ReSA The Review School of Accountancy R. Papa Cor. S.H. Loyola Sts, Sampaloc, Manila Tel Nos. 734-39-89 & 735-98-07 PRACTICAL ACCOUNTING PROBLEMS IT JIT Philosophy-Backflushing; ABC Costing and Overhead Cost Allocation Backflush Accounting Backflush costing also called as backflushing or backflush accounting 1 shorteut approa: account, for the flow : r ng journal entries until the Backflush costing is usually used with matured Just-in~ wh accumulaty dures are impractica > a system involves the maintenance of work-in-process a € of records, time and costs especially in IC ar aspects that JIT costing 2s preferable, whe be more suitable because the elapsed tine under the ween the rials and the completion of produ: b and process) reduce the number of events (entries: hat are measured an ng system. Compared to bo ob or: process costing, backflush costing is notable for its lack of detailed tracking of the work-in-process account. Its keynote is simplicity because it eliminates some of the accounting stages in the traditional costing which combines then with other steps. It also tends to combine general ledger accounts. This od records purchases of raw materials and accumulates actual costs. Differences Between Traditional Costing and Backflush Costing JIT costing differs from traditional costing regard to the accounts used and the timing of cost recording. Specifically, three major differences exist. tead of “Process, separate accounts for Raw Materials and combines these into @ Raw and ount. The rationale 1s that the amount Process Inventory (RIP) ac work-in-process at any particular t 11 be low. 2. The second difference is that since direct labor 1s usually setting, no separate aie es, a Conversion cost item in a JIT SIT costing is created. In other will be maintained to record actua overheads 3. The third difference relates to the application of facto in a traditional manufacturing environment, overhead products as they are being produced. As such, ove applied to products until they are completed. Mo work in-process account exists to accumulate conversion costs. when pro iGnpicted under the JIT costing, conversion cost is applied to the Cost of Goods Sold (or in some cases, Finished Goods account.) I - Recording Transactions and Account Balances under JIT Costing / Backflush Costing general manager of Hormel Corporation's Food Division, has provided ed during March. This Bee Hon, the following information for transactions that occur on uses a JIT costing system. a. Raw materials were purchased at the b. All materials purchased were requisitione c. Direct labor costs of P77,000 were incurred | Actual overhead costs amounted to P225,000 Applied conversion costs totaled P300,000. This included P77,000 of £. All units were completed. entries to record under: A. Traditional Costing B. Backflush/JIT Costing AFAR-16ADVANCED FINANCIAL ACCOUNTING & REPORTING page 2 2, Determine the March 21 balance .n the Conversion Cost account (indicate whether overapplied or 3. Determine the March 31 bela 4. The amount backflushed from: A. RIP to Finished Goods B. Conversion te Finished Soods II - Account Balances Conrad's Jewelry Factory manufactures 2 variety of costume jewelry. The owner Rita Conrad had recently deciaed to implement a JIT costing system. Transactions during Septewner were as follows Raw materials totaling 945,000 vere purchased. 11 materials purchased ware requisitioned for production. Direct labor costs of Pll,u0v were inzurred. Indirect labor costs anounted te P12C,000. Utilities costs tetalec 15,000 Other actual factory overhead costs ancunted to P25, 000. ished Goods accoun Applied conversion costs totaied 221,000. This includes the direct labor cost. h. All units were completed. 1, Determine the September 20 balarce.in the cost of Goods Sold account. No adjustment has been made tor Overagp)ica or Underapplied conversion cost. 2. What was the amount of overapprlisd or Underapplied conversion cost for the month? 