Management Accounting Canadian 6th Edition Horngren Solutions Manual

Management Accounting Canadian 6th
Edition Horngren Solutions Manual

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Solutions Chapter 6
Fundamental Review Material
6-A1 (15–20 min.)
Answers are in thousands.
1. a. Direct materials inventory 360

Cash 360
b. Work-in-process inventory 325

Direct materials inventory 325
c. Work-in-process inventory 130

Accrued payroll 130
d. Factory department overhead control 180

Various accounts 180
(90 + 50 + 40 = 180)
e. Work-in-process inventory 234

Factory department overhead
control 234
(180% x 130)
f. Finished-goods inventory 625

Work-in-process inventory 625
g. Cost of goods sold 425

Finished-goods inventory 425
2.
Direct Materials Inventory _ Finished-Goods Inventory ___
a. 360 b. 325 f. 625 g. 425
a a
Bal. 35 Bal. 200
Work-in-Process Inventory Cost of Goods Sold____

b. 325 f. 625 g. 425
c. 130
e. 234 Factory Department
689 Overhead Control _____
Bal. a 64 d. 180 e. 234
a
12/31/11 Balance
Copyright © 2012 Pearson Canada Inc. 168

6-B1 (20–25 min.)
Entries are in British pounds (£).

Accounts payable 109
b. Work-in-process inventory 90
c. Work-in-process inventory 140

Accrued payroll 140

Various accounts, such as cash
or accounts payable 92
e. Work-in-process inventory 112

Factory department overhead control 112
(80% × 140)
f. Finished-goods inventory 275


h. Accounts receivable 620

Sales 620
2.
Direct Materials Inventory Finished-Goods Inventory_
Bal. a 22 b. 90 Bal. a 102 g. 350
a. 109 f. 275
Bal. b 41 Bal. b 27
Work-in-Process Inventory Cost of Goods Sold

Bal. a 27 f. 275 g. 350
b. 90
c. 140
369 Overhead Control
b
Bal. 94 d. 92 e. 112
a
12/31/11 Balance
b
12/31/12 Balance

Questions
Q6-1 Three purposes of product costing are to satisfy differing demands for (a)
inventory valuation and income determination in accordance with generally accepted
accounting principles; (b) income tax reporting; and (c) guiding pricing, product mix, and
other managerial decisions.
Q6-2 In addition to inventory valuation and income determination, managers want

accurate job costs as guides to pricing and to allocating effort among particular
products, services, or customers.
Q6-3 The distinction between job costing and process costing centres largely around
how product costing is accomplished. Unlike process costing, which deals with broad
averages and great masses of like units, the essential feature of job costing is the
attempt to apply costs to specific jobs that may consist of either a single physical unit (a
custom sofa) or a few like units (a dozen tables) in a distinct batch or job lot.
Q6-4 The most important point is that product costing is an averaging process. The
unit cost used for inventory purposes is the result of taking some accumulated cost and
dividing it by some measure of production. The basic distinction between job order
costing and process costing is the breadth of the denominator: in job order costing, it is
small (for example, one painting, 100 advertising circulars, or one special packaging
machine), but in process costing, it is large (for example, thousands of kilograms, litres,
or board feet).
Q6-5 Hybrid costing systems are blends of ideas from both job costing and process
costing.
Q6-6 The basic record for the accumulation of job costs is the job-cost record or job-
cost sheet. Exhibit 6-1 shows a Job Cost Record and also shows the related source
documents. A file of current job-cost records becomes the subsidiary ledger for the
general ledger account, Work-in-Process Inventory.
Q6-7 Source documents include materials requisitions and labour time tickets (time
cards).
Q6-8 The budgeted overhead application rate is the predicted factory overhead for the
budget period divided by the predicted machine-hours for that period. The amount of
factory overhead applied to a job is the budgeted overhead application rate times the
actual machine-hours used on that job.
Q6-9 The factory department overhead control account is an account that “collects” all
actual overhead costs during an accounting period. They are left-hand entries (debits)
to the account. At the end of the accounting period, the overhead applied is entered on
the right-hand side of the account (credited), and any difference between the actual and
applied overhead is charged as a variance.

Q6-10 No. In the past, most organizations have used only one cost driver per
department. However, the trend is toward using multiple cost drivers. Whether more
than one cost driver is used is a cost-benefit issue. If most overhead costs are caused
by a single cost driver, using that one cost driver for cost application is logical. If
overhead costs are caused by multiple cost drivers, managers must compare the value
of more accurate product costs versus the cost of a complex accounting system that
uses multiple cost drivers for overhead application.
Q6-11 A strong relationship between the factory overhead incurred and the cost driver
used for application is the best available indication of a cause-effect relationship. That
is, the more the cost driver is used, the higher the actual overhead incurred.
Q6-12 Yes. Direct labour cost may be the best cost driver for overhead allocation even
if wage rates vary within a department. For example, higher skilled labour (with higher
wage rates) may require more overhead because it may use more costly equipment and
have more indirect labour support. Moreover, many factory overhead costs include
costly employee benefits such as pensions and payroll taxes.
Q6-13 Cost drivers might include direct labour cost, direct-labour-hours, direct material
cost, total direct cost, machine-hours, number of batches, number of engineering hours
used, number of change orders, and so on.
Q6-14 Incurred overhead will differ from applied overhead in much the same way as
any estimate will differ from actual experience. Specific causes might be variations in
suppliers’ prices; inefficiencies in production (excessive downtime, for example); failure
of sales to materialize; failure to meet production quotas; unexpected increases in fixed
overhead (increase in insurance rates, for example).
Q6-15 No. Using “actual” overhead rates, unit costs will be lower as production volume
increases and higher with low volume. The variable overhead rate will be approximately
constant; the fixed overhead rate will vary inversely with volume. The two rates together
form the total overhead rate.
Q6-16 Normal costing is the product-costing method whereby inventory is carried at

