ACCT3104 Advanced Management Accounting Tutorial 1 - Solutions

a) Concept questions

4-8 An annual period eliminates the influence of seasonal patterns in calculating overhead cost
rates, and reduces the effect of variations in output levels as one single average overhead rate
is calculated for the whole period.

4-11 The statement is false. Both “actual costing” and “normal costing” systems are similar
only in determining the direct costs of jobs/cost objects but they are different in terms of
determining overhead or indirect cost of jobs. In other words, they both use actual direct-cost
rates x actual quantities of direct-cost inputs only for determining the direct cost of a job but
normal costing uses “budgeted indirect-cost rates” × actual quantities of cost-allocation bases
for calculating the indirect cost of a job while actual costing uses ‘actual indirect-cost rates’ x
actual quantities of cost-allocation bases for calculating the indirect cost of a job.

5-2 These two deviations are overcosting and undercosting. Undercosting will cause
underpricing which can lead to sales that actually result in losses, because the sales may bring
in less revenue than the cost of resources, though the company is under the assumption that it
is making a profit. Overcosting will lead to overpricing, causing a loss in market share to
competitors producing similar products.

5-4 Individual activities are the fundamental cost objects in activity-based costing. Activity-
based costing first uses resource drivers to assign the costs of resources to individual activities
and then it uses activity drivers to assign the cost of these activities to products or services (as
final cost objects).

5-5 A cost hierarchy can lead to a more accurate costing system by focusing on the levels of
cause-and-effect relationships between various activity cost pools on the one hand and final
cost objects on the other hand. It categorizes various activity cost pools into four individual
levels on the basis of the different types of cost drivers, cost-allocation bases, or the different
degrees of difficulty in determining cause-and-effect relationships. These four levels of a cost
hierarchy (from the highest to the lowest cause-and-effect relationship to cost objects) are:
output unit-level costs, batch-level costs, product-sustaining costs or service-sustaining costs,
and facility-sustaining costs.

5-13 No. The additional costs and resources needed may not exceed the benefits gained by
having more accurate and detailed information provided by the ABC system. Thus, cost benefit
analysis is always needed to make sure that expected benefits exceed expected costs to replace
simple costing.

5-15 It can be argued that the adoption of ABC may result in reduction of the total
manufacturing costs of the company. ABC can help with cost reduction and process
improvement decisions by identifying individual activities and their relevant costs. This can
help managers to eliminate non-added value activities, reduce costs and improve the overall
process. So, it is not always true that total manufacturing cost remains the same if a company
decides to adopt ABC as eliminating non-added value activities can reduce the production

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costs. It can also be argued that by adopting the ABC system, the manager will be in a better
position to make improved decisions in terms of pricing and product-mixed decisions. ABC
could help to identify products that may be currently under-costed, and are being actually sold
for losses, where the losses are masked by sales of very profitable product lines.

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(b) Tutorial exercises and problems

2-41 Income statement and schedule of cost of goods manufactured.

Schaeffer Corporation
Income Statement
For the Year Ended December 31, 2017
(in millions)

Revenues $359
Cost of goods sold
Beginning finished goods, Jan. 1, 2017 $ 46
Cost of goods manufactured (below) 224
Cost of goods available for sale 270
Ending finished goods, Dec. 31, 2014 16 254
Gross margin 105
Marketing, distribution, and customer-service costs 90
Operating income (loss) $ 15

Schaeffer Corporation
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 2017
(in millions)

Direct material costs

Beginning inventory, Jan. 1, 2017 $ 34
Direct materials purchased 88
Cost of direct materials available for use 122
Ending inventory, Dec. 31, 2017 4
Direct materials used $118
Direct manufacturing labor costs 40
Indirect manufacturing costs
Plant supplies used 9
Property taxes on plant 2
Plant utilities 8
Indirect manufacturing labor costs 21
Depreciation––plant and equipment 6
Miscellaneous manufacturing overhead costs 15 61
Manufacturing costs incurred during 2017 219
Add beginning work-in-process inventory, Jan. 1, 2017 10
Total manufacturing costs to account for 229
Deduct ending work-in-process inventory, Dec. 31, 2017 5
Cost of goods manufactured (to income statement) $224

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ACCT3104 Advanced Management Accounting Tutorial 1 - Solutions

4-22 Actual costing, normal costing, accounting for manufacturing overhead.

𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐

1. 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 =
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐

$3,294,000
= = 1.80 𝑜𝑜𝑜𝑜 180%
$1,830,000

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 =
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
$3,780,000
= = 1.68 𝑜𝑜𝑜𝑜 168%
$2,250,000

2. Costs of Job 635 under actual and normal costing follow:

Actual Normal
Costing Costing

Direct materials $ 73,500 $ 73,500

Direct manufacturing labor costs 51,000 51,000
Manufacturing overhead costs
$51,000 × 1.68; $51,000 × 1.80 85,680 91,800
Total manufacturing costs of Job 635 $210,180 $216,300

3. Total manufacturing overhead allocated under normal costing

= Actual manufacturing labor costs × Budgeted overhead rate
= $2,250,000 × 1.80
= $4,050,000

Overallocated manufacturing overhead

 Budgeted MOH $3,294,000 vs. Actual MOH $3,780,000 = $486,000U (Spending
Variance)
 Allocated MOH $4,050,000* vs Budgeted MOH $3,294,000 = $756,000F (PVV,
Favourable because utilised capacity efficiently)

* BOHR = $3,294,000 / $1,830,000 = $1.80/Labor$. So $2,250,000 x $1,80 = $4,050,000.

= Manufacturing overhead allocated – Actual manufacturing overhead costs

= $4,050,000 − $3,780,000
= $270,000 (Overallocation)
(Made up of: Spending Variance $486,000U + Production Volume Variance $756,000F =
$270,000F. Favourable means over-allocated because the firm utilised facilities
appropriately)

There is no under- or over-allocated overhead under actual costing because overhead is

allocated under actual costing by multiplying actual manufacturing labor costs and the actual

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ACCT3104 Advanced Management Accounting Tutorial 1 - Solutions

manufacturing overhead rate. This, of course, equals the actual manufacturing overhead
costs. All actual overhead costs are allocated to products. Hence, there is no under- or over-
allocated overhead.

4. Managers at Carolin Chemicals might prefer to use normal costing because it enables
them to use the budgeted manufacturing overhead rate determined at the beginning of the
year to estimate the cost of a job as soon as the job is completed. Managers may want to
know job costs for ongoing uses, including pricing jobs, monitoring and managing costs,
evaluating the success of the job, learning about what did and did not work, bidding on new
jobs, and preparing interim financial statements. Under actual costing, managers would only
determine the cost of a job at the end of the year when they know actual manufacturing
overhead costs.

5-26 Activity-based costing, manufacturing.

1. Simple costing system:

Total indirect costs = $95,000 + $45,000 + $25,000 + $60,000 + $8,000 + 3% [($125 ×
3,200) + ($200 × 1,800)] = $255,800
Total machine-hours = 5,500 + 4,500 = 10,000
Indirect cost rate per machine-hour = $255,800 ÷ 10,000 = $25.58 per machine-hour

Simple Costing System Interior Exterior

Direct materialsa $ 96,000 $ 81,000
Direct manufacturing laborb 76,800 64,800
Indirect cost allocated to each job
($25.58 × 5,500; 4,500 machine hours) 140,690 115,110

Total costs $313,490 $260,910

Total cost per unit

($313,490 ÷ 3,200; $260,910 ÷ 1,800) $ 97.97 $ 144.95
a
$30 × 3,200 units; $45 × 1,800 units
b
$16 × 1.5 × 3,200 units; $16 × 2.25 × 1,800 units

