part 2 -- solutions

FMT1 Problem: Business Income - Bat CompanyBat Co. provides you the following accounting information for its June 30, 20x9 taxation year. Revenues Direct expenses Gross margin Depreciation expense Club dues Meals and entertainment Write-down of investments Net Loss for Accounting Purposes Additional information: Capital cost allowance (i.e., depreciation for tax purposes) is $800,000 for the year. Management decided to write-down the value of investments in subsidiaries. There was no actual disposition of the investments. Required: Compute net income for tax purposes. 850,000 20,000 60,000 $3,000,000 (1,770,000) 1,230,000

(930,000) (500,000) ($200,000)

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FMT2 Problem: CCA - Tofu Inc.Tofu Inc. purchased a building in 20x7 for $100,000. Tofu Inc. intended to use the building to house one of its divisions. In 20x9, the building is sold for $100,000 after Tofu Inc. decided to discontinue the division. Tofu Inc. did not own any other buildings. Maximum CCA was claimed each year. The CCA rate is 4% per year. Required: Determine the impact of the disposition to Tofu Inc.

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FMT3 Problem: CEC - Sprout CorporationSprout Corp. purchased in 20x7 an existing business and acquires, among other assets, a customer list for $20,000 and goodwill for $60,000. In 20x9, the business is sold. Sprout Corp. receives $40,000 for the customer list and $100,000 for the goodwill. Required: Track the Cumulative Eligible Capital Account (CEC) for the relevant years.

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FMT4 Problem: CCA - Blake IncorporatedBlake Inc. leased office space for business use in 2003. The terms of the lease include a 5 year initial term with 2 options for renewal of 2 years each. The annual rental charge for the lease is $120,000 including parking. During 2004, Blake undertook significant improvements to the leased office space, incurring costs of $80,000. Further improvements were made in 2005 at a cost of $20,000. Required: a. b. Calculate the amount of CCA that Blake may claim in relation to the leasehold for 2005. Blake anticipates further improvements in 2006 in the amount of $10,000 and wishes to know the amount of CCA which would be deductible in 2006.

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FMT5 Problem: CEC - Greenwood LimitedOn January 1, 2003, Greenwood Limited purchases another business. The purchase price includes $100,000 with respect to goodwill. On January 1, 2003, the balance in the cumulative eligible capital (CEC) account is nil. There are no further additions to the CEC account during 2004 or 2005. On February 1, 2005, Greenwood sells the business acquired in 2003 for $550,000, including $250,000 in respect of goodwill. Required: a. b. c. Calculate the maximum deduction for CEC in each of the years and the income impact of the sale in 2005. Reconsider the facts outlined above. Calculate the income impact of the sale in 2006 if the business acquired in 2003 is sold for $300,000 including an amount of $80,000 in respect of goodwill. How would your answer change if the business acquired was purchased on March 1, 2003 instead of January 1, 2003?

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FMT6 Problem: CCA - Ranger IncorporatedRanger Inc., a Canadian public company with a December 31st year end has the following balances in the CCA classes for its assets at January 1, 2005. Class 1 (4%) Building Class 43 (30%) Manufacturing Equipment Class 8 (20%) Office Furniture and Equipment Class 10 (30%) Delivery trucks $1,150,000 217,000 155,000 67,000

During the year, Ranger Inc. decided to significantly alter its business model. As a result, the following occurred: 1. 2. Ranger Inc. sold its building and entered into a lease for a new office building. The building, which originally cost $1,300,000, was sold for $1,400,000. All manufacturing would be subcontracted out. Accordingly, the manufacturing equipment was sold for $180,000. The equipment was originally purchased for $250,000. Additional office furniture was purchased at a cost of $27,000. In addition, office furniture was sold for $35,000 (original cost $22,000). Ranger sold one of its trucks for $20,000 (original cost $25,000) and purchased a used truck for $8,000.

3. 4.

Required: Calculate the maximum CCA claim for 2005. Identify any other tax issues arising from the above transactions.

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FMT7 Problem: CCA & Rental Income - Beta CorporationBeta Corp. purchased two rental properties in 2006. Building X cost $40,000; building Y cost $200,000. The buildings earned the following income or loss during fiscal 2006. The CCA rate is 4%. Required: Compute the maximum capital cost allowance that can be claimed for Beta Corp. in fiscal 2006.

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FMT8 Problem: Capital Gains - Magma CorporationIn 20x9, Magma Corp. disposed of two investments. Stock A was sold for $500,000 and cost $345,000. Stock B was purchased for $195,000 and was sold for $150,000. The investments were held as capital property. Magma Corp. paid $5,000 to a broker to dispose of each investment. Required: Calculate the capital gain or loss for 20x9.