actual direct material costs plus actual direct labour costs plus applied factory overhead
at a budgeted rate.
Q6-17 The best theoretical method of allocating underapplied or overapplied overhead

is to disregard it completely and recompute an actual overhead rate based on actual
costs incurred and allocated over actual production units. Proration is usually a
reasonable approximation to this theoretical ideal.
Q6-18 Examples of service industries that use the job-costing approach include
repairing, consulting, legal, accounting, painting, dentistry, and income tax preparation.
Q6-19 Not completely. Some service firms trace only direct labour costs to individual
jobs. However, with advances in computer technology and the need for better job-cost
information because of competition, more service firms are tracing additional costs to

jobs. The more costs that are traced to jobs instead of being allocated, the more
accurate are the job costs.
Q6-20 The following are examples of costs that are now classified as direct costs in
many service industries: secretarial, photocopies, phone calls, power, and costs of
computer time.
Exercises
E6-1 (10–15 min.)
You may wish to use T-accounts. Amounts are in millions of dollars. You can also use
the expression “ending balance (of any account) equals the beginning balance plus
additions less subtractions,” or EB = BB + A – S. In this case, “Purchased” is “additions”
and “Used” is “subtractions.”
1. 8 + 5 – 7 = 6 (BB + A – S = EB)
2. 8 + 9 – 6 = 11 (BB + A – EB = S)
3. 5 + Purchases – 7 = 8. Purchases = 10
4. Beginning inventory + 8 – 3 = 7. Beginning inventory = 2
E6-2 (10–15 min.)
Amounts are in thousands of dollars.
1. Finished-goods inventory 128

Finished goods = 72 + 56 = 128
2. Debits: 12 + 50 + 25 + 55 = 142
Credits: 72 + 56 = 128
Balance, April 30 14
3. Accounts receivable 101

Sales 101
Sale of Job A13
Cost of goods sold 72

Cost of Job A13 sold

E6-3 (10–15 min.)
Cancer Research Project

Medical School
Unit
Reference Date Quantity Cost Amount Summary
Direct Materials:
Various medical supplies Jan. 5 $ 925
Various chemicals Jan. 7 780 $ 1,705
Direct Labour:
Research associates Jan. 5–12 120 hrs. $32 3,840
Research assistants Jan. 7–12 180 hrs. $19 3,420 7,260
Project overhead
applied Jan. 12 $7,260 x 0.70 5,082 5,082
Total costs $14,047
E6-4 (10 min.)
1. $6,300 + $4,700 = $11,000
2. $8,300
3. $4,200 + $7,600 = $11,800
E6-5 (15 min.)
Answers are in thousands of dollars.
1. a b c a b c
Construction Finished Cost of Construction Finished Cost of
in Process Cottages, Cottages in Process Cottages, Cottages
Job No. Sept. 30 Sept. 30 Sold Sept. Oct. 31 Oct. 31 Sold Oct.
43 180
51 170
52 150 150
53 200 2501
2
61 115 135
62 180 2053
4
71 118 154
81 106 ___ ___ 1545 ___ ___
719 150 350 308 135 605
1 2 3 4 5
200 + 50 115 + 20 180 + 25 118 + 36 106 + 48

2. Sept. __ Oct.__
Finished houses inventory 500 590
Construction in process 500 590
Sept.: 180 + 170 + 150 = 500
Oct.: 250 + 135 + 205 = 590
3. Cash 345
Sales 345
To record sale of Job 53
Cost of houses sold 250

Finished houses inventory 250
To record cost of Job 53 sold
E6-6 (30 min.)
The answers (in millions) are $15, $60, and $200.
Step-by-step entries are keyed alphabetically. The sequence depends on where the
student prefers to start. You may wish to raise the question of whether the underapplied
overhead should be prorated among the affected accounts at the end of the year.
__Direct Materials__ Work-in-Process

Bal. 15 (a) 210 Bal. 60 (e) Completed 880
(b) 225 (a) Dir. Materials 210
240 210 (c) Dir. Labour 300 a
Bal. 30 (d) Applied overhead 450
1,020 880
Bal. 140
Finished Goods Cost of Goods Sold

Bal. 200 (f) 900 (f) 900
(e) 880
1,080 900
Bal. 180
a
$450 ÷ 150% = $300
E6-7 (30 min.)
The answers (in millions) are $25, $22, and $32.
Step-by-step entries are keyed alphabetically. The sequence depends on where the
student prefers to start. You may wish to raise the question of whether the underapplied
overhead should be prorated among the affected accounts at the end of the year. Note
the heavy ending Finished Goods.
Direct Materials Work-in-Process

Bal. a 25 (a) 235 Bal. a 22 (e) Completed 493
(b) 275 (a) Dir. Materials 235
300 235 (c) Dir. Labour 100
Bal. 65 (d) Applied overhead 150
507 493
Bal. 14

a
Bal. 32 (f) 350 (f) 350
(e) 493
525 350
Bal. 175
a
Let BB = beginning balance
Direct materials: BB + 275 – 235 = 65
BB = 25
Work in process: BB + 235 + 100 + 150 – 493 = 14
BB = 22
Finished goods: BB + 493 – 350 = 175
BB = 32
E6-8 (15–20 min.)
Answers are in thousands.
1. a. Direct-materials inventory 450

Cash 450
b. Work-in-process 420
Direct-materials inventory 420
c. Work-in-process 125
Accrued payroll 125
d. Factory department overhead 175

Various accounts 175
(80 + 55 + 40 = 175)
e. Work-in-process 225
Factory department overhead 225
(180% × 125)
f. Finished goods 705

