplied overhead during 2004
4. Cost of Goods Manufactured during 2004
5. (Adjusted) Cost of Goods Sold during 2004
6. Net income for January
Cost Handy Handbook
Page - 160 -
McGraw Second Edition
MARIE MANUFACTURING COMPANY
Calculations ...
Cost Handy Handbook
Page - 161 -
McGraw Second Edition
ROLEY POLEY COMPANY
(Job-Order Costing)
Below are data for Roley Poley Company as of year-end, December 31, 2002.
Sales salaries
………
Advertising
………
Direct materials inventory
………
Direct materials used
………
Work in process
………
Indirect labor
………
Depreciation, factory
………
Property taxes (70 percent production plant)
Fire insurance (80 percent production plant)
Sales commissions
………
Administrative salaries
………
Finished goods
………
Direct labor
………
Indirect material
………
Direct materials purchased
………
Utilities (80 percent factory)
………
Rent, office equipment
………
Depreciation, office
………
Depreciation, factory equipment
………
Sales
………
Miscellaneous office expense
………
Sales returns and allowances
………
$ 85,000
44,000
126,100
325,000
73,900
22,700
31,000
18,000
9,800
28,500
167,200
77,300
293,480
11,600
319,700
45,000
8,700
17,400
44,000
1,281,700
4,300
36,100
All accounts have normal balances. Beginning work in process was $49,000 and beginning finished goods was
$87,300. Roley Poley pays income taxes at a rate of 40% of pretax income.
Roley Poley’s 2002 budget called for production of 800 unicycles. On average it takes 26 hours of direct labor
per unicycle at a wage rate of $11 per hour. The manufacturing overhead rate is $6.00 per direct labor hour.
During 2002, 920 unicycles were produced. Actual direct labor hours averaged 3 per unit more than expected.
Required:
1. Calculate the beginning balance of direct materials inventory
2. Calculate the total prime cost for 2002.
3. Calculate the underapplied or overapplied overhead for the year.
4. Calculate the cost of goods manufactured.
5. Calculate the average unit cost of unicycles completed during 2002.
6. Calculate the cost of goods sold, and net income before and after taxes.
Cost Handy Handbook
Page - 162 -
McGraw Second Edition
ROLEY POLEY COMPANY
Calculations ...
Cost Handy Handbook
Page - 163 -
McGraw Second Edition
PLENTIFUL PRINTING, INC.
(Job-Order Costing)
You are asked to bring the following incomplete accounts of one of Plentiful Printing's printing plants up to
date through January 31, 1992. Also consider the data that appears below.
Materials (12/31/91 Balance)
Factory Department Overhead (total January charges)
Finished Goods (12/31/91 Balance)
$15,000
$57,000
$20,000
Additional Information:
1.
2.
3.
4.
5.
6.
7.
8.
9.
The overhead is applied using a budgeted rate that is set every December by forecasting the following
year's overhead and relating it to forecast direct labor costs. The budget for 1992 called for $400,000 of
direct labor and $600,000 of factory overhead.
The only job unfinished on January 31, 1992, was No. 419, on which total production costs were $13,000
(direct labor cost of $2,000 --125 direct labor hours--, direct materials cost of $8,000, and manufacturing
overhead costs of $3,000).
Total materials placed into production during January were $90,000.
Cost of goods manufactured during January was $180,000.
Materials inventory as of January 31 was $20,000.
Finished goods inventory as of January 31 was $15,000.
All factory workers earn the same rate of pay. Direct labor hours for January totaled 2,500.
Sales during January of $285,000 were made.
Selling costs of $57,000 and administrative costs of $12,000 were incurred during January.
Required:
1. Materials purchased during January
2. Cost of Goods Sold during January
3. Direct labor costs incurred during January
4. Overhead applied during January
5. Balance, Work in Process, December 31, 1991
6. Balance, Work in Process, January 31, 1992
7. Overapplied or underapplied overhead for January
8. Net income for January
Cost Handy Handbook
Page - 164 -
McGraw Second Edition
PLENTIFUL PRINTING, INC.
Calculations ...
Cost Handy Handbook
Page - 165 -
McGraw Second Edition
POLARIS COMPANY
(Job-Order Costing)
The Polaris Company uses a (normal costing) job-order system. The following data relate to October 2005, the
first month of the company’s fiscal year.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Raw materials purchased, $210,000.
Raw materials issued to production, $190,000 ($178,000 direct materials and $12,000 indirect
materials).
Direct labor cost incurred, $90,000. Indirect labor cost incurred, $110,000.
Depreciation recorded on factory equipment, $40,000.
Other manufacturing overhead incurred during October, $70,000.
The company applies manufacturing overhead cost to production on a basis of $8 per machinehour. There were 30,000 machine hours recorded for October.
Production orders costing $520,000 were completed during October and transferred to finished
goods.
Production orders that had cost $480,000 to complete were shipped to customers during the
month. These goods were invoiced at 25 percent above cost.
Selling costs of $54,000 and administrative costs of $42,000 were incurred.
Raw materials had a beginning balance of $14,000. Work in process had a beginning balance of
$42,000. Finished goods had a beginning balance of $37,000.
Required:
1. Prepare all T-accounts and calculate both the net income and cash flow of Polaris Company for the
month of October 2005.
2. Compute the ending balance of each account.
Cost Handy Handbook
Page - 166 -
McGraw Second Edition
POLARIS COMPANY
Calculations ...
Cost Handy Handbook
Page - 167 -
McGraw Second Edition
THE SWIZZLE MANUFACTURING COMPANY
(Job-Order Costing)
The Swizzle Manufacturing Company is a manufacturer of custom-made equipment and relies heavily on direct
labor in the completion of its jobs. The company uses a job-order costing system and applies manufacturing
overhead cost to jobs on the basis of direct labor hours. At the beginning of 1994, the following estimates were
made as a basis for computing a predetermined overhead rate for the year:
Manufacturing overhead cost ..........
$360,000
Direct labor hours .......................... 20,000 hours
The following transactions took place during the year (all purchases and services were acquired on account):
1.
2.
3.
Raw materials were purchased for use in production, $200,000
Raw materials were requisitioned for use in production (all direct materials), $185,000
Utility bills were incurred, $70,000 (90% related to factory operations, and the remainder related to selling
and administrative activities)
4. Salary and wage costs were incurred:
Direct labor (21,400 hours) ......................
$230,000
Indirect labor ..........................................
90,000
Selling and administrative salaries ............
110,000
5. Maintenance costs were incurred in the factory, $54,000
6. Advertising costs were incurred, $136,000
7. Depreciation was recorded for the year, $95,000 (80% related to factory equipment, and the remainder
related to selling and administrative equipment)
8. Rental cost incurred on buildings, $120,000 (85% related to factory operations, and the remainder related to
selling and administrative facilities)
9. Manufacturing overhead cost was applied to jobs, $ __?___
10. Sales for the year (all on account) totaled $1,200,000. These goods cost $780,000 to manufacture.
The balances in the inventory accounts at the beginning of the year were:
Raw Material
$10,000
Work in Process
15,000
Finished Goods
30,000
Work in Process at December 31, 1994, totaled $22,000
Required:
Prepare a schedule of cost of goods manufactured, a schedule of cost of goods sold, and a statement of net
income (in good form) for the year ended December 31, 1994.
Helpful Hint:
First prepare the calculations using t-accounts, then prepare the required schedules using the information from
the t-accounts. Please turn in all your work (t-accounts and statements).
Cost Handy Handbook
Page - 168 -
McGraw Second Edition
THE SWIZZLE MANUFACTURING COMPANY
Calculations ...
Cost Handy Handbook
Page - 169 -
McGraw Second Edition
THE SWIZZLE MANUFACTURING COMPANY
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 1994
Direct materials:
Direct materials inventory, 1-1-1994
$
Add: Purchases of direct materials
____________
Total materials available
$
Deduct: Direct materials inventory, 12-31-1994
(___________)
Direct materials used in production
$
Direct labor
$
Manufacturing overhead

$





____________
Actual overhead costs
$
Add / (Deduct): Over (Under) applied overhead
Manufacturing overhead applied to Work In Process
Total manufacturing costs incurred
____________
$___________
$
Add: Beginning work in process inventory
____________
Total manufacturing costs to account for
$
Deduct: Ending work in process inventory
(___________)
Cost of Goods Manufactured
$
Cost Handy Handbook
Page - 170 -
.
McGraw Second Edition
THE SWIZZLE MANUFACTURING COMPANY
Schedule of Cost of Goods Sold
For the Year Ended December 31, 1994
Finished goods inventory, 1-1-1994
$
Add: Cost of goods manufactured
___________
Goods available for sale
$
Less: Finished goods inventory, 12-31-1994
(___________)
Cost of goods sold
$
Add / (Deduct): Under (Over) applied overhead
____________
Adjusted cost of goods sold
$
.
THE SWIZZLE MANUFACTURING COMPANY
Income Statement
For the Year Ended December 31, 1994
Sales
$
Less: Cost of goods sold
(___________)
Gross margin
$
Less: Selling and administrative expenses:

$





____________
Net Income
Cost Handy Handbook
(___________)
$
Page - 171 -
.
McGraw Second Edition
MARSHALL PROPS UNLIMITED
(Job-Order Costing)
Marshall Props Unlimited designs and fabricates movie props. The company’s balance sheet as of January 1, 2006:
Marshall Props Unlimited
Balance Sheet
January 1, 2006
Assets
Current Assets:
Cash.................................................................
$15,000
Accounts Recievable .......................................
40,000
Inventories:
Raw materials ................................................. $25,000
Work in process.............................................. 30,000
Finished goods (props awaiting shipment) ..... 45,000 100,000
Prepaid insurance ............................................
5,000
Total current assets ............................................
160,000
Buildings and equipment ................................... 500,000
Less accumulated depreciation .......................... 210,000 290,000
Total assets ........................................................
$450,000
Liabilities and Stockholders Equity
Accounts payable ..............................................
$75,000
Capital stock ...................................................... $250,000
Retained earnings .............................................. 125,000 375,000
Total liabilities and stockholders’ equity...........
$450,000
Since each prop is a unique design and may require anything from a few hours to a month or more to complete,
Marshall Props uses a job-order costing system. Overhead in the fabrication shop is charged to props on the basis of
direct-labor cost. The company estimated that it would incur $80,000 in manufacturing overhead and $100,000 in
direct labor cost during the year. The following transactions were recorded during the year:
a.
b.
c.
Raw materials, such as wood, paints, and metal sheeting, were purchased on account, $80,000.
Raw materials were issued to production, $90,000; $5,000 of this amount was for indirect materials.
Payroll costs incurred and paid; direct labor, $120,000; indirect labor, $30,000; and selling and administrative
salaries, $75,000.
d. Fabrication shop utilities costs incurred, $12,000.
e. Deprecation recorded for the year, $30,000 ($5,000 on selling and administrative assets; $25,000 on fabrication
shop assets).
f. Prepaid insurance expired, $4,800 ($4,000 related to fabrication shop operations, and $800 related to selling and
administrative activities).
g. Shipping expenses incurred, $40,000
h. Other manufacturing overhead costs incurred, $17,000.
i. Manufacturing overhead was applied to production. Overhead is applied on a basis of direct labor cost.
j. Movie props that cost $310,000 to produce according to their job cost sheets were completed.
k. Sales for the year totaled $450,000 and were all on account. The total cost to produce these movies props was
$300,000 according to their job cost sheets.
l. Collections on account from customers, $445,000.
m. Payments on account to suppliers, $150,000.
Required:
1. Use t-accounts to calculate COGM, COGS, and Net Income.
2. Was manufacturing overhead underapplied or overapplied for the year? By how much?
3. Prepare a Schedule of COGM, a Schedule of COGS, and Income Statement for the year.
Cost Handy Handbook
Page - 172 -
McGraw Second Edition
MARSHALL PROPS UNLIMITED
Calculations…
Cost Handy Handbook
Page - 173 -
McGraw Second Edition
MARSHALL PROPS UNLIMITED
Marshall Props Unlimited
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 2006
Direct materials:
Direct materials inventory, 1-1-2006
$
Add: Purchases of direct materials
____________
Total materials available
$
Deduct: Direct materials inventory, 12-31-2006
(___________)
Direct materials used in production
Less: Indirect materials
____________
Direct labor
$
$
Manufacturing overhead

$





____________
Actual overhead costs
$
Add / (Deduct): Over (Under) applied overhead
Manufacturing overhead applied to Work In Process
Total manufacturing costs incurred
____________
$___________
$
Add: Beginning work in process inventory
____________
Total manufacturing costs to account for
$
Deduct: Ending work in process inventory
(___________)
Cost of Goods Manufactured
$
Cost Handy Handbook
Page - 174 -
.
McGraw Second Edition
MARSHALL PROPS UNLIMITED
Marshall Props Unlimited
Schedule of Cost of Goods Sold
For the Year Ended December 31, 2006
Finished goods inventory, 1-1-2006
$
Add: Cost of goods manufactured
___________
Goods available for sale
$
Less: Finished goods inventory, 12-31-2006
(___________)
Cost of goods sold
$
Add / (Deduct): Under (Over) applied overhead
____________
Adjusted cost of goods sold
$
.
Marshall Props Unlimited
Income Statement
For the Year Ended December 31, 2006
Sales
$
Less: Cost of goods sold
(___________)
Gross margin
$
Less: Selling and administrative expenses:

$




____________
Net Income
Cost Handy Handbook
(___________)
$
Page - 175 -
.
McGraw Second Edition
OATMAN COMPANY
(Job-Order Costing)
Oatman Company is a manufacturing firm that uses a job-order cost system. On January 1, 2010, the company’s
inventory balances were as follows:
Direct materials ....................... $16,000
Work in process ....................... 10,000
Finished goods ......................... 30,000
The company applies overhead cost to jobs on the basis of machine-hours. For 2010, the company estimated
that it would work 36,000 machine-hours and incur $153,000 in manufacturing overhead cost. The following
transactions were recorded during 2010:
a.
b.
c.
Direct materials purchased on account, $200,000.
Direct materials requisitioned for use in production, $190,000.
The following costs were incurred for employee services:
Direct labor .............................. $160,000
Indirect labor ........................... 27,000
Sales commissions ................... 36,000
Administrative salaries ............ 80,000
d.
e.
f.
g.
h.
i.
j.
Heat, power, and water costs incurred in the factory, $42,000.
Prepaid insurance expired during the year, $10,000 (90% relates to factory operations, and 10% relates to
selling and administrative activities).
Advertising costs incurred, $50,000.
Depreciation recorded for the year, $60,000 (85% relates to factory operations, and 15% relates to selling
and administrative activities).
Manufacturing overhead cost was applied to production. The company recorded 40,000 machine-hours for
the year.
Goods that cost $480,000 to manufacture according to their job cost sheets were transferred to the finished
goods warehouse.
Sales for the year totaled $700,000 and were all on account. The total cost to manufacture these goods
according to their job cost sheets was $475,000.
Required
1. Use t-accounts to calculate COGM, COGS, and net income.
2. Write journal entries for every applicable number in the t-accounts. (Remember that every arrow is a
journal entry.)
3. Prepare an income statement for the year. (Do not prepare a schedule of cost of goods manufactured; all of
the information needed for the income statement is available in the journal entries and t-accounts you have
prepared.)
Cost Handy Handbook
Page - 176 -
McGraw Second Edition
OATMAN COMPANY
Calculations… [T-Accounts]
Cost Handy Handbook
Page - 177 -
McGraw Second Edition
OATMAN COMPANY
Calculations… [Journal Entries]
Cost Handy Handbook
Page - 178 -
McGraw Second Edition
OATMAN COMPANY
Oatman Company
Income Statement
For the Year Ended December 31, 2010
Sales
$
Less: Cost of goods sold
(___________)
Gross margin
$
Less: Selling and administrative expenses:

$




____________
Net Income
Cost Handy Handbook
(___________)
$
Page - 179 -
.
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 180 -
McGraw Second Edition
ACTIVITY-BASED COSTING
How can unit costs be calculated?
(Some review, some new)
Cost Handy Handbook
Page - 181 -
McGraw Second Edition
ACTIVITY-BASED COSTING
How might PERRY MASON define ABC?
Sometimes you win, sometimes you lose, and sometimes you get rained out.
SATCHEL PAIGE (c. 1905—1982), Baseball player
Pessimism is depreciated will-to-live.
ALBERT SCHWEITZER (1875—1965), Philosopher and physician
DESIGNATED DOODLE ZONE
Cost Handy Handbook
Page - 182 -
McGraw Second Edition
ACTIVITY-BASED COSTING
Two ways ABC differs from Job-Order Costing:


It is what you are inside that matters. You, yourself, are your only real capital.
VLADIMIR ZWORYKIN (1889—1982), Physicist
It often takes more courage to change one’s opinion than to stick to it.
GEORG CHRISTOPH LICHTENBERG (1742—1799), Physicist and philosopher
Cost Handy Handbook
Page - 183 -
McGraw Second Edition
ACTIVITY-BASED COSTING
HANDY NOTES:
ABC Steps:

Pools of MOH

Total Activity and Cost in pools

Calculate “Cost per” in pools

“Apply” to products/lines
It is easy to learn something about everything,
but difficult to learn everything about something.
NATHANIEL EMMONS (1745—1840), Clergyman
** NOTE TO “SELF”! **
See problem:
____________________________
On page _________
of the Handy Handouts
For an example of ABC.
Cost Handy Handbook
Page - 184 -
McGraw Second Edition
ACTIVITY-BASED COSTING
REVIEW / SELF-QUIZ (Job-Order Costing and ABC)
Do you know the answers to these questions??