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2. Activity-based costing system

Total Cost
Cost of Driver
Activity Activity Cost Driver Allocation Rate
Quantity
(1) (2) (3) (4) (5) = (2) ÷ (4)
Product per production
c
scheduling $95,000 Production runs 125 $760.00 run
Material $45,000 Material moves per material
d
handling 240 $187.50 move
e
Machine setup $25,000 Machine setups 200 $125.00 per setup
Assembly $60,000 Machine hours per machine
10,000 $ 6.00 hour
f
Inspection $ 8,000 Inspections 400 $ 20.00 per inspection
Marketing Percentage of $ 0.03 per dollar of
revenues sales
c d e f
40 + 85 = 125; 72 + 168 = 240; 45 + 155 = 200; 250 + 150 = 400

ABC System Interior Exterior

Direct materials $ 96,000 $ 81,000
Direct manufacturing labor 76,800 64,800
Indirect costs allocated:
Production scheduling ($760 per run × 40; 85) 30,400 64,600
Material handling ($187.50 per move × 72; 168) 13,500 31,500
Machine setup ($125 per setup × 45; 155) 5,625 19,375
Assembly ($6 per MH × 5,500; 4,500) 33,000 27,000
Inspection ($20 per inspection × 250; 150) 5,000 3,000
Marketing (0.03 × $125 × 3,200; 0.03 × $200 × 1,800) 12,000 10,800
Total costs $272,325 $302,075

Total cost per unit

($272,325 ÷ 3,200 units; $302,075 ÷ 1,800 units) $ 85.10 $ 167.82

3.
Cost per unit Interior Exterior
Simple Costing System $97.97 $144.95
Activity-based Costing System $85.10 $167.82
Difference (Simple – ABC) $12.87 $ (22.87)

Relative to the ABC system, the simple costing system overcosts interior doors and undercosts
exterior doors. Interior doors require 1.72 machine-hours per unit (5,500 hours ÷ 3,200 units)
while exterior doors require 2.5 machine-hours per unit (4,500 hours ÷ 1,800 units). In the
simple-costing system, overhead costs are allocated to the interior and exterior doors on the
basis of the machine-hours used by each type of door. The ABC study reveals that the ratio of

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ACCT3104 Advanced Management Accounting Tutorial 1 - Solutions

the cost of production runs, material moves, and setups for each exterior door versus each
interior door is even higher than the ratio of 2.5 to 1.72 machine-hours for each exterior relative
to each interior door. This higher ratio results in higher indirect costs allocated to exterior doors
relative to interior doors in the ABC system.

4. Decorative Doors, Inc. can use the information revealed by the ABC system to change
its pricing based on the ABC costs. Under the simple system, Decorative Doors was making
an operating margin of 21.6% on each interior door ([$125 – $97.97] ÷ $125) and 27.5% on
each exterior door ([$200 – $144.95] ÷ $200). But, the ABC system reveals that it is actually
making an operating margin of about 32% ([$125 – $85.10] ÷ $125) on each interior door and
about 16% ([$200 – $167.82] ÷ $200) on each exterior door. Decorative Doors, Inc., should
consider decreasing the price of its interior doors to be more competitive. Decorative Doors
should also consider increasing the price of its exterior doors, depending on the competition it
faces in this market.
Decorative Doors can also use the ABC information to improve its own operations. It
could examine each of the indirect cost categories and analyze whether it would be possible to
deliver the same level of service, but consume fewer indirect resources, or find a way to reduce
the per-unit-cost-driver cost of some of those indirect resources. Making these operational
improvements can help Decorative Doors to reduce costs, become more competitive, and
reduce prices to gain further market share while increasing its profits.

