Fundamentals of Cost Accounting 5th Edition Lanen Solutions Manual Download

Fundamentals of Cost Accounting 5th Edition Lanen Solutions Manual
Fundamentals of Cost Accounting 5th Edition Lanen

Solutions Manual
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6
Fundamentals of Product and Service Costing
Solutions to Review Questions
6-1.
Cost allocation is the assignment of costs in cost pools to cost objects. The cost objects
may be products, services, customers, processes, or anything for which we want to
know the cost. Product costing uses cost allocation to calculate product costs. Product
costing is an application of cost allocation where products are the cost objects.
6-2.
Cost management systems should satisfy the following criteria:
• Cost systems should have a decision focus.
• Different cost information is used for different purposes.
• Cost information for managerial purposes must meet the cost-benefit test.
6-3.
Cost flow diagrams serve two purposes. First, they help describe how a cost
management system works, just like a flow chart helps you understand how a process
works. Second, cost flow diagrams help managers identify and understand quickly the
effect of changes in the system design on reported costs.
6-4.
A job costing accounting system traces costs to individual units or to specific jobs
(typically custom products). A process costing accounting system is used when identical
units are produced through a series of uniform production steps. Operation costing is
used when goods have some common characteristics (process costing) and some
individual characteristics (job costing).
6-5.
All three systems assign costs from cost pools to cost objects using a cost allocation
rule. They differ in detail of the cost assignments to individual units.
©The McGraw-Hill Companies, Inc., 2017

Solutions Manual, Chapter 6 239
6-6.
The predetermined overhead rate is the value at which overhead is applied to one unit
of the cost allocation base. It is used in product costing to apply the overhead to the
units produced.
6-7.
It would be ideal, but unlikely, that an allocation base would reflect direct causality
between the activity and the overhead cost.
6-8.
A two-stage allocation first allocates overhead costs to two or more cost pools and then
allocates costs from these intermediate pools to the cost objects, generally using
different allocation bases.
6-9.
Continuous flow processing is used when a single product is mass produced in a
continuing process. Examples would include products such as paint, gasoline, paper, or
any others that are mass produced in a continuing process.
6-10.
The basic cost flow model appears as follows:
Beginning balance + Transfers in – Transfers out = Ending balance
Beginning balance is the balance of inventory at the beginning of the period. Transfers
in represent inventory purchased or transferred in from another department (for
example, raw materials would be goods transferred in to work in process) for the period.
Transfers out are goods transferred from one department to another (for example, work
in process would be transferred out to finished goods). Ending balance represents the
amount of inventory in a department at the end of the accounting period.

240 Fundamentals of Cost Accounting
Solutions to Critical Analysis and Discussion Questions
6-11.
Although there may be no one correct way to allocate cost, cost allocation can provide
managers with information about the costs of the resources they use. Ignoring costs
that cannot be directly assigned leads to the possibility that managers forget that it is a
real resource that is being used.
6-12.
There are three important points to consider:
1. The cost system should meet the needs of the users (the decision makers).
2. The cost system must provide the appropriate data for its intended purpose.
Different cost information is used for different purposes.
3. Cost information for managerial purposes must meet the cost-benefit test. The costs
of implementing the system should be less than the benefits derived from the system
(i.e. better decisions).
6-13.
The basic cost flow model is as follows:
Beginning balance + Transfers in – Transfers out = Ending balance
This model is used for finding one unknown or for comparing perpetual inventory
system output to a physical inventory count. An example of finding one unknown is if the
beginning balance is known (from the previous period ending balance), transfers in are
known, and ending inventory is counted physically—and we are asked to find the cost of
goods sold for the period (transfers out).
6-14.
It is sometimes difficult (and frustrating) for managers when the cost accountant says
that the cost depends on the decision being made. Many people feel that there is one
cost that is “correct.” However, as we saw in Chapter 2, costs behave in different ways
and this behavior is affected by the decision being made.