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FMT9 Problem: Taxable Income - Jermat Ltd.Jermat Ltd. (Jermat) is a Canadian Controlled Private Corporation carrying on business in Canada. Jermat is 100% owed and operated by Mr. Jermat. Jermats income statement for the year ended December 31, 2005 is as follows: Jermat Ltd. Income Statement For the Year Ended December 31, 2005 Sales Cost of goods sold Gross profit Salaries Amortization Other selling and administrative expenses Operating income Other income and expenses Income before income taxes The following additional information is available: 1. The company uses LIFO for valuation of inventory for accounting purposes. Inventory values under LIFO and FIFO were as follows: January 1, 2005 December 31, 2005 2. 3. LIFO $235,000 $260,000 FIFO $250,000 $280,000 $3,000,000 800,000 2,200,000 350,000 200,000 650,000 1,000,000 56,000 $944,000

Salaries expense includes $50,000 for management bonuses. The bonus will be paid in two equal installments on January 15 and June 15, 2006. Other Selling and administrative expenses include: a. $12,100 paid for damages for breach of contract. b. $10,200 related to landscaping the administrative office premises. The expected life of the landscaping is 12 years. c. $9,500 with regards to the theft by one of the employees. d. $12,000 in respect of the presidents golf club membership. The president uses the facility to entertain prospective clients. $4,000 of the $12,000 was for meals in the club dining room. e. $3,000 for baseball tickets to entertain clients. f. $4,000 in respect of bond premium amortization. g. appraisal fees on assets for sale in the amount of $2,500. h. registered charitable contributions of $38,000, Federal political donations of $3,000 and Provincial political donations of $2,000.

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i. premiums for the life insurance of the presidents wife $3,500. j. $15,000 for property taxes on a parcel of land held for expansion. The expansion is expected to commence in 2007. 4. 5. The company provides a warranty on its products. The warranty liability was $28,000 on January 1, 2005 and $37,000 on December 31, 2005. The president traveled extensively during the year for sales purposes. Reimbursed expenses amounted to $35,000 for travel, including $10,000 for meals and $10,000 for accommodation. The president paid his 16 year old daughter $12,000 during the year for assistance in the filing department. The full amount was deducted for accounting purposes. The company issued new common shares during the year and incurred $20,000 for legal and accounting fees. The fees were included in the amount charged to common shares. "Other income and expenses" includes: a. a gain of $100,000 on the sale of shares of a long-term investment. Jermat paid $20,000 for the shares in 1986 and sold them for $120,000 in 2005. Jermat received a down payment of $30,000 on the sale. The remainder of the proceeds are due in $18,000 instalments on January 31, each year, commencing January 31, 2006. Dividends received from taxable Canadian corporations in which Jermat owns less than 5% of the issued shares Dividends received from taxable Canadian corporations in which Jermat owns 25% of issued shares c. Sale of certain capital property: Cost $10,500 42,000 45,000 8,000 19,600 Proceeds $7,000 11,200 70,000 35,000 1,300 Book value $10,500 15,000 3,500 700 4,200 $12,000 $43,000

6. 7. 8.

b.

Marketable securities Equipment Class 43 Patent Class 14 Government license Trucks*

*The company has decided to lease its trucks in the future and, therefore, disposed of all of its trucks, the only assets in this class.

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10.

Jermat has the following unused losses: Non-capital Fiscal year ended December 31, 1998 Fiscal year ended December 31, 2002 Net Capital $ 27,500

$ 40,000 160,000

11.

The company had the following balances in its tax accounts on January 1, 2005. Depreciable property: Class 3 (5%) Class 8 (20%) Class 10 (two-seat delivery van) (30%) Class 14 Class 43 (30%) Cumulative eligible capital: $29,650 $49,000 8,400 1,500 35,900 35,000

12.

The company made the following capital purchases during the year: Building Manufacturing machinery $315,000 87,000

13.

During the year, the company made an improvement costing $7,000 to a leased warehouse. The 15-year lease commenced 10 years ago and has two successive options to renew of 5 years and 3 years, respectively.

Required: Compute net income for tax purposes and taxable income for the year ended December 31, 2005.

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FMT10 Problem: Federal Tax Payable - Jeb Corporation LimitedJeb Corporation Limited (JEB), a Canadian incorporated company, operates a retail chain of computer supplies stores in Canada and abroad. JEBs taxable income for its most recent year end was $862,000. JEB is taxable in three Canadian provinces and in 2 foreign countries on its business income. JEB earns only business income. JEB is 65% owned by non-Canadian residents. Its gross revenues are 83% earned in Canadian provinces. The % of total salaries and wages paid in Canada are 77%. JEB was not in a taxable position in either of the foreign countries. Required: Calculate JEBs Part I Federal tax payable.

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FMT11 Problem: Small Business Deduction - Botsal Inc.The taxable income for Botsal Inc. (Botsal) for the 2007 taxation year was $624,000. All taxable income was generated from business activities with the exception of $2,000 in foreign interest income on which tax of 10% was withheld. Of the business income, $33,000 was earned outside of Canada. The foreign taxes withheld on this business income were $5,500. Botsal is associated with Latsob Inc. (Latsob) for Canadian tax purposes. The two corporations have agreed to share the small business limit equally. Required: Determine the amount of small business deduction that Botsal may claim for 2007.

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FMT12 Problem: Associated Corporations - Coco Inc.Mrs. Winkler owns 100% of the shares of Coco Inc. Mrs. Winklers daughter, Annie, owns 70% of the shares of Bobot Inc. The remaining shares of Bobot Inc. are held by Coco Inc. Required: Determine whether Coco Inc. and Bobot Inc. are associated corporations.

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FMT13 Problem: Investment Tax Credit - Researchit Inc.Researchit Inc. has current SR&ED expenditures of $500,000 and capital SR&ED expenditures of $350,000. Researchit Inc. is a CCPC whose taxable income for the current and preceding tax years is nil. Required: Determine the investment tax credits for Researchit Inc.