Job-order costing is used for what type(s) of products?
How is cost-per-unit calculated in job-order costing?
Both ABC and job-order costing are trying to answer the same question: what
is it?





How does one calculate PDOR?
How does one calculate Applied MOH?
Where does Applied MOH go in the t-accounts?
Where does Over- or Under-Applied MOH go in the t-accounts?
Where do period costs go in the t-accounts?



How might Perry Mason define ABC?
How is ABC different than job-order costing?
What steps are performed when calculating activity-based costs?
Cost Handy Handbook
Page - 185 -
McGraw Second Edition
ACTIVITY-BASED COSTING
HANDY Information:
Robin Cooper (literally one of the inventors of Activity-Based Costing) suggests four levels for
classifying manufacturing activities:
1. A unit-level activity is performed on each individual unit of products or services of the firm.
Examples of unit-level activities include using direct materials, using direct labor-hours, inserting
a component, and inspecting every unit. A unit-level activity is volume-based. The required
activity varies in proportion with the quantity of the cost object. The resource consumption driver
and the activity consumption driver are most likely to be the same for unit level activities.
2. A batch-level activity is performed for each batch or group of units or products or services. A
firm incurs a batch-level activity for each batch or group of units of products or services
scheduled to be processed together, rather than for each individual unit of the cost object. A batch
has more than one unit of a product or service or more than one product or service. Examples of
batch-level activities are setting up machines, placing purchase orders, scheduling production,
conducting inspections by batch, handling materials, and expediting production.
3. A product-sustaining activity supports the production of a specific product or service. Examples
of product-sustaining activities include designing products, administering parts required for
products, and engaging in engineering changes to modify products.
4. A facility-sustaining activity supports the operation in general. These activities are not caused
by products or customer service needs and cannot be traced to individual units, batches, or
products. Examples of facility sustaining activities include providing security and safety,
performing maintenance of general purpose machines, managing the plant, incurring factory
property taxes and insurance and closing of the books each month. Some firms refer to these
activities as business or infrastructure sustaining activities.
Examples of Activities and Activity Levels for a Manufacturer of Electric Motors
Activity
Direct materials
Direct labor-hours
Machine-hours
Number of production orders
Number of special components
Activity Level
Unit
Unit
Unit
Batch
Batch
Robin Cooper, “Cost Classification in Unit-Based Manufacturing Cost Systems,” Journal of Cost Management,
Fall 1990, pp. 5-14.
Cost Handy Handbook
Page - 186 -
McGraw Second Edition
ACTIVITY-BASED COSTING
ARE YOU EVERYTHING YOU COULD BE?
People the world over came to the museum to walk across Marble Floor and gaze adoringly at
Marble Statue. Soon Marble Floor began to resent being treated like a doormat and said as much to
Marble Statue.
“It’s not fair!” Floor complained. “We started at the same place, but you’re revered while I’m
ignored.”
“My friend,” Statue replied. “You have a short memory. We originated in the same cave, but
don’t you remember what happened after that?”
“No,” Floor pouted.
“Let me remind you. When the designer cut us from the cave, you resisted his tools and efforts
to shape you.”
“Of course I did!” Floor shouted. “It hurt! I didn’t need to be shaped.”
“When you fought being shaped, he worked on me,” Statue said. “I was willing to endure the
hardship because it takes work to reach toward your potential.”
“I never thought of it that way,” Floor said.
“You gave up halfway,” said Statue. “So don’t blame the people who step on you now.”
-- Adapted from The Motivational Manager, Lawrence Ragan Communications
Cost Handy Handbook
Page - 187 -
McGraw Second Edition
MIZZOU COMPANY
(Activity-Based Costing)
Mizzou Company manufactures two products, the Miz and the Zou. The company estimated it would incur
$130,890 in manufacturing overhead costs during the current period. Overhead currently is assigned to
products on the basis of direct labor hours. Data concerning the current period’s operations appear below:
Estimated volume
Direct labor hours per unit
Direct material cost per unit
Direct labor cost per unit
Miz
400 units
0.70 hour
$10.70
$11.20
Zou
1,200 units
1.20 hours
$16.70
$19.20
Management is considering using activity-based costing to apply manufacturing overhead cost to products for
external financial reports. The activity-based costing system would have the following three activity pools:
Activity Cost Pool
Machine Setups
Purchase Orders
General Factory
Activity Cost Pool
Number of setups
Number of purchase orders
Number of direct labor hours
Activity Measure
Number of setups
Number of purchase orders
Direct labor hours
Expected Activity
Miz
Zou
100
130
810 1,270
280 1,440
Overhead Cost
$13,570
$91,520
$25,800
Total
230
2,080
1,720
Required:
1. Compute the predetermined overhead rate using the traditional method. Using this rate and the other
data from the problem, calculate the unit product cost of both products.
2. Determine the activity rate (i.e,. predetermined overhead rate) for each of the cost pools.
3. Use the activity rates you calculated in (2.) above to:
a. Compute the total amount of manufacturing overhead cost that would be applied to each
product using the activity-based costing system.
b. Then, determine the amount of manufacturing overhead cost per unit of each product.
c. Finally, compute the unit product cost of each product.
Cost Handy Handbook
Page - 188 -
McGraw Second Edition
MIZZOU COMPANY
Calculations ...
Cost Handy Handbook
Page - 189 -
McGraw Second Edition
AUDIO BASICS CORPORATION
(Activity-Based Costing)
Audio Basics Corporation manufactures two types of video cassettes: standard and high-grade. The standard
cassettes are primarily for home use. The high-grade version is used for television commercials.
Management believes the accounting system may not be accurately allocating costs to products, particularly
since sales of the high-grade video tapes have been increasing. Management asked you to investigate the cost
allocation problem. You find that manufacturing overhead is currently assigned to products based on the direct
labor costs in the products. For your investigation, you have data from last year. Last year's manufacturing
overhead was $880,000 based on production of 320,000 standard cassettes and 100,000 high-grade cassettes.
Direct labor and direct materials costs were as follows:
Direct labor
Direct materials
Standard
$348,000
$250,000
High-Grade
$132,000
$228,000
Total
$480,000
$478,000
Management determined that overhead costs are caused by three cost drivers. The cost drivers and their costs
for last year were as follows:
Cost Pool
Production Run Setup
Quality Testing
Packing Activities
Total overhead
Costs Assigned
$400,000
$360,000
$120,000
$880,000
Cost Driver
Number of production runs
Quality tests performed
Shipping orders processed
Activity Level
Standard
High-Grade
40
10
180
120
100
50
Total
50
300
150
Required:
1. (a)
(b)
2. (a)
(b)
How much of the overhead will be assigned to each product if the above three cost drivers are used to
allocate overhead?
What is the total cost per unit produced for each product?
How much of the overhead will be assigned to each product if direct labor cost had been used to
allocate overhead?
What would the total cost per unit produced be for each product?
Cost Handy Handbook
Page - 190 -
McGraw Second Edition
AUDIO BASICS CORPORATION
Calculations ...
Cost Handy Handbook
Page - 191 -
McGraw Second Edition
J.B. GOODE COMPANY
(Activity-Based Costing)
J.B. Goode Company produces two models of guitars. One is a standard acoustic guitar model that sells for
$600 and is constructed from medium-grade materials. The other model is a custom-made acoustic-electric
guitar with pearl inlays and a body constructed from special woods. The custom guitar sells for $1,000. Both
guitars require 10 hours of direct labor to produce, but the custom guitar is manufactured by more experienced
workers who are paid at a higher rate.
Most of J.B. Goode’s sales come from the standard guitar, but sales of the custom model have been growing.
Here is the company’s sales, production, and cost information for last year.
Sales and production volume in units
Unit costs:
Direct materials
Direct labor
Manufacturing overhead
Total unit costs
Manufacturing
Overhead Cost
Building rent
Maintenance
Purchasing
Inspection
Indirect materials
Supervision
Supplies
Total Overhead
Amount
$40,000
15,000
22,000
12,000
15,000
28,000
3,000
$135,000
Standard
Guitar
900
Custom
Guitar
100
$ 150
180
135
$465
$ 375
240
135
$750
Cost Driver
Square footage
Direct labor hours
Number of purchase orders
Number of inspections
Number of units
Number of inspections
Number of units
Standard
Guitar
3,000
9,000
1,500
400
900
400
900
Custom
Guitar
1,000
1,000
500
600
100
600
100
The company allocates overhead costs using the traditional method with an activity base of direct labor hours.
Normal production in the facility utilizes 10,000 direct labor hours.
Chuck B., president of J.B. Goode, is concerned that the traditional cost-allocation system the company is using
may not be generating accurate information and that the selling prices of the guitar may not be covering its true
cost.
Required:
1. Using the traditional method, how much overhead is allocated to the standard guitars, and how much to
the custom guitars? Discuss why this might not be an accurate way to assign overhead costs to
products.
2. J.B. Goode’s controller developed the cost driver and activity data presented above. Use activitybased costing to assign the total cost of overhead to each model of guitar.
3. Calculate the cost of one custom guitar using activity-based costing. Why is the cost different from the
cost calculated using the traditional allocation method? At the current selling price, is the company
covering its true cost of production? Explain your answers.
Cost Handy Handbook
Page - 192 -
McGraw Second Edition
J.B. GOODE COMPANY
Calculations ...
Cost Handy Handbook
Page - 193 -
McGraw Second Edition
THE CUTTERS, INC. (A)
(Activity-Based Costing)
Chase Gardner is an expatriate product manager for The Cutters, Inc., a manufacturer of hunting blades
and knives. Its production facilities are located in Argentina. In recent years profits have begun to decline and
Chase is trying to improve the situation by focusing the company’s sales efforts on the most profitable products.
Chase’s reports generally indicate that complex, low volume products (such as The Hunter) are much more
profitable than simple, high volume products (such as The Carver).
The Cutters currently uses a job-order costing and allocates manufacturing overhead to product lines
using direct labor hours. 780,000,000 Pesos (Argentine) of manufacturing overhead costs were incurred during
2003, and 10,000 direct labor hours occurred producing all of the company’s many product lines.
Additional information about The Hunter and The Carver product lines is provided below.
Sales
Cost:
Direct material cost
Direct labor cost
The Hunter
19,500,000 Pesos
The Carver
53,000,000 Pesos
4,500,000 Pesos
1,200,000 Pesos
10,000,000 Pesos
6,000,000 Pesos
Units produced
Total direct labor hours worked
15,000
80
100,000
400
Required:
Using job-order costing, apply overhead to The Hunter and The Carver and calculate the gross profit of these
two product lines.
Cost Handy Handbook
Page - 194 -
McGraw Second Edition
THE CUTTERS, INC. (A)
Calculations ...
Cost Handy Handbook
Page - 195 -
McGraw Second Edition
THE CUTTERS, INC. (B)
(Activity-Based Costing)
Sales and direct costs remain as described in The Cutters, Inc. (A). However, rather than allocating
indirect manufacturing costs to product lines using a single rate, Chase is considering the use of more
sophisticated costing methods. With activity-based costing in mind, he has collected the following information.
COST DRIVER
Number of parts
Number of production runs
Number of machine hours
Number of components tested
Direct labor hours
OVERHEAD COST POOL
POOL 1
Materials purchasing and handling
cost
POOL 2
Production engineering and design
Production machine setup
POOL 3
Production machine depreciation
Production machine maintenance
POOL 4
Quality testing
POOL 5
Plant security
Plant supervision
Building maintenance
Factory supplies
Factory insurance
Total Manufacturing Overhead
OVERHEAD COST
75,000,000 Pesos
60,000,000 Pesos
40,000,000 Pesos
300,000,000 Pesos
50,000,000 Pesos
100,000,000 Pesos
25,000,000 Pesos
70,000,000 Pesos
10,000,000 Pesos
20,000,000 Pesos
30,000,000 Pesos
780,000,000 Pesos
The Cutters, Inc., experienced the following levels of activity:
Number of parts
750,000
Number of production runs
25
Number of machine hours
2,000
Number of components tested
25,000
Number of direct labor hours
10,000
Additional information regarding the The Hunter and The Carver can be found below.
The Hunter The Carver
Number of units produced
15,000
100,000
Number of parts per unit
3
1
Number of production runs
1
1
Number of machine hours
16
48
Number of components tested
1,000
100
Number of direct labor hours
80
400
Required:
Using activity-based costing, apply overhead to The Hunter and The Carver and calculate the gross profit of
these two product lines.
Cost Handy Handbook
Page - 196 -
McGraw Second Edition
THE CUTTERS, INC. (B)
Calculations ...
Cost Handy Handbook
Page - 197 -
McGraw Second Edition
THE CUTTERS, INC. (B)
Calculations (continued) ...
Cost Handy Handbook
Page - 198 -
McGraw Second Edition
GREASY HANDS
(Activity-Based Costing)
Greasy Hands, a small hamburger eatery, has identified the following resources used in its operations:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
Bread
Hourly help
Store rent
Ground beef
Catsup
Advertising for two-pound burger special
Salary for the store managers
Utilities
$1-off-coupon for the second order
Bags
Required:
1. Classify these costs as unit-level, batch-level, product-sustaining, or facility-sustaining costs.
2. Suggest a proper cost driver for each of the above items.
Cost Handy Handbook
Page - 199 -
McGraw Second Edition
HBM INDUSTRIES
(Activity-Based Costing)
HBM Industries manufactures industrial tools after creating a mold for each newly designed tool. The president
of HBM Industries personally inspects every unit during the trial run of a new mold and 10 percent of the units
manufactured in the first three batches. Some of the activities of the firm follow:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
Designing molds
Creating molds
Inspecting products
Modifying molds
Setting up production
Requesting and moving materials
Machining
Insuring equipment
Paying suppliers
Heating the factory
Required:
1. Classify each of the activities as a unit-level, batch-level, product-sustaining, or facility-sustaining
activity.
2. Identify a proper cost driver for each activity.
Cost Handy Handbook
Page - 200 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 201 -
McGraw Second Edition
CHEETAH COMPANY
(Activity-Based Costing)
Cheetah Company has identified the following overhead cost pools and cost drivers:
Cost Pools
Machine setup
Materials handling
Electric power
Activity Costs
$360,000
100,000
40,000
Cost Driver
Setup hours
Pounds of materials
Kilowatt-hours
Driver Consumption
3,000
25,000
40,000
The following cost information pertains to the production of its products The Quick and The Dead.
Number of units produced
Direct materials cost ($)
Direct labor cost ($)
Number of setup hours
Pounds of materials used
Kilowatt-hours
The Quick
4,000
$40,000
$24,000
200
1,000
2,000
The Dead
20,000
$50,000
$40,000
240
3,000
4,000
Required:
Use the activity-based costing approach to calculate the unit cost for each product.
Cost Handy Handbook
Page - 202 -
McGraw Second Edition
CHEETAH COMPANY
Calculations…
Cost Handy Handbook
Page - 203 -
McGraw Second Edition
KNOB NOSTER HOSPITAL
(Activity-Based Costing)
Knob Noster Hospital uses a hospital wide overhead rate based on nurse-hours. The critical care unit (CCU),
which has 30 beds, applies overhead using patient-days. Its budgeted cost and operating data for the year
follow:
Budget Information
Hospital total overhead
Hospital total nurse-hours
$69,120,000
1,152,000
Budget Cost Driver Information for CCU for the Month of June
Cost Pool
Beds
Equipment
Nursing care
Budget Cost
$810,000
422,500
457,500
$1,690,000
Cost Driver
Number of bed-days
Number of patient-days
Number of nurse-hours
Budget Cost Driver Activity
900
845
6,000
In June, Knob Noster Hospital’s critical care unit had the following operating data:
Nurse-hours
Patient-days
5,900
870
Required:
1. Calculate the CCU’s overhead costs for the month of June using
a. The hospital-wide rate.
b. The CCU department-wide rate.
c. The ABC cost drivers for the CCU department.
2. Explain the differences and determine which overhead assignment method is more appropriate.
Cost Handy Handbook
Page - 204 -
McGraw Second Edition
KNOB NOSTER HOSPITAL
Calculations…
Cost Handy Handbook
Page - 205 -
McGraw Second Edition
KNOB NOSTER HOSPITAL
Calculations…
Cost Handy Handbook
Page - 206 -
McGraw Second Edition
PROCESS COSTING
We are still answering what question?
Process costing is used for what types of products?
When a company uses process costing,
costs are accumulated by … _________________
DESIGNATED DOODLE ZONE
Cost Handy Handbook
Page - 207 -
McGraw Second Edition
PROCESS COSTING
How can unit costs be calculated?
(Some review material, some new)
DESIGNATED DOODLE ZONE
Cost Handy Handbook
Page - 208 -
McGraw Second Edition
PROCESS COSTING
Parallel and Sequential Processing
When you get to the end of your rope, tie a knot and hang on.
FRANKLIN D. ROOSEVELT (1882—1945), 32nd U.S. President
Cost Handy Handbook
Page - 209 -
McGraw Second Edition
PROCESS COSTING
What is an EQUIVALENT UNIT? (“EU,” for short)
DESIGNATED DOODLE ZONE
Cost Handy Handbook
Page - 210 -
McGraw Second Edition
PROCESS COSTING
HANDY NOTES:
Process Costing Steps:
 Summarize total physical units and cost
 Compute EU and Cost per EU
 Account for cost of units completed and cost of
ending inventory
The greatest results in life are usually attained by simple means and the exercise of ordinary qualities.
These may for the most part be summed up in these two—common sense and perseverance.
OWEN FELTHAM (c. 1602—1668), Writer
A professional is someone who can do his best work when he doesn’t feel like it.
ALISTAIR COOKE (1908—2004), Journalist
Truth is often eclipsed but never extinguished.
LIVY (59 B.C. —17 A.D.), Historian
** NOTE TO “SELF”! **
See problem:
____________________________
On page _________
of the Handy Handouts
For an example of process costing,
including EU calculations.
Cost Handy Handbook
Page - 211 -
McGraw Second Edition
PROCESS COSTING
REVIEW / SELF-QUIZ
Do you know the answers to these questions??

