Solutions to Problem Set 1

Solutions to Practice Problem Set 1

Exercise 1
For each case below, find the missing amount:

Case 1 Case II Case III

Beginning inventory of finished goods ? $18,000 $3,500
Cost of goods manufactured during period $104,750 $142,500 ?
Ending inventory of finished goods $24,500 $12,000 $10,500
Cost of goods sold $101,250 ? $152,000

The general formula for solving all three cases is as follows:

Beginning Cost of goods Ending Cost-of-

inventory of + manufactured – inventory of = goods sold
finished goods during period finished goods expense

Using this formula, we can find the missing amounts as follows:

Case
I II III
Beginning inventory of finished goods .................. $ 21,000 $ 18,000 $ 3,500
Add: Cost of goods manufactured ......................... 104,750 142,500 159,000
Subtract: Ending inventory of finished goods ....... 24,500 12,000 10,500
Cost of goods sold.................................................. $101,250 $148,500 $152,000

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Solutions to Problem Set 1

Exercise 2

Alhambra Aluminum Company, a manufacturer of recyclable soda cans, had the following
inventory balances at the beginning and end of 20X1.
January 1, 20X1 ($) December 31, 20X1 ($)
Raw material 55,000 75,000
Work in process 110,000 125,000
Finished Goods 160,000 155,000

During 20X1, the company purchased $240,000 of raw material and spent $420,000 for direct
labor. Manufacturing overhead costs were as follows:

$
Indirect material 12,000
Indirect labor 22,000
Depreciation on plant and equipment 110,000
Utilities 23,000
Other 35,000

Sales revenue was $1,210,000 for the year. Selling and administrative expenses for the year
amounted to $105,000. The firm’s tax rate is 35%

Required (use the following tables to prepare full schedules if they help you):
2.1 What is the cost of goods manufactured?
2.2 What is the cost of goods sold?
2.3 What is the net income reported by the company?

2.1 ALHAMBRA ALUMINUM COMPANY

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X1

Direct material:
Raw-material inventory, January 1 ........................................... $ 55,000
Add: Purchases of raw material ................................................ 240,000
Raw material available for use .................................................. $295,000
Deduct: Raw-material inventory, December 31 ....................... 75,000
Raw material used ..................................................................... $220,000
Direct labor ..................................................................................... 420,000
Manufacturing overhead:
Indirect material ........................................................................ $ 12,000
Indirect labor ............................................................................. 22,000
Depreciation on plant and equipment ....................................... 110,000
Utilities...................................................................................... 23,000
Other ......................................................................................... 35,000
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Solutions to Problem Set 1

Total manufacturing overhead .................................................. 202,000

Total manufacturing costs .............................................................. $842,000
Add: Work-in-process inventory, January 1 .................................. 110,000
Subtotal........................................................................................... $952,000
Deduct: Work-in-process inventory, December 31........................ 125,000
Cost of goods manufactured ........................................................... $827,000

2.2 ALHAMBRA ALUMINUM COMPANY

SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X1

Finished-goods inventory, January 1 ............................................................... $160,000

Add: Cost of goods manufactured .................................................................... 827,000
Cost of goods available for sale ....................................................................... $987,000
Deduct: Finished-goods inventory, December 31 ............................................ 155,000
Cost of goods sold ............................................................................................ $832,000

2.3 ALHAMBRA ALUMINUM COMPANY

INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X1

Sales revenue .................................................................................................... $1,210,000

Less: Cost of goods sold................................................................................... 832,000
Gross margin .................................................................................................... $ 378,000
Selling and administrative expenses ................................................................ 105,000
Income before taxes ......................................................................................... $ 273,000
Income tax expense (at 35%) ........................................................................... 95,550
Net income ....................................................................................................... $ 177,450

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Solutions to Problem Set 1

Exercise 3

The following cost data for the year just ended pertain to Heartstrings, Inc., a greeting card
manufacturer:

Service department costs*.................................................................. $ 50,000

Direct labor: Fringe benefits .............................................................. 47,500
Direct labor: Wages ........................................................................... 242,500
Indirect labor: fringe benefits............................................................. 15,000
Fringe benefits for production supervisor .......................................... 4,500
Total overtime premiums paid ........................................................... 27,500
Cost of idle time: production employees** ....................................... 20,000
Administrative costs........................................................................... 75,000
Rental of office space for sales personnel***.................................... 7,500
Sales commissions ............................................................................. 2,500
Product promotion costs .................................................................... 5,000
Direct material used ........................................................................... 1,050,000
Advertising expense ........................................................................... 49,500
Depreciation on factory building ....................................................... 57,500
Cost of finished-goods inventory at year-end .................................... 57,500
Indirect labor: wages .......................................................................... 70,000
Production supervisor’s salary ........................................................... 22,500

*All services are provided to manufacturing departments.

** Cost of idle time is an overhear item, it is not included in direct-labor wages given above.
*** The rental of sales space was made necessary when the sales offices were converted to
storage space for raw material.