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FMT14 Problem: RDTOH - Peleluc Inc.Peleluc Inc (Peleluc). is a Canadian controlled private corporation that produces and sells gourmet cat food. Due to its overwhelming success, Peleluc was fortunate to invest its excess cash flow in several profitable ventures. It generated investment in earnings during 2007 consisting of $2,500 in interest, $12,000 in dividends and $26,000 in capital gains. $8,000 of the dividends were received from a 25% equity position in another profitable Canadian corporation that received a dividend refund of $10,000 in respect of all dividends paid. The remaining $4,000 was received from various portfolio investments. Peleluc had $10,000 in net capital losses carried forward from 2006 and an RDTOH balance of $6,000 at the end of 2006. During 2006, $27,000 of dividends were paid. Pelelucs taxable income for 2007 is $1.4 million. Required: Calculate the balance in the RDTOH account at the end of 2007 and the dividend refund for 2007.

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FMT15 Problem: Taxable Income & Tax Payable - ABC CorporationABC Corporation is a CCPC, and is in the business of manufacturing children's toys. Mr. and Mrs. ABC are the shareholders and actively manage the business. Over the course of the fiscal year, the following transactions occurred. 1) During the fiscal period, there was active business income of $550,000. All of such profits are attributed to the M&P operations of the business. ABC Corporation also owns a building on the other side of town, which they rent out. Net rent for prior periods were normally much higher, however, this year due to the deteriorating condition of the building, much more was invested in maintenance and repairs. Net rental income before CCA was $23,500. The maximum CCA available for this building for deduction is $60,000. During the course of the year, ABC made a donation of $10,000 to the children's hospital, while Mr. ABC, on behalf of the company donated $15,000 to the Liberal Party of Canada. Depreciation expense of $34,000 was deducted. In June ABC disposed of a piece of equipment in Asset Class 12. The net book value of this asset was $25,000; the asset was sold for proceeds of $15,000. There are four other assets remaining in this asset class. During the course of the year, ABC received dividends from non-connected Canadian Corporations of $32,000 and interest of $5,000. In August, ABC disposed of a piece of land that they have owned since incorporation. The original cost of the land was $12,000 and it sold for $150,000, and had associated costs of $7,500. Losses Carried Over: (Expiration in Brackets) Net Capital Losses (n/a) Non-Capital Losses (1) ABIL (2) 100,000 30,000 1,500

2)

3)

4) 5)

6) 7)

8)

9) 10) 11)

ABC reported Meal and Entertainment expense of $35,000 for the year. The company has a maximum of $55,000 CCA available for deduction (excluding the CCA for the building) ABC reported Income for Accounting Purposes of $656,000.

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Required: Calculate the net income, taxable income, and Federal taxes payable for ABC corporations fiscal year.

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IC1 Problem: Internal Control - MCQ1. Which of the following is not an objective of internal control: a. Effectiveness and efficiency of operations. b. Achievement of earnings per share targets. c. Reliability of financial reporting. d. Compliance with applicable laws and regulations. Recent models of control emphasize the following as critically important for internal control. a. Values b. International expansion. c. Computerization of systems. d. The internet. Which of the following refers to making required purchases at the most favorable prices? a. Economy. b. Efficiency. c. Effectiveness. d. Internal control. Which is an example of a conflict of interest? a. The lack of internal controls. b. A long-term employee. c. A nephew who works for his uncle d. A vendor list. Which is not a limitation of internal control? a. Human error b. Carelessness. c. Fatigue and stress. d. Policies and procedures. A failure of the internal control system to attain intended results may be due to each of the following except for: a. When employees fail to act in the interests of the organization b. Competition is more severe than anticipated. c. The control system is designed inappropriately. d. The control system fails to detect that a control is not working.

2.

3.

4.

5.

6.

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7.

In designing systems of internal control, the following must exist: a. A balance between costs and benefits. b. Activity-based costing c. Variable costing. d. Budgets. Which is not a step in the control cycle? a. Develop objectives. b. Measure results. c. Provide incentives. d. Continuous reappraisal. Which is not one of the five types of controls? a. Compensating. b. Annual. c. Preventive. d. Corrective. Which control emphasizes positive actions? a. Preventative. b. Detective. c. Corrective. d. Directive. Compensating control exists to do all of the following, except for: a. To compensate for possible shortcomings. b. To compensate employees. c. To introduce redundancy. d. To be a fail-safe control. The following represent sets of activities that should be separated from one another for internal control purposes, except for: a. Activities from costs. b. Custody of assets from recording of assets. c. Systems development from maintenance. d. Reconciliation from recording. Decentralization creates internal control problems because of all the following, except for: a. There is confusion about the objectives of the overall organization. b. Decentralized decision makers have interests which differ from the overall organization. c. The existence of more decision-makers creates coordination problems. d. Decentralized decision-makers have access to better information.

8.

9.

10.

11.

12.

13.

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14.

Why might an excessive span of control lead to internal control problems? a. The manager might not be able to effectively supervise subordinates. b. There are too many subordinates. c. There are too few managers. d. The structure would be too tall or too flat. Internal control can be reinforced with: a. Policies and procedures. b. Managers. c. Moral and ethical values. d. The audit committee. Why is computerization a threat to internal control? a. There is no or minimal "paper trail". b. Too fast to see the transactions. c. Minimal involvement of employees. d. The processing is distributed. Which employee group has tended to monitor internal control in the past but which has been downsized in recent years to the detriment of effective internal control? a. Professionals b. Middle managers. c. The audit committee. d. Senior managers. Internal control is necessary because: a. Organizations are large. b. Organizations have many products or services. c. Employees do not always do what the organization desires. d. Organizations operate in many geographical locations. Which of the following is not a method that employees use to manipulate information? a. Smoothing. b. Gaming. c. Decentralization. d. Data falsification. Gaming exists when an employee: a. Alters his or her actions to manipulate a performance indicator. b. Accelerates or delays the planned flow of information. c. Falsifies information. d. Steals from his or her employer.

