ACG 4361
Handout #1B – Cost Classifications & Cost Flows
Spring 2016
Problem 1. For each of the following costs incurred in a manufacturing company, indicate the proper
classification by placing an X in the correct columns.
Fixed
Variable
Product
Period
Prime
Conversion
Indirect
1. Salary of the CFO
2. Lettuce used on taco at Taco Bell
3. Wages of clerical staff in corporate office
4. DDB Depreciation of factory machines
5. Property taxes on the factory
6. Maintenance cost on delivery trucks
7. Factory janitor salary
8. Sales personnel commissions
9. Wages of assembly workers
10. Shipping cost to acquire production
materials
Problem 2. Answer each of the following:
A. What are the three manufacturing costs?
B. What are the four product cost accounts reported on financial statements?
C. What are the three inventory accounts for manufacturers? In which section of the balance
sheet are they reported?
D. What are the three components of manufacturing overhead?
E. How do direct and indirect costs differ?
Updated December 26, 2015
Problem 3 Speedster Inc. manufactures custom all terrain vehicles (ATVs). March's beginning
inventory consisted of the following components:
Raw materials
$ 45,000
Work in process
17,000
Finished goods
40,000
Speedster applies factory overhead based on direct labor cost using normal costing. Budgeted direct
labor is $102,000 at an average labor rate of $15.00 based on direct labor cost. Budgeted factory
overhead for March is $112,200. Speedster tracks both direct and indirect materials in its Raw
Materials Inventory. Over or underapplied overhead is considered to be immaterial.
The following descriptions summarize the various transactions that occurred during March:
1. Purchased $96,000 of raw materials on account.
2. Purchased $7,000 of raw materials for cash.
3. Used $137,000 of raw materials in the production process. $124,000 of this amount consisted
of parts and other materials directly incorporated into ATVs. The remainder was indirect
material for shop supplies and small dollar items that are not otherwise traceable to specific
ATVs.
4. Paid $2,400 during the month for shipping costs for raw materials acquired.
5. Paid for materials purchased in transaction 1.
6. Total wages and salaries were $147,000 at an actual wage rate of $16.00 per hour. Of this
amount, $99,000 was attributable to direct labor, $12,000 to indirect labor, and $36,000 to
general and administrative activities.
7. Depreciation for the period totaled $29,000, with $21,000 related to the factory and factoryrelated equipment (included in the factory overhead rates). The other $8,000 is related to
general and administrative activities.
8. Other general and administrative costs, excluding wages and depreciation, totaled $15,000.
9. Other factory overhead costs, excluding indirect materials, wages, and depreciation, totaled
$61,200.
10. Applied manufacturing overhead for the period at the rate of $1.10 per direct labor dollar.
11. Sales for the month amounted to $525,000. All sales are on account. Cash received from
customers totaled $522,000.
12. Ending work in process was $33,000.
13. Ending finished goods inventory totaled to $21,500.
14. Income taxes are 30%.
Speedster treats under or overapplied overhead as immaterial in amount.
A.
B.
C.
D.
Draw t-accounts for all product cost accounts and post all transactions to these accounts.
Prepare a cost of goods manufactured statement for the month of March.
Prepare a multiple-step full costing income statement for March,
Show how the inventories would be reported on the company’s March 31 balance sheet. Be
sure to indicate the specific balance sheet sections.
E. Why is overhead applied?
Updated December 26, 2015
Updated December 26, 2015
Problem 4
Randalson, Inc. applied $87,700 of manufacturing overhead during 2016. Budgeted factory overhead
was $87,100 and budgeted machine hours were 10,575. Actual factory overhead was $88,250 and
actual machine-hours were 10,900. Actual year end account balances before disposition of the under
or over applied amount were as follows:
Account Names
Cost of goods sold
Raw materials
Work in process
Finished goods
Account
Balances
$363,350
27,500
33,800
25,350
Sales revenue for the period was $385,000. The company uses only one control account for factory
overhead. The total amount of overhead cost included in each account is not readily determinable.
A. If the company deems under or overapplied overhead to be immaterial, to which account(s) is it
closed, and why is/are this/these account(s) selected?
B. If the company deems under or overapplied overhead to be material in amount, to which
account(s) is it closed, and why is/are this/these account(s) selected?
C. Post all transactions and respective amounts to the two t-accounts below, including the effects of
disposing of any over/underapplied overhead assuming the amount is material. Calculate and
write the account balances n the proper account location. Label the amount of over or
underapplied.
Manufacturing Overhead
Cost of Goods Sold
D. How much gross profit will the company report on its income statement for 2016 (if under or
overapplied MOH is assumed to be material)?
Updated December 26, 2015
Problem 5
Fanna Fans produces several ceiling fan styles, employs a normal costing system, and considers
under or overapplied overhead to be immaterial. It tracks all material costs in the materials storeroom.
During July, its transactions and account balances included the following:
Raw materials purchased on account
Work in process inventory, beginning
Work in process inventory, ending
Finished goods, beginning
Finished goods, ending
Total manufacturing overhead applied
A.
B.
C.
D.
E.
F.
$132,000
12,200
23,500
19,000
12,500
41,600
Raw materials inventory, beg.
Raw materials inventory, ending
Product delivery cost to customers
Indirect materials used in production
Total manufacturing overhead incurred
Direct labor cost incurred
$12,600
13,400
3,400
2,700
43,000
50,400
How much is the cost of direct materials transferred to production during July?
How much is the cost of goods manufactured for July?
How much is total manufacturing costs for July?
What amount of conversion costs were added to production during July?
What amount of prime costs were added to production during July?
How much will Fanna Fans report as cost of goods sold for July?
Updated December 26, 2015