Required:
Compute each of the following costs for the year just ended:

a. Total prime costs $ 1,340,000

b. Total manufacturing overhead costs $ 267,000
c. Total conversion costs $ 557,000
d. Total product costs $ 1,607,000
e. Total period costs $ 139,500

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Solutions to Problem Set 1

Explanation:

a. Total prime costs:

Direct material ................................................................................... $ 1,050,000
Direct labor:
Wages ............................................................................................ 242,500
Fringe benefits ............................................................................... 47,500
Total prime costs ............................................................................... $ 1,340,000

b. Total manufacturing overhead:

Depreciation on factory building ....................................................... $ 57,500

Indirect labor: wages .......................................................................... 70,000
Production supervisor's salary............................................................ 22,500
Service department costs .................................................................... 50,000
Indirect labor: fringe benefits ............................................................. 15,000
Fringe benefits for production supervisor .......................................... 4,500
Total overtime premiums paid ........................................................... 27,500
Cost of idle time: production employees ........................................... 20,000
Total manufacturing overhead ........................................................... $ 267,000

c. Total conversion costs:

Direct labor ($242,500 + $47,500)..................................................... $ 290,000

Manufacturing overhead .................................................................... 267,000
Total conversion costs ........................................................................ $ 557,000

d. Total product costs:

Direct material.................................................................................... $1,050,000

Direct labor ........................................................................................ 290,000
Manufacturing overhead .................................................................... 267,000
Total product costs ............................................................................. $1,607,000
e. Total period costs:

Advertising expense .......................................................................... $ 49,500

Administrative costs .......................................................................... 75,000
Rental of office space for sales personnel ......................................... 7,500
Sales commissions............................................................................. 2,500
Product promotion costs .................................................................... 5,000
Total period costs .............................................................................. $ 139,500

Exercise 4:

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Solutions to Problem Set 1

Consider the following items:

A. Tomatoes used in the manufacture of Heinz ketchup
B. Administrative salaries of executives employed by Southwest Airlines
C. Wages of assembly-line workers at a Ford plant
D. Marketing expenditures of the Los Angeles Dodgers baseball club
E. Commissions paid to Coca-Cola's salespeople
F. Straight-line depreciation on manufacturing equipment owned by Dell Computer
G. Speakers used in Sony home-theater systems
H. Insurance costs related to a Mary Kay Cosmetics' manufacturing plant

Required:
Complete the table that follows and classify each of the costs listed as a product or period
cost by placing an "X" in the appropriate column.

Product or Period Cost

Item Product Period
A
B
C
D
E
F
G
H

Answer:

Product or Period Cost

Item Product Period
A 
B 
C 
D 
E 
F 
G 
H 

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Solutions to Problem Set 1

Exercise 5:
Rexford Company manufactures finger splints for kids who get tendonitis from playing video
games. The firm had the following inventories at the beginning and end of the month of January.
January 1 January 31
Finished-goods $ 162,500 $152,100
Work-in-process 305,500 326,300
Raw-material 174,200 161,200
The following additional manufacturing data pertains to January operations.

Raw-material purchases 248,300

Direct labor 390,000
Actual manufacturing overhead 227,500
Actual selling and administrative expense 230,000
Rexford Company applies manufacturing overhead at the rate of 70 percent of direct-labor cost.

Required:
1. Compute the company's prime cost for January.
Prime cost $651,300

Explanation
Raw-material inventory, January 1 ......................................................... $174,200
Add: Raw-material purchases ................................................................. 248,300
Raw material available for use ................................................................ $422,500
Deduct: Raw-material inventory, January 31 ......................................... 161,200
Raw material used in January ................................................................. $261,300
Direct labor ............................................................................................. 390,000
Total prime costs incurred in January ..................................................... $651,300

2. Compute the total manufacturing cost for January.

Total manufacturing cost $924,300

Explanation
Total prime cost incurred in January ....................................................................... $651,300
Applied manufacturing overhead (70% × $390,000) .............................................. 273,000
Total manufacturing cost for January ...................................................................... $924,300

3. Compute the cost of goods manufactured for January.

Cost of goods manufactured $ 903,500

Explanation
Total manufacturing cost for January ...................................................................... $ 924,300
Add: Work-in-process inventory, January 1 ............................................................ 305,500
Subtotal .................................................................................................................... $1,229,800
Deduct: Work-in-process inventory, January 31 ..................................................... 326,300
Cost of goods manufactured .................................................................................... $ 903,500

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Solutions to Problem Set 1

4. Compute the cost of goods sold for January.

Cost of goods sold $ 913,900

Explanation
Finished-goods inventory, January 1 ................................................................... $ 162,500
Add: Cost of goods manufactured ....................................................................... 903,500
Cost of goods available for sale ........................................................................... $1,066,000
Deduct: Finished-goods inventory, January 31 ................................................... 152,100
Cost of goods sold................................................................................................ $ 913,900