6-15.
Reasons to agree with approach: If the products are not contributing to company profits,
then the products should be eliminated. This will increase overall company profits.
Reasons not to agree with approach: The reported product costs and the associated
product profits depend on the allocation of indirect costs. Under a different allocation
process, the results could be very different. In addition, many of the indirect costs are
unavoidable. If the products are eliminated, the costs will be allocated to the remaining
products.
6-16.
The way the “products” are defined will depend, at least in part, on the decision the
dean is interested in making. They may be defined as degree programs vs. non-degree
programs. They may be the different degree programs. They might be the credit hour
(although it is unlikely you would be able to get much information at this level).
You might ask about the time frame of the analysis (to determine fixed and variable
costs), the source of the data, and how to treat costs that the school does not directly
pay for but where the school consumes the resources (e.g., university buildings).
This is a very difficult analysis in a university setting because of the high proportion of
common costs and the difficulty in defining products.
6-17.
Answers will vary. Common answers include the number of students, the number of
credit hours, number of classes, number of class sessions, and so on.
6-18.
The two most important criteria in determining an allocation base are (1) causality and
(2) measurability. We would like an allocation base that “causes” costs. This is rarely
possible, but it is a good criterion to use. Second, we need to be able to measure the
allocation base at reasonable cost.
6-19.
Although it would be ideal for the cost allocation base to have cause-and-effect relation
with overhead costs, it is unlikely to happen for several reasons. One reason is that
some of the overhead is fixed and therefore does not depend on volume (at least within
certain volume ranges). This does not make the choice of the allocation base
unimportant. First, it is helpful to have an intuitive link between the allocation base
(machine hours, for example) and overhead resource (machine depreciation). It serves
as a reminder of the service being provided. Second, it is often the case that the cost is
not solely fixed and there might be some variable component. Finally, cost might be
fixed over a certain range, but not over the entire relevant range.

6-20.
The allocation base determines the costs assigned to the cost objects. If these costs are
used to make decisions and if they are based on inappropriate or improper allocation
bases, they could lead the manager to make bad decisions.
6-21.
There are many reasons why two companies may have different cost systems. First,
firms may be pursuing different strategies (cost containment versus product
differentiation) and want different information from the cost system. A second reason is
that some firms may be subject to regulations (for example, utilities) and the regulations
dictate the information needed from the cost system.
6-22.
A firm can have a two-stage system and use the same allocation base to allocate costs
in the second stage. There will be different costs reported if the allocation base (direct
labor, say) is used differently by the products in the second stage cost pools.
6-23.
Although it is true that the cost of the product will be the same regardless of the cost
allocation method, it does not mean that cost allocation does not matter. We might be
interested in identifying profitable customers or profitable markets. Therefore, even
single product or service companies need to consider the allocation method used.

Solutions to Exercises
6-24. (20 min.) Basic Cost Flow Model: Ralph’s Mini-Mart.

a. $225,000 (see item 5)
b. $900,000 = $870,000 + $30,000 (see items 3 & 4)
c. $140,000 (see item 5)
d. $1,340,000. BB + TI – TO = EB
$225,000 + $900,000 – TO = $140,000
TO = $225,000 + $900,000 – $140,000
TO = $985,000
6-25. (20 min.) Basic Cost Flow Model: Generic Electric.

a. $32.0 million = $8.0 million + $13.5 million + (.7 x $15.0 million)
b. $20.8 million = .65 x $32.0 million
c. BB + TI – TO = EB
0 + $32.0 million – $20.8 million = EB
EB = $11.2 million
6-26. (20 min.) Basic Cost Flow Model.

Based on the basic formula:
BB + TI – TO = EB
a. $14,200 + $44,000 – X = $12,400
X = $44,000 + $14,200 – $12,400
X = $45,800
b. $33,500 + X – $85,000 = $28,000
X = $28,000 + $85,000 – $33,500
X = $79,500
c. $17,000 + X – $19,000 = $16,000
X = $16,000 + $19,000 – $17,000
X = $18,000

BB + –TI TO = EB
A. $39,000 + – $70,000
X = $32,000
X = $32,000 + $70,000 – $39,000
X = $63,000
B. $21,300 + $66,000 – X = $18,600
X = $21,300 – $18,600 + $66,000
X = $68,700
C. X + $52,000 – $54,000 = $50,000
X = $50,000 + $54,000 – $52,000
X = $52,000

BB + TI – TO = EB
A. X + $108,000 – $127,000 = $12,000
X = $12,000 + $127,000 – $108,000
X = $31,000
B. $30,000 + $210,000 – X = $22,000
X = $30,000 + $210,000 – $22,000
X = $218,000
C. $102,000 + X – $815,000 = $114,000
X = $114,000 + $815,000 – $102,000
X = $827,000

6-29. (10 min.) Basic Product Costing: Enviro Corporation.
Materials............................................ $2,142,000
Labor ................................................. 183,600
Manufacturing overhead.................... 734,400
Total cost ...................................... $3,060,000
÷ Gallons produced ........................... ÷ 1,275,000
= Cost per gallon ............................... $2.40
6-30. (10 min.) Basic Product Costing: Sara’s Sodas.
Materials............................................ $310,000
Labor ................................................. 55,000
Manufacturing overhead.................... 1,315,000
Total cost ...................................... $1,680,000
÷ Liters produced............................... ÷ 4,000,000
= Cost per liter ................................... $0.42

