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Chapter 19: Q35PGA-3 (page 1077)

Question:Oscar, Inc. manufactures bookcases and uses an activity-based costing system. Oscar’s activity areas and related data follow:

Activity

Budgeted Cost of Activity

Allocation Base

Predetermined Overhead Allocation Rate

Materials handling

\( 240,000

Number of parts

\)1.00

Assembly

3,500,000

Number of assembling direct labor hours

17.00

Finishing

190,000

Number of finished units*

4.50

*Refers to number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory

Oscar produced two styles of bookcases in October: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and other data follow:

Product

Total Units Produced

Total Direct materials Costs

Total Direct Labor Costs

Total Number of Parts

Total Assembling Direct Labor Hours

Standard bookcase

7,000

\(91,000

\)105,000

28,000

10,500

Unfinished bookcase

7,500

82,500

75,000

22,500

7,500

Requirements

3. Which product costs are reported in the external financial statements? Which costs are used for management decision-making? Explain the difference.

Short Answer

Expert verified

Answer

Manufacturing cost is reported in the external financial statement and differs from the full product cost in terms of the pre and post-manufacturing costs not included in it.

Step by step solution

01

Manufacturing cost

Manufacturing cost is related to the all the manufacturing elements such as material, labor, and overhead. It is the cost that affects the external parties’ decisions relating to investment, financing, and pricing.

Manufacturing cost is a part of the cost of goods sold and is reported in the income statement.

02

Full product cost

Full product cost is the total cost incurred before manufacturing, at the time of manufacturing, and after the manufacturing process. This cost includes all the components that are related to the production decisions.

Some costs included in the full product cost may not be relevant to the external parties but are very important for management.

Full product cost is not reported on the external financial statement but is used in the internal reporting and helps in the management decision making.

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Most popular questions from this chapter

Eason Company manufactures wheel rims. The controller expects the following ABC allocation rates for 2018:

Activity Allocation Base Predetermined Overhead

Allocation Rate

Materials handling Number of parts $ 4.00 per part

Machine setup Number of setups 400.00 per setup

Insertion of parts Number of parts 26.00 per part

Finishing Number of finishing hours 90.00 per hour

Eason produces two wheel rim models: standard and deluxe. Expected data for 2018 are as follows:

Standard Deluxe

Parts per rim 4.0 7.0

Setups per 500 rims 18.0 18.0

Finishing hours per rim 1.0 5.5

Total direct hours per rim 5.0 6.0

The company expects to produce 500 units of each model during the year.

Requirements

3. Compute the estimated ABC indirect manufacturing cost per unit of each model for 2018. Carry each cost to the nearest cent.

Question:Refer to Exercise E19-24. The president of Western suspects that her allocation of indirect costs could be giving misleading results, so she decides to develop an ABCsystem. She identifies three activities: documentation preparation, information technologysupport, and training. She figures that documentation costs are driven by thenumber of pages, information technology support costs are driven by the number ofsoftware applications used, and training costs are driven by the number of direct laborhours worked. Estimates of the costs and quantities of the allocation bases follow:

Activity

Estimated Cost

Allocation Base

Estimated quantity of allocation base

Documentation Preparation

\( 85,850

Pages

1,317 Pages

Information technology support

150,150

Applications used

715 applications

Training

424,000

Direct labor hours

4,000 hours

Total Indirect costs

\) 640,000

Compute the predetermined overhead allocation rate for each activity. Round to thenearest dollar.

Koehler (see Exercise E19-15 and Exercise E19-16) makes handheld calculators in two models—basic and professional—and wants to further refine its costing system by allocating overhead using activity-based costing. The estimated \(721,000 of manufacturing overhead has been divided into three primary activities: Materials Handling, Machine Setup, and Insertion of Parts. The following data have been compiled:

Material Handling

Machine Setup

Insertion of Parts

Total

Overhead costs

\) 45,000

\( 136,000

\) 540,000

$ 721,000

Allocation base

Number of parts

Number of setups

Number of parts

Expected usage:

Basic Model

32 parts per calculator

24 setups per year

32 parts per calculator

Professional

Model

58 parts per calculator

44 setups per year

58 parts per calculator

Requirement 2

Compare your answers for Exercise E19-15, Exercise E19-16, and Exercise E19-17. What conclusions can you draw?

Martin, Inc. manufactures bookcases and uses an activity-based costing system. Martin’s activity areas and related data follow:

Activity

Budgeted Cost of Activity

Allocation Base

Predetermined Overhead Allocation Rate

Materials handling

\( 230,000

Number of parts

\)1.50

Assembly

3,200,000

Number of assembling direct labor hours

16.00

Finishing

150,000

Number of finished units*

3.00

*Refers to the number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory

Martin produced two styles of bookcases in April: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and other data follow:

Product

Total Units Produced

Total Direct materials Costs

Total Direct Labor Costs

Total Number of Parts

Total Assembling Direct Labor Hours

Standard bookcase

3,000

\(54,000

\)67,500

9,000

4,500

Unfinished bookcase

3,500

56,000

52,500

7,000

3,500

Requirements

3. Which product costs are reported in the external financial statements? Which costs are used for management decision making? Explain the difference.

Question:High Mountain produces fleece jackets. The company uses JIT costing for its JIT production system.

High Mountain has two inventory accounts: Raw and In-Process Inventory and

Finished Goods Inventory. On April 1, 2018, the account balances were Raw and In-Process Inventory, \(10,000; Finished Goods Inventory, \)2,100.

The standard cost of a jacket is \(33, composed of \)12 direct materials plus \(21

conversion costs. Data for April’s activities follow:

Number of jackets completed 19,000

Number of jackets sold (on account for \)50 each) 18,600

Direct materials purchased (on account) \( 220,500

Conversion costs incurred \) 500,000

Requirements

1. What are the major features of a JIT production system such as that of High Mountain?

2. Prepare summary journal entries for April. Underallocated or overallocated

conversion costs are adjusted to Cost of Goods Sold monthly.

3. Use a T-account to determine the April 30, 2018, balance of Raw and In-ProcessInventory.
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