Work-in-process 705

Finished goods 460
Direct Materials Inventory Finished Goods

a. 450 b. 420 f. 705 g. 460
12/31/11 Bal. 30 12/31/11 Bal. 245
Work-in-Process Cost of Goods Sold
b. 420 f. 705 g. 460
c. 125
12/31/11 Bal. 65 d. 175 e. 225
E6-9 (5–10 min.)
Case A, $3,400,000 ÷ $2,000,000 = 170% of direct labour cost

Case B, $5 x 450,000 = $2,250,000
Case C, $1,750,000 ÷ 250,000 = $7 per machine-hour
E6-10 (15–20 min.)
A major lesson of this exercise is the distinction between budgeted, actual, and applied
overhead. Case 2 is more challenging, but it forces the student to learn basic
relationships.
1. c. $750,000 ÷ $500,000 = 150% of direct-labour cost

f. 1.50 x $570,000 = $855,000
g. $825,000 – $855,000 = $30,000 overapplied
2. f. $415,000 – $25,000 = $390,000

d. $390,000 ÷ 1.20 = $325,000
b. $420,000 ÷ 1.20 = $350,000
Problems
P6-1 (15–25 min.)
1. Ending inventory = Beginning inventory + Purchases – Usage

90 = 70 + Purchases – 468
Purchases = 488
2. Total manufacturing costs = Direct + Direct + Factory

charged to production materials labour (DL) overhead
864 = 468 + DL + 0.8 DL
864 – 468 = 1.8 DL
1.8 DL = 396
DL = 220
3. Cost of goods = Cost of goods available – Beginning finished

manufactured for sale goods
= 1,004 – 100
= 904
4. Cost of goods = Cost of goods available – Ending finished

sold for sale goods
= 1,004 – 120
= 884
6-2 (20 min.)
1. Overhead
Compensation for nonchargeable time,

0.15 x $3,600,000 $ 540,000
Other costs 1,449,000
(a) Total overhead $1,989,000
(b) Direct labour, 0.85 x $3,600,000 $3,060,000
Overhead application rate, (a) ÷ (b) 65%
2. Hourly rate:
$60,000 ÷ (48 x 40) = $60,000 ÷ 1,920 $31.25
Many students will forget that “his work there” includes an overhead application:
Direct labour, 10 x $31.25 $312.50

Applied overhead, $312.50 x 0.65 203.13
Total costs applied $515.63
We point out that direct labour time on a job is usually compiled for all classes of
engineers and then applied at their different compensation rates. Overhead is
usually not applied on the piecemeal basis demonstrated here. Instead, it is
applied in one step after all the labour costs of the job have been accumulated.
P6-3 (15–20 min.)
1. Factory department overhead control 995,000

Cash, accounts payable, and various accounts 995,000
2. Work-in-process 1,605,000
Direct materials inventory 1,605,000
Work-in-process 1,200,000
Accrued payroll 1,200,000
3. Work-in-process 960,000
Factory department overhead control 960,000
Budgeted rate = $980,000 ÷ $1,225,000
= 80%; 0.80 x $1,200,000 = $960,000.

4. Work-in-Process Factory Department Overhead Control
(2) 1,605,000 (1) 995,000 (3) 960,000
(2) 1,200,000 (5) 35,000
(3) 960,000 0
5. Cost of goods sold (underapplied overhead) 35,000

($995,000 – $960,000)
Some students will confuse actual overhead, budgeted overhead, and overhead
applied.
P6-4 (10–15 min.)

(in thousands)
Case 1 Case 2
1. Applied overhead: 30 x $8.50 = $255

36 x $8.50 = $306
2. Overhead incurred:
$32 + $22 + $35 + $138 = 227
$40 + $32 + $47 + $214 = 333
3. Overapplied overhead: $255 – $227 = 28

Underapplied overhead: $333 – $306 = 27
Note the irrelevant items:

Sales commissions are selling expenses.
Depreciation of finished-goods warehouse is also a selling expense,
because the manufacturing processing has been completed.
Cost of goods sold is an overall figure of no use in this problem.
Direct labour cost and direct material cost are not pertinent either.
P6-5 (10–15 min.)
Direct materials inventory is irrelevant.
1. Factory department overhead control 60

2. Factory department overhead control 60

Work-in-process 6
Finished goods 18
Supporting schedule:
Unadjusted Proration of Adjusted

(in thousands) Balance Overapplied Overhead Balances

Work-in-process $ 50 50/500 x $60 = $ 6 $ 44
Finished goods 150 150/500 x $60 = 18 132
Cost of goods sold 300 300/500 x $60 = 36 264
Totals $500 $60 $440
3. Cost of goods sold would be lower in requirement 1, so gross profit would be

higher in requirement 1 by $60 – $36 = $24. That is, cost of goods sold would be
$264 in requirement 2 and $300 – $60 or $240 in requirement 1.
P6-6 (10–15 min.)
Answers are in millions of euros.
1. First Way
Unadjusted cost of goods sold 150
Add: Underapplied overhead 10
Adjusted cost of goods sold 160
Proration of
Second Way Unadjusted Underapplied Overhead Adjusted
Cost of goods sold 150 150/300 x 10 = 5 155
Work-in-process 30 30/300 x 10 = 1 31
Finished goods 120 120/300 x 10 = 4 124
Totals 300 10 310

Work-in-process 1
Finished goods 4
2. First Second
Way Way
Gross profit before adjustment 43 43
Adjustment –10 –5
Gross profit after adjustment 33 38
P6-7 (10–15 min.)
Overhead is overapplied by $457,000 – $409,000 = $48,000.
1. First Way
Unadjusted cost of goods sold $400,000
Deduct: Overapplied overhead 48,000
Adjusted cost of goods sold $352,000
Cost of goods sold 48,000
Proration of
Second Way Unadjusted Overapplied Overhead Adjusted
Cost of goods sold $400,000 400/800 x $48,000 = $24,000 $376,000
Work-in-process 200,000 200/800 x 48,000 = 12,000 188,000
Finished goods 200,000 200/800 x 48,000 = 12,000 188,000
Totals $800,000 $48,000 $752,000

Work-in-process 12,000
Finished goods 12,000
2. Cost of goods sold would be $48,000 – $24,000 = $24,000 lower (and gross
profit higher) under the first way (no proration).
P6-8 (20–25 min.)
Entries are in thousands of British pounds (£).