If the cost per liter is $0.43 and 4.5 million liters were produced, the total manufacturing
cost must have been $1,935,000 (= $0.43 x 4.5 million). But total manufacturing cost is
computed as:
Manufacturing cost = Materials + Labor + Manufacturing

overhead
$1,935,000 = $340,000 + Labor + $1,525,000
So,
Labor = $1,935,000 – $340,000 – $1,525,000
= $70,000

a. If the cost per liter is $0.45 and 3.8 million liters were produced, the total
manufacturing cost must have been $1,710,000 (= $0.45 x 3.8 million). But total
manufacturing cost is computed as:
Manufacturing cost = Materials + Labor + Manufacturing

overhead
$1,710,000 = Materials + 0.20 x Materials + $1,350,000
So,
1.20 x Materials = $1,710,000 – $1,350,000
= $360,000
Materials = $300,000 (= $360,000 ÷ 1.20)
b. Labor = 0.20 x Materials

= 0.20 x $300,000
= $60,000.
6-33. (10 min.) Basic Product Costing: Big City Bank.
Labor .................................................. $ 35,000

Center overhead ................................ 77,000
Total .............................................. $ 112,000
÷ Checks processed ........................... ÷ 2,800,000
= Cost per check ................................ $0.04

6-34. (20 min.) Basic Product Costing: Luke’s Lubricants.
a. b.
Work-in-
Process,
Total Sold January 31
Production:
Gallons ......................................... 900,000 800,000 100,000
Percentage complete ................... 100% 80%
Equivalent gallons........................ 880,000a 800,000 80,000
Costs:
Materials ...................................... $564,000
Labor .......................................... 145,200
Manufacturing overhead .............. 294,000
Total cost incurred ....................... $1,003,200
Cost per equivalent gallon .............. $1.14b
Cost assigned to product ................ $1,003,200 $912,000c $91,200d
a 880,000 equivalent units = 800,000 gallons completed + 80% x 100,000 gallons
in process.
b $1.14 = $1,003,200 ÷ 880,000 equivalent units.
c $912,000 = 800,000 equivalent units x $1.14.
d $91,200 = 80,000 equivalent units x $1.14.

6-35. (20 min.) Basic Product Costing—Ethical Issues: Old Tyme Soda.
a. and b.
a. b.
Work-in-
Process,
Total Sold November 30
Production:
Barrels .............................................. 10,000 8,800 1,200
Percentage complete ...................... 100% 30%
Equivalent barrels............................ 9,160a 8,800 360
Costs:
Materials .......................................... $18,072
Manufacturing overhead .................. 20,400
Total cost incurred ........................... $38,472
Cost per equivalent barrel .................. $4.20b
Cost assigned to product .................... $38,472 $36,960c $1,512d
a 9,160 equivalent units = 8,800 barrels sold + 30% x 1,200 barrels in process.
b $4.20 = $38,472 ÷ 9,160 equivalent units.
d $1,512 = 360 equivalent units x $4.20.
c. (1) He would raise the estimated degree of completion. The change in the estimate
will cause more cost to be assigned to work-in-process inventory and less to finished
goods. As the finished goods are sold, cost of goods will be lower and income
higher.
(2) Unless the production supervisor’s estimates are incorrect, the controller should
not change the estimates. He or she has an ethical (and legal) obligation to ensure
that the estimates reflect fairly the results of operations.

6-36. (15 min.) Process Costing: Sanchez & Company.
Transferred Work-in-
to Finished Process,
Total Goods January 31
Production:
Gallons ......................................... 150,000 120,000 30,000
Costs:
Materials ...................................... $137,000
Conversion costs ......................... 175,000
Total cost incurred ....................... $312,000
Cost assigned to product ................ $312,000 $300,000c $12,000d
a 124,800 equivalent units = 120,000 gallons completed + 16% x 30,000 gallons
in process.

6-37. (15 min.) Process Costing: Graham Petroleum.
Work-in-
Process,
Total Shipped May 31
Production:
Barrels (millions) .......................... 244.0 216.0 28.0
Equivalent barrels (millions) ......... 232.8 a 216.0 16.8
Costs:
Materials (millions) ....................... $6,000
Conversion costs (millions) .......... 7,968
Total cost incurred (millions) ........ $13,968
Cost per equivalent barrel ............... $60b
a 232.8 equivalent units = 216 barrels shipped + 60% x 28 barrels in process.
b $60 = $13,968 ÷ 232.8 equivalent units.
c $12,960 = 216.0 equivalent units x $60.
d $1,008 = 16.8 equivalent units x $60.

