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Demonstration Problem

Accounting What the Numbers Mean 7e. Demonstration Problem. Chapter 13 – Exercise 7 Product Costing – Various Issues. Problem Definition.

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Demonstration Problem

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  1. Accounting What the Numbers Mean 7e Demonstration Problem Chapter 13 – Exercise 7 Product Costing – Various Issues

  2. Problem Definition • Gale Co. produces ceramic coffee mugs and pencil holders. Manufacturing overhead is assigned to production using an application rate based on direct labor hours.

  3. Problem Requirements • For 2007, the company’s cost accountant estimated that total overhead costs incurred would be $408,750 and that a total of 54,500 direct labor hours would be worked. Calculate the amount of overhead to be applied for each direct labor hour worked on a production run. • A production run of 750 coffee mugs used raw materials that cost $810 and used 90 direct labor hours at a cost of $9.50 per hour. Calculate the cost of each coffee mug produced. • At the end of April 2007, 530 coffee mugs made in the above production run had been sold and the rest were in ending inventory. Calculate (1) the cost of coffee mugs sold that would have been reported in the income statement and (2) the cost included in the April 30, 2007, finished goods inventory.

  4. Problem Solution • Calculate the predetermined overhead rate for Gale Company based on estimated direct labor hours:

  5. Problem Solution • Calculate the predetermined overhead rate for Gale Company based on estimated direct labor hours: Predetermined Overhead Application Rate =

  6. Problem Solution • Calculate the predetermined overhead rate for Gale Company based on estimated direct labor hours: Predetermined Overhead Application Rate = Estimated Total Overhead Costs

  7. Problem Solution • Calculate the predetermined overhead rate for Gale Company based on estimated direct labor hours: Predetermined Overhead Application Rate = Estimated Total Overhead Costs

  8. Problem Solution • Calculate the predetermined overhead rate for Gale Company based on estimated direct labor hours: Predetermined Overhead Application Rate = Estimated Total Overhead Costs Estimated Direct Labor Hours =

  9. Problem Solution • Calculate the predetermined overhead rate for Gale Company based on estimated direct labor hours: Predetermined Overhead Application Rate = Estimated Total Overhead Costs Estimated Direct Labor Hours $408,750 =

  10. Problem Solution • Calculate the predetermined overhead rate for Gale Company based on estimated direct labor hours: Predetermined Overhead Application Rate = Estimated Total Overhead Costs Estimated Direct Labor Hours $408,750 54,500 DLH = =

  11. Problem Solution • Calculate the predetermined overhead rate for Gale Company based on estimated direct labor hours: Predetermined Overhead Application Rate = Estimated Total Overhead Costs Estimated Direct Labor Hours $408,750 54,500 DLH = = $7.50 per direct labor hour

  12. Problem Solution • Calculate the predetermined overhead rate for Gale Company based on estimated direct labor hours: Predetermined Overhead Application Rate = Estimated Total Overhead Costs Estimated Direct Labor Hours $408,750 54,500 DLH = = $7.50 per direct labor hour For every direct labor hour incurred, $7.50 of overhead will be applied to the production run.

  13. Problem Requirements • For 2007, the company’s cost accountant estimated that total overhead costs incurred would be $408,750 and that a total of 54,500 direct labor hours would be worked. Calculate the amount of overhead to be applied for each direct labor hour worked on a production run. • A production run of 750 coffee mugs used raw materials that cost $810 and used 90 direct labor hours at a cost of $9.50 per hour. Calculate the cost of each coffee mug produced. • At the end of April 2007, 530 coffee mugs made in the above production run had been sold and the rest were in ending inventory. Calculate (1) the cost of coffee mugs sold that would have been reported in the income statement and (2) the cost included in the April 30, 2007, finished goods inventory.

  14. Problem Solution • Step 1: Calculate the total cost of producing 750 mugs:

  15. Problem Solution • Step 1: Calculate the total cost of producing 750 mugs: Raw materials

  16. Problem Solution • Step 1: Calculate the total cost of producing 750 mugs: Raw materials $ 810 Calculation: $810 Raw material amount was given

  17. Problem Solution • Step 1: Calculate the total cost of producing 750 mugs: Raw materials Direct labor $ 810

  18. Problem Solution • Step 1: Calculate the total cost of producing 750 mugs: Raw materials Direct labor $ 810 855 Calculation: 90 direct labor hours * $9.50 per hour

  19. Problem Solution • Step 1: Calculate the total cost of producing 750 mugs: Raw materials Direct labor Overhead $ 810 855

  20. Problem Solution • Step 1: Calculate the total cost of producing 750 mugs: Raw materials Direct labor Overhead $ 810 855 675 Calculation: 90 direct labor hours * $7.50 predetermined overhead rate

  21. Problem Solution • Step 1: Calculate the total cost of producing 750 mugs: Raw materials Direct labor Overhead Total Manufacturing Cost $ 810 855 675

  22. Problem Solution • Step 1: Calculate the total cost of producing 750 mugs: Raw materials Direct labor Overhead Total Manufacturing Cost $ 810 855 675 $ 2,340