8-31 Production-volume variance analysis and sales-volume variance (parts 1-3)

1. and 2. Fixed Overhead Variance Analysis for Marissa Designs, Inc. for February

Actual Fixed Static Budget Standard Hours

Overhead Fixed Overhead × Budgeted Rate

(720 × 1.5 × $6*)
$11,400 $10,800 $6,480

$600 U $4,320 U
Spending variance Production-volume variance

* fixed overhead rate = (budgeted fixed overhead)/(budgeted DL hours at capacity)

= $10,800/(1,200 × 1.5 hours)
= $10,800/1,800 hours
= $6/hour

3. An unfavorable production-volume variance measures the cost of unused capacity.

Production at capacity would result in a production-volume variance of zero because the fixed
overhead rate is based on expected hours at capacity production. However, the existence of an
unfavorable volume variance does not necessarily imply that management is doing a poor job
or incurring unnecessary costs. Two reasons can be identified.

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ACCT3104 Advanced Management Accounting Tutorial 1 - Solutions

a. For most products, demand varies from month to month while commitment to the
factors that determine capacity, e.g., size of the workshop or supervisory staff, tends to
remain relatively constant. If Marissa wants to meet demand in high demand months, it will
have excess capacity in low demand months. In addition, forecasts of future demand contain
uncertainty due to unknown future factors. Having some excess capacity would allow
Marissa to produce enough to cover peak demand as well as slack to deal with unexpected
demand surges in non-peak months.
b. Basic economics provides a demand curve that shows a tradeoff between price charged
and quantity demanded. Potentially, Marissa could have a lower net revenue if they produce at
capacity and sell at a lower price than if they sell at a higher price at some level below capacity.
In addition, the unfavorable production-volume variance may not represent a feasible
cost savings associated with lower capacity. Even if Marissa could shift to lower fixed costs
by lowering capacity, the fixed cost may behave as a step function. If so, fixed costs would
decrease in fixed amounts associated with a range of production capacity, not a specific
production volume. The production-volume variance would only accurately identify potential
cost savings if the fixed cost function is continuous, not discrete.

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(c) Additional exercises

2-36 Flow of Inventoriable Costs.

(All numbers below are in millions).

1.
Direct materials inventory 10/1/2017 $ 105
Direct materials purchased 365
Direct materials available for production 470
Direct materials used (385)
Direct materials inventory 10/31/2017 $ 85

2.
Total manufacturing overhead costs $ 450
Subtract: Variable manufacturing overhead costs (265)
Fixed manufacturing overhead costs for October 2017 $ 185

3.
Total manufacturing costs incurred during October 2017 $ 1,610
Subtract: Direct materials used (from requirement 1) (385)
Total manufacturing overhead costs (450)
Direct manufacturing labor costs for October 2017 $ 775

4.
Work-in-process inventory 10/1/2017 $ 230
Total manufacturing costs incurred during October 2017 1,610
Work-in-process available for production 1,840
Subtract: Cost of goods manufactured (moved into finished goods) (1,660)
Work-in-process inventory 10/31/2017 $ 180

5.
Finished goods inventory 10/1/2017 $ 130
Cost of goods manufactured (moved from work in process) 1,660
Cost of finished goods available for sale in October 2017 $ 1,790

6.
Cost of finished goods available for sale in October 2017
(from requirement 5) $ 1,790
Subtract: Cost of goods sold (1,770)
Finished goods inventory 10/31/2017 $ 20

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ACCT3104 Advanced Management Accounting Tutorial 1 - Solutions

4-23 Job costing, normal and actual costing.

𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 (𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑠𝑠𝑠𝑠𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝)

1. 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 =
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜
$5,100,000
= = $34 𝑝𝑝𝑝𝑝𝑝𝑝 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 ℎ𝑜𝑜𝑜𝑜𝑜𝑜
150,000 ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 (𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑠𝑠𝑢𝑢𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝)

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 =
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜

$5,355,000
= = $35 𝑝𝑝𝑝𝑝𝑝𝑝 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 ℎ𝑜𝑜𝑜𝑜𝑜𝑜
153,000 ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜

These rates differ because both the numerator and the denominator in the two calculations are
different—one based on budgeted numbers and the other based on actual numbers.