Accounts payable 112
b. Work-in-process 98
c. Work-in-process 105
Accrued payroll 105
Various accounts, such as cash or
accounts payable 90
e. Work-in-process 84
Factory department overhead applied 84
(80% x 105)
f. Finished goods 280
Work-in-process 280
Finished goods 350
h. Accounts receivable 600
Sales 600
2.
Direct Materials Inventory Finished Goods
12/31/11 Bal. 18 b. 98 12/31/11 Bal. 100 g. 350
a. 112 f. 280
12/31/12 Bal. 32 12/31/12 Bal. 30

Work-in-Process Cost of Goods Sold
12/31/11 Bal. 25 f. 280 g. 350
b. 98
c. 105
12/31/12 Bal. 32 d. 90 e. 84
P6-9 (10–15 min.)
Note that the direct materials inventory is irrelevant.


Supporting schedule:
Unadjusted Proration Adjusted

(in thousands) Balances Overapplied Overhead Balances
Work-in-process $100 100/500 x $20 = 4 $96
Finished goods 150 150/500 x $20 = 6 144
Cost of goods sold 250 250/500 x $20 = 10 240
Totals $500 $20 $480
Gross profit would be lower in requirement 2 by $20,000 – $10,000, or $10,000.

Adjusted cost of goods sold would be $250,000 – $10,000 = $240,000 in
requirement 2 but $250,000 – $20,000 = $230,000 in
requirement 1.

P6-10 (15–20 min.)
Budgeted overhead
1. Overhead rate =
Budgeted cost - driver level
$225,000
Pharmacy = = $2.50 per prescription
90,000
$300,000
Medical records = = $5.00 per patient-visit
60,000
2. Pharmacy = $2.50 x 4 $10.00

Medical records = $5.00 x 2 10.00
Total applied overhead $20.00
3. Students must be on guard to get their definitions clear. Overapplied essentially

means that “actual” overhead is less than that absorbed by (applied to) the
products worked on during the period.
Computations follow.
Medical
Pharmacy Records Total
Actual $217,000 $325,000 $542,000
Applied, 85,000 x $2.50
and 63,000 x $5.00 212,500 315,000 527,500
Underapplied $ 4,500 $ 10,000 $ 14,500
P6-11 (25–35 min.)
1. Job 412 ($ 9,000 + $4,000 + $8,000) $21,000

Job 413 ($12,000 + $5,000 + $10,000) 27,000
Work-in-process inventory, April 30 $48,000
2. The job-cost records indicate an overhead application rate of
$8,000 ÷ $4,000 = 200%, or $10,000 ÷ $5,000 = 200%.
3. a. Work-in-process inventory 15,500
Direct materials inventory 15,500
Job 412 of $2,500 + Job 414 of $13,000
b. Work-in-process inventory 6,000
Accrued payroll 6,000
$1,500 + $2,500 + $2,000
c. Work-in-process inventory 12,000
Factory department overhead 12,000
$6,000 x 200%
d. Finished-goods inventory 28,000
Work-in-process inventory 28,000
$21,000 + $2,500 + $1,500 + 200% of $1,500

e. Cost of goods sold 33,000
Finished-goods inventory 33,000
The $33,000 amount is given.
Direct Materials Inventory Work-in-Process Inventory

Bal. 19,000 (a) 15,500 Bal. 48,000 (d) 28,000
Bal. 3,500 (a) 15,500
(b) 6,000
Accrued Payroll (c) 12,000
(b) 6,000 81,500
Bal. 53,500
Factory Department Overhead Finished-Goods Inventory

(c) 12,000 Bal. 18,000 (e) 33,000
(d) 28,000
Bal. 13,000
Cost of Goods Sold

Bal. 450,000
(e) 33,000
Bal. 483,000
4. Job 413 ($27,000 + $2,500 + 200% of $2,500) $34,500

Job 414 ($13,000 + $2,000 + 200% of $2,000) 19,000
Work-in-process inventory, October 31 $53,500
P6-12 (40–60 min.)
1. Machining Assembly
(a) Budgeted overhead $990,000 $1,100,000
(b) Cost drivers:
Budgeted machine-hours 90,000 -
Budgeted direct labour cost - $2,200,000
Budgeted overhead rates (a) ÷ (b) $11/hour 50%
2. The machine-hours actually worked were factory overhead applied, $880,000,

divided by the budgeted rate, $11, or 80,000 hours.
3. 0.50 x $2,800,000 = $1,400,000
4. All amounts in thousands of dollars:
a. Direct materials inventory 1,900

Accounts payable 1,900
b. Work-in-process 1,850
Direct materials inventory 1,850
c. Work-in-process 3,700

Accrued payroll 3,700
d1. Factory department overhead control 2,200

Various accounts 2,200
d2. Work-in-process 2,280

(80,000 x $11) + ($2,800,000 x 0.50)
e. Finished goods 7,820

f1. Accounts receivable 13,000

Sales 13,000
f2. Cost of goods sold 7,800

Direct Materials Inventory Work-in-Process

Bal. 65 b. 1,850 Bal. 50 e. 7,820
a. 1,900 b. 1,850
Bal. 115 c. 3,700
d2. 2,280
7,880
Bal. 60
Finished Goods
Bal. 40 f2. 7,800
e. 7,820
Bal. 60
5. Sales $13,000,000
Cost of goods sold:
Before adjustment $7,800,000
Overapplied overhead 80,000
Adjusted cost of goods sold 7,720,000
Gross profit $ 5,280,000
P6-13 (20–30 min.)
Students are likely to make errors in this “easy” problem.
1. Professional salaries unassigned, 0.20 x $1,333,000 $ 266,600