6-38. (15 min.) Process Costing: Joplin Corporation.
Work-in-
Process,
Total Completed November 30
Production:
Gallons ........................................ 41,000 38,000 3,000
Costs:
Materials ...................................... $89,100
Conversion costs ......................... 110,820
Total cost incurred ....................... $199,920
a 39,200 equivalent units = 38,000 gallons completed + 40% x 3,000 gallons in
process.

6-39. (15 Minutes) Predetermined Overhead Rates: Tiger Furnishings.
Predetermined overhead rate = $35.00 per direct labor hour.
Basic Dominator Total

Units produced ...................... 1,000 250 1,250
Machine-hours....................... 4,500 2,500 7,000
Direct labor-hours .................. 3,000 2,000 5,000
Direct materials ..................... $10,000 $3,750 $13,750
Direct labor ............................ 64,500 35,500 100,000
Manufacturing overhead ........ 175,000
Total Costs ............................ $288,750
Burden Rate: .........................
Total overhead .................. $175,000
÷ Direct labor-hours ............ ÷ 5,000 = $35.00
Predetermined overhead rate = 175% of direct labor cost.

Units produced ...................... 1,000 250 1,250
Machine-hours....................... 4,500 2,500 7,000
Direct labor-hours .................. 3,000 2,000 5,000
Direct materials ..................... $10,000 $3,750 $13,750
Direct labor ............................ 64,500 35,500 100,000
Manufacturing overhead ........ 175,000
Total Costs ............................ $288,750
Burden Rate: .........................
Total overhead .................. $175,000
÷ Direct labor cost .............. ÷ $100,000 =175%

Predetermined overhead rate = $25.00 per machine-hour.

Units produced .................. 1,000 250 1,250
Machine-hours................... 4,500 2,500 7,000
Direct labor-hours .............. 3,000 2,000 5,000
Direct materials ................. $10,000 $3,750 $13,750
Direct labor ........................ 64,500 35,500 100,000
Manufacturing Overhead ... 175,000
Total Costs ........................ $288,750
Burden Rate: .....................
Total overhead .............. $175,000
÷ Machine-hours............. ÷ 7,000 =$25.00

6-43. (30 Minutes) Operations Costing: Howrley-David, Inc.
The unit costs are:
Fatboy: ............ $4,000
Screamer: ....... $5,000
Fatboy Screamer Total
Number of units ......................... 2,000 4,000 6,000
Materials cost per unit ............... $2,000 $3,000
Costs ......................................... $ 4,000,000 $12,000,000 $16,000,000
Conversion costs:
Direct Labor .......................... $ 6,000,000
Indirect materials .................. 1,800,000
Other overhead .................... 4,200,000
Total operation cost ......... $12,000,000
Conversion cost per unit in plant ........................

($12,000,000 ÷ 6,000 units) = $2,000 per unit.
Operation cost
(@ $2,000 per unit) ................... $4,000,000a $8,000,000b $12,000,000
Material cost .............................. 4,000,000 12,000,000
Total cost ................................... $8,000,000 $20,000,000
Number of units ......................... ÷ 2,000 ÷ 4,000
Unit cost .................................... $4,000 $5,000
a $4,000,000 = 2,000 units x $2,000 per unit.

b $8,000,000 = 4,000 units x $2,000 per unit.

6-44. (30 Minutes) Operations Costing: S. Lee Enterprises.
The unit costs are:
SL1: ................ $2,200
SL2: ................ $2,700
SL1 SL2 Total
Number of units ......................... 1,300 1,800 3,100
Materials cost per unit ............... $900 $1,400
Costs ......................................... $ 1,170,000 $2,520,000 $3,690,000
Conversion costs:
Direct Labor .......................... $ 1,200,000
Indirect materials .................. 480,000
Other overhead .................... 2,350,000
Total operation cost ......... $4,030,000
Conversion cost per unit in plant ........................

($4,030,000 ÷ 3,100 units) = $1,300 per unit.
Operation cost
(@ $1,300 per unit) ................... $1,690,000a $2,340,000b $4,030,000
Material cost .............................. 1,170,000 2,520,000
Total cost ................................... $2,860,000 $4,860,000
Number of units ......................... ÷ 1,300 ÷ 1,800
Unit cost .................................... $2,200 $2,700
a $1,690,000 = 1,300 units x $1,300 per unit.

b $2,340,000 = 1,800 units x $1,300 per unit.