2a.
Steel Wheels Magic Wheels
Normal costing
Direct costs
Direct materials $78,290 $94,650
Direct labor $25,445 $32,752
103,735.0 127,402.0
Indirect costs
Manufacturing support ($34 × 840; $34 × 960) 28,560 32,640
Total costs $132,295 $160,042

2b.
Actual costing
Direct costs
Direct materials $78,290 $94,650
Direct labor 25,445 32,752
103,735 127,402
Indirect costs
Manufacturing support ($35 × 840; $35 × 960) 29,400 33,600
Total costs $133,135 $161,002

3. Normal costing enables Caldwell to report a job cost as soon as the job is completed,
assuming that both the direct materials and direct labor costs are known at the time of use.
Once the 840 direct labor-hours are known for the Steel Wheels (Jan–May 2017), Caldwell
can compute the $132,295 cost figure using normal costing. Caldwell can use this
information to manage the costs of the Steel Wheels job as well as to bid on similar jobs later
in the year. In contrast, Caldwell has to wait until the December 2017 year-end to compute
the $133,135 cost of the Steel Wheels using actual costing.

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The following overview diagram summarizes Caldwell Toy’s job-costing system:

INDIRECT
COST
POOL
} Manufacturing
Assembly
support
Support

COST
ALLOCATION
BASE
} Direct
Labor-Hours

COST OBJECT:
RESIDENTIAL
HOME
} Indirect Costs
Direct Costs

DIRECT
COSTS } Direct
Materials
Direct
Manufacturing
Labor

4-39 Proration of overhead.

1. Budgeted manufacturing overhead rate is $4,800,000 ÷ 80,000 hours = $60 per machine-hour.

2. Manufacturing overhead = Manufacturing overhead – Manufacturing overhead

underallocated incurred allocated
= $4,900,000 – $4,500,000*
= $400,000
Spending Variance = $100,000U (Actual $4,900,000 – Budget $4,800,000)
Production Volume Variance = $300,000U (Budget $4,800,000 – Allocated $4,500,000)

*$60 × 75,000 actual machine-hours = $4,500,000

a. Write-off to Cost of Goods Sold

Write-off Dec. 31, 2017
Dec. 31, 2017 of $400,000 Account
Account Underallocated Balance
Balance Manufacturing (After
Account (Before Proration) Overhead Proration)
(1) (2) (3) (4) = (2) + (3)

Work in Process $ 750,000 $ 0 $ 750,000

Finished Goods 1,250,000 0 1,250,000
Cost of Goods Sold 8,000,000 400,000 8,400,000
Total $10,000,000 $400,000 $10,400,000

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 ACCT3104 Advanced Management Accounting Tutorial 1 - Solutions

b. Proration based on ending balances (before proration) in Work in Process, Finished

Goods, and Cost of Goods Sold.
Proration of $400,000 Dec. 31, 2017
Dec. 31, 2017 Underallocated Account
Account Balance Manufacturing Balance
Account (Before Proration) Overhead (After Proration)
(1) (2) (3) (4) = (2) + (3)
Work in Process $ 750,000 (7.5%) 0.075 × $400,000 = $ 30,000 $ 780,000
Finished Goods 1,250,000 (12.5%) 0.125 × $400,000 = 50,000 1,300,000
Cost of Goods Sold 8,000,000 (80.0%) 0.800 × $400,000 = 320,000 8,320,000
Total $10,000,000 100.0% $400,000 $10,400,000