Other costs 533,200
Total overhead $ 799,800
Divided by professional salaries that are “direct labour” ÷ 1,066,400 a
Equals overhead rate 75%
a
Not $1,333,000, but $1,333,000 – $266,600
2. Hourly rates:
Level 12, $35,000 ÷ 1,800 hours $19.44
Level 10, $26,000 ÷ 1,800 hours $14.44
Level 8, $18,000 ÷ 1,800 hours $10.00
The allocation to Client No. 273 is:
Direct labour:
Level 12, 2 hours at $19.44 $ 38.88
Level 10, 4 hours at $14.44 57.76
Level 8, 9 hours at $10.00 90.00
Total direct labour $186.64
Overhead, 0.75 x $186.64 139.98
Total job cost $326.62
The hardest thing for students to grasp is the idea that some of the professional
salaries are transferred to the overhead category. In turn, this reduces the
“direct labour” cost allocation base from $1,333,000 to $1,066,400.
P6-14 (20–35 min.)
1. $10,000,000 ÷ $5,000,000 = 200% of direct labour
2. ($10,000,000 – $3,000,000) ÷ $5,000,000 = 140% of direct labour

($10,000,000 – $3,000,000) ÷ ($5,000,000 + $3,000,000)
= $7,000,000 ÷ $8,000,000 = 87.5% of total direct costs
3. Engagement
Eagledale First Valley
Direct labour $15,000 $15,000
Applied overhead @ 200% 30,000 30,000
Total costs $45,000 $45,000
Total direct costs $25,000 $21,000

Applied overhead @ 140% of $15,000 21,000 21,000
Total costs $46,000 $42,000
Total direct costs $25,000 $21,000

Applied overhead @ 87.5% 21,875 18,375
Total costs $46,875 $39,375
4. The billings would differ significantly:
Engagement
Eagledale First Valley
Method 1:
Total costs $45,000 $45,000
Total billings @ 130% $58,500 $58,500
Method 2:
Total costs $46,000 $42,000
Total billings @ 130% $59,800 $54,600

Method 3:
Total costs $46,875 $39,375
Total billings @ 130% $60,938 $51,188
5. The first method is inferior to the other two because the latter give more
accurate measures of how specific jobs cause increases in costs. In general, the
more costs that are directly charged to jobs, the more accurate the picture of
where the money is really spent.
As between the other two methods, the answer depends on what causes the
indirect costs to rise. If direct labour is the dominant cause, then the 140% rate
is better. If the increases in indirect costs are more closely related to increases
in all direct costs, then the 87.5% rate is preferable. Additional studies of how
indirect costs behave would be necessary to answer this question.
P6-15 (35–50 min.)
Some instructors may want to provide more details about accrued payroll in conjunction
with their assignment of this problem.
1. Direct materials purchased: $140,000 + $27,000 – $20,000 = $147,000.
2. Cost of goods sold: $25,000 + $260,000 – $35,000 = $250,000.
3. Direct labour rate: $3,000 ÷ 200 hours = $15 hour (see (b)).
Direct labour cost: 3,000 hours x $15 = $45,000 (see (g)).
4. Overhead rate: $800,000 ÷ $640,000 = 125%. Overhead applied: 125% x

$45,000 = $56,250.
5. Accrued factory payroll, Dec. 31: $55,000 + $5,000 – $45,000 – $12,000 =

$3,000.
6. Work-in-process, Dec. 31: $260,000 + $27,750 – $140,000 – $45,000 –

$56,250 = $46,500.
7. Work-in-process, Jan. 31: $21,000 + $3,000 + 125% of $3,000 = $27,750.
8. Overapplied overhead: $56,250 – $55,000 = $1,250.
Entries in T-accounts are numbered in accordance with the “additional information” in

the problem and are lettered in accordance with the amounts required to be determined.
Direct Materials Inventory

12/31/10 Bal. (given) 20,000
(1) 147,000 a (c) 140,000
1/31/11 Bal. (e) 27,000
Work-in-Process

12/31/10 Bal. (6) 46,500 a (d) 260,000
Direct materials (c) 140,000
Direct labour (b) (g) (3) 45,000
Overhead (g) (a) (7) 56,250
1/31/11 Bal. (b) (7) 27,750
Finished Goods
12/31/10 Bal. (given) 25,000
(d) 260,000 (2) 250,000
1/31/11 Bal. (f) 35,000
Accrued Factory Payroll

(h) 55,000 12/31/10 (5) 3,000
(g) 45,000
(g) 12,000
1/31/11 Bal. (given) 5,000
Factory Department Overhead Control

January charges (given) 55,000 (g) (a) (4) 56,250
Cost of Goods Sold

(f) (2) 250,000
a
Can be computed only after all other postings in the account have been found; for example, (7) must be
computed before (6) in Work-in-Process.
P6-16 (15–20 min.)
This is a solid basic problem concerning overhead application.
1. Department A = $2,170,000 ÷ 350,000 = $6.20 per machine-hour

Department B = $1,000,000 ÷ 125,000 = $8.00 per direct-labour-hour
2. Department A = $6.20 x 3,500 $21,700

Department B = $8.00 x 1,250 10,000
Total applied overhead $31,700
3. Dept. A Dept. B Total