Job-order costing, ABC and process costing are trying to answer the same
question: what is it?
On what types of products would you generally use Process Costing?


What is sequential processing?
What is parallel processing?




What is an EU?
How do you calculate EU using the weighted-average method?
How do you calculate EU using the FIFO method?
In what t-account do you calculate EU?

What steps are performed when calculating process costs?

Good has two meanings: It means that which is good absolutely and that which is good for somebody.
ARISTOTLE (384—322 B.C), Philosopher
Cost Handy Handbook
Page - 212 -
McGraw Second Edition
B. G. WIP COMPANY
(Process Costing)
B. G. Wip Company manufactures and sells buggy whips as novelty items. A continuous flow production
operation is necessary to satisfy demand. The company is relatively new and the accountant hired last month
worked only for a job order manufacturing company before this position. The accountant is familiar with what
costs to accumulate as product costs, but is having difficulty determining the amount of output for the month so
that unit costs can be computed. Below are some notes the accountant has gathered to help determine the output
for the last process center in the manufacturing process.
2,000 units were in beginning inventory.
9,000 units were transferred in from the preceding process center during the month.
7,700 units were completed and transferred to finished goods inventory during the month.
Both the beginning and ending work in process inventory had all material added. Conversion was 60 percent
complete on the beginning work in process inventory but only 1/3 complete on the ending inventory.
Required:
Prepare a schedule for the new accountant showing the amount of production for the period in the department.
Use both the weighted average and FIFO methods.
Cost Handy Handbook
Page - 213 -
McGraw Second Edition
ABIQUA ACRES
(Process Costing)
The following information is available for the Pasteurization Department of the Abiqua Acres dairy farm for the
year 1996:
Units
Costs
Work in process, January 1
(100% complete as to direct materials,
40% complete for conversion costs)
5,000
Direct materials
$20,000
Conversion costs
16,000
Total work in process, January 1
$36,000
Started in production during the year
60,000
Costs added:
Direct materials
Conversion costs
Total costs added during 1996
$250,000
450,000
$700,000
Work in process, December 31
(100% complete as to direct materials,
50% complete as to conversion costs)
Units transferred out during the year
57,000
Materials are added at the beginning of the process. Round unit costs to 4 decimal places.
Required:
1. What would be the equivalent units of production for materials using the weighted average method?
2. What would be the equivalent units of production for conversion costs using the weighted average method?
3. What would be the cost per equivalent unit of production for materials using the weighted average
method?
4. What would be the cost per equivalent unit of production for conversion costs using the weighted average
method?
5. What would be the cost of goods transferred out using the weighted average method?
6. What would be the cost of ending work in process using the weighted average method?
Repeat steps 1 through 6 using the FIFO Method.
Cost Handy Handbook
Page - 214 -
McGraw Second Edition
ABIQUA ACRES
Weighted Average Method … Calculations ...
Cost Handy Handbook
Page - 215 -
McGraw Second Edition
ABIQUA ACRES
FIFO Method … Calculations ...
Cost Handy Handbook
Page - 216 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 217 -
McGraw Second Edition
THE JOHN COMPANY
(Process Costing)
October 2005 manufacturing cost data are presented below for the Machining process center of The John
Company.






Beginning work in process consists of 5,000 gallons, all materials, 60 percent of conversion.
Beginning work in process costs include $5,050 materials and $3,270 conversion.
Gallons started in October are 40,000.
Material costs in October are $44,000.
Conversion costs in October are $48,600.
Ending work in process consists of 10,000 gallons, all materials and 40 percent of conversion.
Required:
1. Calculate the value of goods transferred-out and ending inventory using the weighted average method.
2. Calculate the value of goods transferred-out and ending inventory using the FIFO method.
Cost Handy Handbook
Page - 218 -
McGraw Second Edition
THE JOHN COMPANY
Weighted Average Method … Calculations ...
Cost Handy Handbook
Page - 219 -
McGraw Second Edition
THE JOHN COMPANY
FIFO Method … Calculations …
Cost Handy Handbook
Page - 220 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 221 -
McGraw Second Edition
STEINMUELLER STEINS, INC.
(Process Costing)
The following information is available for the Molding Department of Steinmueller Steins for the month of
July:
Units
Work in process, July 1
(70% complete for conversion costs)
Direct materials
Direct labor
Manufacturing overhead
Total work in process, July 1
Costs
5,000
$ 6,000
3,000
4,000
$13,000
Started in production during July
20,000
Costs added:
Direct materials
Direct labor
Manufacturing overhead
Total costs added during July
$18,000
8,000
10,000
$36,000
Work in process, July 31
(80% complete for conversion costs)
2,000
Materials are added at the beginning of the process. Round unit costs to 2 decimal places.
Required:
1. What would be the equivalent units of production for materials using the Weighted Average Method?
2. What would be the equivalent units of production for conversion costs using the Weighted Average
Method?
3. What would be the cost per equivalent unit of production for materials using the Weighted Average
Method?
4. What would be the cost per equivalent unit of production for conversion costs using the Weighted Average
Method?
5. What would be the cost of goods transferred out using the Weighted Average Method?
6. What would be the cost of ending work in process using the Weighted Average Method?
Repeat steps 1 through 6 using the FIFO Method.
Cost Handy Handbook
Page - 222 -
McGraw Second Edition
STEINMUELLER STEINS, INC.
Weighted Average Method … Calculations ...
Cost Handy Handbook
Page - 223 -
McGraw Second Edition
STEINMUELLER STEINS, INC.
FIFO Method … Calculations ...
Cost Handy Handbook
Page - 224 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 225 -
McGraw Second Edition
CANDLELIGHT CANDLES CO.
(Process Costing)
The following is data for the August 2001 operations of the production department of Candlelight Candles.
Beginning inventory:
Units in process
Percent complete with respect to materials
Percent complete with respect to conversion
25,000
100%
40%
Costs in the beginning inventory:
Materials
Conversion
Total
$42,650
17,152
$59,802
Units started into production during August
Units completed and transferred out
510,000
523,000
Costs added to production during November
Materials
Conversion
Total
$433,500
339,690
$773,190
Work in process inventory, ending:
Units in process
Percent complete with respect to materials
Percent complete with respect to conversion
12,000
100%
80%
Required:
Calculate the value of goods transferred-out and ending inventory using both the weighted average and FIFO
methods.
Cost Handy Handbook
Page - 226 -
McGraw Second Edition
CANDLELIGHT CANDLES CO.
Weighted Average Method … Calculations ...
Cost Handy Handbook
Page - 227 -
McGraw Second Edition
CANDLELIGHT CANDLES CO.
FIFO Method … Calculations ...
Cost Handy Handbook
Page - 228 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 229 -
McGraw Second Edition
CUTTING EDGE SKIS
(Process Costing)
The following is data for the November, 1997, operations of the shaping and milling department of Cutting
Edge Skis.
Work in process inventory, beginning:
Units in process
Percent complete with respect to materials
Percent complete with respect to conversion
Costs in the beginning inventory:
Materials
Conversion
Total
200
50%
30%
$3,000
1,000
$4,000
Units started into production during November
Units completed and transferred out
5,000
4,800
Costs added to production during November
Materials
Conversion
Total
$74,000
70,000
$144,000
Work in process inventory, ending:
Units in process
Percent complete with respect to materials
Percent complete with respect to conversion
400
40%
25%
Required:
1. Calculate the value of goods transferred-out and ending inventory using the weighted average method.
2. Calculate the value of goods transferred-out and ending inventory using the FIFO method.
Cost Handy Handbook
Page - 230 -
McGraw Second Edition
CUTTING EDGE SKIS
Weighted Average Method … Calculations ...
Cost Handy Handbook
Page - 231 -
McGraw Second Edition
CUTTING EDGE SKIS
FIFO Method … Calculations ...
Cost Handy Handbook
Page - 232 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 233 -
McGraw Second Edition
BROTHER’S BAKERIES (A)
(Process Costing)
Brother’s Bakeries makes loafs of bread for various distributors. Two departments are involved—Mixing and
Baking. Data relating to the loaves of bread mixed in the Mixing Department during June are given below:
Loaves Percent
of Bread Completed
Work in process, June 1 ............................ 30,000
55%
Started into processing during June........... 480,000
-Work in process, June 31 .......................... 20,000
90%
All materials are added at the beginning of processing in the Mixing Department.
Required:
Calculate the loaves of bread transferred-out of the Mixing Department and in ending inventory using the
weighted average method.
Cost Handy Handbook
Page - 234 -
McGraw Second Edition
BROTHER’S BAKERIES (A)
Calculations…
Cost Handy Handbook
Page - 235 -
McGraw Second Edition
BROTHER’S BAKERIES (B)
(Process Costing)
Brother’s Bakeries makes loafs of bread for various distributors. Two departments are involved—Mixing and
Baking. Data relating to the loaves of bread mixed in the Mixing Department during June are given below:
Loaves Percent
of Bread Completed
Work in process, June 1 ............................ 30,000
55%
Started into processing during June........... 480,000
-Work in process, June 31 .......................... 20,000
90%
All materials are added at the beginning of processing in the Mixing Department.
Required:
Calculate the loaves of bread transferred-out of the Mixing Department and in ending inventory using the FIFO
method.
Cost Handy Handbook
Page - 236 -
McGraw Second Edition
BROTHER’S BAKERIES (B)
Calculations…
Cost Handy Handbook
Page - 237 -
McGraw Second Edition
PIPES COMPANY
(Process Costing)
The Pipes Company manufactures a high-quality metal pipe in two departments, Welding and Finishing.
Materials are introduced at various points during work in the Welding Department. After the welding is
completed, the materials are transferred into the Finishing Department.
Selected data relating to the Welding Department during Many are given below:
Production data:
Pounds in process, May 1: materials 100%
complete, conversion 90% complete ........................................................ 70,000
Pounds started into production during May ................................................. 350,000
Pounds completed and transferred to Finishing ...........................................
?
Pounds in process, May 31: materials 75% complete,
conversion 25% complete ........................................................................ 40,000
Cost data:
Work in process inventory, May 1:
Materials cost ........................................................................................ $ 86,000
Conversion cost .................................................................................... 36,000
Cost added during May:
Materials cost ........................................................................................ 447,000
Conversion cost .................................................................................... 198,000
The company uses the weighted-average method.
Required:
Calculate the value of goods transferred-out and ending inventory using the weighted average method.
Cost Handy Handbook
Page - 238 -
McGraw Second Edition
PIPES COMPANY
Calculations…
Cost Handy Handbook
Page - 239 -
McGraw Second Edition
EDWARDS, INC.
(Process Costing)
Edwards Inc. manufactures a single product and uses process costing. The company’s product goes through two
processing departments, Hammering and Drilling. The following activity was recorded in the Hammering
Department during July:
Production data:
Units in process, July 1: materials 60% complete,
conversion 30% complete ........................................................................
Units started into production ........................................................................
Units completed and transferred to Drilling .................................................
Units in process, July 31: materials 80%
complete, conversion 40% complete ........................................................
60,000
510,000
?
70,000
Cost data
Work in process inventory, July 1:
Materials cost ........................................................................................ $ 27,000
Conversion cost .................................................................................... 13,000 $ 40,000
Cost added during July:
Materials cost ........................................................................................ 468,000
Conversion cost .................................................................................... 357,000 825,000
Total cost .........................................................................................................
$865,000
Materials are added at several stages during the hammering process. The company uses the FIFO method.
Required:
Calculate the value of goods transferred-out and ending inventory using the FIFO method.
Cost Handy Handbook
Page - 240 -
McGraw Second Edition
EDWARDS, INC.
Calculations…
Cost Handy Handbook
Page - 241 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 242 -
McGraw Second Edition
BUDGETING
THE FIRM
What we hope ever to do with ease, we must first learn to do with diligence.
SAMUEL JOHNSON (1709—1784), Lexicographer and writer
Failure is the condiment that gives success its flavor.
TRUMAN CAPOTE (1924—1984), Writer
Cost Handy Handbook
Page - 243 -
McGraw Second Edition
BUDGETING
What is a “BUDGET”?
Budgets are used for TWO major purposes:


DESIGNATED DOODLE ZONE
The art of living is always to make a good thing out of a bad thing.
E. F. SCHUMACHER (1911—1977), Economist
Cost Handy Handbook
Page - 244 -
McGraw Second Edition
BUDGETING
Additional Handy Information:
The Roles of Budgeting [also, The Benefits of Budgeting]:
Planning = linking objectives and resources
Motivation = degree of participation, level of goals (goal theory)
Evaluation = fair and productive
Coordination = among Marketing, Operations, Finance, Distribution, Purchasing, etc.
Communication = “ – “
Education = learning about business by all levels of managers and staff
Ritual = need to do more than just go through the motions every year to reap the benefits of
planning
The Environments of Budgeting:
Economic Variables = assumptions, indicators, and forecasts are implicit at the onset of
budgeting
Organizational Factors = corporate culture, company tradition and taboos, leadership styles
Behavioral Patterns = link between management philosophy, leadership style, and budget
formulation; budget slack and budgeting behavior; “people make budgets work, not vice
versa”
Managerial Decisions About the Budget Process:
What? = management’s decisions about the form or structure of the budget; line-item,
program, or other budget models
How? = specific process of assigning resources during budget deliberations; incremental,
zero-base, and hybrid forms of budgeting; tradeoff: time vs. accuracy
Who? = personnel who will be directly involved in formulating the budget; authoritative vs.
participative budgeting
One does what one is; one becomes what one does.
ROBERT [Edler von] MUSIL (1880—1942), Novelist and essayist
Cost Handy Handbook
Page - 245 -
McGraw Second Edition
BUDGETING
Budgets are generally prepared in this order:




The Master Budget =
DESIGNATED DOODLE ZONE
It is not in everyone’s power to secure wealth, office or honors;
but everyone may be good, generous, and wise.
LUC de CAPIERS (1715—1747), Moralist and essayist
Cost Handy Handbook
Page - 246 -
McGraw Second Edition
BUDGETING
Punctuality is the politeness of kings.
LOUIS XVIII (1755—1824), King of France
Cost Handy Handbook
Page - 247 -
McGraw Second Edition
BUDGETING
REVIEW / SELF-QUIZ
Do you know the answers to these questions??

What is a budget?

Budgets are used for what two major purposes in organizations?

In what order are the budgets prepared?

What do the words “pro-forma” mean?