3. Determine the amount oF cost uf goods sold after all adjustments were made. III - RIP and Finished Goods Account includes Conversion Cost (no separate account maintained) ‘The Compaq Manufacturing Company has a cycle of 1.5 days, uses a raw and in process (RIP) account, and charges all conversion costs to Cost of Goods Sold. At the end of each month, ail inventories are counted, their conversion cost components are estimated, and inventory account balances are adjusted. Raw material cost is backflushed from ¥1P to Finished Goods. The following information is for Juni Beginning balance of #1 unt, including P1,200 of Conversion COSt nme _ P 11,700 Beginning balance of finished goods ac: P4,000 of conversion cost 7 12, 000 Raw materials received on credit ssumnmnnnnnniinencnns 2224000 Ending RIP inventory per physical court, including P1,600 conversion cost estimate... be wweeennmnes 12,800 Ending finished goods inventory per physical count, including P3,500 conversion COSt @StIM&tCrmmnannaeemees 9,500 Required: 1. Determine the umount to be beckfluvhed from RIP to Finished Goods 2. Determine the amount t: be dackflushed from Finished Goods to Cost of Goods Sold 3. "Determine the amount of Cost of Goods Sold after all transactions and adjustments were completed. IV ~ ABC Costing : Determining Product Cost and Selling Price Belton Furniture Corporation had identified activity centers to which overhead costs are assigned. The cost pool amounts for these centers and their selected activity drivers for 2003 are as follows: ‘Activity Centers [ee Activity Drivers Ueilities F320, 000 60,000 machine hours Scheduling and setup ~~ 273, 006 780 setups Materials handling (er, ‘600,000 pounds of material gher operating statistics follow: PRODUCTS thecompany’s products and tiie’ ang x 5 € Direct costs (direct materials and lakor) | P 80,000] P 60,000] P 30,000 Machine hours ___ 30,000] 10,000 20,000 Number of setups 130 380 270 Pounds of material — 500, 000 | 300,000] 800, 000 Number of units produced 40,000 | 20,000 ‘60, 000 Direct labor hours [32,900 [18,000 50, 000 Before it installed an ABC sy:tem, the company used a conventional costing systen and allocated factory overhead to products using direct labor hours. P2-16ADVANCED FINANCIAL ACCOUNTING & REPORTING page 3 ‘e firm operates in a competitive market and product prices were set at a st plus a 20 percent markup. Required Determine the total overhead allocated to each product, using the: a. Traditional/Conventional Costing b. ABC Costing Determine the total product cost, using the a. Traditional Costing/Conventional Costing b. ABC Costing 3. Determine the unit product cost, using the: a. Traditional Costing/Conventional Costing b. ABC Costing Determine the selling prices based on unit costs for: @. Traditional Costing/Conventional Costing b. ABC Costing V = Comparison of Product Costs: Traditional vs. ABC Costing Eatherine Company cf Cebu Company, manufactures two types of field hockey sticks ~ Regular and SuperPro. The following data have been obtained: Reqular | SuperPro Direct materials cost_per unit P 33.00] P 38.00 Direct labor cost per unit 32.00 44.00 Direct labor hours 32, 000 3,000 Machine hours 2,000 4,000 [Engineering hours 450 450 Number of setups ~ 3 20 (Number of units ~ 7 3,000 2,200 Gvethead costs are assigned to products on the basis of direct labor hours ‘The overhead costs consists of the following itens: Overhead Cost Item Taount Setup costs ~ P__250, 000 Engineering costs 320; 000 Machine costs — 309,000 Total costs 7,330,000 + Using direct labor hours (conventional costing) to allocate overhead costs, determine the cost per unit for each produce 2. Using activity-based costing, determine the cost per unit for each product 3. Assuming the selling price of Regular and Super?ro amounted to 7300 and P500, respectively, determine the gross margin per unit for cack product. Service Department Cost Allocation + the allocation! procedure for service department costs is a process of pooling, allocating, repooling and reallocating costs. + three basic methods are used to allocate the pooled service department cost to the revenue producing departments a. Darect tethod - allocates service department costs directly to the revenue-producing areas without recognition of services provided among the service departments b. Step (Step-down or sequential) Method - allocates service department costs to other service departments after nsidering the interrelationships among. the service departments and revenue-producing departments. A “BENEF:TS PROVIDED” ranking is a listing of service departments in an order that begins with the one providing the most corporate areas and ends with the service departmen service primarzly to the revenue-producing areas. all other Reciprocal (Algebraic or simultaneous solution or allocation or matrix allocation or double distribution) Method it allows departments AFAR-16ADVANCED FINANCIAL ACCOUNTING & REPORTING page 4 VI ~ Service Cost. to Operating Departments Following are data about harron Company's two service departments and two operating departments: [eee Operating — | __ nepertmencs Departments a 3 % z [Direct Costs {mui} 600[o, 0003-000 [Services performed by Dept. A] 308) 308 408 ‘Services perforned by wep 5 708 10% Required 1. Sharron allocates costs of its service departments using the direct method of allocation. Find che total costs that will be allocated to each of the operating departments. 