Chapter 2: Calculating Unit Product Costs

Exercise 2-3 (10 minutes)

1. Total direct labor-hours required for Job A-500:

Direct labor cost (a) .................................... $153
Direct labor wage rate per hour (b) .............. $17
Total direct labor hours (a) ÷ (b) ................. 9

Total manufacturing cost assigned to Job A-500:

Direct materials....................................................... $231

Direct labor............................................................. 153
Manufacturing overhead applied ($14 per DLH × 9
DLHs) .................................................................. 126
Total manufacturing cost ......................................... $510

2. Unit product cost for Job A-500:

Total manufacturing cost (a)........................ $510
Number of units in the job (b) ..................... 40
Unit product cost (a) ÷ (b) .......................... $12.75

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Exercise 2-4 (10 minutes)

1 and 2.

The total direct labor-hours required for Job N-60:

Testing &
Assembly Packaging
Direct labor cost (a) .................................... $180 $40
Direct labor wage rate per hour (b) .............. $20 $20
Total direct labor hours (a) ÷ (b) ................. 9 2

The total manufacturing cost and unit product cost for Job N-60 is
computed as follows:

Direct materials ($340 + $25) ................................ $365

Direct labor ($180 + $40) ...................................... 220
Assembly Department ($16 per DLH × 9 DLHs) ....... $144
Testing & Packaging Department ($12 per DLH × 2
DLHs) ................................................................ 24 168
Total manufacturing cost ....................................... $753

Total manufacturing cost (a) .................................. $753

Number of units in the job (b) ................................ 10
Unit product cost (a) ÷ (b) ..................................... $75.30

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Exercise 2-9 (30 minutes)

1. The estimated total overhead cost is computed as follows:

Y = $1,980,000 + ($2.00 per MH)(165,000 MHs)

Estimated fixed overhead....................................... $1,980,000

Estimated variable overhead: $2.00 per MH ×
165,000 MHs ...................................................... 330,000
Estimated total overhead cost ................................ $2,310,000

The plantwide predetermined overhead rate is computed as follows:

Estimated total overhead (a) ..................... $2,310,000

Estimated total machine-hours (b) ............. 165,000 MHs
Predetermined overhead rate (a) ÷ (b) ...... $14.00 per MH

2. Total manufacturing cost assigned to Job P90:

Direct materials....................................................... $1,150

Direct labor............................................................. 830
Overhead applied ($14 per MH × 72 MHs) ................ 1,008
Total manufacturing cost ......................................... $2,988

3a. Given that the company is operating at 50% of its manufacturing

capacity, an argument can be made that the company should pursue
any business opportunities that generate a positive a contribution
margin. Based on the information provided, it appears that Job P90
does generate a positive contribution margin as shown below:

Sales .............................................................. $2,500

Direct materials............................................... $1,150
Direct labor..................................................... 830
Variable overhead applied ($2.00 per MH × 72
MHs) ........................................................... 144 2,124
Contribution margin ........................................ $ 376

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3b. The CFO’s argument is based on the assertion that Job P90 does not
generate enough revenue to cover the cost of the manufacturing
resources that it consumes. However, given that the company is
operating at 50% of its manufacturing capacity, the overhead costs
applied to Job P90 in requirement 2 do not represent the cost of the
overhead resources consumed making Job P90. In other words, the
overhead applied in requirement 2 includes a charge for used and
unused capacity. This reality provides instructors an opportunity to
introduce students to the main idea underlying Appendix 2B.

If we estimate a capacity-based overhead rate for the company and

apply overhead costs to Job P90 using this rate, it reveals that the
revenue generated by the job ($2,500) is still insufficient to cover its
manufacturing costs of $2,556, as computed below:

The estimated total overhead cost (at capacity) is computed as follows

(keep in mind that 165,000 MHs ÷ 50% = 330,000 MHs):
Y = $1,980,000 + ($2.00 per MH)(330,000 MHs)

Estimated fixed overhead....................................... $1,980,000

Estimated variable overhead: $2.00 per MH ×
330,000 MHs ...................................................... 660,000
Estimated total overhead cost ................................ $2,640,000

The predetermined capacity-based overhead rate is computed as follows:

Estimated total overhead (a) ..................... $2,640,000

Estimated total machine-hours (b) ............. 330,000 MHs
Predetermined overhead rate (a) ÷ (b) ...... $8.00 per MH

The total manufacturing cost assigned to Job P90 (using a capacity-based

overhead rate):

Direct materials....................................................... $1,150

Direct labor............................................................. 830
Overhead applied ($8 per MH × 72 MHs) .................. 576
Total manufacturing cost ......................................... $2,556