15.

16.

17.

18.

19.

20.

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21.

Organizational controls include all but: a. Purposes, authorities, and responsibilities b. The organization structure c. Plans d. Decision authority Operational controls include all but: a. Budgets. b. Job descriptions. c. Established policies and procedures d. Accounting and information systems. Personnel controls include all but: a. Recruitment policies and procedures b. Employee orientation and training policies and procedures c. An organization structure. d. Supervision of employees.

22.

23.

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MA1 Solution: Cost Classification & Behavior - MCQ1. 2. 3. d a e

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MA2 Solution: Cost Classification & Behavior SMAa.

Direct labor can be directly traced to a cost object such as a product or service This is accomplished through a source document, such as a time ticket, or through automated tracking systems such as touch screens or bar code scanners at a workstation. An example of direct labor is the hours spent by an artist in creating a painting. Indirect labor cannot be easily traced to a particular product or service (or management chooses not to trace this directly because of the cost involved in attempting direct tracing, and/or the insignificance of the labor cost involved). Often, indirect labor is a common cost applicable to many products. For example, the time involved by an artist in obtaining supplies is an indirect labor cost because the supplies are used on more than one painting.

b.

Nonproductive labor included in direct labor: Some types of nonproductive labor are normal, unavoidable, and/or required by law. Examples include break time and bathroom time. Thus, the amount of time that is budgeted (and must be paid for) as direct labor includes both productive time directly working on a product or service plus an allocation of this nonproductive time. Nonproductive labor classified as indirect labor: Other types of labor time, such as downtime and training time, are classified as indirect labor costs because these activities are (potentially) avoidable and not attributable to an individual product.

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MA3 Solution: Cost Classification & Behavior XDATA Limited1. d Determine slope: ($14,200-$6,200) / (3,200 units 1,200 units) = $4.00/unit Determine intercept: ($14,200) (3,200 units * $4.00/unit) = $1,400 Establish cost function: ($1,400) + (# of units * $4.00/unit) = Total Cost Apply cost function: ($1,400) + (2,000 units * $4.00/unit) = $9,400 e (Outside relevant range).

2.

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MA4 Solution: Cost Classification & Behavior Vettor Companya. High Low Change MachineHours 25,000 10,000 15,000 Overhead Costs 99,000 64,500 34,500

Variable cost = $34,500 / 15,000 = $2.30 Fixed cost = $99,000 (25,000 x $2.30) = $41,500 b. Economic Plausibility Criteria is it reasonable to expect that overhead costs would vary with machine hours? Yes. Goodness of fit criteria the r2 = 91%. This means that 91% of the variation in overhead costs is explained by the variation in machine hours. Significance of slope coefficient the t-value of 15 is greater than 2 making the slope coefficient significantly different from zero. Conclusion: the regression is acceptable. c. Using the high-low method, the overhead equation is: Overhead = $41,500 + 2.30*MH The estimate of overhead costs at 22,000 machine hours is: $41,500 + 2.30(22,000) = $92,100 Using regression analysis, the overhead equation is: Overhead = $39,859 + 2.15*MH The estimate of overhead costs at 22,000 machine hours is: $39,859 + 2.15(22,000) = $87,159

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MA5 Solution: Cost Estimation High-Low Method Alex LimitedThe units produced at Alex Limited are the independent variable. Therefore, the costs associated with the high and low values for units produced are used to calculate the cost function. Units Produced (x) High Low Difference b = slope (variable rate) a = constant = y = bx 31,040 16,120 14,920 $193,960 14,920 Direct Labour Cost (y) $450,080 256,120 $193,960 = $13.00 per unit

= $450,080 - $13.00 (31,040) = $46,560 OR a = constant = y bx

= $256,120 - $13.00 (16,120) = $46,560 y = $46,560 + $13.00x

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MA6 Problem: Manufacturing Cost Crites ManufacturingCrites Manufacturing Company Schedule of Cost of Goods Manufactured For the year ended December 31, 20x5 Direct materials used Direct materials inventory, January 1, 20x5 Direct materials purchased Direct materials inventory, December 31, 20x5 Direct labour Manufacturing overhead Supervisory and indirect labour Supplies and indirect materials Heat light and power ($31,600 x 70%) Amortization ($37,500 x 80%) Property taxes ($9,900 x 75%) Total manufacturing costs Work in process, January 1, 20x5 Work in process, December 31, 20x5 Cost of goods manufactured Crites Manufacturing Company Income Statement For the year ended December 31, 20x5 Sales Cost of goods sold Finished goods inventory, January 1, 20x5 Cost of goods manufactured Finished goods inventory, December 31, 20x5 Gross margin Operating expenses Administrative costs Administrative salaries Marketing costs Heat light and power ($31,600 x 30%) Amortization ($37,500 x 20%) Property taxes ($9,900 x 25%) Operating incomeCMA Ontario

$21,400 32,400 (19,800)

$34,000 52,000

27,300 5,400 22,120 30,000 7,425

92,245 178,245 19,000 (15,600) $181,645

$325,000 $36,700 181,645 (13,600)