2. Sharron allocates the cost of its service departments using the step-down method, beginning with Department A, Find the total amount of cost that will be allocated to each of the sprzating departments. 3. Sharron allocated costs ot its service departments using the reciprocal method of allocation. Find the inte: cost that will be allocated to each of the operating departments VII - Factory Overhead Allocut:on / Service Department Cost Allocation Gold Corporation nas three prouuction departments A, B, and C. Gold Corporation also has two service departments, Administration and Personnel. Administration costs are allocate’ based on value of assets employed, and Personnel costs are allocated based on number of employees. Assume that Administration provides more service Lo the other departments than does the Personnel Department (they are presented in a benefits-provided ranking) : Allocation Bases Departm Direct Ceste Employees Asset Value Admin 900, 390 25 'P450, 000 Personnel 350, 00¢ 10 600, 000, a 700,000 as 300,000 B 209,000 5 150,000 c 256,000 10 800, 000 1. Refer to Goldberg Corporaticn. Using the direct method, what amount of Administration costs is allocated to A (round to the nearest peso)? ‘a. 216,000 . 2150, 000 b. P288, 000 a. P 54,090 2. Using the direct methea, what amount of Personnel costs is allocated to B (round to the nearest peso)? a. P50,000 c. 43,750 b. P26,933, P58, 332 3. Using the step method, wnat amount ot Administration costs is allocated to Personnel (round to the nearest peso)? ‘a. P 72,973 5. B 145,946 b. P291,892 P 389,189 Using the step method, what amount of Administration costs is allocated to A (zound to the nearest peso)? a. P72, 973 cc. P45, 946 b. P291,892 G. F389, 189 Assume that Administration costs have been allocated and the balance in Personnel is P860,000, What amount 1s allocated to A (round to the nearest peso)? a. P213, 964 c. 430,000 b. P106, 982 a. PO Assune that Administration costs have been allocated and the balance in Personnel is P860,000. What amount is allocated to B (round to the nearest peso)? a. P213, 964 c. P106, 982 b. P430,000 de. P143, 333 Assume that Administration costs have been allocated and the balance in Personnel is P860,000. Writ amount 1s allocated to C (round to the nearest peso) ? a. P213, 964 ce. P286, 667 b. P430,000 a. P143, 333 Assume the use of algebraic method to allocate the support or service department costs, what amount is allocated to A (round to the nearest peso)? Assume the use of algebraic method to allocate the support or service department costs, determine the total costs of the revenue-producing (operating) department B (zound to the nearest peso) ? AFAR-16ADVANCED FINANCIAL ACCOUNTING & REPORTING page 5 Hybrid Costing / Blended Method — Operation Costing Operation costing is a.hybrid system because it contains features that are Present in both a job-costing system and a process-costing system. Direct moteriais are assigned directly to the batches of goods produced (ob order costing); in contrast, conversion costs are accumulated by department (proces: certing) and are then assigned to manufactured goods by using an averagig technique. Operation costing is used by firms that produce different models of similar products. The products go through essentially the same manufacturing Process, so conversion costs can be assigned in a manner similar to that used in process-costing systems. Materials, on the other hand, are unique to the individusl goods being produced and, accordingly, the cost is assigned by batch (or in a manner similar to that used in job costing). VIII - Hybrid Costing (Combination of Job Order - Materials and Process Costing - Conversion Coste) or Operation Coating Orville Knitters manufactures sweaters and uses an operation-costing system. All sweaters are processed through Department No. 1, with subsequent Processing taking place in Department No. 2 or Department No. 3 depending on the type of fabric used. Twenty thousand sweaters were produced during the year; there was no beginning or ending work in process. Sixty percent of the goods were sent to Department No. 2 for manufacturing. ion cost incurred