Accounting
What the Numbers Mean 9e
Demonstration Problem
Chapter 13 – Exercise 7
Product Costing – Various Issues
Problem Definition
• Clay Company produces ceramic coffee
mugs and pencil holders. Manufacturing
overhead is assigned to production using an
application rate based on direct labor hours.
Problem Requirements
a.
For 2010, the company’s cost accountant estimated that
total overhead costs incurred would be $420,000 and that a
total of 50,000 direct labor hours would be worked.
Calculate the amount of overhead to be applied for each
direct labor hour worked on a production run.
b.
A production run of 400 coffee mugs used raw materials that
cost $432 and used 40 direct labor hours at a cost of $10.00 per
hour. Calculate the cost of each coffee mug produced.
c.
At the end of October 2010, 280 coffee mugs made in the above
production run had been sold and the rest were in ending
inventory. Calculate (1) the cost of coffee mugs sold that would
have been reported in the income statement and (2) the cost
included in the October 31, 2010, finished goods inventory.
Problem Solution
• Calculate the predetermined overhead rate for
Clay Company based on estimated direct labor
hours:
Problem Solution
• Calculate the predetermined overhead rate for
Clay Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Problem Solution
• Calculate the predetermined overhead rate for
Clay Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Problem Solution
• Calculate the predetermined overhead rate for
Clay Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Problem Solution
• Calculate the predetermined overhead rate for
Clay Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Estimated Direct Labor Hours
=
Problem Solution
• Calculate the predetermined overhead rate for
Clay Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Estimated Direct Labor Hours
$420,000
=
Problem Solution
• Calculate the predetermined overhead rate for
Clay Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Estimated Direct Labor Hours
$420,000
=
50,000 DLH
=
Problem Solution
• Calculate the predetermined overhead rate for
Clay Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Estimated Direct Labor Hours
=
$420,000
= $8.40 per direct labor hour
50,000 DLH
Problem Solution
• Calculate the predetermined overhead rate for
Clay Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Estimated Direct Labor Hours
=
$420,000
= $8.40 per direct labor hour
50,000 DLH
For every direct labor hour incurred, $8.40 of
overhead will be applied to the production run.
Problem Requirements
a.
For 2010, the company’s cost accountant estimated that total
overhead costs incurred would be $420,000 and that a total of
50,000 direct labor hours would be worked. Calculate the
amount of overhead to be applied for each direct labor hour
worked on a production run.
b.
A production run of 400 coffee mugs used raw materials
that cost $432 and used 40 direct labor hours at a cost of
$10.00 per hour. Calculate the cost of each coffee mug
produced.
c.
At the end of October 2010, 280 coffee mugs made in the above
production run had been sold and the rest were in ending
inventory. Calculate (1) the cost of coffee mugs sold that would
have been reported in the income statement and (2) the cost
included in the October 31, 2010, finished goods inventory.
Problem Solution
• Step 1: Calculate the total cost of
producing 400 mugs:
Problem Solution
• Step 1: Calculate the total cost of producing
400 mugs:
Raw materials
Problem Solution
• Step 1: Calculate the total cost of producing
400 mugs:
Raw materials
$ 432 Calculation:
$432 Raw material
amount was given
Problem Solution
• Step 1: Calculate the total cost of producing
400 mugs:
Raw materials
Direct labor
$ 432
Problem Solution
• Step 1: Calculate the total cost of producing
400 mugs:
Raw materials
Direct labor
$ 432
400 Calculation:
40 direct labor hours
* $10.00 per hour
Problem Solution
• Step 1: Calculate the total cost of producing
400 mugs:
Raw materials
Direct labor
Overhead
$ 432
400
Problem Solution
• Step 1: Calculate the total cost of producing
400 mugs:
Raw materials
Direct labor
Overhead
$ 432
400
336 Calculation:
40 direct labor hours *
$8.40 predetermined
overhead rate
Problem Solution
• Step 1: Calculate the total cost of producing
400 mugs:
Raw materials
$ 432
Direct labor
400
Overhead
336
Total Manufacturing Cost
Problem Solution
• Step 1: Calculate the total cost of producing
400 mugs:
Raw materials
Direct labor
Overhead
Total Manufacturing Cost
$ 432
400
336
$ 1,168
Problem Solution
• Step 1: Calculate the total cost of producing
400 mugs:
Raw materials
Direct labor
Overhead
Total Manufacturing Cost
$ 432
400
336
$ 1,168
Total cost of
producing
400 mugs
Problem Solution
• Step 2: Calculate the cost of producing
each mug:
Problem Solution
• Step 2: Calculate the cost of producing
each mug:
Cost per coffee mug produced =
Problem Solution
• Step 2: Calculate the cost of producing
each mug:
Cost per coffee mug produced =
Total manufacturing costs
Problem Solution
• Step 2: Calculate the cost of producing
each mug:
Cost per coffee mug produced =
Total manufacturing costs
Problem Solution
• Step 2: Calculate the cost of producing
each mug:
Cost per coffee mug produced =
Total manufacturing costs
Number of mugs produced =
Problem Solution
• Step 2: Calculate the cost of producing
each mug:
Cost per coffee mug produced =
Total manufacturing costs
Number of mugs produced
$1,168
=
Problem Solution
• Step 2: Calculate the cost of producing
each mug:
Cost per coffee mug produced =
Total manufacturing costs
Number of mugs produced
$1,168
400 mugs
=
Problem Solution
• Step 2: Calculate the cost of producing
each mug:
Cost per coffee mug produced =
Total manufacturing costs
Number of mugs produced
=
$1,168
= $2.92 per coffee mug
400 mugs
Problem Solution
• Step 2: Calculate the cost of producing
each mug:
Cost per coffee mug produced =
Total manufacturing costs
Number of mugs produced
=
$1,168
= $2.92 per coffee mug
400 mugs
Unit cost of
producing
each mug
Problem Requirements
a.