204,745 120,255

10,950 43,000 42,600 9,480 7,500 2,475

116,005 $4,250

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MA7 Solution: Manufacturing Cost Stoney Manufacturing1. STONEY MANUFACTURING SCHEDULE OF COST OF GOODS MANUFACTURED FOR THE YEAR ENDING DECEMBER 31, 20X6 Direct materials: Beginning raw materials inventory, Jan. 1 Plus: Net purchases of raw materials Raw materials available Less: Ending raw materials inventory, Dec. 31 Raw materials used Direct labour Factory overhead Indirect materials Indirect labour Factory depreciation (20,000 x .70) Factory taxes Utilities (20,000 x .90) Miscellaneous plant overhead Plant repairs and maintenance Fire Insurance: factory equipment Materials handling costs Total manufacturing costs Beginning work in process inventory, Jan. 1 Less: Ending work in process inventory, Dec. 31 Cost of goods manufactured $ 7,000 3,000 14,000 11,000 18,000 4,000 9,000 3,000 8,000 77,000 $158,000 19,000 $177,000 18,000 $159,000 $ 8,000 47,000 $55,000 4,000 $ 51,000 30,000

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2. STONEY MANUFACTURING SCHEDULE OF COST OF GOODS SOLD FOR THE YEAR ENDING DECEMBER 31, 20X6 Beginning finished goods inventory, Jan. 1 Plus: Cost of goods manufactured Goods available for sale Less: Ending finished goods inventory, Dec. 31 Cost of goods sold1 1

$ 25,000 159,000 $184,000 77,000 $107,000

1. Ending finished goods inventory and cost of goods sold: Gross Profit: Sales x 73.25% 400,000 x .7325 293,000

Cost of goods sold: Sales gross profit 400,000 293,000 107,000

Ending inventory: Goods available for sale cost of goods sold 184,000 107,000 77,000

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3.

STONEY MANUFACTURING INCOME STATEMENT FOR THE YEAR ENDING DECEMBER 31, 20X6 Sales Cost of goods sold Gross profit Operating expenses Selling expenses General and administrative Depreciation (20,000 x .30) Marketing promotions Utilities (20,000 x .10) Courier costs (office) Customer service costs Net income $50,000 18,000 6,000 1,500 2,000 900 3,000 81,400 $ 211,600 $400,000 107,000 $ 293,000

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MA8 Solution: Activity Based Costing Madcap ManufacturingUsing DLH to apply factory overhead at MadCap: Direct materials: Cost per meter ($75,000 / 100,000m) Cost for special order ($0.75 x 500m) Direct labour: Cost per hour ($160,000 / 10,000h) Cost for special order ($16.00 x 60h) Overhead: Rate per DLH ($300,000 / 10,000h) Cost for special order ($30.00 x 60h) Total manufacturing costs Bid mark-up (40% of full manf. cost) Bid price for special order Using ABC to apply factory overhead: Direct materials: Cost per meter ($75,000 / 100,000m) Cost for special order ($0.75 x 500m) Direct labour: Cost per hour ($160,000 / 10,000h) Cost for special order ($16.00 x 60h) Unit level overheads: Pool 1: Material handling Pool rate ($6,000 / 100,000m) Applied OH ($0.06 x 500m) Pool 2: Depreciation & Power Pool rate ([$200K+$8K] / 20,000MH) Applied OH ($10.40 x 100MH) Batch-level overheads: Pool 3: Set-ups Pool rate ($22,500 / 750SU Applied OH ($30.00 x 2SU) 30.00 0.06 $0.75 16.00 $0.75 16.00 30.00

$375.00 960.00 1,800.00 3,135.00 1,254.00 $4,389.00

$375.00 960.00

30.00

10.40

1,040

60.00

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Pool 4: Production scheduling Pool rate ($7,500 / 500 batches) Applied OH ($15.00 x 1 batch) Pool 5: Inspections Pool rate ($16,000/800 inspections) Applied OH ($20.00 x 2 inspections) Product-level overheads: Pool 6: Maintenance Pool rate ($40,000 / 20,000MH) Applied OH ($2.00 x 100MH) Total manufacturing costs Bid mark-up (40% of full manufacturing cost) Bid price for special order

15.00

15.00

20.00

40.00

2.00

200.00 2,720.00 1,088.00 $3,808.00

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MA9 Solution: Activity Based Costing Alaire Corporationa. At least four general advantages associated with activity-based costing for Alaire Corporation include the following. Provides management with a more thorough understanding of complex product costs and product profitability for improved resource management and pricing decisions. Allows management to focus on value-added and non value-added activities so that non valueadded activities can be controlled or eliminated, thus streamlining production processes. Highlights the interrelationship (cause and effect) of activities which identifies opportunities to reduce costs, i.e., designing products with fewer parts in order to reduce the cost of the manufacturing process. Provides more appropriate means of charging overhead costs to products.

b. Variable Overhead POR = $1,120,000 280,000 = $4.00 per DLH Direct Materials Materials Handling @ 10% of DM Direct Labour: 1.5 hours x $14 | 4 hours x $14 Machine Time: .5 hours x $10 | 1.5 hours x $10 Variable OH: 1.5 hours x $4 | 4 hours x $4 Selling Price Gross Profit per unit Volume Total Gross Profit c. Cost Driver Calculations: Material Overhead: Procurement: $400,000 / 4,000,000 Production scheduling: $220,000 / 110,000 Packaging & shipping : $440,000 / 110,000 Variable Overhead: Machine set-ups : $446,000 / 278,750 Hazardous waste disposal: $48,000 / 16,000 Quality control: $560,000 / 160,000 General supplies: $66,000 / 110,000 $1.60 per set-up $3.00 per pound $3.50 per inspection $0.60 per board $0.10 per part $2.00 per board $4.00 per board TV $80 8 21 5 6 120 $150 $30 65,000 $1,950,000 PC $140 14 56 15 16 241 $300 $59 40,000 $2,360,000