in the three departments totaled 504,000, subdivided as follows: Department No 360,000; Department No. 2, P60,000; and Department No. 3, P4,000 Data pertaining to two representative orders, Nos. $45 and 567, were: No. 545 No. 567 Direct materials 112,000 P 94,000 Number of sweaters 800 1,300 Subsequent processing department No. 3 No. 2 Required: Determine the cost of order Nos. 545 and 567. IX ~ Hybrid - Operation Costing Levitt Corporation, which uses an operation-costing system, has three processing departments. All units pass through Department No. 1; upon Completion, 702 of the goods are sent to Department No. 2 and 30% are sent to Department No. 3, Additional data follow: Forty thousand units were manufactured during the year. Conversion cost in each department was: No. 1, P380,000; no. 2, 196,000; and no. 3, P150,000 © Batch No. 67, which consisted of $00 units, was sent to Dep: No. 3 for its additional processing. Direct materials of 23,500 and P11,900 were introduced to this batch in Department Nos. 1 and 3, respectively. Levitt assigns conversion cost to goods manufactured on the basis of units produced. A. Determine the conversion cost per unit in Department No. 1, Department No. 2, and Department No. 3 B. Compute the total cost of batch No. 67 Answer: a Department No. 1: P380,000 - 40,000 units P 9.50 Department No. 2: P196,000 ~ 28,000 units (40,000 x 708) Department No. 3: P150,000 = 12,000 units (40,000 x 30%) = P12.50 B P35, 400 Direct materials (P23,500 + P11, 900) Department no. 1 conversion (500 x P9.50) 4,750 Department no. 3 conversion (500 x P12.50) 6,250 Total cost 46,400 AFAR-16 [Be great in act as you have been in thought‘ADVANCED FINANCIAL ACCOUNTING & REPORTING Soll Problem I: ifraditional Costing (Geb or Procets)) fiack#iueh Costing = ause-in-Rind 2, Materials (oF Stores Contro)......97,000 2. Raw-and-In-Provess... ~ 97,000 ‘Accounts payable... - 97,000 ‘Accounts payable, * 97,000 D, Work-in-Process = DM....--97,000 b. No entry ‘Materials (or Stores Control)... 97,000 . Payroll ssenseesT 7,000 c. No entry ACCTUEG PAYTOI oe ronennan 7,000 Work-in-Process — DL. 7,000 ‘No entry Payrol... “ 7,000 4. Factory Overhead Control.....225,000 4. Conver. Cost ~ Actual (77+225)..302,000 Cash, AP, Various Credits... 225,000 “ 77,000 Cash, AP, Various Credits... 225,000 €. Work-in-Process-Applied FOH.....223,000 e. No entry Applied FOH (300 - 77), 223,000 f. Finished goods (97+77+223)....397,000 f. Finished goods. 397,000 WorkeiM-PrOC2S5.ecrcnsnsnane 397,000 ‘Conversion Cost-Applied.. 300,000 Raw-and-In-Process.... 97,000 ‘T-Accounts: _ Materials Work in Process Raw and In Process Fished Goods Payroll Conversion Cast FOHC Fished Goods — = Actual ‘evied = 2. Underapplied Conversion cost of P2,000 (or P2,000 debit balance) 3. P397,000 4. A. P/97,000 B. 300,000 Problem II - Account Balances Problem IV Product A | Product B | Product © Direct Cost (birect materials + Direct labor) ‘Overhead Allocated: P1,213,000/100,000 LH = P12.13/0uH Az P12.13/DLH x B: P12.13/DLH x 2 P12.13/0LH x Total Gverhead Allocated U1 Total Cost_(2) vided by? Units Produced Tnit Cost (3) Multiplied by? Cost pI [Selling Price 14 MarkupADVANCED FINANCIAL ACCOUNTING & REPORTING Sol2 Problem IV - ABC Costing Product € [Direct Cost (Direct Direct labor) Overhead Allocated: Lities: P300,000 / 60,000 =| | sched. ‘and P272,000/780= 350 | | A: P 350 x B: P 350 x c: PB 350 x Materials P640, 00/1, 600, 000 PB .40 A: P.40 x B: P.40 x P.40 x Total Overhead Ailocated (1) Total Cost _(2) Divided by: Units Produced Unit Cost_(3) | [Multiplied by: Cost plus Mark - ‘Selling Price (4) __. i Problem 1. Conventional/Traditional Costing using Direct Labor hours as the basis. Regular | Superpro 33. 38. 32 Direct materials cost per unit Direct labor cost per un ‘Overhead Allocated: P: 3,000 DLE) 133 Regular: (P@8.67 x 12,609) /8,000 units _ azn Superpro: (P@8.67 x 3,900) /2,200 units | Gait Cost (1) _ 138 203 2. ABC Costing __ = Regular | Superpro Direct materials cost per unit 33. 38. Direct labor cost per unit EA 44 ‘overhead Allocated: Setup Cost: P250, 000; = P10,000 Regular: (P10,006 x >)/8,000 units Superpro: (P10,090 » 29)/2,200 units Engineering Cost: P10,000/ =P Regular: Superpro: Materials Handling: P| / Pe Regular: Superpro: Unit Cost (2) _ ‘Traditional /Convention Regular Superpro .P P 3. Gross Margin/Profit per unit: Selling price per unit... - Less: Unit cost... . Gross margin/profit Per Yai Een ne Bc costing ‘Superpro Selling price per unit... saree ess: Unit cost... Gross margin/profit per unit