What is the master budget?
[N]o legacy is so rich as honesty.
WILLIAM SHAKESPEARE, All’s Well That Ends Well
Character is long-standing habit.
PLUTARCH (c. 46—120 A.D.), Biographer
Grant me the courage not to give up even though I think it is hopeless.
CHESTER W. NIMITZ (1885—1966), U.S. Navy Admiral
Cost Handy Handbook
Page - 248 -
McGraw Second Edition
BEE-SAFE COMPANY
(Budgeting)
BeeSafe Company manufactures burglar-resistant commercial door locks. Recently, the company began selling
locks on the Web, and the company expects sales to increase dramatically compared with the prior year. For
the past year, 2004, unit sales were as follows:
First quarter
Second quarter
Third quarter
Fourth quarter
21,000
26,000
25,000
30,000
Because the company started selling locks on the web, it expects sales in each quarter of 2005 will be 30
percent higher than they were in 2004. The selling price for each lock is $40.
Required:
What will be sales, in units and in dollars, in 2005?
Cost Handy Handbook
Page - 249 -
McGraw Second Edition
BEE-GO COMPANY
(Budgeting)
Bee-Go produces a sports drink that is sold in southern Florida. The company expects sales to be 15,600 bottles
in January, 16,500 bottles in February, 16,000 bottles in March, and 18,500 bottles in April. There are 1,600
bottles on hand at the start of January. Bee-Go desires to maintain monthly ending inventory equal to 10
percent of next month’s expected sales.
Required:
How many units (bottles) will Bee-Go need to produce in the months of January, February, and March?
Cost Handy Handbook
Page - 250 -
McGraw Second Edition
BEE-KILL CHEMICAL (A)
(Budgeting)
Bee-Kill Chemical company has estimated that production for the next five quarters will be:
Production Information
Quarter 1, 2006
46,000 units
Quarter 2, 2006
42,000 units
Quarter 3, 2006
50,000 units
Quarter 4, 2006
39,000 units
Quarter 1, 2007
48,000 units
Finished units of production require 4 pounds of raw material per unit. The raw material cost is $4 per pound.
There are 45,000 pounds of raw material on hand at the beginning of Quarter 1, 2006. Bee-Kill desires to have
30 percent of the next quarter’s material requirements on hand at the end of each quarter.
Required:
1. How many pounds of raw material will need to be purchased for Quarters 1 through 4 of 2006?
2. How much will Bee-Kill spend on raw materials during 2006?
Cost Handy Handbook
Page - 251 -
McGraw Second Edition
BEE-KILL CHEMICAL (B)
(Budgeting)
Bee-Kill Chemical company has estimated that production for the next five quarters will be:
Production Information
Quarter 1, 2006
46,000 units
Quarter 2, 2006
42,000 units
Quarter 3, 2006
50,000 units
Quarter 4, 2006
39,000 units
Quarter 1, 2007
48,000 units
It takes 2.5 hours of direct labor to produce each unit of finished product. Direct labor costs are $20 per hour.
Each employee can work 450 hours per quarter.
Required:
1. How many hours of direct labor will be required for Quarters 1 through 4 of 2006?
2. How much will Bee-Kill spend on direct labor during 2006?
Cost Handy Handbook
Page - 252 -
McGraw Second Edition
BEE-KILL CHEMICAL (C)
(Budgeting)
Bee-Kill Chemical company has estimated that production for the next five quarters will be:
Production Information
Quarter 1, 2006
46,000 units
Quarter 2, 2006
42,000 units
Quarter 3, 2006
50,000 units
Quarter 4, 2006
39,000 units
Quarter 1, 2007
48,000 units
Bee-Kill has manufacturing overhead costs as follows:
Variable Costs
Indirect material
$2.25 per unit
Indirect labor
1.50 per unit
Utilities
1.00 per unit
Fixed Costs per Quarter
Supervisor salaries
$80,000
Factory depreciation
30,000
Other
4,100
Required:
1. How much will Bee-Kill spend on variable manufacturing overhead costs each quarter of 2006?
2. How much will Bee-Kill spend in total on manufacturing overhead during 2006?
Cost Handy Handbook
Page - 253 -
McGraw Second Edition
BEE-CEE’S GUITAR EMPORIUM (A)
(Budgeting)
Bee-Cee’s Guitar Emporium budgeted Credit sales in the first quarter of 2006 to be as follows:
January
February
March
$60,000
80,000
90,000
Credit sales in December 2005 are expected to be $100,000. The Emporium expects to collect 80 percent of a
month’s sales in the month of sale and 20 percent in the following month.
Required:
Estimate cash receipts for each month of the first quarter of 2006.
Cost Handy Handbook
Page - 254 -
McGraw Second Edition
BEE-CEE’S GUITAR EMPORIUM (B)
(Budgeting)
Bee-Cee’s Guitar Emporium expects to make instrument purchases in the first quarter of 2006 as follows:
January
February
March
$42,000
56,000
63,000
Purchases in December of 2005 are expected to be $70,000. The Emporium expects that 10 percent of a
month’s purchases will be paid in the month of purchase and 90 percent will be paid the following month.
Required:
Estimate cash disbursements related to purchases for each month of the first quarter of 2006.
Cost Handy Handbook
Page - 255 -
McGraw Second Edition
MISSOURI RETAILERS (A)
(Budgeting)
Missouri Retailers expects Credit sales in the next quarter as follows:
February
March
April
May
June
$ 85,000
95,000
75,000
85,000
108,000
Prior experience has shown that 50 percent of a month’s sales are collected in the month of sale, 30 percent in
the month following sale, and the remaining 20 percent in the second month following sale.
Required:
Estimate budgeted cash receipts for April, May and June.
Cost Handy Handbook
Page - 256 -
McGraw Second Edition
MISSOURI RETAILERS (B)
(Budgeting)
Missouri Retailers expects to make inventory purchases in the next quarter as follows:
March
April
May
June
$50,000
55,000
65,000
88,000
Prior experience has shown that 30 percent of a month’s purchases are paid in the month of purchase and 70
percent in the month following purchase.
Required:
Estimate cash disbursements related to purchases for April, May and June.
Cost Handy Handbook
Page - 257 -
McGraw Second Edition
WHITTLE COMPANY
(Budgeting)
Whittle Company plans to sell 4,600 units in October and 5,000 units in November of 1997. The beginning
inventory of finished goods on October 1 is expected to be 650 units. Whittle has a policy of wanting to have
10% of next month's sales as ending inventory.
Required: How much production should Whittle’s schedule for the month of October?
Cost Handy Handbook
Page - 258 -
McGraw Second Edition
PARADISE COMPANY
(Budgeting)
Paradise Company forcasted the following information about its inventories for the fiscal year ending June 30,
1995.
7/1/94
6/30/95
Raw Material
Work In Process
Finished Goods
40,000 lbs.
10,000 lbs.
80,000 lbs.
50,000 lbs.
10,000 lbs.
50,000 lbs.
During the manufacturing process, 2 lbs. of raw material is used to produce one finished unit of product.
Required:
If 500,000 units are expected to be manufactured during the fiscal year, how much raw material should Paradise
Company plan on purchasing?
Cost Handy Handbook
Page - 259 -
McGraw Second Edition
WHISKERS PRODUCTS, INC.
(Budgeting)
Whiskers Products expects the following sales to occur during 1996:
February
March
April
May
June
Sales Volume
110,000
120,000
100,000
120,000
110,000
Sales Revenue
$55,000
$60,000
$50,000
$60,000
$55,000
Whiskers Products makes all sales on account. Fifty percent of the sales is collected in the month of the sale,
thirty percent is collected in the following month, and the remaining twenty percent is collected two months
after the sale.
Required: Calculate the second quarter cash budget for Whisker Products, Inc.
Cost Handy Handbook
Page - 260 -
McGraw Second Edition
KAITLYN KORPORATION
(Budgeting)
The cash balance of Kaitlyn Korp. at the beginning of the month is $15,000, the balance required in the cash
account at the end of the month is $12,000, cash disbursements are $125,000, and cash collections from
customers for the month are $90,000.
Required: How much money should Kaitlyn Korp. borrow?
Cost Handy Handbook
Page - 261 -
McGraw Second Edition
ARCHER COMPANY
(Budgeting)
Archer Company has budgeted sales of 30,000 units in April, 40,000 units in May, and 60,000 units in June.
The company has 6,000 units on hand on April 1.
Required:
If the company requires an ending inventory equal to 20 percent of the following month's sales, what should be
Archer Company's production in May?
Refer to the data for Archer Company above. Each unit requires 3 pounds of material X. Some 24,000 pounds
of material X were on hand April 1, and the company requires materials on hand at the end of each month equal
to 25 percent of the following month's production needs.
Required: For April, the company should purchase how many pounds of material X?
Cost Handy Handbook
Page - 262 -
McGraw Second Edition
WARD COMPANY
(Budgeting)
Actual sales in Ward Company were: June, $30,000; July, $50,000; and August, $70,000.
Sales in September are expected to be $60,000.
Required Part 1:
If all sales are made on account and 30 percent of a month's sales are collected in the month of sale, 50 percent
in the first month after sale, and 15 percent in the second month after sale, then what are cash receipts for
September budgeted to be?
Required Part 2:
If twenty percent of sales are cash sales, then the remaining 80 percent of sales are on account. If 30 percent of
a month's account sales are collected in the month of sale, 50 percent in the first month after sale, and 15
percent in the second month after sale, then what are cash receipts for September budgeted to be?
Cost Handy Handbook
Page - 263 -
McGraw Second Edition
YOUNG PRODUCTS
(Budgeting)
Young Products produces coat racks. The projected sales for the first quarter of the coming year and the
beginning and ending inventory data are as follows:
Sales (units)
Unit price
Beginning inventory (units)
Targeted ending inventory (units)
100,000
$15
8,000
12,000
The coat racks are molded and then painted. Each rack requires four pounds of metal, which costs $2.50 per
pound. The beginning inventory of raw materials is 4,000 pounds. Young Products wants to have 6,000
pounds of metal in inventory at the end of the quarter. Each rack produced required thirty minutes of direct
labor time, which is billed at $9.00 per hour.
Required:
For the first quarter prepare a …
1. Sales budget
2. Production budget
3. Direct materials purchases budget
4. Direct labor budget
Cost Handy Handbook
Page - 264 -
McGraw Second Edition
YOUNG PRODUCTS
Calculations ...
Cost Handy Handbook
Page - 265 -
McGraw Second Edition
YOUNG PRODUCTS
Calculations ...
Cost Handy Handbook
Page - 266 -
McGraw Second Edition
CYCLONE COMPANY
(Production Budget)
Cyclone Company has the following sales budget for the next year:
Quarter 1
Quarter 2
Quarter 3
Quarter 4
10,000 units
8,000 units
12,000 units
14,000 units
Company policy is to have a finished goods inventory at the end of each quarter equal to 20 percent of the next
quarter’s sales.
Required:
Calculate the budgeted production for the second quarter of the next year.
Cost Handy Handbook
Page - 267 -
McGraw Second Edition
PENNER CORPORATION
(Production and Materials Purchase Budgets)
Penner Corporation’s budget calls for the following sales next year:
Quarter 1
Quarter 2
Quarter 3
Quarter 4
45,000 units
38,000 units
34,000 units
48,000 units
Each unit of the product requires 3 pounds of direct material. The company’s policy is to begin each quarter
with an inventory of the product equal to 10 percent of that quarter’s sales requirements and an inventory of
direct materials equal to 20 percent of that quarter’s direct materials requirements for productions.
Required:
Determine the production and materials purchase budgets for the second quarter.
Cost Handy Handbook
Page - 268 -
McGraw Second Edition
PENNER CORPORATION
Calculations ...
Cost Handy Handbook
Page - 269 -
McGraw Second Edition
KIT INCORPORATED
(Cash Budget)
Kit Incorporated has the following budget data for 2006:
Cash balance, beginning
Collections from customers
Expenses:
Direct materials purchases
Operating expenses
Payroll
Income taxes
Machinery purchases
$ 10,000
150,000
25,000
50,000
75,000
6,000
30,000
Operating expenses include $20,000 depreciation for buildings and equipment. The company requires a
minimum cash balance of $20,000.
Required:
Compute the amount the firm needs to finance or excess cash available for Kit Incorporated to invest.
Cost Handy Handbook
Page - 270 -
McGraw Second Edition
KIT INCORPORATED
Calculations…
Cost Handy Handbook
Page - 271 -
McGraw Second Edition
CMSU WHO
(Accounts Receivable Collections Budget)
CMSU Who’s credit sales have the following historical pattern:
70 percent collected in the month of sale
15 percent collected in the first month after sale
10 percent collected in the second month after sale
4 percent collected in the third month after sale
1 percent uncollectible
These sales on open account (credit sales have been budgeted for the last six months in 2007.
July
August
September
October
November
December
$ 60,000
70,000
80,000
90,000
100,000
85,000
Required:
1. Determine the estimated total cash collections from accounts receivable during October 2007.
2. Compute the estimated total cash collections during the fourth quarter from credit sales of the fourth
quarter.
Cost Handy Handbook
Page - 272 -
McGraw Second Edition
CMSU WHO
Calculations…
Cost Handy Handbook
Page - 273 -
McGraw Second Edition
Sincerity and truth are the basis of every virtue.
CONFUCIUS (551—479 B.C.), Philosophoer
Logic is a machine of the mind,
and if it is used honestly it ought to bring out an honest conclusion.
G. K. CHESTERTON (1874—1936), Journalist and essayist
Cost Handy Handbook
Page - 274 -
McGraw Second Edition
STANDARD COSTS and FLEXIBLE BUDGETING
DAY #1
What I hope you always remember (BOOK BUYING EXAMPLE):
What two reasons can be used to explain literally any variance?
#1.
#2.
DESIGNATED DOODLE ZONE
It is not the mountain we conquer but ourselves.
EDMUND HILLARY (1919—present), Explorer and the first man conquer Mt. Everest
Cost Handy Handbook
Page - 275 -
McGraw Second Edition
STANDARD COSTS and FLEXIBLE BUDGETING
Static Budget =
Flexible Budget =
Budget =
Standard =
We will learn how to calculate four variances:




DESIGNATED DOODLE ZONE
Cost Handy Handbook
Page - 276 -
McGraw Second Edition
FOOLS GOLD JEWELRY
(Standard Costs and Flexible Budgeting)
Fools Gold Jewelry produced 1,300 rings during March.
The standard cost of each ounce of gold used in a ring is $295 per ounce.
The standard quantity of material for each ring is a half ounce of gold per ring.
The cost of gold purchased and used in March was $198,900 at $300 per ounce.
Required:
Calculate the direct materials price variance and the direct materials quantity variance.
Cost Handy Handbook
Page - 277 -
McGraw Second Edition
GEE-WHIZ SHOES
(Standard Costs and Flexible Budgeting)
The standard labor cost in the production of a pair of Gee-Whiz Shoes is .5 hours at $18 per hour.
During the month of June, 20,000 pairs were produced.
Actual labor costs were $172,900 for 9,500 hours.
Required:
1. Calculate the actual labor rate paid during June.
2. Calculate the direct labor rate variance and the direct labor efficiency variance for the month of June.
Cost Handy Handbook
Page - 278 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 279 -
McGraw Second Edition
COWBOY BOOTS CO.
(Standard Costs and Flexible Budgeting)
Cowboy Boots Company uses a standard cost system. The standard material and labor costs for producing each
pair of boots are as follows
Materials (1.5 yards × $9.00)
Direct labor (.5 hours × $15)
$13.50
$ 7.50
During May, the company produced 7,000 pairs of boots.
10,000 yards of material were purchased for $80,000.
11,000 yards of material were used in production.
Also during May, 3,800 direct labor hours were worked at a cost of $58,900.
Required:
Calculate the material price and quantity variances and labor rate and efficiency variances.
Cost Handy Handbook
Page - 280 -
McGraw Second Edition
COWBOY BOOTS CO.
Calculations ...
Cost Handy Handbook
Page - 281 -
McGraw Second Edition
BIG DOG FOODS
(Standard Costs and Flexible Budgeting)
Big Dog Foods operates a small plant in Tigard, Oregon, manufacturing dog food using human-quality
ingredients. Big Dog produces dog food in batches of 1,000 pounds. The product sells for $4.00 per pound.
Standard costs for 2006 are:
Standard direct labor cost = $15 per hour
Standard direct labor hours per batch = 8 hours
Standard cost of Ground Brown Rice = $0.20 per pound
Standard pounds of Ground Brown Rice per batch = 800 pounds
Standard cost of Chicken Meal = $0.40 per pound
Standard pounds of Chicken Meal per batch = 200 pounds
At the start of 2006, the company estimated monthly production and sales of 40 batches. During the month of
June, 2006 (typically a somewhat slow month) 30 batches were produced (not an unusual level of production
for this month). The following costs were incurred:
Direct labor costs were $4,800 for 300 hours.
24,500 pounds of Ground Brown Rice costing $4,655 were purchased and used.
5,900 pounds of Chicken Meal costing $2,419 were purchased and used.
Required:
Calculate all variances for material and labor.
Cost Handy Handbook
Page - 282 -
McGraw Second Edition
BIG DOG FOODS
Calculations ...
Cost Handy Handbook
Page - 283 -
McGraw Second Edition
P.W. PRODUCTS
(Standard Costs and Flexible Budgeting)
P.W. Products has developed the following standards for one of its products:
Direct materials
Direct labor
25 pounds at $4 per pound
8 hours at $10 per hour
The following activity was recorded for the production of 12,000 units during the month of August:
Materials purchased
Materials used
Direct labor
Required:
1.
2.
3.
4.
350,000 pounds at $4.12 per pound
304,000 pounds
95,400 hours at $10.55 an hour
Compute the materials price variance.
Compute the materials usage variance.
Compute the labor rate variance.
Compute the labor efficiency variance.
Cost Handy Handbook
Page - 284 -
McGraw Second Edition
P.W. PRODUCTS
Calculations ...
Cost Handy Handbook
Page - 285 -
McGraw Second Edition
POSTMODERN PRODUCTS
(Standard Costs and Flexible Budgeting)
Postmodern Products manufactures a single product, for which the following standards have been developed:
Direct materials
Direct labor
Standard Quantity
or Hours
5 feet
? hours
Standard Price
or Rate
$3 per foot
? per hour
Standard
Cost
$15
?
During October, the company purchased 15,200 feet of direct materials at a cost of $47,880, all of which was
used in the production of 3,000 units.
A total of 5,400 hours was spent on production during the month. The actual cost of direct labor was
$61,560. The following labor variances have been computed:
Total labor variance
Labor rate variance
$1,185 Unfavorable
$ 540 Favorable
Required:
1. For direct materials, compute (a) the actual cost paid for materials per foot, (b) the materials price
variance, and (c) the materials usage variance.
2. For direct labor, compute (a) the standard labor rate per hour, (b) the standard hours allowed for the
output of 3,000 units, and (c) the standard hours allowed per unit of product.
Cost Handy Handbook
Page - 286 -
McGraw Second Edition
POSTMODERN PRODUCTS
Calculations ...
Cost Handy Handbook
Page - 287 -
McGraw Second Edition
LANDS’ END MEN’S SUITS
(Standard Costs and Flexible Budgeting)
The following information is available:
Std. DM cost per yard =
$6.00
DM qty. std. =
(Std. Qty.)
=
Actual price per yard
Actual quantity used per suit
Yards purchased
Units produced
2.8 yards of material
.6 yards of waste
.1 yards of rejects
3.5 yards per suit
how the standard was established
$5.00
4 yards
10,000
2,700
Required:
Calculate all variances.
Cost Handy Handbook
Page - 288 -
McGraw Second Edition
PIRATES, INC.
(Standard Costs and Flexible Budgeting)
Pirates, Inc. uses a standard cost system. Pirates has established the following standards for the cost of one unit
of product.
Direct labor
Std. Qty.
1.25 hours
Std. Price or Rate
$12.00 per hour
During June, Pirates incurred total factory direct labor wages for June of $327,600. Pirates manufactured
22,000 units of product during June, using 28,000 direct labor hours.
Required:
1. What is the direct labor rate variance for June?
2. What is the direct labor efficiency variance for June?
3. What was the actual direct labor rate for June?
Cost Handy Handbook
Page - 289 -
McGraw Second Edition
SMITH COMPANY
(Standard Costs and Flexible Budgeting)
Let’s do this example:
DM
DL
Standards:
10 lbs. at @
3.5 hrs at @
$8.25 / lb.
$9.65 / hour
Actuals:
Units produced 3,200
DM purchased 36,000 @ $8.35 / lb.
DM used
31,800 lbs.
DL
11,520 hours
DL cost
$112,896
Required:
1. Compute material price and usage variances
2. Compute labor rate and efficiency variances
Cost Handy Handbook
Page - 290 -
McGraw Second Edition
SMITH COMPANY
Calculations ...
Cost Handy Handbook
Page - 291 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 292 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 293 -
McGraw Second Edition
SHOCKEY COMPANY
(Direct MaterialsVariances)
Shockey Company used 3,375 pounds of steel in June to manufacture 900 units. The company paid $30 per
pound during the month to purchase the steel. On June 1, the firm had 500 pounds of steel on hand. At the end
of June, the firm only had 250 pounds of steel in its warehouse. The company spent 4,200 direct labor hours in
June and the average wage during the month is $42 per hour.
Additional important information:
Steel allowed per unit……………………………………..
Standard cost per pound of steel………………………….
Standard direct labor wage………………………………..
Standard direct-labor hours per unit of product…………..
4 lbs. per unit
$25 per lb.
$40 per direct labor hour
5
Required:
1. Compute for June, Shockey Company’s purchase price and usage variances for steel.
2. Compute for June, Shockey Company’s direct labor rate and efficiency variances.
Cost Handy Handbook
Page - 294 -
McGraw Second Edition
SHOCKEY COMPANY
Calculations…
Cost Handy Handbook
Page - 295 -
McGraw Second Edition
WABASH CANNONBALL
(Direct Materials Variances)
Wabash Cannonball has the following data from its operations for the month just completed:
Direct materials purchased .......................................
Direct materials used ...............................................
Total direct materials purchased costs .....................
Standard price of direct materials ............................
Direct materials usage variance-unfavorable ...........
30,000 pounds
28,000 pounds
$90,000
$3.25 per pound
$6,500
Required:
1. Compute the price per pound paid to purchase direct materials.
2. Compute the direct materials price variance.
3. Compute the total standard quantity of direct materials for the operation.
Cost Handy Handbook
Page - 296 -
McGraw Second Edition
WABASH CANNONBALL
Calculations…
Cost Handy Handbook
Page - 297 -
McGraw Second Edition
KSU COMPANY
(Direct Labor Variances)
KSU Company’s direct labor costs for the month of January follow:
Total direct labor-hours worked ................................................
Total standard direct labor-hours for units manufactured ..........
Average hourly wage rate paid for direct labor .........................
Direct labor efficiency variance .................................................
40,000
42,000
$25
$48,000 favorable
Required:
1. What is KSU’s standard hourly rate?
2. What is KSU’s direct labor rate variance?
Cost Handy Handbook
Page - 298 -
McGraw Second Edition
KSU COMPANY
Calculations…
Cost Handy Handbook
Page - 299 -
McGraw Second Edition
CREAMED CORNHUSKER, INC.
(Direct Labor Variances)
Creamed Cornhusker’s direct labor costs for the month of February follow:
Direct labor hourly rate paid ......................................................
Total standard direct labor hours for production .......................
Direct labor hours worked .........................................................
Direct labor rate variance ...........................................................
$30.00
12,000
11,000
$33,000 favorable
Required:
1. Compute Cornhusker’s standard direct wage per hour in February.
2. Compute Cornhusker’s direct labor efficiency variance.
Cost Handy Handbook
Page - 300 -
McGraw Second Edition
CREAMED CORNHUSKER, INC.
Calculations…
Cost Handy Handbook
Page - 301 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 302 -
McGraw Second Edition
STANDARD COSTS and FLEXIBLE BUDGETING
DAY #2
Normal Cost System:
Extended Normal Cost System:
Small opportunities are often the beginning of great enterprises.
DEMOSTHENES (384—322), Orator and statesman
Cost Handy Handbook
Page - 303 -
McGraw Second Edition
STANDARD COSTS and FLEXIBLE BUDGETING
If you wouldn’t write it and sign it, don’t say it.
EARL WILSON (1907—1987), Columnist
Living well and beautifully and justly are all one thing.
SOCRATES (c. 470—399 B.C.), Philosopher
REVIEW / SELF-QUIZ
Do you know the answers to these questions??