Direct material $12,000 $32,000 $44,000
Direct labour 10,800 10,000 20,800
Applied factory overhead 21,700 10,000 31,700
Totals $44,500 $52,000 $96,500
Unit cost, $96,500 ÷ 200 = $482.50
4. Students must be on guard to get their definitions clear. “Overapplied” essentially

means that “actual” overhead is less than that absorbed by (applied to) the
products worked on during the period.
Computations follow:
Dept. A Dept. B Factory as a Whole
Actual $1,600,000 $1,200,000 $2,800,000
Applied, 300,000 x $6.20
and 120,000 x $8.00 1,860,000 960,000 2,820,000
Underapplied (overapplied) $ (260,000) $ 240,000 $ (20,000)
P6-17 (10–15 min.)
Dell would most likely use a job-cost system with each order considered a job. Because
each order is assembled from a set of common parts, there is a single cost for each
part. Most of the parts are purchased, so the cost is the purchase price. If some parts
are made, the production cost would be used as the cost of the part.
Each order would call for several materials, and each would be added to the order’s job-
cost sheet. Labour would be incurred in assembly, so the direct-labour cost could be
allocated to each order based on the number of hours used for assembly. If assembly is
highly automated, it is possible that no labour is considered “direct,” and labour
becomes one more overhead item.
Overhead costs would be allocated based on one or more cost drivers. Possible drivers
would include direct-labour-hours or cost (if direct labour is measured separately), hours
in assembly, or number of component parts. For a highly automated process, the latter
would be a likely cost driver.
Testing and quality control costs might be part of overhead. Alternately, costs of testing
completed computers could be charged directly to the order (job). If different types of
computers require different amounts of testing, this is a logical allocation method.
P6-18 (15–20 min.)

50,000 Beg. Bal. 100,000 150,000
Dir. Materials 50,000
Dir. Labour 100,000
Applied overhead 150,000
End. Bal. 250,000
Finished Goods Cost of Goods Sold (CGS)

140,000 180,000 180,000
150,000
110,000
(1) CGS comes from the finished-goods account, and so is 140,000 + 150,000 – CGS =
110,000; thus CGS = 180,000.
(2) Let EB = Ending balance

Work-in-process: 100,000 + 50,000 + 100,000 + 150,000 – 150,000 = EB
EB = 250,000.
(3) Budgeted rate (from WIP entries) is 150,000/100,000 = 150% of direct labour costs.
(4) Since overhead is overapplied by $60,000, the adjusted CGS = 180,000 – 60,000 =
$120,000.
P6-19 (15–20 min.)

20,000 50,000 Beg. Bal. 300,000 600,000
50,000 Dir. Materials 50,000
Dir. Labour 100,000
20,000 Applied overhead 450,000
End. Bal. 300,000

100,000 500,000 500,000
600,000 150,000
350,000
200,000
(1) Direct materials (DM) used are 20,000 + 50,000 – DM used = 20,000; DM used is
50,000.
(2) Factory overhead applied is (50,000 + 100,000) x 300% = $450,000.
(3) Cost of goods manufactured (CGM) is (from the WIP account) 300,000 + 50,000 +
100,000 + 450,000 – CGM = 300,000; thus CGM = 600,000.
(4) Initial CGS comes from the finished-goods account, and so is 100,000 + 600,000 –
CGS = 200,000; thus CGS = 500,000. Adjusted CGS is given in the problem as
350,000. Since the company does not prorate, the 150,000 credit to CGS to reconcile
the initial and adjusted CGS amounts must represent the difference between actual and
applied overhead. Since it is a credit (overapplied), the actual factory overhead must be
$450,000 – $150,000 = $300,000.

Cases
C6-1 (15–20 min.)
1. Factory Overhead
Activity Costs Applied
1. 1 x $ 1.20 = $ 1.20
2. 39 x 0.07 = 2.73
3. 28 x 0.20 = 5.60
4. 15 x 0.40 = 6.00
5. 1 x 3.20 = 3.20
6. 8 x 0.60 = 4.80
7. 0.15 x 80.00 = 12.00
8. 0.05 x 90.00 = 4.50
Total $40.03
Direct materials $55.00

Factory overhead applied 40.03
Total manufacturing product cost $95.03
2. Direct labour is no longer traced separately via time tickets to individual

products. Instead, it becomes part of activity cost pools and is included in each
activity’s factory overhead application rate. This reduces accounting costs
because there is no elaborate tracking of labour.
3. Managers would primarily favour this multiple overhead rate, activity-based

costing system because of more accurate product costing. In this way,
managers will have more confidence in their decisions regarding pricing and
emphasizing or de-emphasizing various products. The older system may be
easier to understand but is less believable.
C6-2 (20–30 min.)
1. Machining Finishing Plant

Factory overhead SF960,000 SF800,000 SF1,760,000
Divide by direct labour 300,000 800,000 1,100,000
Application rate 320% 100% 160%
Divide by machine-hours 60,000 20,000 80,000
Application rate SF16 SF40 SF22
2. a. Order
K102 K156
Machining:
Direct materials SF 4,000 SF 4,000
Direct labour 3,000 1,500
Factory overhead applied,
160% of direct labour 4,800 2,400
Finishing:

Total cost SF15,700 SF15,700
b. Order
K102 K156
Machining:
Direct materials SF 4,000 SF 4,000
Factory overhead applied, 1,200 h x
SF16 and 100 h x SF16 19,200 1,600
Finishing:
Total cost SF29,200 SF13,100
3. The answers in 2(b) are preferable to those in 2(a). Why? Because the use of
machine-hours is probably an important cause of increases in the company’s
overhead costs. Machine-hours are cost drivers. The plantwide rate based on
direct labour fails to distinguish between those jobs that make heavy and light
use of machinery. In general, the use of departmental overhead rates is
preferable to plantwide rates. Why? Because the use of key activities (cost
drivers) is pinpointed more accurately. Decisions regarding pricing and product
lines should improve.
C6-3 (90 min) (SMAC)
MEMORANDUM
TO: Wayne Andrews, President, Walnut Furniture Limited

FROM: John Doe, Management Accounting Consultant
SUBJECT: Report on Operations and Management Accounting System of Walnut
Furniture Limited
Attached is my report on the operations and management accounting system of Walnut

Furniture Limited which you had requested. The main recommendations contained in
my report are summarized as follows:
1. Immediately implement a flexible budgeting system based on variable

standard costs.
2. Develop separate standards for custom work versus standard work.
3. Implement a job costing system, including reject costs.