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Exercise 2-13 (20 minutes)
1. Cutting Department:
The estimated total manufacturing overhead cost in the Cutting
Department is computed as follows:
Y = $264,000 + ($2.00 per MH)(48,000 MHs)
Estimated fixed manufacturing overhead .................. $264,000
Estimated variable manufacturing overhead
$2.00 per MH × 48,000 MHs ................................. 96,000
Estimated total manufacturing overhead cost ............ $360,000

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead (a) . $360,000
Estimated total machine-hours (b) ............... 48,000 MHs
Predetermined overhead rate (a) ÷ (b)......... $7.50 per MH
Finishing Department:
The estimated total manufacturing overhead cost in the Finishing
Department is computed as follows:
Y = $366,000 + ($4.00 per DLH)(30,000 DLHs)
Estimated fixed manufacturing overhead .................. $366,000
Estimated variable manufacturing overhead
$4.00 per DLH × 30,000 DLHs .............................. 120,000
Estimated total manufacturing overhead cost ............ $486,000

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead (a) .. $486,000
Estimated total direct labor-hours (b) ............ 30,000 DLHs
Predetermined overhead rate (a) ÷ (b).......... $16.20 per DLH

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2. Total manufacturing cost assigned to Job 203:
Direct materials ($500 + $310)......................... $ 810
Direct labor ($108 + $360) .............................. 468
Cutting Department (80 MHs × $7.50 per MH) .. $600
Finishing Department (20 DLH × $16.20 per
DLH) ............................................................ 324 924
Total manufacturing cost ................................. $2,202

3. Yes; if some jobs require a large amount of machine time and a small
amount of labor time, they would be charged substantially less overhead
cost if a plantwide overhead rate based on direct labor hours were used.
It appears, for example, that this would be true of Job 203 which
required considerable machine time to complete, but required a
relatively small amount of labor hours.

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Chapter 3: Cost Flows and External Reporting

Exercise 3-2 (20 minutes)

Requirement 1

Cash Raw Materials

(a) 94,00 (a) 94,00 89,00
0 0 (b) 0
(c) 132,0 Bal.
00 5,000
(d) 143,0
00

Work in Process Finished Goods

(b) 78,00 342,0 (f) 342,0 342,0
0 (f) 00 00 (g) 00
(c) 112,0 Bal.
00 0
(e) 152,0
00
Bal. 0

Manufacturing Overhead Cost of Goods Sold

(b) 11,00 152,0 (g) 342,0
0 (e) 00 00
(c) 20,00 22,00 (h) 22,00
0 (h) 0 0
(d) 143,0 Bal. 364,0
00 00
Bal. 0

Requirement 2: The adjusted cost of goods sold is shown above as the

ending balance in the Cost of Goods Sold T-account ($364,000).

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 Exercise 3-3 (20 minutes)

1. Schedule of cost of goods manufactured

Beginning work in process inventory ............... $56,000

Direct materials:
Beginning raw materials inventory ..............$12,000
Add: Purchases of raw materials ................ 30,000
Total raw materials available ...................... 42,000
Deduct: Ending raw materials inventory ..... 18,000
Raw materials used in production ............... 24,000
Deduct: indirect materials used in 5,000
production ................................................
Direct materials used
in production............ $19,000
Direct labor ..................................................... 58,000
Manufacturing overhead applied to work in
process ......................................................... 87,000
Total manufacturing costs added to 164,000
production ....................................................
Total manufacturing costs to account for ........ 220,000
Deduct: Ending work in process inventory ...... 65,000
Cost of goods manufactured ........................... $155,000

2. Schedule of Cost of Goods Sold:

Beginning finished goods inventory .................... $ 35,000

Add: Cost of goods manufactured ...................... 155,000
Cost of goods available for sale .......................... 190,000
Deduct: Ending finished goods inventory............ 42,000
Unadjusted cost of goods sold ............................ 148,000
Add: Underapplied overhead .............................. 4,000
Adjusted cost of goods sold ................................ $152,000

Exercise 3-4 (10 minutes)

1. Manufacturing overhead incurred (a) ......... $215,000

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 Actual direct labor-hours ........................... 11,500
× Predetermined overhead rate ................ $18.20
= Manufacturing overhead applied (b) ....... $209,300

Manufacturing overhead underapplied

(a) – (b) ............................................... $5,700

2. Because manufacturing overhead is underapplied, the journal entry

would increase cost of goods sold by $5,700 and the gross margin
would decrease by $5,700.