What is the difference between a budget and a standard?
What is a static budget?
What is a flexible budget?
What four variances should you be able to calculate?
When utilizing standard costs, what is another name for the PDOR?
When utilizing standard costs, how is the “activity” calculated?
Know Thy Calculations!
Cost Handy Handbook
Page - 304 -
McGraw Second Edition
TRUE-BLUE CORPORATION
(Standard Costs and Flexible Budgeting)
True-Blue Corporation has the following information available for December, 2003:
VOH Std. Rate
Actual VOH
Actual DLH
Std. Hours Allowed
$3.85 per DLH
$1,600
400 hours
420 hours
Required:
Calculate all variances.
Cost Handy Handbook
Page - 305 -
McGraw Second Edition
STRANGE FIRE, P.C.
(Standard Costs and Flexible Budgeting)
Strange Fire, P.C., has the following information available for the first quarter of 2004:
Actual VOH
Standard OH Applied
Actual “hours” incurred
Variable OH Rate
$54,000
$56,000
2,900 hours
$20 per hour
Required:
What is the Standard Quantity?
Cost Handy Handbook
Page - 306 -
McGraw Second Edition
THE COSTUME COMPANY
(Standard Costs and Flexible Budgeting)
The Costume Company incurred the following during the fiscal year ending January 31, 2002:
Budgeted FOH
Expected Production
Std. FOH Rate
Actual Production
Actual FOH
Actual Hours
$800,000
25,000 units
$8 per DLH
25,250 units
$802,000
102,000
Required:
Calculate all variances.
Cost Handy Handbook
Page - 307 -
McGraw Second Edition
TALLYHO COMPANY
(Standard Costs and Flexible Budgeting)
Normal activity for Tallyho Company is 100,000 units.
Tallyho Company
Operating Data for 2005
Production in units
Sales in units, at $80 each
Ending inventory in units
Actual production costs:
Variable
Fixed
Selling and administrative expenses:
Variable at $5 per unit
Fixed
Standards and budgets:
Budgeted fixed production costs
Standard variable production costs
110,000
90,000
20,000
$2,255,000
$3,200,000
$450,000
$1,400,000
$3,000,000
$20 per unit
Required:
Calculate all fixed manufacturing overhead variances.
Cost Handy Handbook
Page - 308 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 309 -
McGraw Second Edition
FROSTEE FREEZE COMPANY
(Standard Costs and Flexible Budgeting)
Each Super-Tastee required 2.5 machine hours (standard) per unit at a variable overhead cost of $2.20 per
machine hour (standard).
Actual production was 3,000 Super-Tastees, actual machine hours used was 7,300, and actual variable factory
overhead was $16,850.
The standard fixed overhead cost per Super-Tastee was $0.90 per machine hour. Normal (budgeted) production
was 3,100 Super-Tastees, and actual fixed overhead was $7,890.
Required:
Calculate all variable and fixed manufacturing overhead variances.
Cost Handy Handbook
Page - 310 -
McGraw Second Edition
FROSTEE FREEZE COMPANY
Calculations …
Cost Handy Handbook
Page - 311 -
McGraw Second Edition
BENTON COMPANY
(Standard Costs and Flexible Budgeting)
Benton Co. provides the following information from their cost system. Benton records standard overhead based
on direct labor hours.
Actual units completed
Actual labor cost (@ $6.90)
Budgeted total overhead
Actual variable overhead
Actual fixed overhead
310
$20,769
$45,900
$25,150
$23,800
Standard specification per unit of finished product:
Direct labor (9 hrs./unit)
Variable overhead
Fixed overhead
$63.00
$72.00
$81.00
Required:
Calculate the standard hours, manufacturing overhead rate, and the variances.
Cost Handy Handbook
Page - 312 -
McGraw Second Edition
BENTON COMPANY
Calculations ...
Cost Handy Handbook
Page - 313 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 314 -
McGraw Second Edition
BEACHSIDE INDUSTRIES (A)
(Variable Overhead Variances)
Beachside Industries manufactures metal detectors. The cost of each metal detector includes direct materials,
direct labor, and factory overhead. The firm traces all direct costs to products, but assigns overhead based on
direct labor hours. The following measures have been provided for the month of July:
Budgeted variable factory overhead
Budgeted direct labor hours
Budgeted metal detectors to manufacture
$21,000
3,500
7,000
Actual variable factory overhead
Actual direct labor hours
Actual metal detectors manufactured
$21,840
3,780
6,720
Required:
1. Compute the spending variance and the efficiency variance for variable factory overhead.
2. Comment on the factory’s operation in July with regard to variable factory overhead.
Cost Handy Handbook
Page - 315 -
McGraw Second Edition
BEACHSIDE INDUSTRIES (B)
(Fixed Overhead Variances)
Beachside Industries manufactures metal detectors. The cost of each metal detector includes direct materials,
direct labor, and factory overhead. The firm traces all direct costs to products, but assigns overhead based on
direct labor hours. The following information is available for the month of July:
Budgeted fixed factory overhead
Budgeted direct labor hours
Budgeted metal detectors to manufacture
$126,000
3,500
7,000
Actual fixed factory overhead
Actual direct labor hours
Actual metal detectors manufactured
$128,800
3,780
6,720
Required:
1. Compute the spending variance and the volume variance for fixed factory overhead.
2. Comment on the factory’s operation in July with regard to fixed factory overhead.
Cost Handy Handbook
Page - 316 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 317 -
McGraw Second Edition
BIG LEAGUE, INC.
(Comprehensive Variance Problem)
Big League Inc. manufactures baseballs and other equipment, measuring production volume in direct laborhours and uses a flexible budget system to plan and control department overhead. Standard costs of
manufacturing a dozen baseballs are as follows:
Direct materials
Leather
String
Cork
Direct labor
Variable overhead
Fixed overhead
Total
2 sheets x $ 2
6 spools x $ 1
1 sheet x $2
2 hours x $ 6
2 hours x $ 3
2 hours x $ 2
$ 4
6
2
12
6
4
$34
The overhead rate is 3,000 direct labor hours per month, though practical capacity is 3,500 hours per month.
Variable overhead costs are expected to vary with the numbers of direct labor-hours actually used. During
March, the plant produced 1,500 dozen baseballs. In addition, the following costs were incurred in March:
Direct Material
Leather
String
Cork
Direct Labor
Regular time
Overtime
Factory Overhead
Variable
Fixed
Purchased 4,000 sheets at $2.00/sheet and used 3,050 sheets
Purchased 12,000 spools at $1.10/spool and used 9,100 spools
Purchased 2,000 sheets at $1.95/sheet and used 1,650 sheets
2,800 hours at $6.00 and 400 hours at $6.25
All of the 400 hours at $6.25 were subject to overtime premium amounting
to $1,250 which is included in variable overhead
$ 10,000
$ 6,500
Required:
1. What is the most appropriate time to record any variance of actual materials prices from standard?
2. What is the total direct materials price variance?
3. What is the total direct materials usage variance?
4. What is the direct labor rate (price) variance?
5. What is the direct labor efficiency variance?
6. What is the variable overhead spending variance?
7. What is the variable overhead efficiency variance?
8. What is the budget (spending) variance for fixed overhead?
9. What is the factory overhead production volume variance?
Cost Handy Handbook
Page - 318 -
McGraw Second Edition
BIG LEAGUE INC.
Calculations ...
Cost Handy Handbook
Page - 319 -
McGraw Second Edition
BIG LEAGUE INC.
Calculations (continued) ...
Cost Handy Handbook
Page - 320 -
McGraw Second Edition
STANDARD COSTS and FLEXIBLE BUDGETING
DAY #3
Why do unfavorable variances occur?? Who is to blame?
DM
:
DM
:
DL
:
DL
:
I think we consider too much the good luck of the early bird, and not enough the bad luck of the early
worm.
FRANKLIN D. ROOSEVELT (1882—1945), U.S. President
Cost Handy Handbook
Page - 321 -
McGraw Second Edition
STANDARD COSTS and FLEXIBLE BUDGETING
Why do unfavorable variances occur?? Who is to blame?
VOH
:
VOH
:
FOH
:
FOH
:
You cannot be a leader and ask other people to follow you, unless you know how to follow, too.
SAM RAYBURN (1882—1961), Legislator
Cost Handy Handbook
Page - 322 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 323 -
McGraw Second Edition
BEALE STREET BLUES, INC.
(Standard Costs and Flexible Budgeting)
At the beginning of 1987, Beale Street Blues, Inc., adopted the following standards:
Total
Direct materials
Direct labor
Factory overhead:
Variable
Fixed
Standard cost
per unit
Input
3 lbs. @ $2.50 per lb.
5 hrs. @ $7.50 per hr.
$ 7.50
$37.50
$3.00 per direct labor hour
$4.00 per direct labor hour
$15.00
$20.00
$80.00
Normal volume per month is 40,000 standard labor hours. Beale’s January 1987 budget was based on normal
volume. During January Beale produced 7,800 units, with records indicating the following:
Direct materials purchased
Direct materials used
Direct labor
Total factory overhead
Variable overhead
25,000 lbs. @ $2.60
23,100 lbs.
40,100 hrs. @ $7.30
$300,000
$130,000
Required:
For the month of January 1987, compute the following variances, indicating whether each is favorable or
unfavorable:
1. Direct materials price variance, based on purchases.
2. Direct materials usage variance.
3. Direct labor rate variance.
4. Direct labor efficiency variance.
5. Variable factory overhead efficiency variance.
6. Fixed factory overhead spending variance.
7. Factory overhead volume variance.
Cost Handy Handbook
Page - 324 -
McGraw Second Edition
BEALE STREET BLUES, INC.
Calculations ...
Cost Handy Handbook
Page - 325 -
McGraw Second Edition
BEALE STREET BLUES, INC.
Calculations ...
Cost Handy Handbook
Page - 326 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 327 -
McGraw Second Edition
BALLYCANALLY CORPORATION
(Standard Costs and Flexible Budgeting)
The following information is available for Ballycanally's operations for the latest calendar year. Treat each
variance calculation independently.
Materials Variances
AX-89:
Material Price
Sheets Requisitioned
Sheets Purchased
Units Produced
Standard
$1.75
13,000
6,500
Actual
$1.80
13,250
14,000
6,300
Labor Variances
Deluxe Model:
Labor Hours
Labor Costs
Units Produced
Standard Hours Per Unit
Standard
$36,000
Actual
4,100
$37,105
2,000
2
Variable Overhead Variances
Supplies Expense:
Cost Per Labor Hour
Labor Hours
Standard Allowable Hours
Standard
$1.20
Actual
$1.22
27,750
28,000
Fixed Overhead Variances
Standard Units Allowed
Volume Variance
Standard Fixed Cost Rate
Total Fixed Cost Variance
60,000
$6,000 F
$2.50 per unit
$5,500 U
Required:
1.
Materials variances: Calculate the standard allowable sheets per unit and all variances.
2.
Labor variances: Calculate the actual labor rate per hour and all variances.
3.
Variable overhead variances: Calculate the actual supplies expense and all variances.
4.
Fixed overhead variances: Calculate actual and budgeted fixed overhead and all variances.
Cost Handy Handbook
Page - 328 -
McGraw Second Edition
BALLYCANALLY CORPORATION
Calculations ...
Cost Handy Handbook
Page - 329 -
McGraw Second Edition
BALLYCANALLY CORPORATION
Calculations ...
Cost Handy Handbook
Page - 330 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 331 -
McGraw Second Edition
BRÖTCHEN BAKERY
(Standard Costs and Flexible Budgeting)
Brötchen Bakery sells brötchen (rolls) by the case to specialty shops in the U.S. During April, Brötchen Bakery
produced 1,450 cases of rolls and incurred the following actual costs.
Actual Costs
Variable overhead ………………………………………….. $ 11,000
Fixed overhead ……………………………………………..
26,000
Actual labor cost (8,000 direct-labor hours) ……………….. 151,200
Actual material cost (30,000 pounds purchased and used) …
66,000
Standard cost and annual budget information are as follows:
Standard Costs per Case
Direct labor (5 hours at $18) ………………………………….
Direct material (20 pounds at $2) …………………………….
Variable overhead (5 hours at $1.50) …………………………
Fixed overhead (5 hours at $3) ……………………………….
Total
Annual Budget Information
Variable overhead ………………………………………….
Fixed overhead …………………………………………….
Planned activity for year …………………………………..
$ 90.00
40.00
7.50
15.00
$152.50
$150,000
$300,000
100,000 direct-labor hours
Required:
Prepare as complete an analysis of cost variances as is possible from the available data.
Cost Handy Handbook
Page - 332 -
McGraw Second Edition
BRÖTCHEN BAKERY
Calculations ...
Cost Handy Handbook
Page - 333 -
McGraw Second Edition
BRÖTCHEN BAKERY
Calculations ...
Cost Handy Handbook
Page - 334 -
McGraw Second Edition
COXWAIN COMPANY
(Standard Costs and Flexible Budgeting)
Information on Coxwain Company's direct materials costs for the month of January 2003 was as follows:
Actual quantity purchased
Actual unit purchase price
Materials purchase price variance — unfavorable (based on purchases)
Standard quantity allowed for actual production
Actual quantity used
18,000
$ 3.60
$ 3,600
16,000
15,000
Required:
What was the direct material usage variance for January 2003?
Cost Handy Handbook
Page - 335 -
McGraw Second Edition
KENNEL STREET COMPANY
(Standard Costs and Flexible Budgeting)
Information on Kennel Street Company's direct material costs is as follows:
Standard unit price
Actual quantity purchased
Standard quantity allowed for actual production
Materials purchase price variance — favorable
$3.60
1,600
1,450
$ 240
Required:
What was the actual purchase price per unit, rounded to the nearest penny?
Cost Handy Handbook
Page - 336 -
McGraw Second Edition
REBEL COMPANY
(Standard Costs and Flexible Budgeting)
Information on Rebel Co.'s direct material costs for May 2005 is as follows:
Actual quantity of direct materials purchased and used
Actual cost of direct materials
Unfavorable direct materials usage variances
Standard quantity of direct materials allowed for May production
30,000 lbs.
$ 84,000
$ 3,000
29,000 lbs.
Required:
For the month of May, what was Rex's direct materials price variance?
Cost Handy Handbook
Page - 337 -
McGraw Second Edition
BARBERSHOP COMPANY
(Standard Costs and Flexible Budgeting)
Information on Barbershop Company's direct labor costs for the month of January 2001 is as follows:
Actual direct-labor hours
Standard direct-labor hours
Total direct-labor payroll
Direct-labor efficiency variance — favorable
34,500
35,000
$ 241,500
$ 3,200
Required:
What is Barbershop's direct labor rate variance?
Cost Handy Handbook
Page - 338 -
McGraw Second Edition
TUBBER COMPANY
(Standard Costs and Flexible Budgeting)
Tubber Co. uses a standard cost system. The following information pertains to direct labor for Product T for the
month of October:
Actual rate paid
Standard rate
Standard hours allowed for actual production
Labor efficiency variance
$ 8.40 per hour
$ 8.00 per hour
2,000 hours
$ 1,600 unfavorable
Required:
What were the actual hours worked?
Cost Handy Handbook
Page - 339 -
McGraw Second Edition
THOR’S HAMMER, INC.
(Standard Costs and Flexible Budgeting)
For the month of April, Thor’s Hammer's records disclosed the following data relating to direct labor:
Actual costs
Rate variance
Efficiency variance
Standard cost
$10,000
1,000 favorable
1,500 unfavorable
$ 9,500
For the month of April, actual direct labor hours amounted to 2,000.
Required:
In April, what was Thor’s Hammer’s standard direct labor rate per hour?
Cost Handy Handbook
Page - 340 -
McGraw Second Edition
DUNCE COMPANY
(Standard Costs and Flexible Budgeting)
The following processing standards have been set for Dunce Co.'s clerical workers:
Number of hours per 1,000 paper processed
Number of papers processed per year
Wage rate per 1,000 papers
Standard variable cost of processing 1,500,000 papers
Fixed costs per year
150
1,500,000
$600
$900,000
$150,000
The following information pertains to the 1,200,000 papers that were processed during 2006:
Total cost
Labor cost
Labor hours
$915,000
$760,000
190,000
Required:
1. Assuming standard performance, what should be Dunce's expected total cost to process the 1,200,000
papers be for 2006?
2. What would be Dunce's labor rate variance for 2006?
Cost Handy Handbook
Page - 341 -
McGraw Second Edition
HERRY COMPANY
(Standard Costs and Flexible Budgeting)
The following information relates to one department of Herry Company for the fourth quarter 2004:
Actual total overhead (fixed plus variable)
Budget formula
Total overhead application rate
Spending variance
Volume variance
$178,500
$110,000 plus $0.50/hr.
$1.50/hr.
$8,000 unfavorable
$5,000 favorable
The total overhead variance is divided into three variances — spending, efficiency, and volume.
Required:
1. What were the actual hours worked in this department during the quarter?
2. What were the standard hours allowed for good output in this department during the quarter?
Cost Handy Handbook
Page - 342 -
McGraw Second Edition
HERDING CATS, INC.
(Standard Costs and Flexible Budgeting)
Herding Cats reported the following data for 2002:
Actual hours
Denominator hours
Standard hours allowed for output
40,000
50,000
42,000
The predetermined overhead rate was $9.00 per hour, of which $3.00 was variable and $6.00 was fixed.
Required:
Given these data, what was the company's volume variance for the year?
Cost Handy Handbook
Page - 343 -
McGraw Second Edition
BOSNA CORPORATION
(Standard Costs and Flexible Budgeting)
The following information is available for the variable overhead expense of Bosna Corporation:
Estimated 1995 sales
Bad debt
Budgeted bad debt
$2,000,000
0.5% of sales
??
Actual 1995 sales
Actual bad debt
$2,450,000
$12,500
Required:
Calculated budgeted bad debt expense and the bad debt variance.
Cost Handy Handbook
Page - 344 -
McGraw Second Edition
STIEGL CORPORATION
(Standard Costs and Flexible Budgeting)
The following information is available for the variable overhead expense of Stiegl Corporation:
Budgeted indirect labor per direct labor hour