4. Develop a quality control system which would identify causes of rejects in
a timely manner and would encourage workers to reduce the amount of
waste from rejects and maintain a high quality standard.
5. Base bidding on variable costs and contribution margin.
6. Conduct an in-depth analysis to discover which type of contract is most

profitable for Walnut, and focus bidding on the most profitable contracts.
Implementation of these recommendations should result in a much higher success rate

in bidding, better quality production, better control, motivated employees, and higher
profits.
REPORT ON
WALNUT FURNITURE LIMITED
Introduction
During 2013, Walnut experienced an overall increase in total sales; however, net
income after taxes was lower for 2013 than it was for 2012. In order to find the cause of
this trend, the following four areas have been analyzed:
1. Management accounting system.
2. Feasibility of budgeting.
3. Control of rejects.
4. Bidding process.
Each of these areas is analyzed in turn.
Management Accounting System
Management accounting data are required primarily for cost control and bidding. The
nature of the business involves bidding in two distinct markets; therefore, cost data are
needed as a basis for bidding in each market and for monitoring contracts (jobs) in each
category.
Many of the problems with controlling rejects and with the bidding process are caused
by problems with Walnut’s management accounting system. The main problems are as
follows:
1. For cost control, departmental operating costs are compared with those of
the previous year. This is an inappropriate basis for controlling costs. The
previous year’s costs may not have been in control, in which case, they
would be inappropriate benchmarks for future costs. As well, historical
costs do not consider relevant changes in the business environment.

2. The current standard rates are based on full absorption costing, which
does not distinguish between fixed and variable costs. Production and
sales are a function of which bids are won; since these cannot be forecast
accurately, total capacity utilization cannot be accurately predicted. Since
the denominator activity may fluctuate, a full cost system would not be
appropriate.
3. The current standard rates do not distinguish between standard and

customized work. It is probably reasonable to assume that variable costs
per operating hour for standard jobs are not the same as those for
customized jobs. Costs for standard jobs would follow a process-costing
behaviour pattern, while costs for customized jobs would follow a job-
costing behaviour pattern.
4. The existing cost system focuses responsibility for costs on the

departments; however, many of the department costs are fixed and not
under the control of the department supervisors.
5. Labour costs are inappropriately treated as fixed costs. This may be

institutionalizing waste, especially considering that labour is shifted from
department to department.
6. The current system encourages department supervisors to pass on costs

related to rejects without declaring them, resulting in an increase in the
unidentified corporate reject reprocessing account. The system also fails
to encourage quality control.
Considering the size of Walnut’s operation and the fact that it is controlled by the major
shareholder, a sophisticated management accounting system should be put into place.
Expected value techniques could be used by Walnut which should provide fairly
accurate predictions.
Feasibility of Budgeting
As well, the effect of any inaccuracy in contract type and volume predictions can be
minimized by the type of budgeting system which is used.
The most appropriate budgeting system for Walnut would be a flexible budgeting
system where budgets are prepared in contribution format using standard variable costs
for each type of production. Advantages of such a system would be as follows:
1. Analysis of expected profits and costs could be done on a periodic basis.
2. Detailed variance analysis could be conducted which would point out

problem areas and would also be useful for appraising the performance of
the three production departments.
3. The profitability of the two types of production would be highlighted,

indicating where the selling effort should be concentrated.

4. This system would provide a better basis for bid calculation.
5. This system would assist in controlling the costs of rejects.
Control of Rejects
The costs of rejects have increased significantly over the past year, indicating that
current quality controls are inadequate. As previously indicated, the current
management accounting system allows reject costs to be passed on without identifying
the source of the defects. Also, the current practice of shifting labour between
departments could be contributing to the reject problem. Some workers may be working
on jobs that they are not properly trained for, which would result in defects. This is a
serious problem since it not only increases costs, but also may have a detrimental effect
on Walnut’s reputation for quality in the eyes of its customers and potential customers.
Possible actions to help control rejects are as follows:
1. Use only fully trained workers to perform specialized jobs. This may
require upgrading the training of some employees.
2. Assess to what extent rejects are a function of the type of contract versus
avoidable department errors. Once the causes of the rejects are identified,
steps can be taken to reduce or eliminate spoilage.
3. Inspect work more frequently especially when work is transferred from one
department to another. This would prevent further processing of defective
work, thereby reducing reject costs. Also, defects could be corrected
before customers inspect the finished work, thereby improving Walnut’s
reputation for high-quality work.
4. Provide incentives for workers to minimize waste.
5. Determine whether there is a normal unavoidable reject rate for each type
of job. This will make it possible to determine the benefits of installing a
formal quality control system and will also assist in preparing bids.
6. Charge reject costs to the responsible department and to the specific job
where possible.
The Bidding Process
Walnut’s bidding record indicates a low success rate in bids for standard contracts and
a high success rate in bids for customized contracts. The causes of this trend must be
determined before corrective action can be taken. Possible causes are as follows:
1. Walnut may not have a competitive advantage in the standard market.

Competitors in this market may be large companies which are able to
achieve greater economies of scale.