c. Proration based on the allocated overhead amount (before proration) in the ending
balances of Work in Process, Finished Goods, and Cost of Goods Sold.
Dec. 31, 2017 Allocated Overhead Dec. 31, 2017
Account Included in Proration of $400,000 Account
Balance Dec. 31, 2017 Balance
(Before Account Balance Underallocated (After
Account Proration) (Before Proration) Manufacturing Overhead Proration)
(1) (2) (3) (4) (5) (6) = (2) + (5)
a
Work in Process $ 750,000 $ 240,000 (5.33%) 0.0533×$400,000 =$ 21,320 $ 771,320
b
Finished Goods 1,250,000 660,000 (14.67%) 0.1467×$400,000 = 58,680 1,308,680
c
Cost of Goods Sold 8,000,000 3,600,000 (80.00%) 0.8000×$400,000 = 320,000 8,320,000
Total $10,000,000 $4,500,000 100.00% $400,000 $10,400,000
a b c
$60 × 4,000 machine-hours; $60 × 11,000 machine-hours; $60 × 60,000 machine-hours

3. Alternative (c) is theoretically preferred over (a) and (b) because the underallocated
amount and the balances in work-in-process and finished goods inventories are material.
Alternative (c) yields the same ending balances in work in process, finished goods, and cost of
goods sold that would have been reported had actual indirect cost rates been used.
Chapter 4 also discusses an adjusted allocation rate approach that results in the same
ending balances as in alternative (c). This approach operates via a restatement of the indirect
costs allocated to all the individual jobs worked on during the year using the actual indirect
cost rate.

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ACCT3104 Advanced Management Accounting Tutorial 1 - Solutions

5-28 ABC, wholesale, customer profitability.

1.
Chain
1 2 3 4
Gross sales $50,000 $30,000 $100,000 $70,000
Sales returns 10,000 5,000 7,000 6,000
Net sales 40,000 25,000 93,000 64,000
Cost of goods sold (80%) 32,000 20,000 74,400 51,200
Gross margin 8,000 5,000 18,600 12,800
Customer-related costs:
Regular orders
$20 × 40; 150; 50; 70 800 3,000 1,000 1,400
Rush orders
$100 × 10; 50; 10; 30 1,000 5,000 1,000 3,000
Returned items
$10 × 100; 26; 60; 40 1,000 260 600 400
Catalogs and customer 1,000 1,000 1,000 1,000
support
Customer related costs 3,800 9,260 3,600 5,800
Contribution (loss) margin $4,200 $(4,260) $15,000 $7,000
Contribution (loss) margin 8.4% (14.2%) 15.0% 10.0%
as percentage of gross
sales

Chain
1 2 3 4
Gross sales $50,000 $30,000 $100,000 $70,000
Sales returns 10,000 5,000 7,000 6,000
Net sales 40,000 25,000 93,000 64,000
Cost of goods sold (80%) 32,000 20,000 74,400 51,200
Gross margin 8,000 5,000 18,600 12,800
Customer-related costs:
Regular orders
$20 × 40; 150; 50; 70 800 3,000 1,000 1,400
Rush orders
$100 × 10; 50; 10; 30 1,000 5,000 1,000 3,000
Returned items
$10 × 100; 26; 60; 40 1,000 260 600 400
Catalogs and customer support 1,000 1,000 1,000 1,000
Customer related costs 3,800 9,260 3,600 5,800
Contribution (loss) margin $ 4,200 $(4,260) $ 15,000 $ 7,000
Contribution (loss) margin as
percentage of gross sales 8.4% (14.2%) 15.0% 10.0%

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ACCT3104 Advanced Management Accounting Tutorial 1 - Solutions

The analysis indicates that customers’ profitability (loss) contribution varies widely from
(14.2%) to 15.0%. Immediate attention to Chain 2 is required which is currently showing a loss
contribution. The chain has a disproportionate number of both regular orders and rush orders.
Ramirez should work with the management of Chain 2 to find ways to reduce the number of
orders while maintaining or increasing the sales volume. If this is not possible, Ramirez should
consider dropping Chain 2 if it can save the customer-related costs.
Chain 1 has a disproportionate number of the items returned as well as sale returns. The causes
of these should be investigated so that the profitability contribution of Chain 1 could be
improved.

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