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Manufacturing: Machine insertion: $1,200,000 / 3,000,000 Manual insertion: $4,000,000 / 1,000,000 Wave soldering: $132,000 / 110,000 $0.40 per part $4.00 per part $1.20 per board

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Direct Materials Material Overhead: Procurement: $0.10 x 25 | 55 Production scheduling Packaging & shipping : $440,000 / 110,000 Variable Overhead: Machine set-ups : $1.60 x 2 | 3 Hazardous waste disposal: $3.00 x .02 | .35 Quality control: $3.50 x 1 | 2 General supplies Manufacturing: Machine insertion: $0.40 x 24 | 35 Manual insertion: $4.00 x 1 | 20 Wave soldering Selling Price Gross Profit per unit Volume Total Gross Profit

TV $80.00 2.50 2.00 4.00

PC $140.00 5.50 2.00 4.00

3.20 0.06 3.50 0.60

4.80 1.05 7.00 0.60

9.60 4.00 1.20 110.66 150.00 $39.34 65,000 $2,557,100

14.00 80.00 1.20 260.15 300.00 $39.85 40,000 $1,594,000

d. The analysis using standard costs shows that the unit gross profit of the PC Board is almost double that of the TV Board. On this basis, Alaire's management is likely to accept the suggestion of the production manager and concentrate promotional efforts on expanding the market for the PC Boards. However, the analysis using activity-based costs does not support this decision. This analysis shows that the unit dollar gross profit from each of the boards is almost equal, and the total gross profit from the TV Board exceeds that of the PC Board by almost $1,000,000. As a percentage of selling price, the contribution from the TV Board is double that of the PC Board, e.g.. 26 percent versus 13 percent.

CMA Ontario

S- 394

MA10 Solution: Activity Based Costing Johannes IncorporatedRegular mattress: Direct Materials Direct Labour Activity Level Cost Materials Handling Cutting Assembly Product Level Cost: Upstream Activities Downstream Activities Calculation 624,000 2,000 6,000 x 25 = 150,000 150,000 2,000 40,000 x 1.40 = 56,000 56,000 2,000 40,000 x 3.20 = 128,000 128,000 2,000 6,000 x 28 = 168,000 168,000 2,000 given in question given in question Cost per unit Premium mattress: Direct Materials Direct Labour Activity Level Cost Materials Handling Cutting Assembly Product Level Cost: Upstream Activities Downstream Activities Per unit 312.00 75.00 28.00 64.00 84.00 40.00 87.00 690.00

= = = = = = =

Calculation 210,000 500 2,000 x 25 = 50,000 50,000 500 20,000 x 1.40 = 28,000 28,000 500 20,000 x 3.20 = 64,000 64,000 500 2,000 x 28 = 56,000 56,000 500 given in question given in question Cost per unit

= = = = =

Per unit 420.00 100.00 56.00 128.00 112.00 83.00 104.00 1,003.00

CMA Ontario

S- 395

MA11 Solution: Activity Based Costing Uppervale Health Centre1a. The activity-based approach would allocate costs using the appropriate cost drivers and costdriver rates.Calculation of Allocation Base: Patient-years of service = X Number of patients Alcohol 40 80 = = = Drug 50 100 Children 50 100 = = = After-care 60 120 $300,000 200 $200,000 40,000 $800,000 200 = $275,000 5,500 = $50 per test = = = Total 200 400 $1,500/patient-year $5 per square metre $4,000 per patient-year

Patient-years of service Number of patients Medical supplies rate Rent and clinic maintenance rate Admin. cost rate for patient charts, food, and laundry Laboratory service rate

Medical supplies costs Total number of patient-years

Rent and clinic mtce. costs Total amount of square feet of space Admin. costs to manage patient charts, food, laundry Total number of patient-years =

Laboratory services costs Total number of laboratory tests

1b. Activity-based costs for each program and cost per patient-year of the four programs follow:Direct labour: Physicians at $100,000 x 0; 2; 4; 0 Psychologists at $50,000 x 6; 4; 0; 9 Nurses at $25,000 x 4; 6; 4; 9 Direct labour costs Medical supplies1 $1,500 x 40; 50; 50; 60 Rent and clinic maintenance2 $5 x 9,000; 9,000; 10,000; 12,000 Administrative costs to manage patient charts, food, and laundry3 $4,000 x 40; 50; 50; 60 Laboratory services4 $50 x 400; 1,400; 3,000; 700 Total costs Divided by number of patient-years Cost per patient-year1 2

Alcohol -$300,000 100,000 400,000 60,000 45,000 160,000 20,000 $685,000 40 $ 17,125

Drug $200,000 200,000 150,000 550,000 75,000 45,000 200,000 70,000 $940,000 50 $ 18,800

Children $400,000 -100,000 500,000 75,000 50,000 200,000 150,000 $975,000 50 $ 19,500

After-care -$450,000 225,000 675,000 90,000 60,000 240,000 35,000 $1,100,000 60 $ 18,333

Allocated using patient years Allocated using square metres of space 3 Allocated using patient-years 4 Allocated using number of laboratory tests

CMA Ontario

S- 396

MA12 Solution: Job Order Costing Redro Limited1. Balance of W-I-P: Beginning balance Add: Direct materials Direct labour Applied overhead (Note 1) Less: Job orders completed (transferred to finished goods) Ending balance Note 1. Predetermined overhead rate: $2,400,000 240,000 D.L. hours $10/DLH x 12,000 hours = = $10/DLH $120,000 $85,000 $110,000 $180,000 $120,000 ($400,000) $95,000

2.