2. Walnut may have a competitive advantage in the custom market, or there
may be few competitors in this market.
3. The success rates in bidding may be a function of how bids are calculated.
From the two sample bids provided, it appears that the estimated
processing/operating hours are understated for customized bids, while
estimated hours for standardized bids may be overstated. Also, the use of
a single set of standard costs for both types of bids may not accurately
relate to the actual costs.
Walnut must improve the method by which it calculates bids. The cost estimates for
bidding should start with identifying direct job costs. These costs should reflect standard
variable costs. Walnut must develop different standard rates for the two types of jobs for
use in bidding. Standard reject costs must also be estimated for each type of job and
included in the direct job-cost estimates. This can be refined further by estimating the
most likely amount of rejects which can be expected for individual jobs and including the
associated costs in the bid.
The overall bidding strategy should recognize the type of business Walnut is seeking.
Currently, sales efforts are being focused on attaining standard contracts. This may not
be the most profitable course of action. The profitability of the two types of contracts
must be analyzed. Available techniques in analyzing profitability include regression
analysis and linear programming (i.e., determining contribution of each type of contract
in relation to capacity utilization). Once profitability is examined, Walnut should consider
specializing in only one market (custom or standard).
Alternatively, the bidding strategy could differentiate the markup rates for the different
types of jobs. Expected values of contribution at various markup rates taking into
consideration the probability of winning the contracts at the various rates should be
determined. The results would then be used to formulate a bidding strategy. This type of
analysis should be repeated periodically to determine whether a change in the strategy
is required in reaction to changes in the market environment. As well, post-completion
analysis of bids won and lost should be conducted periodically to indicate where
improvements may be made for future bidding.
Conclusions
The management accounting system should be restructured to separate fixed and

variable costs, and to set separate standard costs for the standard and customized
types of work. This will allow a flexible budgeting system based on standard variables
costs to be implemented. This will also be essential for a job costing system which
should be used as the basis for bidding.
Together with a quality control system, the revised management accounting system
should reduce the amount of the rejects, provide a basis for performance evaluation,
and improve the motivation of the workers.

Once an analysis of the profitability of the two types of jobs is completed, an appropriate
bidding strategy can be determined and implemented.
C6-4
The purpose of this group project is to help students connect job costing with
information systems. The report can be written, oral, or both. The case does not set a
required length; the instructor can decide the length.
Following are some sample sites obtained in January 2010:
The following site explains and reviews job costing software for construction:
<http://www.constructionsoftwarereview.com/learning_center/articles/abcs-construction-
job-costing-software>
The following site for Turtle Creek Software has a number of links illustrating how job
costing works.
<http://www.turtlesoft.com/business-software-details/construction_job_costing.htm>
The following site explains a scale house integration solution (SHIP) provided by
Slofstra Software Inc., with headquarters in Waterloo, Ontario.
<http://www.slofstra.com/Applications/ship/factsheet.html>
Groups’ success in writing this report will depend mainly on two factors. First, the three
products chosen must be comparable; the search terms construction and manufacturing
help narrow searches, but are general. Groups will have to decide how to specify
comparable software. Second, software cost is a key consideration, and ideally the sites
selected will offer some pricing information. Instructors who prefer to direct students on
these two issues may wish to add instructions to clarify their expectations.

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Management Accounting Canadian 6th

Edition Horngren Solutions Manual

Fundamental Review Material

6-A1 (15–20 min.)

Answers are in thousands.

1. a. Direct materials inventory 360

b. Work-in-process inventory 325

c. Work-in-process inventory 130

d. Factory department overhead control 180

e. Work-in-process inventory 234

f. Finished-goods inventory 625

g. Cost of goods sold 425

Work-in-Process Inventory Cost of Goods Sold____

Copyright © 2012 Pearson Canada Inc. 168

Entries are in British pounds (£).

1. a. Direct materials inventory 109

c. Work-in-process inventory 140

d. Factory department overhead control 92

e. Work-in-process inventory 112

f. Finished-goods inventory 275

g. Cost of goods sold 350

h. Accounts receivable 620

Work-in-Process Inventory Cost of Goods Sold

Copyright © 2012 Pearson Canada Inc. 169

Q6-2 In addition to inventory valuation and income determination, managers want

Copyright © 2012 Pearson Canada Inc. 170

Q6-16 Normal costing is the product-costing method whereby inventory is carried at

Q6-17 The best theoretical method of allocating underapplied or overapplied overhead

Copyright © 2012 Pearson Canada Inc. 171

E6-1 (10–15 min.)

4. Beginning inventory + 8 – 3 = 7. Beginning inventory = 2

E6-2 (10–15 min.)

Amounts are in thousands of dollars.

1. Finished-goods inventory 128

3. Accounts receivable 101

Cost of goods sold 72

Copyright © 2012 Pearson Canada Inc. 172

Cancer Research Project

Total costs $14,047

E6-4 (10 min.)

1. $6,300 + $4,700 = $11,000

3. $4,200 + $7,600 = $11,800

E6-5 (15 min.)

Answers are in thousands of dollars.

Copyright © 2012 Pearson Canada Inc. 173

Cost of houses sold 250

E6-6 (30 min.)

The answers (in millions) are $15, $60, and $200.

__Direct Materials__ Work-in-Process

Finished Goods Cost of Goods Sold

E6-7 (30 min.)

The answers (in millions) are $25, $22, and $32.

Direct Materials Work-in-Process

Finished Goods Cost of Goods Sold

E6-8 (15–20 min.)

Answers are in thousands.

1. a. Direct-materials inventory 450

d. Factory department overhead 175

f. Finished goods 705

g. Cost of goods sold 460

Direct Materials Inventory Finished Goods

E6-9 (5–10 min.)

Case A, $3,400,000 ÷ $2,000,000 = 170% of direct labour cost

E6-10 (15–20 min.)

Direct Materials Work-in-Process