6-45. (30 Minutes) Operations Costing: Organic Grounds.
The unit costs are:
Star: ................
$10.60
Bucks: .............
$12.60
Star Bucks Total
Number of pounds ..................... 5,000 20,000 25,000
Materials cost per pound ........... $4.00 $6.00
Costs ......................................... $20,000 $120,000 $ 140,000
Conversion costs:
Direct Labor .......................... $ 50,000
Other overhead .................... 100,000
Total operation cost ......... $165,000
Cost per pound in plant .............

($165,000 ÷ 25,000 pounds) = $6.60 per pound.
Conversion cost
(@ $6.60 per pound) ................. $33,000a $132,000b $165,000
Material cost .............................. 20,000 120,000
Total cost................................... $53,000 $252,000
Number of pounds ..................... ÷ 5,000 ÷ 20,000
Cost per pound .......................... $10.60 $12.60
a $33,000 = 5,000 units x $6.60 per pound.

b $132,000 = 20,000 units x $6.60 per pound.

Solutions to Problems
6-46. (30 Minutes) Product Costing: Tiger Furnishings.

The unit costs are: Basic: $187.38 (rounded) and Dominator: $405.50

Direct materials ............................................................ $10,000 $3,750 $13,750
Direct labor ...................................................................64,500 35,500 100,000
Manufacturing overhead
(@175% of Direct labor cost)a .................................... 112,875 62,125 175,000
Total costs ....................................................................
$187,375 $101,375 $288,750
Units produced .............................................................÷ 1,000 ÷ 250
Unit cost .......................................................................
$187.38 $405.50
a 175% = $175,000 ÷ $100,000.
6-47. (30 Minutes) Product Costing: Tiger Furnishings.

The unit costs are: Basic: $187 and Dominator: $407

Direct materials ......................................................
$ 10,000 $3,750 $13,750
Direct labor .............................................................64,500 35,500 100,000
Manufacturing overhead
(@25 per machine-hour) a..................................... 112,500b 62,500c 175,000
Total costs ..............................................................
$ 187,000 $101,750 $288,750
Units produced ....................................................... ÷ 1,000 ÷ 250
Unit cost .................................................................
$ 187.00 $407.00
a $25 per machine-hour = $175,000 ÷ 7,000 machine-hours.
b $112,500 = 4,500 machine-hours x $25 per machine-hour.
c $62,500 = 2,500 machine-hours x $25 per machine-hour.

6-48. (30 Minutes) Product Costing—Ethical Issues: Tiger Furnishings.
a. The unit costs are different because the two products use the machine hours and
direct labor costs in different proportions. The Basic model is more machine
intensive (it uses relatively more machine hours than labor compared to the
Dominator model). This means that when the company moves to machine hours to
allocate costs, the Basic model will be assigned more overhead costs resulting in
higher reported product costs.
b. Without knowing more about the production process at Tiger Furnishings, it is not
possible to say which of these is better. Because you get different results, it may pay
to use a two stage system to split overhead between that which is driven more by
machine hours and that driven more by direct labor.
c. The allocation base should be chosen on the basis of how overhead is related to
cost. Income is the result of this decision and not the basis for the decision. Of
course, if these are the only two products and the choice of the allocation base does
not affect other decisions (or sales), total income will be the same.

6-49. (30 Minutes) Two-Stage Allocation and Product Costing: Donovan &
Parents.
a. The overhead rates are $18 per machine hour and 45% of direct-materials cost.
Machine-Hour Materials
Account Related Related
Utilities …………………………. ................. $ 48,000
Supplies .................................................... $33,600
Machine depreciation and maintenance ... 105,600
Purchasing and storing materials ............. 38,400
Miscellaneous ............................................ 40,800 ___________________________
Total overhead ........................................ $194,400 $72,000
÷ Total machine hours ............................... ÷ 10,800 hours
÷ Total materials cost................................. ÷ $160,000
Overhead rate ........................................... $18.00 / hour 45%
b. The cost per unit of output is $8.75 for jerseys and $12.40 for shorts.
Jerseys Shorts Total

Machine hours used ...........................................
6,000 4,800 10,800
Direct materials costs …………………. $96,000 $64,000 $160,000

Direct labor costs ……………………… 32,800 19,200 52,000
Manufacturing overhead costs ……….
Machine-hour related overheada ...................... 108,000 86,400 194,400
b
Materials-related overhead ............................. 43,200 28,800 72,000
Total cost ...........................................................
$280,000 $198,400 $478,400
Units produced ……………………….. ÷ 32,000 ÷ 16,000
Cost per unit.......................................................
$8.75 $12.40
a
$108,000 = 6,000 machine hours x $18 per machine hour;
$86,400 = 4,800 machine hours x $18 per machine hour.
b
$43,200 = $96,000 materials cost x 45%;
$28,800 = $64,000 materials cost x 45%.