Budgeted indirect labor for 1995
Total (actual) indirect labor hours for 1995
Total (actual) indirect labor cost for 1995
$2 / DLH
$24,000
15,000
$27,500
Required:
Calculate the variable overhead spending variance for indirect labor.
Cost Handy Handbook
Page - 345 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 346 -
McGraw Second Edition
JOINT COSTS
Prosperity is no just scale; adversity is the only balance to weigh friends.
PLUTARCH (c. 46—c. 120 A.D.), Biographer and moralist
Our ideas, like orange-plants, spread out in proportion to the size of the box which imprisons the roots.
EDWARD GEORGE BULWER-LYTTON (1803—1873), Writer
Cost Handy Handbook
Page - 347 -
McGraw Second Edition
JOINT COSTS
A Helping Hand
Companies may engage in a single process to simultaneously generate various different outputs such as the
refining of crude oil may produce gasoline, motor oil, heating oil, and kerosene. A single process in which one
product cannot be manufactured without producing others is known as a joint process. The costs incurred for
materials, labor, and overhead during a joint process are referred to as the joint cost of the production process.
The point at which joint process outputs are first identifiable as individual products is called the split-off point.
Once the split-off point is reached, the joint cost has already been incurred and is a sunk cost that cannot be
changed regardless of what future course of action is taken.
There are several methods companies use to distribute joint costs to products. Under the physical units
method, joint costs are distributed to products on the basis of some physical measure such as pounds, tons,
gallons, board feet, atomic weight, or heat units.
For example, suppose that Canyon Lumber Company processes logs into four types of lumber totaling
6,000,000 board feet. Total joint cost is $372,000. First we find the proportion of the total units for each grade,
and then assign each grade its proportion of joint cost.
Types
Douglas Fir
Western Red Cedar
Forrest Oak
Tiger Maple
Board Feet
900,000
2,400,000
1,200,000
1,500,000
Totals
6,000,000
% of Units
0.15
0.40
0.20
0.25
Joint Cost Allocation
$ 55,800
148,800
74,400
93,000
$ 372,000
The sales-value-at-split-off method allocates joint cost based on each product’s share of market or sales value
at the split-off point. Using the same example of lumber mill cost given in the preceding discussion of the
physical units method, the joint cost of $372,000 is distributed to the various grades on the basis of their sales
value at split-off.
Quantity
Produced
Types
(Board Feet)
Douglas Fir
900,000
Western Red Cedar 2,400,000
Forrest Oak
1,200,000
Tiger Maple
1,500,000
Totals
Price at Split-Off
(per Board Foot)
$ 0.300
0.200
0.121
0.070
6,000,000
Sales Value
at Split-Off
$ 270,000
280,000
145,200
105,000
$1,000,200
% of Total
Sales Value
0.2699
0.4799
0.1452
0.1050
Allocated
Joint Cost
$ 100,403
178,523
54,014
39,060
1.0000
$ 372,000
The net realizable value method assigns cost based on the joint products’ proportional net realizable values.
Net realizable value (NRV) is equal to product sales revenue at split-off minus any incremental costs, which
are incurred between the split-off point and the point of sale. Once the net realizable value for each product is
determined, calculate the joint cost allocation using the sales value at split-off method.
Our ideas, like orange-plants, spread out in proportion to the size of the box which imprisons the roots.
EDWARD GEORGE BULWER-LYTTON (1803—1873), Writer
Cost Handy Handbook
Page - 348 -
McGraw Second Edition
ABILENE MEAT PACKERS
(Joint Costs)
In-Class Assignment
Group Members
______________________________________
______________________________________
______________________________________
______________________________________
Abilene Meat Packers experienced the operating statistics in the following table for its joint meat cutting
process during March 2006. The costs of the joint process were direct material, $19,000; direct labor, $11,100;
and overhead, $4,300. The main products are ribs, brisket, and steak. The products do not require any
additional processing or disposal costs, although management may consider additional processing.
Products
Ribs
Brisket
Steak
Weight in Pounds
4,300
6,700
5,400
Sales Value
at Split-Off
$66,000
$43,000
$11,200
a.
Calculate the per pound and total value of each joint product based on (1) relative sales value and (2)
pounds.
b.
Discuss the advantages and disadvantages of each allocation base for (1) financial statement purposes and
(2) decisions about the desirability of processing the joint products beyond the split-off point.
Cost Handy Handbook
Page - 349 -
McGraw Second Edition
ABILENE MEAT PACKERS
Calculations ...
Cost Handy Handbook
Page - 350 -
McGraw Second Edition
SPARTAN, INC.
(Joint Cost)
Spartan Inc. produces joint products Alpha, Beta, and Chi from a process. This information concerns a batch
produced in May at a joint cost of $120,000:
Product
Alpha
Beta
Chi
Units Produced
and Sold
2,000
4,000
8,000
After Split-Off:
Total Additional Costs Total Sales Value
$20,000
$180,000
20,000
100,000
5,000
20,000
Required:
How much of the joint cost should be allocated to each joint product using the net realizable value method?
Cost Handy Handbook
Page - 351 -
McGraw Second Edition
CAROLINA CORP.
(Joint Costs)
Carolina Corp. manufactures tar from coal and from petroleum from a joint process. It allocates joint costs on
the basis of sales value at split-off. Processing 750 gallons of coal tar and 1,500 gallons of petroleum tar to the
split-off point costs $6,840. The sales value at split-off is $15 per gallon for coal tar and $21 for petroleum tar.
Petroleum tar requires an additional process beyond split-off at a cost of $3.75 per gallon before it can be sold.
Required:
What is Carolina’s cost to produce 1,500 gallons of petroleum tar?
Cost Handy Handbook
Page - 352 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 353 -
McGraw Second Edition
SOAP ‘N SUDS, INC.
(Joint Costs)
Soap ‘N Suds Inc. manufactures two lines of liquid hand soap, Mango Delight and Kiwi Surprise, from a joint
process. The joint costs incurred are $210,000 for a standard production run that generates 90,000 gallons of
Mango Delight and 60,000 gallons of Kiwi Surprise. Mango Delight sells for $2.25 per gallon, when Kiwi
Surprise sells for $3.50 per gallon.
Required:
1. Assuming that both products are sold at the split-off point, how much of the joint cost of each production run
is allocated to Mango Delight on a net realizable value basis?
2. If no additional costs are incurred after the split-off point, how much of the joint cost of each production run
is allocated to Kiwi Surprise on the physical measure method basis?
3. If additional processing costs beyond the split-off point are $1.30 per gallon for Mango Delight and $0.80
per gallon for Kiwi Surprise, how much of the joint cost of each production run is allocated to Kiwi Surprise
on a net realizable value basis?
4. If additional processing cost beyond the split-off point are $1.30 per gallon for Mango Delight and $0.80 per
gallon for Kiwi Surprise, how much of the joint cost of each production run is allocated to Mango Delight on
a physical measure method basis?
Cost Handy Handbook
Page - 354 -
McGraw Second Edition
SOAP ‘N SUDS, INC.
Calculations ...
Cost Handy Handbook
Page - 355 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 356 -
McGraw Second Edition
ABSORPTION COSTING AND VARIABLE COSTING
Absorption Costing
Income Statement
Variable Costing
Income Statement
DESIGNATED DOODLE ZONE
Cost Handy Handbook
Page - 357 -
McGraw Second Edition
ABSORPTION COSTING AND VARIABLE COSTING
Some HANDY Information:
Absorption Costing I/S
Variable Costing I/S
 GAAP
 Not GAAP
 FOH considered an asset*;
results in future cost avoidance
because incurring cost now
will make future costs unnecessary,
therefore has future service
potential and is an asset
 FOH not considered an asset*;
viewed as relating to capacity
to produce, not production
itself
*Asset = something that has future service potential
HANDY NOTES:
Advantages of Variable Costing Income Statement Format:
1. Dovetails with C-V-P
2. More useful information for pricing decisions
3. Changes in inventory don’t affect NI
4. Managers find it easier to understand
5. Impact of fixed costs on NI emphasized
6. More difficult to “game”
Cost Handy Handbook
Page - 358 -
McGraw Second Edition
ABSORPTION COSTING AND VARIABLE COSTING
When will Net Income be the same for both approaches?
When will Net Income be different??
DESIGNATED DOODLE ZONE
To be good is noble; but to show others how to be good is nobler and no trouble.
MARK TWAIN “Following the Equator” Dover
Cost Handy Handbook
Page - 359 -
McGraw Second Edition
ABSORPTION COSTING AND VARIABLE COSTING
A conceptual discussion about “gaming” …
DESIGNATED DOODLE ZONE
To have ideas is to gather flowers; to think, is to weave them into garlands.
ANNE-SOPHIE SWETCHINE (1782—1857), Writer
Cost Handy Handbook
Page - 360 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 361 -
McGraw Second Edition
BOWLING COMPANY
(Absorption Costing and Variable Costing Income Statements)
Bowling Company produces a single product. The cost characteristics of the product and of the manufacturing
plant for 2005 are given below:
Beginning inventory in units
Units produced
Units sold
Ending inventory in units
-06,000
5,000
1,000
Selling price per unit
Selling and administrative expenses:
Variable per unit
Fixed per year
Cost of a unit of product:
Direct materials
Direct labor
Variable overhead
Fixed overhead ($30,000 ÷ 6,000 units)
Total cost per unit
$20
$ 3
$10,000
Absorption
$ 2
4
1
5
$12
Variable
$2
4
1
-$7
Required:
Calculate net income under absorption costing and variable costing for 2005.
Cost Handy Handbook
Page - 362 -
McGraw Second Edition
BOWLY COMPANY
Calculations ...
Cost Handy Handbook
Page - 363 -
McGraw Second Edition
HOLLANDAISE COMPANY
(Absorption Costing and Variable Costing Income Statements)
Hollandiase Company produces a single product.
Number of units produced annually
Variable costs per unit:
Direct material, direct labor, and
variable manufacturing overhead
Selling and administrative expense
Fixed costs per year:
Manufacturing overhead
Selling and administrative expense
5,000
$5
$1
$15,000
$21,000
Selling price per unit
Units Produced
Units Sold
$15.00
Year 1
5,000
5,000
Year 2
5,000
4,000
Year 3
5,000
6,000
Required:
1. Calculate the production cost of a single unit of product under the absorption and variable costing methods.
2. Calculate net income for years 1, 2 and 3 with under the absorption and variable costing methods.
3. Reconcile any differences between net income calculated using both methods.
Cost Handy Handbook
Page - 364 -
McGraw Second Edition
HOLLAND COMPANY
Calculations ...
Cost Handy Handbook
Page - 365 -
McGraw Second Edition
FAST COMPANY
(Absorption Costing and Variable Costing Income Statements)
Presented below is the operating data of Fast Company in the years 2002, 2003 and 2004.
Variable costs per unit:
Direct materials
Direct labor
Variable overhead (estimated and actual)
Variable selling and administrative
$4.00
1.50
0.50
0.25
Estimated fixed overhead was $150,000 each year. Actual fixed overhead was also $150,000. Normal
production volume was 150,000 units per year. The sales price each year was $10 per unit. Fixed selling and
administrative expenses were $50,000 per year. Other operating data were as follows:
Beginning inventory
Production
Sales
Ending inventory
2002
----150,000
150,000
-----
2003
----150,000
100,000
50,000
2004
50,000
150,000
200,000
-----
Required:
Prepare variable-costing and absorption-costing income statements for 2002, 2003 and 2004.
Cost Handy Handbook
Page - 366 -
McGraw Second Edition
FAST COMPANY
Calculations ...
Cost Handy Handbook
Page - 367 -
McGraw Second Edition
SOUTH STREET FURNITURE CO.
(Absorption Costing and Variable Costing Income Statements)
The South Street Furniture Company makes cabinets for televisions and VCR units. Normal capacity for the
company is 80,000 units per year. During year-ended December 31, 2004, 78,000 units were manufactured.
Prime cost
Variable overhead
Variable selling and administrative cost
Fixed overhead cost
Fixed selling and administrative cost
$25 per unit
$ 3 per unit
$ 3 per unit
$480,000
$340,000
During the year, 72,000 units were sold for $50 each. Beginning inventory was 8,000 units with variable
manufacturing costs of $26 and applied fixed overhead of $5 per unit. The FIFO inventory method is used.
Required:
1. Prepare a variable costing income statement for the South Street Furniture Company
2. Prepare an absorption costing income statement for the South Street Furniture Company.
3. Prepare a schedule to reconcile the difference in net income between the two costing methods.
Cost Handy Handbook
Page - 368 -
McGraw Second Edition
SOUTH STREET FURNITURE CO.
Calculations ...
Cost Handy Handbook
Page - 369 -
McGraw Second Edition
STETSON COMPANY
(Absorption Costing and Variable Costing Income Statements)
Stetson Company began business on January 1, 2001. It is now the end of 2002. The company uses absorption
costing. The president is trying to decide whether to adopt variable costing for measuring management
performance. She has asked you to prepare comparative income statements for 2001 and 2002 under absorption
and variable costing.
The following simplified data are available:
Beginning inventory
Production
Sales
Ending inventory
2001
----6,000
2,000
4,000
2002
4,000
900
3,000
1,900
Variable manufacturing costs per unit ……………..
$2.00
Fixed manufacturing costs ………………………… $10,000
Denominator volume in units ……………………… 10,000
Fixed manufacturing costs per unit ………………..
$1.00
Fixed selling and administrative costs …………….
$1,400
Variable selling and administrative costs per unit sold
$0.50
Selling price per unit ………………………………
$8.50
There were no inventories of work in process or raw materials. Production was far below expected volume in
2002 because of persistent shortages of raw materials.
Required:
1. Prepare the requested comparative income statements.
2. Explain the difference in operating income between absorption costing and variable costing in each of
the two years.
3. Sales rose in 2002. Did operating income rise? Explain.
Cost Handy Handbook
Page - 370 -
McGraw Second Edition
STETSON COMPANY
Calculations ...
Cost Handy Handbook
Page - 371 -
McGraw Second Edition
STETSON COMPANY
Calculations (continued) ...
Cost Handy Handbook
Page - 372 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 373 -
McGraw Second Edition
BELLY RUB PRODUCTIONS
(Absorption Costing and Variable Costing Income Statements)
Below are the Production, sales and cost data for Belly Rub Productions’ only product. Normal capacity is
producing 10,000 units annually.
Belly Rub Productions
Calendar Years 2001 through 2004
Sales in units
Production in units
Direct materials per unit
Direct labor per unit
Variable MOH per unit
Fixed MOH
Variable S&A per unit
Fixed S&A
Sales price per unit
Beg. Inventory in units
2001
8,000
10,000
$6
$3
$2
$50,000
$3
$30,000
$25
0
2002
9,000
12,000
$6
$4
$2
$60,000
$3
$35,000
$27
2,000
2003
13,000
10,000
$7
$4
$3
$70,000
$4
$40,000
$30
5,000
2004
10,000
8,000
$8
$5
$4
$80,000
$5
$50,000
$35
2,000
Required:
1. Calculate the production cost of a single unit of product under the absorption and variable costing methods.
2. Calculate net income for 2001, 2002 and 2003 using both the absorption and variable costing methods.
3. Reconcile any differences between net income calculated using both methods.
Cost Handy Handbook
Page - 374 -
McGraw Second Edition
BELLY RUB PRODUCTIONS
Calculations ...
Cost Handy Handbook
Page - 375 -
McGraw Second Edition
BELLY RUB PRODUCTIONS
Calculations (continued) ...
Cost Handy Handbook
Page - 376 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 377 -
McGraw Second Edition
ROCKY MOUNTAIN BICYCLE CLUB
(Absorption Costing and Variable Costing)
Rocky Mountain Bicycle Club produces all-terrain mountain bikes which are very popular in the Wyoming
area. The bikes are sold at $350. The following production information for 2005 is available below:
Units in beginning inventory
Units produced
Units sold
Units in ending inventory
Variable costs per unit:
Direct materials
Direct labor
Variable manufacturing overhead
Variable selling and administrative
Fixed costs:
Fixed manufacturing overhead
Fixed selling and administrative
0
5,000
4,000
2,000
$60
70
25
10
$300,000
400,000
Required:
1. Assume that the company uses absorption costing. Compute the unit product cost for one bicycle. Prepare
an income statement based on absorption costing.
2. Assume that the company uses variable costing. Compute the unit product cost for one bicycle. Prepare an
income statement based on variable costing.
Cost Handy Handbook
Page - 378 -
McGraw Second Edition
ROCKY MOUNTAIN BICYCLE CLUB
Calculations …
Cost Handy Handbook
Page - 379 -
McGraw Second Edition
GEORGETOWN, INC.
(Absorption Costing and Variable Costing)
Georgetown, Inc. manufactures toothbrushes that sell at wholesale for $2.00 per unit. The company had no
beginning inventory in 2005. These data summarize the 2005 and 2006 operations:
Sales
Production:
Production cost
– Variable (per unit)
– Fixed
Marketing – Variable
Administrative – Fixed
2005
2,000 units
2,200 units
2006
2,400 units
2,200 units
$ 0.70
$ 1,100.00
$ 0.50
$ 300.00
$ 0.70
$ 1,100.00
$ 0.50
$ 300.00
Required:
Prepare the following:
1. An income statement for each year based on absorption costing.