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Solutions to Problem Set 1

Exercise 6:
Cherry Hill Glass Company employs a normal costing system. The following information
pertains to the
year just ended.
• Total manufacturing costs were $ 1,250,000.
• Cost of goods manufactured was $ 1,212,500.
• Applied manufacturing overhead was 30 percent of total manufacturing costs.
• Manufacturing overhead was applied to production at a rate of 80 percent of direct-labor
cost.
• Work-in-process inventory on January 1 was 75 percent of work-in-process inventory on
December 31.
Required:
1. Compute Cherry Hill's total direct-labor cost for the year
Direct-labor cost $468,750

Explanation
Applied manufacturing overhead = total manufacturing costs × 30%
= $1,250,000 × 30%
= $375,000

Applied manufacturing overhead = direct-labor cost × 80%

Direct-labor cost = applied manufacturing overhead ÷ 80%

= $375,000 ÷ .8
= $468,750

2. Calculate the total cost of direct-material used during the year.

Direct-material cost $406,250

Explanation
Direct-material used = total manufacturing cost
– direct labor cost
– applied manufacturing overhead
= $1,250,000 – $468,750 – $375,000
= $406,250

3. Compute the value of the company's work-in-process inventory on December 31.

Work-in-process inventory on December 31 $150,000

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

Total work-in-process work-in-process cost of

manufacturing + inventory, – inventory, = goods
cost Jan. 1 Dec. 31 manufactured

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Solutions to Problem Set 1

$1,250,000 + .75X – X = $1,212,500

.25X = $1,250,000 –
$1,212,500
X = $150,000

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Solutions to Problem Set 1

Exercise 7:
The controller for Tender Bird Poultry, Inc. estimates that the company's fixed overhead is
$150,000 per year. She also has determined that the variable overhead is approximately $0.15
per chicken raised and sold. Since the firm has a single product, overhead is applied on the basis
of output units, chickens raised and sold.
Required:
1. Calculate the predetermined overhead rate under each of the following output
predictions: (Round your answers to 2 decimal places.)

100,000 chickens $1.65 per chicken

200,000 chickens $.90 per chicken
300,000 chickens $.65 per chicken

Explanation
budgeted overhead
Predetermined overhead rate =
budgeted production volume

(a) At 100,000 chicken volume:

$150,000 + ($.15)(100,000)
Overhead rate = = $1.65 per chicken
100,000

(b) At 200,000 chicken volume:

$150,000 + ($.15)(200,000)
Overhead rate = = $.90 per chicken
200,000

(c) At 300,000 chicken volume:

$150,000 + ($.15)(300,000)
Overhead rate = = $.65 per chicken
300,000

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Solutions to Problem Set 1

2. Does the predetermined overhead rate change in proportion to the change in predicted
production?
No.

Explanation: see following page

The predetermined overhead rate does not change in proportion to the change in production
volume. As production volume increases, the $150,000 of fixed overhead is allocated across a
larger activity base. When volume rises by 100%, from 100,000 to 200,000 chickens, the decline
in the overhead rate is 45.45% [($1.65 – $.90)/$1.65]. When volume rises by 50%, from 200,000
to 300,000 chickens, the decline in the overhead rate is 27.78% [($.90 – $.65)/$.90].

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Solutions to Problem Set 1

Exercise 8:
The following data pertain to the Aquarius Hotel Supply Company for the year just ended.
Budgeted sales revenue $ 945,000
Budgeted manufacturing overhead 650,000
Budgeted machine hours (based on practical capacity) 20,000
Budgeted direct-labor hours (based on practical capacity) 25,000
Budgeted direct-labor rate per hour 13
Actual manufacturing overhead 690,000
Actual machine hours 22,000
Actual direct-labor hours 26,000
Actual direct-labor rate per hour 14

Required
1. Compute the firm's predetermined overhead rate for the year using each of the following
common cost drivers: (Round your answers to 2 decimal place.)

Cost Drivers POHR Overhead Rate

(a) Machine hours $32.50 per machine hour
(b) Direct-labor hours $26.00 per direct-labor hour
(c) Direct-labor dollars 2.00 times per direct-labor dollar

Explanation
budgeted manufacturing overhead
Predetermined overhead rate =
budgeted level of cost driver
$650,000
(a) = $32.50 per machine hour
20,000 machine hours
$650,000
(b) = $26.00 per direct-labor hour
25,000 direct - labor hours
$650,000 2.00 times per direct-labor dollar or 200%
(c) =
$325,000 * of direct-labor cost
*Budgeted direct-labor cost =
25,000$13

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Solutions to Problem Set 1

2. Calculate the applied overhead for the year using each of the following cost drivers.

Cost Drivers Amount

(a) Machine hours $25,000
(b) Direct-labor hours $14,000
(c) Direct-labor dollars $38,000

Explanation

2(a): Applied OH based on machine hours = (22,000)X($32.50) =$715,000

2(b): Applied OH based on direct labor hours = (26,000)X($26.00) = $676,000
2(c): Applied OH based on direct labor dollars = (26,000)X($14)X(2.00) = $728,000

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