6-50. (30 Minutes) Two-Stage Allocation and Product Costing: Owl-Eye
Radiologists.
a. The overhead rates are $46 per equipment hour and $50 per direct labor hour.
Equipment- Direct-Labor
Account Hour Related Hour Related
Utilities …………………………. .................... $ 4,800
Supplies ....................................................... $12,600
Indirect labor and supervision ...................... 20,400
Equipment depreciation and maintenance ... 8,400
Miscellaneous ............................................... 3,360 ___________________________
Total overhead ........................................... $ 16,560 $ 33,000
÷ Total equipment hours ............................... ÷ 360 hours
÷ Total labor hours ........................................ ÷ 660 hours
Overhead rate .............................................. $46 per hour $50 per hour
b. The costs per patient are $114.75 per hospital patient hour and $29.44 per other
patient.
Hospital Other
Patients Patients Total
Equipment hours used .......................................240 120 360
Direct labor-hours ..............................................480 180 660
Direct labor costs ……………………… $38,400 $10,800 $49,200

Overhead costs ……….
Equipment-hour related overheada .................. 11,040 5,520 16,560
Direct labor-hours related overhead ............... b 24,000 9,000 33,000
Total cost ...........................................................
$73,440 $25,320 $98,760
Patients ………………………………….. ÷ 640 ÷ 860 1,500
Cost per patient ..................................................
$114.75 $29.44
a
$11,040 = 240 equipment hours x $46 per equipment hour;
$5,520 = 120 equipment hours x $46 per equipment hour.
b
$24,000 = 480 direct labor-hours x $50 per direct labor-hour;
$9,000 = 180 direct labor-hours x $50 per direct labor-hour.
6-51. (30 Minutes) Operations Costing: Vermont Instruments.
The unit costs are:
Fin-X: ...... $28
Sci-X: ...... $33
Fin-X Sci-X Total
Number of units ......................... 10,000 40,000 50,000
Parts cost per unit ..................... $25 $30
Costs ......................................... $250,000 $1,200,000 $ 1,450,000
Operation costs:
Direct Labor .......................... 62,000
Overhead ............................. 70,500
Total operation cost ......... $ 150,000
Cost per unit in plant ................. ($150,000 ÷ 50,000 units) = $3 per unit.
Operation cost (@ $3 per unit) .. $ 30,000a $ 120,000b $150,000

Material cost .............................. 250,000 1,200,000
Total cost................................... $ 280,000 $1,320,000
Number of units ......................... ÷ 10,000 ÷ 40,000
Unit cost .................................... $28 $33
a $30,000 = 10,000 units x $3 per unit.

b $120,000 = 40,000 units x $3 per unit.

6-52. (30 Minutes) Operation Costing: DiDonato Supplies.
The unit costs are:
Basic: ...... $17.75
Laser: ...... $30.75
Basic Laser Total
Number of units ......................... 250,000 60,000 310,000
Parts cost per unit ..................... $12 $25
Costs ......................................... $3,000,000 $1,500,000 $ 4,500,000
Operation costs:
Direct Labor .......................... 744,000
Overhead ............................. 848,500
Total operation cost ......... $ 1,782,500
Cost per unit in plant ................. ($1,782,500 ÷ 310,000 units) = $5.75 per unit.
$1,437,500a $ 345,000b
Operation cost (@ $5.75 per unit) ...................... $150,000
Material cost .............................. 3,000,000 1,500,000
Total cost................................... $4,437,500 $1,845,000
Number of units ......................... ÷ 250,000 ÷ 60,000
Unit cost .................................... $17.75 $30.75
a $1,437,500 = 250,000 units x $5.75 per unit.

b $345,000 = 60,000 units x $5.75 per unit.

6-53. (45 Minutes) Account Analysis, Two-Stage Allocation, and Product
Costing: Tiger Furnishings.
a. Cost Flow Diagram
Overhead
First Stage
Direct Labor Cost

Machine-Related
Related
Overhead
Overhead
Machine Hours Direct Labor Cost

Second Stage
Basic Dominator

6-53. (continued)
b.
Basic $187
Dominator $406
Units Produced ........................................... 1,000 250 1,250
Machine hours ............................................ 4,500 2,500 7,000
Direct labor hours ....................................... 3,000 2,000 5,000
Direct materials........................................... $10,000 $3,750 $ 13,750

Direct labor ................................................. 64,500 35,500 100,000
Machine-hour Direct labor