2. An income statement for each year based on variable costing.
3. A reconciliation and explanation of the differences in the operating income resulting from using the
absorption costing method and variable costing method.
Cost Handy Handbook
Page - 380 -
McGraw Second Edition
GEORGETOWN, INC.
Calculations …
Cost Handy Handbook
Page - 381 -
McGraw Second Edition
GROVER MANUFACTURING
(Absorption Costing and Variable Costing)
Grover Manufacturing has the following information for the years ended Dec. 31, 2003 and Dec. 31, 2004:
Units
Beginning inventory (units)
Price
Units sold
Actual production (units)
Budgeted production (units)
Unit variable costs
Manufacturing
Selling and administrative
Fixed costs
Manufacturing
Selling and administrative
2003
300
$75
1,100
1,300
1,500
2004
$35
$10
$35
$10
$27,000
$4,000
$27,000
$4,000
$75
2,000
1,500
1,500
Required:
1. Prepare the absorption cost and variable cost income statements for 2003 and 2004.
2. Prepare a reconciliation and explanation for the differences between absorption cost and variable cost
income for both years.
Cost Handy Handbook
Page - 382 -
McGraw Second Edition
GROVER MANUFACTURING
Calculations …
Cost Handy Handbook
Page - 383 -
McGraw Second Edition
THE LOST ART OF HENRY JONES
A critic, an artist, and a scholar were assembled on a panel for an art history presentation at a
university. During the question and answer portion of the lecture, a student asked the panel to name
the greatest artist who ever lived.
“Michelangelo,” responded the critic.
“Monet,” said the artist.
“Henry Jones,” replied the scholar.
“Henry Jones?” questioned the student. “Who is Henry Jones?”
“Many years ago, he was a janitor at this very institution.”
“How can you compare a janitor to great artists like Monet and Michelangelo?”
“Henry Jones has more talent than either of those men,” said the scholar.
“Then why have we never heard of him?” asked the student.
“Because he never thought he was good enough, so he never cultivated his talents nor shared
them with the world,” the scholar sighed. “Henry Jones is lost to us forever, because he never lived up
to his potential.”
Adapted from American Scandal!, Pat Williams, Destiny Image Publishers
I don’t paint things. I only paint the difference between things.
HENRI MATISSE (1869—1954), Artist
Anyone can hold the helm when the sea is calm.
PUBLILIUS SYRUS (c. 42 B.C.), Writer
Cost Handy Handbook
Page - 384 -
McGraw Second Edition
TRANSFER PRICING
Education is the best provision for old age.
ARISTOTLE (384—322 B.C.), Philosopher
Cost Handy Handbook
Page - 385 -
McGraw Second Edition
TRANSFER PRICING
A HELPING HAND
A transfer price is the price charged when one division of a company provides goods or services to another
division of the company. The profits of both the buying (incurring a cost) and selling (realizing revenue and
expenses) divisions are impacted by the purchase, but the transfer price nets out for the company as a whole.
Many methods can be used to establish a transfer price. Generally, the highest price the buying division would
be willing to pay is the market price (if known); the lowest price the selling division would be willing to accept
is the relevant (variable) cost of the product.
The market price method sets the transfer price as the outside market price of the selling division’s product or
service.
Cost-Based Transfer Price Methods
Variable cost: transfer price is based on the variable cost per unit.
Full cost: transfer price equals a product or service’s variable costs plus fixed costs allocated to it.
Variable cost + markup: transfer price equals variable cost plus a markup.
For example, variable cost plus 25%
Full cost + markup: transfer price equals full cost plus a markup.
For example, 120% of full cost.
A negotiated transfer price results when top management allows the buying and selling division managers to
negotiate a transfer price.
Whether or not the selling division has idle capacity will influence the price the selling division is willing to
accept for the good or service. When the selling division must displace outside business to provide goods or
services to another division, the lost profit is an opportunity cost for the selling division.
The most beautiful thing in the world is the conjunction of learning and inspiration.
-- Wanda Landowski (1879—1959), Musician
Shun idleness. It is a rust that attaches itself to the most brilliant of metals.
-- Voltaire [François-Marie Arouet] (1694—1778), Humorist
“On with the dance, let joy be unconfined” is my motto, whether there’s any dance to dance or any joy to
unconfine.
-- Mark Twain [Samuel L. Clemens] (1835—1910), Humorist
The two powers which in my opinion constitute a wise man are those of bearing and forbearing.
-- Epicletus (c. 55—135), Philosopher
Cost Handy Handbook
Page - 386 -
McGraw Second Edition
TRANSFER PRICING
More on Transfer Pricing
Why are transfer prices necessary? Because many companies are decentralized. In decentralized companies,
decision-making authority and empowerment is spread throughout the company, not just to a few top managers.
Hence, you read in textbooks about responsibility centers such as cost centers, profit centers, and investment
centers. In practice, such responsibility centers are sometimes called “divisions”.
There are many advantages and disadvantages of a decentralized company.
Advantages:
1. Lower-level managers usually have better information than does top management for making
operational decisions.
2. Local managers can make decisions more quickly, benefiting customers and others.
3. Decentralized decision-making gives lower-level managers more experience making decisions—which
is good training for higher-level positions.
4. Relatedly, top management can concentrate on big decisions rather than worrying about day-to-day
operations.
5. Smaller, decentralized units are more flexible to changing business conditions.
6. Decentralized organizations are better able to expose its divisions to competition, which can improve
division performance.
7. Decentralized can provide lower-level managers with greater motivation and job satisfaction because
of their higher levels of responsibility.
Disadvantages:
1. Lower-level managers can make decisions without understanding the true big picture.
2. Lower-level managers are less experienced decision-makers and can make poor decisions.
3. There can be a lack of coordination among lower-level managers.
4. More sophisticated (and expensive) accounting control systems are required in decentralized
organizations.
5. More training of lower-level managers must occur.
6. The personal objectives of lower-level managers may different than those of the organization (at least
as represented by top management). For instance, a lower-level manager may be concerned about
earning a year-end bonus and use methods that are not in the best interest of the company as a whole to
earn that bonus.
7. Innovation can be more difficult to introduce and implement in a decentralized company.
Centralization exists when top management controls the major functions of an organization. Centralization
also has advantages and disadvantages.
Advantages:
1. There are greater economies of scale when company resources are coordinated centrally.
2. There is improved control over organizational resources.
3. More complex organization-wide activities can be performed.
Disadvantages:
1. As a company grows larger, there is upper limit to how much can be controlled by top management.
2. Relatedly, as company activities grow more complex, they can be centrally unmanageable.
3. Diminishing returns of centralization can occur.
Cost Handy Handbook
Page - 387 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 388 -
McGraw Second Edition
TEXAS PRODUCTS, INC.
(Transfer Pricing)
In-Class Assignment
Group Members
______________________________________
______________________________________
______________________________________
______________________________________
Texas Products, Inc. is a decentralized company. Each division has its own sales force and production facilities
and is operated as an investment center. Top management uses return on investment (ROI) for performance
evaluation of division managers. The Midland Division has just been awarded a contract for a product that uses
a component manufactured by the Amarillo Division as well as by outside suppliers. Midland used a cost figure
of $3.80 for the component when the bid was prepared for the new product. Amarillo supplied this cost figure
in response to Midland’s request for the average variable cost of the component.
Midland Division anticipates a total cost of $26.25 for the product (including the $3.80 cost of the Amarillo
component) and won the contract with a bid of $36.25.
Variable manufacturing cost
Variable selling and distribution cost
Fixed manufacturing cost
Total cost [New Product]
$16.80
3.15
6.30
$26.25
(including $3.80)
Amarillo has an active sales force that is continually soliciting new customers. Amarillo’s regular selling price
for the component Midland needs for the new product is $6.50. Sales of the component are expected to
increase. Amarillo management has the following costs associated with the component:
Variable manufacturing cost
Variable selling and distribution cost
Fixed manufacturing cost
Total cost [Component]
$3.20
0.60
1.20
$5.00
The two divisions have been unable to agree on a transfer price for the component. Corporate management has
never established a transfer price because interdivisional transactions have never occurred. The following
suggestions have been made for the transfer price:
 Regular selling price
 Regular selling price less variable selling and distribution expenses
 Manufacturing cost plus 15 percent
 Variable manufacturing cost plus 20 percent
Required:
1. Compute each of the suggested transfer prices.
2. Discuss the effect of each of the transfer prices might have on the Amarillo Division management’s attitude
toward intra-company business.
3. Is the negotiation of a price between the Midland and Amarillo Divisions a satisfactory method to solve the
transfer price problem?
4. Should the corporate management of Texas Products, Inc., become involved in this transfer controversy?
Explain.
Cost Handy Handbook
Page - 389 -
McGraw Second Edition
TEXAS PRODUCTS, INC.
Calculations…
Cost Handy Handbook
Page - 390 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 391 -
McGraw Second Edition
ZEPHYR COMPANY
(Transfer Pricing)
Zephyr Company’s Mechanics Division produces a high powered motor used in smaller electronics. Sales and
cost data on the motor follow:
Selling price per unit on the outside market
Variable cost per unit
Fixed costs per unit (based on capacity)
Capacity in units
$80
$42
$18
30,000
Zephyr has a Computer Division that would like to begin purchasing this motor from the Mechanics Division.
The Computer Division is currently purchasing 5,000 motors each year from another company at a cost of $76
per motor. Zephyr Company evaluates its division managers on the basis of divisional profits.
Required:
1. Assume that the Mechanics Division is now only selling 25,000 motors each year to outside customers.
a. From the standpoint of the Mechanics Division, what is the lowest acceptable transfer price for motors
sold to the Computer Division?
b. From the standpoint of the Computer Division, what is the highest acceptable transfer price for motors
acquired from the Mechanics Division?
c. If left free to negotiate without interference, would you expect the division mangers to voluntarily agree
to the transfer of 5,000 motors from the Mechanics Division to the Computer Division? Why or why
not?
d. From the standpoint of the entire company, should a transfer take place? Why or why not?
2. Assume that the Mechanics Division is now selling all of the motors it can product to outside customers.
a. From the standpoint of the Computer Division, what is the lowest acceptable transfer price for motors
sold to the Computer Division?
b. From the standpoint of the Mechanics Division, what is the highest acceptable transfer price for motors
acquired from the Mechanics Division?
c. If left free to negotiate without interference, would you expect the division mangers to voluntarily agree
to the transfer of 5,000 motors from the Mechanics Division to the Computer Division? Why or why
not?
d. From the standpoint of the entire company, should a transfer take place? Why or why not?
Cost Handy Handbook
Page - 392 -
McGraw Second Edition
ZEPHYR COMPANY
Calculations…
Cost Handy Handbook
Page - 393 -
McGraw Second Edition
RAINBOW, INC.
(Transfer Pricing)
Rainbow, Inc.’s Yellow Division produces a part that is used by the Green Division. The cost of manufacturing
the part follows:
Direct materials
Direct labor
Variable overhead
Fixed overhead*
Total cost
$20
4
6
10
$40
* Based on a practical volume of 100,000 parts
Other costs incurred by the Yellow Division are as follows:
Fixed selling and administrative
Variable selling (per unit)
$400,000
2
The part usually sells for between $56 and $60 in the external market. Currently, the Yellow Division is selling
it to external customers for $58. The division is capable of producing 100,000 units of the part per year;
however, because of a weak economy, only 75,000 parts are expected to be sold during the coming year. The
variable selling expenses are avoidable if the part is sold internally.
The Green Division has been buying the same part from an external supplier for $56. It expects to use 25,000
units of the part during the coming year. The manger of the Green Division has offered to buy 25,000 units
from the Yellow Division for $36 per unit.
Required:
1. Determine the minimum transfer price that the Yellow Division would accept.
2. Determine the maximum transfer price that the manager of the Green Division would pay.
3. Assume a transfer price of $36 each. What will be the operating income for the Yellow Division?
4. Should an internal transfer take place? Why or why not? If you were the manager of the Yellow Division,
would you sell the 25,000 components for $36 each? Explain.
Cost Handy Handbook
Page - 394 -
McGraw Second Edition
RAINBOW, INC.
Calculations…
Cost Handy Handbook
Page - 395 -
McGraw Second Edition
CARDINAL MANUFACTURING
(Transfer Pricing)
The Jocketty Division of Cardinal Manufacturing produces a component used by the LaRussa Division in its
finished product. Jocketty, which is operating at full capacity, sells the components in an active external market
for $80 per unit. The current transfer price for the unit is the market price, or $80. Variable costs on the unit
are $50.
LaRussa Division is operating at 75 percent capacity. The division has an opportunity to bid on a special order
from a large wholesaler. Accountants have prepared the following cost analysis for LaRussa’s manager:
Variable costs
Manufacturing
Shipping
Electrical component purchased
Transfer price (from Jocketty)
Total variable costs
Fixed costs (based on 100% capacity)
Total costs
$30
10
80
$120
30
$150
The manager considers the total cost too high to allow a competitive bid on the special order. To obtain the
order, LaRussa must bid no more than $130. Accordingly, the manager has asked Jocketty Division to reduce
its transfer price to $60. Jocketty’s manager has refused because the division can sell all its production to
external customers at $80 per unit.
Required:
1. Will Cardinal Manufacturing’s overall contribution margin per unit increase or decrease if Jocketty sells its
component to LaRussa for the special order?
2. Should corporate management force the transfer at a price of $60 per unit?
Cost Handy Handbook
Page - 396 -
McGraw Second Edition
CARDINAL MANUFACTURING
Calculations…
Cost Handy Handbook
Page - 397 -
McGraw Second Edition
This page
left blank
Cost Handy Handbook
Page - 398 -
McGraw Second Edition
THE COST OF UNETHICAL BEHAVIOR
DESIGNATED DOODLE ZONE
One man practicing sportsmanship is far better than 50 preaching it.
KNUTE K. ROCKNE (1888—1931), College football coach
Cost Handy Handbook
Page - 399 -
McGraw Second Edition
THE COST OF UNETHICAL BEHAVIOR
Really great people always see the best in others;
it is the little man who looks for the worst – and finds it.
SAMUEL COLERIDGE-TAYLOR (1875—1912), Composer and conductor
Cost Handy Handbook
Page - 400 -
McGraw Second Edition
THE COST OF UNETHICAL BEHAVIOR
DESIGNATED DOODLE ZONE
Never bend your head. Always hold it high. Look the world straight in the face.
HELLEN KELLER (1880—1968), Writer and lecturer
Cost Handy Handbook
Page - 401 -
McGraw Second Edition
THE COST OF UNETHICAL BEHAVIOR
Fame is something which must be won; honor is something which must not be lost.
ARTHUR SCHOPENHAUER (1788—1860), Philosopher
Cost Handy Handbook
Page - 402 -
McGraw Second Edition
THE COST OF UNETHICAL BEHAVIOR
DESIGNATED DOODLE ZONE
If you get hung up on everybody else’s hang-ups,
then the whole world’s going to be nothing more than one huge gallows.
RICHARD BRAUTIGAN (1935—1984), Writer and poet
Cost Handy Handbook
Page - 403 -
McGraw Second Edition
THE COST OF UNETHICAL BEHAVIOR
Your honesty influences others to be honest.
GEORGE WASHINGTON (1732—1799), 1st U.S. President
Cost Handy Handbook
Page - 404 -
McGraw Second Edition
THE COST OF UNETHICAL BEHAVIOR
DESIGNATED DOODLE ZONE
The less you do, the better you do it.
MARCELLO MASTROIANNI (1924—1996), Actor
Cost Handy Handbook
Page - 405 -
McGraw Second Edition
THE COST OF UNETHICAL BEHAVIOR
REVIEW / SELF-QUIZ
Were you paying attention??
If I asked you to prepare some review questions, what would you ask?