For 2010, the company’s cost accountant estimated that total
overhead costs incurred would be $420,000 and that a total of
50,000 direct labor hours would be worked. Calculate the
amount of overhead to be applied for each direct labor hour
worked on a production run.
b.
A production run of 400 coffee mugs used raw materials that
cost $432 and used 40 direct labor hours at a cost of $10.00 per
hour. Calculate the cost of each coffee mug produced.
c.
At the end of October 2010, 280 coffee mugs made in the
above production run had been sold and the rest were in
ending inventory. Calculate (1) the cost of coffee mugs sold
that would have been reported in the income statement and
(2) the cost included in the October 31, 2010, finished goods
inventory.
Problem Solution
• Step 1: Calculate the cost of coffee mugs sold
that would be reported in the income
statement
Problem Solution
• Step 1: Calculate the cost of coffee mugs sold that
would be reported in the income statement
Cost of coffee mugs sold =
Problem Solution
• Step 1: Calculate the cost of coffee mugs sold that
would be reported in the income statement
Cost of coffee mugs sold =
Mugs sold
Problem Solution
• Step 1: Calculate the cost of coffee mugs sold that
would be reported in the income statement
Cost of coffee mugs sold =
Mugs sold *
Problem Solution
• Step 1: Calculate the cost of coffee mugs sold that
would be reported in the income statement
Cost of coffee mugs sold =
Mugs sold * Unit cost =
Problem Solution
• Step 1: Calculate the cost of coffee mugs sold that
would be reported in the income statement
Cost of coffee mugs sold =
Mugs sold * Unit cost =
280 mugs
Problem Solution
• Step 1: Calculate the cost of coffee mugs sold that
would be reported in the income statement
Cost of coffee mugs sold =
Mugs sold * Unit cost =
280 mugs *
Problem Solution
• Step 1: Calculate the cost of coffee mugs sold that
would be reported in the income statement
Cost of coffee mugs sold =
Mugs sold * Unit cost =
280 mugs * $2.92 per mug =
Problem Solution
• Step 1: Calculate the cost of coffee mugs sold that
would be reported in the income statement
Cost of coffee mugs sold =
Mugs sold * Unit cost =
280 mugs * $2.92 per mug =
$817.60
Problem Solution
• Step 1: Calculate the cost of coffee mugs sold that
would be reported in the income statement
Cost of coffee mugs sold =
Mugs sold * Unit cost =
280 mugs * $2.92 per mug =
$817.60
Cost of coffee
mugs sold
reported in
the income
statement
Problem Solution
• Step 2: Calculate the cost of coffee mugs that
would be reported in the finished goods
inventory
Problem Solution
• Step 2: Calculate the cost of coffee mugs that
would be reported in the finished goods inventory
Cost of coffee mugs not sold =
Problem Solution
• Step 2: Calculate the cost of coffee mugs that
would be reported in the finished goods inventory
Cost of coffee mugs not sold =
Mugs produced
Problem Solution
• Step 2: Calculate the cost of coffee mugs that
would be reported in the finished goods inventory
Cost of coffee mugs not sold =
(Mugs produced –
Problem Solution
• Step 2: Calculate the cost of coffee mugs that
would be reported in the finished goods inventory
Cost of coffee mugs not sold =
(Mugs produced – Mugs sold)
Problem Solution
• Step 2: Calculate the cost of coffee mugs that
would be reported in the finished goods inventory
Cost of coffee mugs not sold =
(Mugs produced – Mugs sold) *
Problem Solution
• Step 2: Calculate the cost of coffee mugs that
would be reported in the finished goods inventory
Cost of coffee mugs not sold =
(Mugs produced – Mugs sold) * Unit cost =
Problem Solution
• Step 2: Calculate the cost of coffee mugs that
would be reported in the finished goods inventory
Cost of coffee mugs not sold =
(Mugs produced – Mugs sold) * Unit cost =
120 mugs
Calculation:
400 mugs produced – 280 mugs sold
Problem Solution
• Step 2: Calculate the cost of coffee mugs that
would be reported in the finished goods inventory
Cost of coffee mugs not sold =
(Mugs produced – Mugs sold) * Unit cost =
120 mugs *
Problem Solution
• Step 2: Calculate the cost of coffee mugs that
would be reported in the finished goods inventory
Cost of coffee mugs not sold =
(Mugs produced – Mugs sold) * Unit cost =
120 mugs * $2.92 per mug =
Problem Solution
• Step 2: Calculate the cost of coffee mugs that
would be reported in the finished goods inventory
Cost of coffee mugs not sold =
(Mugs produced – Mugs sold) * Unit cost =
120 mugs * $2.92 per mug =
$350.40
Problem Solution
• Step 2: Calculate the cost of coffee mugs that
would be reported in the finished goods inventory
Cost of coffee mugs not sold =
(Mugs produced – Mugs sold) * Unit cost =
120 mugs * $2.92 per mug =
$350.40
Cost of coffee
mugs not sold
reported in the
finished goods
inventory
Accounting
What the Numbers Mean 9e
You should now have a better understanding of
using product costing information.
Remember that there is a demonstration problem for
each chapter that is here for your learning benefit.
David H. Marshall
Wayne W. McManus
Daniel F. Viele