Manufacturing Overhead related cost related
Utilities ................................................... $1,800 $0 $1,800
Supplies ................................................. 0 5,000 5,000
Training ................................................. 0 10,600 10,600
Supervision ............................................ 0 25,800 25,800
Machine depreciation ............................ 32,100 0 32,100
Plant depreciation .................................. 14,400 0 14,400
Miscellaneous ........................................ 0 85,300 85,300
Total ................................................. $48,300 $126,700 175,000
Total Costs ................................................. $288,750
Burden Rates
Machine hour rate.................................. ($48,300 ÷ 7,000 hours) = $6.90
Direct labor cost rate ............................. ($126,700 ÷ $100,000) = 126.7%

6-53. (continued)
Product Costing
Direct material ......................................... $ 10,000 $ 3,750 $ 13,750
Direct labor .............................................. 64,500 35,500 100,000
Overhead
Machine-related (@$6.90 per machine-
hour) ........................................................... 31,050a 17,250b 48,300
Labor-related (@126.7% direct labor cost) 81,722c 44,978d 126,700
Total overhead ....................................... $112,772 $62,228 $175,000
Total cost.................................................... $187,272 $101,478 $288,750
÷ Units produced ........................................ ÷ 1,000 ÷ 250
= Unit cost (rounded) ................................. = $187 = $406
a $31,050 = 4,500 machine-hours x $6.90 per machine-hour.
b $17,250 = 2,500 machine-hours x $6.90 per machine-hour.
c $81,722 = $64,500 x 126.7% direct labor cost.
d $44,978 = $35,500 x 126.7% direct labor cost

Solutions to Integrative Cases
6-54. (45 Minutes) Product Costing, Cost Estimation, and Decision Making: Dolan
Products.
a. To determine product costs and margins, first calculate the Year 1 overhead rate:
Overhead rate = Total overhead ÷ Total direct labor hours

= $750,000 ÷ (5,000 x 2.0 + 10,000 x 1.0 + 20,000 x 0.5)
= $750,000 ÷ 30,000 hours
= $25 per direct labor hour
The product costs are:
Red Yellow Green

Direct materials ............................... $70.00 $50.00 $30.00
Direct labor (@$20).......................... 40.00 20.00 10.00
Manufacturing overhead (@$25) ..... 50.00 25.00 12.50
Product cost ................................ $160.00 $95.00 $52.50
The product margins are:
Red Yellow Green

Price ................................................ $150.00 $100.00 $75.00
Product cost ..................................... 160.00 95.00 52.50
Product margin............................ $(10.00) $5.00 $22.50

6-54. (continued)
b. To determine product costs and margins, first calculate the Year 2 overhead rate:
Overhead rate = Total overhead ÷ Total direct labor hours

= $650,000 ÷ (10,000 x 1.0 + 20,000 x 0.5)
= $650,000 ÷ 20,000 hours
= $32.50 per direct labor hour
The product costs are:
Yellow Green
Direct materials ...................................... $50.00 $30.00
Direct labor (@$20) ................................ 20.00 10.00
Manufacturing overhead (@$32.50) ....... 32.50 16.25
Product cost....................................... $102.50 $56.25
The product margins are:
Yellow Green
Price ................................................ $100.00 $75.00
Product cost ..................................... 102.50 56.25
Product margin............................ $(2.50) $18.75

6-54. (continued)
c. Dolan should not drop Yellow.

The problem is that some of the manufacturing overhead is fixed and when a
product is dropped, that cost is not avoided, but added to the overhead allocated to
the remaining products. We know that not all the overhead is fixed, however,
because overhead declined from $750,000 to $650,000 when Dolan dropped Red.
We can use the high-low method from Chapter 5 to estimate the fixed overhead
component and the variable overhead rate. We only have two observations, so
these serve as the high and low observations.
Cost at highest activity – cost at lowest activity

Variable cost =
Highest activity – lowest activity
$750,000 – $650,000
= = $10.00 per direct labor hour
30,000 – 20,000
Fixed costs = Total costs – variable costs

= $750,000 – ($10.00 x 30,000)
= $450,000
or
Fixed costs = $650,000 – ($10.00 x 20,000)

= $450,000
Considering only financial considerations, the variable cost of Yellow is $50 for
materials, $20 for direct labor, and $10 for variable overhead (because Yellow
requires one hour of direct labor). Therefore, the total variable cost of Yellow is $80
(= $50 + $20 +$10) and the unit contribution margin is $20 (=$100 – $80). If Dolan
drops Yellow, the firm will lose $200,000 (= 10,000 units x $20 unit contribution
margin) and profit.