Cost Handy Handbook
Page - 406 -
McGraw Second Edition
MISCELLANEOUS
Cost Handy Handbook
Page - 407 -
McGraw Second Edition
MISCELLANEOUS
Cost Handy Handbook
Page - 408 -
McGraw Second Edition
MISCELLANEOUS
Cost Handy Handbook
Page - 409 -
McGraw Second Edition
MISCELLANEOUS
Cost Handy Handbook
Page - 410 -
McGraw Second Edition
1st Edition
©2007 Dr. Nick Fessler
Common sense is not so common.
VOLTAIRE (1694—1778),
Philosopher and writer
We cannot all do GREAT THINGS,
but we can do SMALL THINGS
WITH GREAT LOVE.
MOTHER TERESA (1910—1997)
OBSERVATIONS FROM THE ANCIENTS …
Hope is a waking dream.
ARISTOTLE (384—322 B.C.),
Philosopher
Fate leads the willing, drags the unwilling.
CLEANTHES (c. 331—231 B.C.),
Philosopher
Human behavior flows from three main sources: desire, emotion, and knowledge.
PLATO (c. 428—348 B.C.),
Philosopher
I hold this as a rule of life:
Too much of anything is bad.
TERENCE (c. 186—159 B.C.),
Dramatist
... INDEX ...
Problem
Let’s Take Notes!
Topic
ON THE FIRST DAY OF CLASS?
Page
1
Let’s Take Notes!
MANGO MOTORS
SOMUCH STEROES
BOJANGLE DANCE SHOES
MULESKINNER ATHLETIC WEAR
CATTLE COMPANY
JUDGE ELY JEANS
SLEEP WARM, INC.
TRABER COMPANY
HANNIBAL COMPANY
BOB’S BEEF BOY
BILLY’S BOAT BONANZA, INC.
DUNCAN’S AVIONICS
GLOBAL, INC.
MOORE COMPUTERS
PACIFIC COAST HOME FURNISHINGS
TERMS AND FLOWS
(Variable and Fixed Costs)
(Variable and Fixed Costs)
(Variable and Fixed Costs)
(Cost Flows)
(Cost Flows)
(Cost Flows)
(Cost Flows)
(Cost Flows)
(Cost Flows)
(Cost Flows)
(Classifying Costs)
(Classifying Costs)
(Classifying Costs)
(Variable and Fixed Costs)
(Cost Flows)
7
15
16
17
18
20
24
26
28
32
34
37
38
39
40
42
Let’s Take Notes!
STONE MONUMENT COMPANY (A)
STONE MONUMENT COMPANY (B)
STONE MONUMENT COMPANY (C)
STONE MONUMENT COMPANY (D)
STONE MONUMENT COMPANY (E)
STONE MONUMENT COMPANY (F)
STONE MONUMENT COMPANY (G)
EAST MEETS WEST COMPANY (A)
EAST MEETS WEST COMPANY (B)
EAST MEETS WEST COMPANY (C)
EAST MEETS WEST COMPANY (D)
EAST MEETS WEST COMPANY (E)
SADLY CORPORATION
THE HAT SOURCE
JOLLY ROGER CANDIES
HOWARD’S LIMITED
CLEAR TOYS
CASSIDY COMPANY
DEERING BANJO COMPANY
ALCATRAZ ARTIFACTS
PHONY PHONES COMPANY
ABTEX ELECTRONICS
BAGS AND MORE
LANDIS PLAYHOUSES
GREEN SODA
BAREFOOT BOOKS
BREAKEVEN (C-V-P)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Multiple-Product Breakeven)
(Multiple-Product Breakeven)
(Multiple-Product Breakeven)
(Multiple-Product Breakeven)
(Breakeven)
(Breakeven)
(Breakeven)
(Multiple-Product Breakeven)
47
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
78
79
80
82
86
88
90
92
Cost Handy Handbook
-i-
McGraw Second Edition
... INDEX ...
Problem
Let’s Take Notes!
JOE SLOW
JUDE LAW & ASSOCIATES
TIGÉR BOATS
APPLE APPLIANCES
TINA’S BEST CHOCOLATE (A)
TINA’S BEST CHCOLATE (B)
FUNK AND WAGNALL
FRODO COMPANY
TOLEDO TORPEDO COMPANY
HASSLE COMPANY
CALIFORNIA TEXTBOOKS (A)
CALIFORNIA TEXTBOOKS (B)
ADAMS’ COMPANY
SAM ENTERPRISES
MOEHRLE MANUFACTURING
TILLAMOOK CHEESE CO.
ANDRETTI COMPANY
FABULOUS FURNITURE
BOHR, INC.
PAULEY’S PARTS COMPANY
GILLIGAN’S BOAT RENTALS
EARL CORPORATION
STEWART COMPANY
GAMERS, INC.
FOSTER’S BAR-B-QUE
JOHNSON COUNTY SENIOR SERVICES
Cost Handy Handbook
Topic
Page
RELEVANT COSTS
(Classifying Relevant and Irrelevant Items)
(Relevant Costs) MACHINE REPLACEMENT
(Relevant Costs) SPECIAL ORDER
(Relevant Costs) MAKE OR BUY
(Relevant Costs) SELL NOW OR PROCESS FURTHER
(Relevant Costs) SCARCE RESOURCES
(Classifying Relevant and Irrelevant Items)
(Relevant Costs) MACHINE REPLACEMENT
(Relevant Costs) MACHINE REPLACEMENT
(Relevant Costs) MAKE OR BUY
(Relevant Costs) MAKE OR BUY
(Relevant Costs) MAKE OR BUY
(Relevant Costs) SCARCE RESOURCES
(Relevant Costs) SCARCE RESOURCES
(Relevant Costs) SPECIAL ORDER
(Relevant Costs) SELL NOW OR PROCESS FURTHER
(Relevant Costs)
(Identifying Relevant Costs)
(Relevant Costs: Make or Buy)
(Relevant Costs: Disposal of Assets)
(Relevant Costs: Asset Replacement)
(Relevant Costs: Sell Now or Process Further)
(Relevant Costs: Make or Buy)
(Relevant Costs: Scarce Resources)
(Relevant Costs: Special Orders)
(Relevant Costs: Dropping or Retaining Segment)
- ii -
95
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
116
119
120
121
122
123
124
125
126
128
McGraw Second Edition
... INDEX ...
Problem
Topic
Page
Let’s Take Notes!
EGG YOLK YUMMIES
JOB-ORDER COSTING
(Applying Overhead)
131
135
Let’s Take Notes!
THE BAIZE COMPANY
ROBIN HOOD, INC.
HALO PRODUCTS COMPANY
NARCISSUS NEEDLES
McKAY MILLS
BUFFALO BROILERS
HOWDY COMPANY
AXIOM PRODUCTS
HOLMAN COMPANY
EVERYTHING INCORPORATED
JOB-ORDER COSTING & APPLYING OVERHEAD
(Applying Overhead)
(Applying Overhead)
(Applying Overhead)
(Applying Overhead)
(Applying Overhead)
(Applying Overhead)
(Applying Overhead)
(Applying Overhead)
(Applying Overhead)
(Process Costing and Job-Order Costing)
136
139
140
141
142
143
144
146
150
152
154
Let’s Take Notes!
ARC LIGHT & SOUND
MARIE MANUFACTURING CO.
ROLEY POLEY COMPANY
PLENTIFUL PRINTING, INC.
POLARIS COMPANY
THE SWIZZLE MANUFACTURING CO.
MARSHALL PROPS UNLIMITED
OATMAN COMPANY
[EVEN MORE] JOB-ORDER COSTING
(Job-Order Costing)
(Job-Order Costing)
(Job-Order Costing)
(Job-Order Costing)
(Job-Order Costing)
(Job-Order Costing)
(Job-Order Costing)
(Job-Order Costing)
155
158
160
162
164
166
168
172
176
Let’s Take Notes!
MIZZOU COMPANY
AUDIO BASICS CORPORATION
J.B. GOODE COMPANY
THE CUTTERS, INC. (A)
THE CUTTERS, INC. (B)
GREASY HANDS
HBM INDUSTRIES
CHEETAH COMPANY
KNOB NOSTER HOSPITAL
ACTIVITY-BASED COSTING
(Activity-Based Costing)
(Activity-Based Costing)
(Activity-Based Costing)
(Activity-Based Costing)
(Activity-Based Costing)
(Activity-Based Costing)
(Activity-Based Costing)
(Activity-Based Costing)
(Activity-Based Costing)
181
188
190
192
194
196
199
200
202
204
Cost Handy Handbook
- iii -
McGraw Second Edition
... INDEX ...
Problem
Topic
Page
Let’s Take Notes!
B.G. WIP COMPANY
ABIQUA ACRES
THE JOHN COMPANY
STEINMUELLER STEINS, INC.
CANDLELIGHT CANDLES CO.
CUTTING EDGE SKIS
BROTHER’S BAKERY (A)
BROTHER’S BAKERY (B)
PIPES COMPANY
EDWARDS, INC.
PROCESS COSTING
(Process Costing)
(Process Costing)
(Process Costing)
(Process Costing)
(Process Costing)
(Process Costing)
(Process Costing)
(Process Costing)
(Process Costing)
(Process Costing)
207
213
217
218
222
226
230
234
236
238
240
Let’s Take Notes!
BEE-SAFE COMPANY
BEE-GO COMPANY
BEE-KILL CHEMICAL (A)
BEE-KILL CHEMICAL (B)
BEE-KILL CHEMICAL (C)
BEE-CEE’S GUITAR EMPORIUM (A)
BEE-CEE’S GUITAR EMPORIUM (B)
MISSOURI RETAILERS (A)
MISSOURI RETAILERS (B)
WHITTLE COMPANY
PARADISE COMPANY
WHISKERS PRODUCTS, INC.
KAITLYN KORPORATION
ARCHER COMPANY
WARD COMPANY
YOUNG PRODUCTS
CYCLONE COMPANY
PENNER CORPORATION
KIT INCORPORATED
CMSU WHO
BUDGETING
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
(Budgeting)
(Production Budget)
(Production and Materials Purchase Budgets)
(Cash Budget)
(Accounts Receivable Collections Budget)
243
249
250
251
252
253
254
255
256
257
258
259
260
261
262
263
264
267
268
270
272
Cost Handy Handbook
- iv -
McGraw Second Edition
... INDEX ...
Problem
Topic
Page
Let’s Take Notes!
(Day #1)
FOOLS GOLD JEWELRY
GEE-WHIZ SHOES
COWBOY BOOTS CO.
BIG DOG FOODS
P.W. PRODUCTS
POSTMODERN PRODUCTS
LANDS END MENS SUITS
PIRATES, INC.
SMITH COMPANY
SHOCKEY COMPANY
WABASH CANNONBALL
KSU COMPANY
CREAMED CORNHUSKER, INC.
STANDARD COSTS AND FLEXIBLE BUDGETING
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Direct Materials Variances)
(Direct Materials Variances)
(Direct Labor Variances)
(Direct Labor Variances)
275
277
278
280
282
284
286
288
289
290
294
296
298
300
Let’s Take Notes!
(Day #2)
TRUE-BLUE CORPORATION
STRANGE FIRE, P.C.
THE COSTUME COMPANY
TALLYHO COMPANY
FROSTEE FREEZE COMPANY
BENTON COMPANY
BEACHSIDE INDUSTRIES (A)
BEACHSIDE INDUSTRIES (B)
BIG LEAGUE, INC.
STANDARD COSTS AND FLEXIBLE BUDGETING
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Variable Overhead Variances)
(Fixed Overhead Variances)
(Comprehensive Variance Problem)
303
305
306
307
308
310
312
315
316
318
Let’s Take Notes!
(Day #3)
BEALE STREET BLUES, INC.
BALLYCANALLY CORPORATION
BRÖTCHEN BAKERY
COXWAIN COMPANY
KENNEL STREET COMPANY
REBEL COMPANY
BARBERSHOP COMPANY
TUBBER COMPANY
THOR’S HAMMER, INC.
DUNCE COMPANY
HERRY COMPANY
HERDING CATS, INC.
BOSNA CORPORATION
STIEGL CORPORATION
STANDARD COSTS AND FLEXIBLE BUDGETING
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
(Standard Costs and Flexible Budgeting)
321
324
328
332
335
336
337
338
339
340
341
342
343
344
345
Cost Handy Handbook
-v-
McGraw Second Edition
... INDEX ...
Problem
Topic
Page
Let’s Take Notes!
ABILENE MEAT PACKERS
SPARTAN, INC.
CAROLINA CORP.
SOAP ‘N SUDS, INC.
JOINT COSTS
(Joint Costs)
(Joint Costs)
(Joint Costs)
(Joint Costs)
347
349
351
352
354
Let’s Take Notes!
BOWLING COMPANY
HOLLANDAISE COMPANY
FAST COMPANY
SOUTH STREET FURNITURE CO.
STETSON COMPANY
BELLY RUB PRODUCTIONS
ROCKY MOUNTAIN BICYCLE CLUB
GEORGETOWN, INC.
GROVER MANUFACTURING
ABSORPTION COSTING AND VARIABLE COSTING
(Absorption and Variable Costing Income Statements)
(Absorption and Variable Costing Income Statements)
(Absorption and Variable Costing Income Statements)
(Absorption and Variable Costing Income Statements)
(Absorption and Variable Costing Income Statements)
(Absorption and Variable Costing Income Statements)
(Absorption Costing and Variable Costing)
(Absorption Costing and Variable Costing)
(Absorption Costing and Variable Costing)
357
362
364
366
368
370
374
378
380
382
Let’s Take Notes!
TEXAS PRODUCTS, INC.
ZEPHYR COMPANY
RAINBOW, INC.
CARDINAL MANUFACTURING
TRANSFER PRICING
(Transfer Pricing)
(Transfer Pricing)
(Transfer Pricing)
(Transfer Pricing)
385
389
392
394
396
Let’s Take Notes!
THE COST OF UNETHICAL BEHAVIOR
399
Let’s Take Notes!
MISCELLANEOUS
407
Cost Handy Handbook
- vi -
McGraw Second Edition