Demonstration Problem

Chapter 13 – Exercise 7

Product Costing -

Various Issues

Problem Definition

• Gale Co. 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 2002, the company’s cost accountant estimated that total overhead costs incurred would be $408,750 and that a total of 54,500 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 750 coffee mugs used raw materials that cost $810 and used 90 direct labor hours at a cost of $9.50 per hour. Calculate the cost of each coffee mug produced.

c. At the end of April 2002, 530 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 April 30, 2002, finished goods inventory.

Problem Solution

• Calculate the predetermined overhead rate for Gale Company based on estimated direct labor hours:

Problem Solution

• Calculate the predetermined overhead rate for Gale Company based on estimated direct labor hours:

Predetermined Overhead Application Rate =

Problem Solution

• Calculate the predetermined overhead rate for Gale Company based on estimated direct labor hours:

Predetermined Overhead Application Rate =

Estimated Total Overhead Costs

Problem Solution

• Calculate the predetermined overhead rate for Gale Company based on estimated direct labor hours:

Predetermined Overhead Application Rate =

Estimated Total Overhead Costs

Problem Solution

• Calculate the predetermined overhead rate for Gale 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 Gale Company based on estimated direct labor hours:

Predetermined Overhead Application Rate =

Estimated Total Overhead Costs Estimated Direct Labor Hours

$408,750

=

Problem Solution

• Calculate the predetermined overhead rate for Gale Company based on estimated direct labor hours:

Predetermined Overhead Application Rate =

Estimated Total Overhead Costs Estimated Direct Labor Hours

$408,75054,500 DLH

=

=

Problem Solution

• Calculate the predetermined overhead rate for Gale Company based on estimated direct labor hours:

Predetermined Overhead Application Rate =

Estimated Total Overhead Costs Estimated Direct Labor Hours

$408,75054,500 DLH

=

= $7.50 per direct labor hour

Problem Solution

• Calculate the predetermined overhead rate for Gale Company based on estimated direct labor hours:

Predetermined Overhead Application Rate =

Estimated Total Overhead Costs Estimated Direct Labor Hours

$408,75054,500 DLH

=

= $7.50 per direct labor hour

For every direct labor hour incurred, $7.50 of overhead will be applied to the production run.

Problem Requirements

a. For 2002, the company’s cost accountant estimated that total overhead costs incurred would be $408,750 and that a total of 54,500 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 750 coffee mugs used raw materials that cost $810 and used 90 direct labor hours at a cost of $9.50 per hour. Calculate the cost of each coffee mug produced.

c. At the end of April 2002, 530 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 April 30, 2002, finished goods inventory.

Problem Solution

• Step 1: Calculate the total cost of producing 750 mugs:

Problem Solution

• Step 1: Calculate the total cost of producing 750 mugs:

Raw materials

Problem Solution

• Step 1: Calculate the total cost of producing 750 mugs:

Raw materials $ 810 Calculation:

$810 Raw material amount was given

Problem Solution

• Step 1: Calculate the total cost of producing 750 mugs:

Raw materialsDirect labor

$ 810

Problem Solution

• Step 1: Calculate the total cost of producing 750 mugs:

Raw materialsDirect labor

$ 810855 Calculation:

90 direct labor hours * $9.50 per hour

Problem Solution

• Step 1: Calculate the total cost of producing 750 mugs:

Raw materialsDirect labor Overhead

$ 810855

Problem Solution

• Step 1: Calculate the total cost of producing 750 mugs:

Raw materialsDirect labor Overhead

$ 810855675 Calculation:

90 direct labor hours * $7.50 predetermined

overhead rate

Problem Solution

• Step 1: Calculate the total cost of producing 750 mugs:

Raw materialsDirect labor Overhead Total Manufacturing Cost

$ 810855675

Problem Solution

• Step 1: Calculate the total cost of producing 750 mugs:

Raw materialsDirect labor Overhead Total Manufacturing Cost

$ 810855675

$ 2,340

Problem Solution

• Step 1: Calculate the total cost of producing 750 mugs:

Raw materialsDirect labor Overhead Total Manufacturing Cost

$ 810855675

$ 2,340Total cost of producing 750 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

$2,340

=

Problem Solution

• Step 2: Calculate the cost of producing each mug:

Cost per coffee mug produced =

Total manufacturing costs Number of mugs produced

$2,340750 mugs

=

Problem Solution

• Step 2: Calculate the cost of producing each mug:

Cost per coffee mug produced =

Total manufacturing costs Number of mugs produced

$2,340750 mugs

=

= $3.12 per coffee mug

Problem Solution

• Step 2: Calculate the cost of producing each mug:

Cost per coffee mug produced =

Total manufacturing costs Number of mugs produced

$2,340750 mugs

=

= $3.12 per coffee mug Unit cost of producing each mug

Problem Requirements

a. For 2002, the company’s cost accountant estimated that total overhead costs incurred would be $408,750 and that a total of 54,500 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 750 coffee mugs used raw materials that cost $810 and used 90 direct labor hours at a cost of $9.50 per hour. Calculate the cost of each coffee mug produced.

c. At the end of April 2002, 530 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 April 30, 2002, 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 =

530 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 =

530 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 =

530 mugs * $3.12 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 =

530 mugs * $3.12 per mug =

$1,653.60

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 =

530 mugs * $3.12 per mug =

$1,653.60

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 =

220 mugs

Calculation:

750 mugs produced – 530 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 =

220 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 =

220 mugs * $3.12 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 =

220 mugs * $3.12 per mug =

$686.40

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 =

220 mugs * $3.12 per mug =

$686.40

Cost of coffee mugs not sold reported in the finished goods

inventory

Accounting: What the Numbers

Mean, 5e