Fundamentals of Cost Accounting 5th Edition Lanen Solutions Manual
6-55. (45 Minutes) Product Costing and Decision Making: Brunswick Parts.
This problem is designed to get students to understand the effect that cost systems
can have on decisions by showing what happens when product cost information is
used to schedule production when plants have very different ages (hence, very
different depreciation expense).
a.
The reported product costs include direct materials, direct labor, and manufacturing
overhead.
First, compute the plant-wide overhead rates used to allocate manufacturing

overhead. (Note that the corporate administration overhead is irrelevant in the
product-costing question. It is used for performance evaluation only.)
Moncton Fredericton
Estimated plant overhead ........ $1,000,000 $600,000
÷ Estimate production.............. ÷ 100,000 labor hours ÷ 150,000 labor hours
= Overhead rate ...................... = $10 / labor hour =$4 / labor hour
The reported product costs of P28 in each plant can then be determined as follows:
Moncton Fredericton
Direct material ......................... $25 $25
Direct labor .............................. 3 hrs. @ $9 = 27 4 hrs @ $10 = 40
Manufacturing overhead .......... 3 hrs @ $10 = 30 4 hrs @ $4 = 16
Total ................................... $82 $81
b.
Based on the reported product costs, it appears that Fredericton is the plant where
P28 should be produced. However, the Moncton plant is more efficient (it requires
only 3 hours of direct labor compared to 4 hours at Fredericton). The distortion is
caused by the fact that the Fredericton plant is almost fully depreciated whereas the
Moncton plant is new and probably much more automated.

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Solutions to Review Questions

©The McGraw-Hill Companies, Inc., 2017

©The McGraw-Hill Companies, Inc., 2017

©The McGraw-Hill Companies, Inc., 2017

©The McGraw-Hill Companies, Inc., 2017

©The McGraw-Hill Companies, Inc., 2017

6-24. (20 min.) Basic Cost Flow Model: Ralph’s Mini-Mart.

6-25. (20 min.) Basic Cost Flow Model: Generic Electric.

6-26. (20 min.) Basic Cost Flow Model.

©The McGraw-Hill Companies, Inc., 2017

6-28. (20 min.) Basic Cost Flow Model.

©The McGraw-Hill Companies, Inc., 2017

6-30. (10 min.) Basic Product Costing: Sara’s Sodas.

6-31. (15 min.) Basic Product Costing: Sara’s Sodas.

Manufacturing cost = Materials + Labor + Manufacturing

©The McGraw-Hill Companies, Inc., 2017

Manufacturing cost = Materials + Labor + Manufacturing

b. Labor = 0.20 x Materials

6-33. (10 min.) Basic Product Costing: Big City Bank.

Labor .................................................. $ 35,000

©The McGraw-Hill Companies, Inc., 2017

©The McGraw-Hill Companies, Inc., 2017

©The McGraw-Hill Companies, Inc., 2017

©The McGraw-Hill Companies, Inc., 2017

©The McGraw-Hill Companies, Inc., 2017

©The McGraw-Hill Companies, Inc., 2017

Basic Dominator Total

6-40. (15 Minutes) Predetermined Overhead Rates: Tiger Furnishings.

Predetermined overhead rate = 175% of direct labor cost.

Basic Dominator Total

©The McGraw-Hill Companies, Inc., 2017

Basic Dominator Total

6-42. (20 Minutes) Predetermined Overhead Rates: Tiger Furnishings.

©The McGraw-Hill Companies, Inc., 2017

Conversion cost per unit in plant ........................

a $4,000,000 = 2,000 units x $2,000 per unit.

©The McGraw-Hill Companies, Inc., 2017

Conversion cost per unit in plant ........................

a $1,690,000 = 1,300 units x $1,300 per unit.

©The McGraw-Hill Companies, Inc., 2017

Cost per pound in plant .............

a $33,000 = 5,000 units x $6.60 per pound.

©The McGraw-Hill Companies, Inc., 2017

6-46. (30 Minutes) Product Costing: Tiger Furnishings.

Basic Dominator Total

6-47. (30 Minutes) Product Costing: Tiger Furnishings.

Basic Dominator Total

©The McGraw-Hill Companies, Inc., 2017

©The McGraw-Hill Companies, Inc., 2017

Jerseys Shorts Total

Direct materials costs …………………. $96,000 $64,000 $160,000

©The McGraw-Hill Companies, Inc., 2017

Direct labor costs ……………………… $38,400 $10,800 $49,200

Operation cost (@ $3 per unit) .. $ 30,000a $ 120,000b $150,000

a $30,000 = 10,000 units x $3 per unit.