Under or over applied overhead: Actual overhead incurred Overhead applied to product Underapplied overhead

$129,000 120,000 $9,000

CMA Ontario

S- 397

MA13 Solution: Job Order Costing Tapem Limited1. Predetermined overhead rates: Estimated manufacturing overhead Divisor (DLH for Dept. I and MH for Dept. II) Dept. I $403,000 26,000 $15.50 /DLH Dept. II $352,000 32,000 $11.00

/DLH

Overhead applied to Job 1368: Dept. I Dept. II 89 DLHs x $15.50/DLH 96 MHs x $11.00/MH = = $1,379.50 $1,056.00 $2,435.50

2.

Calculation of under- or overapplied overhead: Actual overhead Applied overhead Dept. I: 28,510 x $15.50/DLH Dept. II: 33,400 x $11.00/MH Dept. I $463,105 $441,905 $21,200 underapplied $367,400 $19,800 overapplied Dept. II $347,600

CMA Ontario

S- 398

MA14 Solution: Job Order Costing Valani CorporationWIP Direct materials inventory To record the issue of direct materials to production. WIP Wages payable or Cash To record direct labour. WIP ($13,500 x 4) Manufacturing overhead To record the application of manufacturing overhead. POR = $600,000 / $150,000 = 4 Finished Goods Inventory WIP To record the completion of Jobs A4, A5 and A6. Job A4: $5,600 OP WIP + 10,000 DM + 5,000 DL + 5,000*4 OH Job A5: $7,800 OP WIP + 20,000 DM + 4,000 DL + 4,000*4 OH Job A6: $16,000 DM + 3,000 DL + 3,000*4 OH Cost of goods sold Finished Goods Inventory To record the sale of Job A4 Accounts receivable (or Cash) Sales To record the sale of Job A4: $40,600 x 1.4 Note: the ending WIP balance should be: Opening balance Direct materials Direct labour Manufacturing overhead applied Less Cost of goods manufactured Proof: Job A7: $4,000 DM + 1,500 DL + 1,500*4 OH 40,600 $50,000 $50,000

13,500

13,500

54,000

54,000

119,400

119,400 $40,600 47,800 31,000 $119,400 40,600

56,840

56,840

$13,400 50,000 13,500 54,000 (119,400) $11,500 $11,500

CMA Ontario

S- 399

MA15 Solution: Job Order Costing Devoe Companya. Raw materials inventory Cash or Accounts Payable To record the purchase of raw materials. WIP Manufacturing overhead Raw materials inventory To record the issue of direct materials to production and the use of indirect materials. WIP (19,500 x $30) Wages payable or Cash To record direct labour. WIP (19,500 x $25*) Manufacturing overhead To record the application of manufacturing overhead. * POR = $500,000 / 20,000 = $25 Manufacturing overhead Accounts Payable or Cash To record the incurrence of manufacturing overhead costs. Finished goods inventory WIP To record cost of goods manufactured (see section b). Cost of goods sold Finished goods inventory To record the cost of goods sold (see section b). $450,000 $450,000

475,000 20,000

495,000

585,000

585,000

487,500

487,500

485,000

485,000

1,525,325

1,525,325

1,543,325

1,543,325

CMA Ontario

S- 400

b.

Devoe Company Schedule of Cost of Goods Manufactured for the year ended December 20x5 Direct materials used Direct labour Manufacturing overhead applied Total manufacturing costs WIP-Beginning WIP - end (Schedule) Cost of goods manufactured $475,000 585,000 487,500 1,547,500 87,000 (109,175) $1,525,325

CMA Ontario

S- 401

Devoe Company Schedule of Cost of Goods Sold for the year ended December 20x5 Finished goods inventory, beginning Cost of goods manufactured Finished goods inventory, ending Cost of goods sold Schedule - Ending WIP Direct materials Direct labour: 560 x $30 | 125 x $30 Manufacturing overhead: 560 x $25 125 x $25 Job A650 $45,000 16,800 14,000 $75,800 $ 265,000 1,525,325 (247,000) $1,543,325 Job A652 $26,500 3,750 3,125 $33,375

c.

