Bus 227 Management Accounting

May Trimester 2016

Workshop Solutions Session 4
Chapter 3
RQ:

3-4; 3-9; 3-10; 3-15

E:

3-23; 3-26; 3-33; 3-34

P:

3-48

Review Questions

3-4

a. Material requisition form: A document upon which the production department

supervisor requests the release of raw materials for production.
b. Labor time record: A document upon which employees record the time they
spend working on each production job or batch.
c. Job-cost record: A document on which the costs of direct material, direct
labor, and manufacturing overhead are recorded for a particular production
job or batch. The job-cost sheet is a subsidiary ledger account for the Workin-Process Inventory account in the general ledger.

3-9

The difference between actual and normal costing systems involves the
procedure for applying manufacturing overhead to Work-in-Process Inventory.
Under actual costing, applied overhead is the product of the actual overhead rate
(computed at the end of the period) and the actual amount of the cost driver
used. Under normal costing, applied overhead is the product of the
predetermined overhead rate (computed at the beginning of the period) and the
actual amount of the cost driver used.

3-10

When a single volume-based cost driver is used to apply manufacturing

overhead, the managerial accountant's primary objective is to select a cost driver
that varies in a pattern similar to the pattern in which manufacturing overhead
varies. Moreover, if a single cost driver is used, it should be some productive
input that is common to all of the firm's products.

3-15

A cost driver is a characteristic of an event or activity that results in the

incurrence of costs by that event or activity. A volume-based cost driver is one
that is closely associated with production activity, such as the number of units
produced, direct-labor hours, or machine hours.

EXERCISE 3-23 (10 MINUTES)

1.

Process

Job-order

Job-order (contracts or projects)

Process

Process
Job-order

Bus 227 Management Accounting

May Trimester 2016
Workshop Solutions Session 4
2.

Process

3.

Job-order (contracts or projects)

4.

Process

5.

Job-order
EXERCISE 3-26 (15 MINUTES)
1.

Applied manufacturing overhead

=
=

total manufacturing costs 30%

$1,250,000 30%

= $375,000
Applied manufacturing overhead

Direct-labor cost =
=

direct-labor cost 80%

applied manufacturing overhead 80%

$375,000 .8

= $468,750
2.

Direct-material used = total manufacturing cost

direct labor cost
applied manufacturing overhead
= $1,250,000 $468,750 $375,000
= $406,250

3.

Let X denote work-in-process inventory on December 31.

Total

manufacturing

work-in-process
+

cost
$1,250,000

inventory,

work-in-process

Jan. 1
+

.75X

inventory,
Dec. 31

cost of
=

goods
manufactured

= $1,212,500

Bus 227 Management Accounting

May Trimester 2016
Workshop Solutions Session 4
.25X = $1,250,000 $1,212,500
X = $150,000
Work-in-process inventory on December 31 amounted to $150,000.

EXERCISE 3-33 (20 MINUTES)

NOTE: Budgeted sales revenue, although given in the exercise, is irrelevant to
the solution.

1.

Predetermined overhead rate

budgetedmanufacturing overhead
budgetedlevel of cost driver

$650,000
= $32.50 per machine hour
20,000 machine hours

(a)

(b)

$650,000
25,000 direct - labor hours

(c)

$650,000
$325,000 *

= $26.00 per direct-labor hour

$2.00 per direct-labor dollar or 200%

of direct-labor cost

*Budgeted direct-labor cost = 25,000$13

2.

Actual
manufacturing
overhead

applied
manufacturing

overapplied or
underapplied
overhead

overhead

(a)

$690,000 (22,000)($32.50)

$25,000 overapplied overhead

(b)

$690,000 (26,000)($26.00)

$14,000 underapplied overhead

Bus 227 Management Accounting

May Trimester 2016
Workshop Solutions Session 4
(c)

$690,000 ($364,000)(200%)

$38,000 overapplied overhead

Actual direct-labor cost = 26,000$14

EXERCISE 3-34 (5 MINUTES)
1.

Work-in-Process Inventory.......................................................

690,000

Manufacturing Overhead................................................
2.

Work-in-Process Inventory.......................................................

690,000
715,000*

Manufacturing Overhead................................................

715,000

*Applied manufacturing overhead = $715,000

= 22,000 hours x $32.50 per machine hour
PROBLEM 3-48 (30 MINUTES)
1.

Traceable costs total $3,750,000, computed as follows:

Total Cost
Professional staff salaries $3,750,000
Administrative support staff
450,000
Photocopying..
75,000
Travel.
375,000
Other operating costs
150,000
Total. $4,800,000

Percent
Traceable

Traceable
Cost

80%
60
90
90
50

$3,000,000
270,000
67,500
337,500
75,000
$3,750,000

Golden State Enterprises overhead (i.e., the nontraceable costs) total $1,050,000
($4,800,000 - $3,750,000).
1.

Predetermined overhead rate = budgeted overhead traceable costs

= $1,050,000 $3,750,000 = 28% of traceable
costs

2.

Target profit percentage = target profit total cost

= $960,000 $4,800,000 = 20% of cost

Bus 227 Management Accounting

May Trimester 2016
Workshop Solutions Session 4
PROBLEM 3-48 (CONTINUED)
3.

The total cost of the Davis Manufacturing project is $96,000, and the billing is
$115,200, as follows:
Professional staff salaries
Administrative support staff
Photocopying
Travel..
Other operating costs.
Subtotal
Overhead ($75,000 x 28%).
Total cost.
Markup ($96,000 x 20%).
Billing to Davis

4.

$61,500
3,900
750
6,750
2,100
$75,000
21,000
$96,000
19,200
$115,200

Possible nontraceable costs include utilities, rent, depreciation, advertising, top

management salaries, and insurance.

6.
Professional staff members are compensated for attending training sessions and
firm-wide planning meetings, paid vacations, and completion of general, non-clientrelated paperwork and reports. These activities benefit multiple clients, the consultant,
and/or the overall firm, making traceability to specific clients difficult if not impossible.