Midterm Exam Cost Accounting

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Financial Statements
Morton Buildings is a manufacturer of steel buildings. They close their books at the end of the month and prepare financial statements. The statement of cost of goods sold for April is below:

Morton Buildings
Statement of Cost of Goods Sold
For the Month Ending April 30, 2016
($000 omitted)

Inventory of Finished Goods, March 31 $50
Cost of Goods Manufactured $790
Cost of Goods Available for Sale $840
Less Inventory of Finished Goods, April 30 $247
Cost of Goods Sold $593

 Of the utilities, 80% is for the manufacturing plant; the remaining 20% is for the sales and
administrative building.
 All rent is for the office building.
 Property taxes are assessed on the manufacturing plant.
 Of the insurance, 60% is related to manufacturing the steel; the remaining 40% is related to the sales and administrative functions.
 Depreciation expense includes the following:
Manufacturing plant $20,000
Manufacturing equipment $30,000
Office equipment $ 4,000
Total $54,000

The company manufactured 7,825 tons of steel during May.
The inventory balances at May 31, follow:
 Direct materials inventory $23,000
 Work-in-process inventory $220,000
 Finished goods inventory $175,000
Morton Buildings
Account Balances, May 31, 2016
($000 omitted)
Direct materials inventory (April 30) 28
Work-in-process inventory (April 30) 150
Finished goods inventory (April 30) 247
Sales 1,488
Sales discounts 20
Other revenue 2
Purchases of direct materials 510
Direct labor 260
Indirect factory labor 90
Office salaries 122
Sales salaries 42
Utilities 135
Rent 9
Property taxes 60
Insurance 20
Depreciation 54
Interest expense 6
Freight-in for materials purchases 15
1. Prepare a statement of cost of goods manufactured for Morton Buildings for May.
2. Prepare an income statement for Morton Buildings for May.

Problem 2 – Job Costing System
Acme Company uses a job costing system, and factory overhead is applied on the basis of machine hours. At the beginning of the year, management estimated that the company would incur $1,050,000 of factory overhead costs and use 70,000 machine hours.

Acme Company recorded the following events during the month of March.
(a) Purchased 200,000 pounds of materials on account. The cost was $4.00 per pound.
(b) Issued 150,000 pounds of materials to production, of which 20,000 pounds were used as indirect materials. Assume all materials are at $4 per pound.
(c) Incurred $250,000 of direct labor costs and $50,000 of indirect labor costs.
(d) Recorded depreciation on equipment for the month, $18,000.
(e) Recorded $4,000 of insurance costs for the manufacturing property.
(f) Paid $8,000 cash for utilities and other miscellaneous items for the manufacturing plant.
(g) Completed job M11 costing $17,000 and job M12 costing $80,000 during the month and transferred them to Finished Goods inventory account.
(h) Shipped job M12 to the customer during the month. The job was invoiced at 40 percent above cost.
(i) Used 10,000 machine hours during March.

(1) Compute Acme Company’s predetermined overhead rate for the year.
(2) Prepare journal entries to record the events that occurred during March.
(3) Compute the amount of overapplied or underapplied overhead and prepare a journal entry to close overapplied or underapplied overhead into cost of goods sold on March 31.

Problem 3 – Activity-Based Costing
The O’Donnell Company uses volume-based costing system. They apply overhead costs based
on direct labor hours at $250 per direct labor hour.

The company is considering adopting an activity-based costing system with the following data:
Activity Area Cost Driver Cost Driver Rate
Number of parts $1.20
Lathe work Number of turns 0.30
Number of machine
Grinding Number of parts 1.25
Testing Number of units tested 12.00

The two jobs processed in the month of June had the following characteristics:

Job A Job B
Direct materials costs $10,000 $50,000
Direct labor costs $1,000 $10,000
Number of direct labor hours 40 400
Number of parts 500 2,000
Number of turns 25,000 50,000
Number of machine hours 140 1,000
Number of units in each job (all tested) 15 200

1. Compute the unit manufacturing cost of each job under the firm’s current volume-based
costing system.
2. Compute the unit manufacturing cost of each job under the activity-based costing system.
3. Compare the unit manufacturing cost for Jobs A and B computed in requirements 1 and 2.
(a) Why do the two cost systems differ in their total cost for each job?
(b) Why might these differences be important to the Company?

Problem 4 – Process Costing
Williams Co. manufactures a single product that goes through two processes — mixing and cooking. The following data pertains to the Mixing Department for September.

Work-in-process inventory, September 1 38,000 units
Conversion— 60% completed
Work-in-process inventory, September 30 24,000 units
Conversion — 40% completed
Units started into production 86,000 units
Units completed and transferred out ? units
Work-in-process inventory, September 1
Material R $122,300
Material S 143,780
Conversion 194,550
Costs added during September:
Material R 409,660
Material S 246,820
Conversion 526,618

Material R is added at the beginning of work in the Mixing Department. Material S is also added in the Mixing Department, but not until units of product are thirty percent completed with regard to conversion. Conversion costs are incurred uniformly during the process.

(1) Calculate the equivalent units for Material R using the weighted-average method.
(2) Calculate the equivalent units for Material S using the weighted-average method.
(3) Calculate the equivalent units for conversion using the weighted-average method.
(4) Calculate the unit costs using the weighted-average method.
(5) Calculate the cost of units completed and transferred out using the weighted-average method.
(6) Calculate the cost of ending work in process using the weighted-average method.

Problem 5 – Cost Allocation

The Thompson Manufacturing Company has two service departments — manufacturing support and facilities management, and two production departments — assembly and packing/shipping. The distribution of each service department’s efforts to the other departments is shown below:

Support Facilities Assembly Pack/Ship
Support 0% 45% 25% 30%
Facilities 30% 0% 30% 40%

The direct operating costs of the departments (including both variable and fixed costs) were as follows:
Manufacturing Support $240,000
Facilities Management 450,000
Assembly 1,200,000
Pack/Ship 225,000

(Calculate all ratios and percentages to 4 decimal places, for example 33.3333%, and round all dollar amounts to the nearest whole dollar.):
(1) Allocate the service department costs to the production departments using the direct method.
(2) Allocate the service department costs to the production departments using the step method with the support department going first.
(3) Allocate the service department costs to the production departments using the reciprocal method.

Problem 6 – Learning Curve Analysis
Williams Equipment Inc. produced a pilot run of 20 units of a recently developed motor used in the finished products. The pilot run required an average of 12 direct labor hours per motor. Williams has an 80% learning curve on the direct labor hours needed to produce new motors.


Calculate the average direct labor hours per unit for the first 640 motors (including the pilot run)

Problem 7 – Cost Behavior
Caboose Company manufactures locomotive engines. The company is attempting to predict its
maintenance costs more accurately. Maintenance costs are a mixed cost. Maintenance costs and machine hours for the first 4 months of 2016 are as follows:

January $50,320 1,340
February 60,210 1,580
March 58,005 1,450
April 62,370 1,840

using the high low method, calculate unit variable cost and monthly fixed costs.