  23. Problem Solution • Step 1: Calculate the total cost of producing 750 mugs: Raw materials Direct labor Overhead Total Manufacturing Cost $ 810 855 675 $ 2,340 Total cost of producing 750 mugs

  24. Problem Solution • Step 2: Calculate the cost of producing each mug:

  25. Problem Solution • Step 2: Calculate the cost of producing each mug: Cost per coffee mug produced =

  26. Problem Solution • Step 2: Calculate the cost of producing each mug: Cost per coffee mug produced = Total manufacturing costs

  27. Problem Solution • Step 2: Calculate the cost of producing each mug: Cost per coffee mug produced = Total manufacturing costs

  28. Problem Solution • Step 2: Calculate the cost of producing each mug: Cost per coffee mug produced = Total manufacturing costs Number of mugs produced =

  29. Problem Solution • Step 2: Calculate the cost of producing each mug: Cost per coffee mug produced = Total manufacturing costs Number of mugs produced $2,340 =

  30. Problem Solution • Step 2: Calculate the cost of producing each mug: Cost per coffee mug produced = Total manufacturing costs Number of mugs produced $2,340 750 mugs =

  31. Problem Solution • Step 2: Calculate the cost of producing each mug: Cost per coffee mug produced = Total manufacturing costs Number of mugs produced $2,340 750 mugs = = $3.12 per coffee mug

  32. Problem Solution • Step 2: Calculate the cost of producing each mug: Cost per coffee mug produced = Total manufacturing costs Number of mugs produced $2,340 750 mugs = Unit cost of producing each mug = $3.12 per coffee mug

  33. Problem Requirements • For 2007, the company’s cost accountant estimated that total overhead costs incurred would be $408,750 and that a total of 54,500 direct labor hours would be worked. Calculate the amount of overhead to be applied for each direct labor hour worked on a production run. • A production run of 750 coffee mugs used raw materials that cost $810 and used 90 direct labor hours at a cost of $9.50 per hour. Calculate the cost of each coffee mug produced. • At the end of April 2007, 530 coffee mugs made in the above production run had been sold and the rest were in ending inventory. Calculate (1) the cost of coffee mugs sold that would have been reported in the income statement and (2) the cost included in the April 30, 2007, finished goods inventory.

  34. Problem Solution • Step 1: Calculate the cost of coffee mugs sold that would be reported in the income statement

  35. Problem Solution • Step 1: Calculate the cost of coffee mugs sold that would be reported in the income statement Cost of coffee mugs sold =

  36. Problem Solution • Step 1: Calculate the cost of coffee mugs sold that would be reported in the income statement Cost of coffee mugs sold = Mugs sold

  37. Problem Solution • Step 1: Calculate the cost of coffee mugs sold that would be reported in the income statement Cost of coffee mugs sold = Mugs sold *

  38. Problem Solution • Step 1: Calculate the cost of coffee mugs sold that would be reported in the income statement Cost of coffee mugs sold = Mugs sold * Unit cost =

  39. Problem Solution • Step 1: Calculate the cost of coffee mugs sold that would be reported in the income statement Cost of coffee mugs sold = Mugs sold * Unit cost = 530 mugs

  40. Problem Solution • Step 1: Calculate the cost of coffee mugs sold that would be reported in the income statement Cost of coffee mugs sold = Mugs sold * Unit cost = 530 mugs *

  41. Problem Solution • Step 1: Calculate the cost of coffee mugs sold that would be reported in the income statement Cost of coffee mugs sold = Mugs sold * Unit cost = 530 mugs * $3.12 per mug =

  42. Problem Solution • Step 1: Calculate the cost of coffee mugs sold that would be reported in the income statement Cost of coffee mugs sold = Mugs sold * Unit cost = 530 mugs * $3.12 per mug = $1,653.60

  43. Problem Solution • Step 1: Calculate the cost of coffee mugs sold that would be reported in the income statement Cost of coffee mugs sold = Mugs sold * Unit cost = 530 mugs * $3.12 per mug = $1,653.60 Cost of coffee mugs sold reported in the income statement

  44. Problem Solution • Step 2: Calculate the cost of coffee mugs that would be reported in the finished goods inventory

  45. Problem Solution • Step 2: Calculate the cost of coffee mugs that would be reported in the finished goods inventory Cost of coffee mugs not sold =

  46. Problem Solution • Step 2: Calculate the cost of coffee mugs that would be reported in the finished goods inventory Cost of coffee mugs not sold = Mugs produced

  47. Problem Solution • Step 2: Calculate the cost of coffee mugs that would be reported in the finished goods inventory Cost of coffee mugs not sold = (Mugs produced –

  48. Problem Solution • Step 2: Calculate the cost of coffee mugs that would be reported in the finished goods inventory Cost of coffee mugs not sold = (Mugs produced – Mugs sold)

  49. Problem Solution • Step 2: Calculate the cost of coffee mugs that would be reported in the finished goods inventory Cost of coffee mugs not sold = (Mugs produced – Mugs sold) *

  50. Problem Solution • Step 2: Calculate the cost of coffee mugs that would be reported in the finished goods inventory Cost of coffee mugs not sold = (Mugs produced – Mugs sold) * Unit cost =

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