Actual manufacturing overhead ($20,000 Indirect MateriaIs + 485,000 Other) Manufacturing overhead applied Under applied overhead i. ii. Cost of goods sold Manufacturing overhead COGS ($1,544,325 - 87,000 WIP-OP - 265,000 FG - OP) WIP FG Balance $1,192,325 108,175 247,000 $1,547,500 17,500 % 77% 7% 16%

$505,000 487,500 $ 17,500 $17,500 Allocation $13,475 1,225 2,800 $17,500

Cost of goods sold Work in Process Finished Goods Inventory Manufacturing overhead

13,475 1,225 2,800

17,500

CMA Ontario

S- 402

MA16 Solution: Job Order Costing Duench Incorporateda. A job order cost system is appropriate for manufacturing, merchandising and service firms that provide individual products or services, or products or services in unique batches. The process characteristic that makes a job order costing desirable is the ability to trace materials and labour directly to the unit or batch. POR = $4,500,000 I 600,000 direct labour hours = $7.50 per DLH The only job in process at May 31, 20x4 is Job DRS114: Costs in opening WIP Direct materials added in May Purchased parts added in May Direct labour added in May Manufacturing overhead applied: 19,500 hours x $7.50 c. Beginning inventory, finished goods Playpens manufactured in May WIP - opening Direct materials added in May Purchased parts added in May Direct labour added in May Manufacturing overhead applied: 4,400 hours x $7.50 Less Sales Beginning inventory Manufactured in May Ending inventory, finished goods d. Cost /Unit $35.00 $250,000 124,000 87,000 200,500 146,250 $807,750 Units 19,400 Total $679,000 420,000 3,000 10,800 43,200 34.00 35.00 34.00 $34.00 15,000 19,400 1,600 13,400 33,000 510,000 (679,000) (54,400) $455,600

b.

If the ending overhead balance at the end of the year is significant, it should be prorated over COGS and the balances in WIP, FG and COGS. If it is insignificant, the ending balance can be closed to COGS, or simply carried forward to the following year.

CMA Ontario

S- 403

MA17 Solution: Job Order Costing Eagleson Companya. 1. PORs are used rather than actual overhead rates for four related purposes: To calculate an appropriate amount of overhead to be included in the cost of products or services. To enable overhead allocation to be made in a timely manner, rather than waiting until total actual overhead costs and hours worked become known at the end of the year. To provide timely product cost information for journal entries transferring completed products from WIP to FG, and from FG to COGS. To normalize the overhead charge: PORs smooth out uncontrollable fluctuations in actual overhead costs that are unrelated to activity or volume levels. Actual overhead rates, if calculated monthly for example, often vary due to seasonal factors.

2. POR = $1,200,000 / 80,000 = $15.00 per MH Applied overhead to October 31 = 73,000 MH x $15 = $1,095,000 3. 6,000 MH x $15.00 = $90,000 4. Actual manufacturing overhead $1,100,000 + 96,000 Manufacturing overhead applied $1,095,000 + 90,000 Under-applied overhead $1,196,000 1,185,000 $ 11,000

5. The ending overhead balance at the end of the fiscal year is $11,000 under-applied. This is less than one percent of the actual overhead costs incurred. Theoretically, proper product costing requires any ending balance, regardless of its significance, to be prorated over all the jobs worked on throughout the year. Insignificant amounts such as this will not distort net income or the ending WIP and FG balances. Thus, from a practical perspective, Eagleson Company is justified in closing the ending overhead balance to COGS. b. WIP Balance, October 31, 20x5 Costs added in November Direct materials Direct labour Manufacturing overhead: 1,000 MH x $15 Job N11-013 $55,000 4,000 12,000 15,000 $86,000

CMA Ontario

S- 404

c.

Ending WIP Direct materials Direct labour Manufacturing overhead: 2,500 MH x $15 | 800 MH x $15 Eagleson Company Schedule of Cost of Goods Manufactured For the year ended November 30, 20x5 Direct Materials Used: Raw materials inventory, beginning Raw material purchases Raw materials inventory, ending Raw materials used Less indirect materials used Direct labour Manufacturing overhead applied Total manufacturing cost WIP, beginning WIP, end Cost of goods manufactured

Job D12-002 $37,900 20,000 37,500 $95,400

Job D12-003 $26,000 16,800 12,000 $54,800

$105,000 1,063,000 (85,000) 1,083,000 (134,000)

$ 949,000 925,000 1,185,000 3,059,000 60,000 (150,200) $2,968,800

CMA Ontario

S- 405

MA18 Solution: Process Costing Equivalent Units ABC CompanyPart A: EQUIVALENT UNITS Direct Material Conversion Costs

PHYSICAL UNITS Beginning WIP inventory + Units started = Physical units to account for Completed WIP, ending 0 13,000 13,000 10,000 3,000 13,000

= Physical units accounted for

(at percentage complete for DM and conversion costs)

10,000 3,000

(3000 x .4)

10,000 1,200

Work done to date (equivalent units under W.A. method) Less: equivalent units for work done on beginning inventory in prior period (at percentage complete in prior year for DM and conversion costs) Work done in current period only (equivalent units under FIFO method)

13,000 (0)

11,200 (0)

13,000

11,200

CMA Ontario

S- 406

Part B: EQUIVALENT UNITS Direct Material Conversion Costs

PHYSICAL UNITS Beginning WIP inventory + Units started = Physical units to account for Completed WIP, ending 8,000 20,000 28,000 22,000 6,000 28,000



(6000 x .8)

22,000 4,800

(6000 x .7)

22,000 4,200


26,800

26,200

(8,000)

8,000 x .25

(2,000)

18,800

24,200

CMA Ontario

S- 407

Part C: EQUIVALENT UNITS Direct Material Conversion Costs

PHYSICAL UNITS Beginning WIP inventory + Units started = Physical units to account for Completed WIP, ending 6,000 40,000 46,000 30,000 16,000 46,000



(16000 x 25%)

30,000 4,000

(16000 x 30%)

30,000 4,800


34,000

34,800

(6000 x 75%)

(4,500)

(6000 x 50%)

(3,000)

29,500

31,800

CMA Ontario

S- 408

MA19 Solution: Process Costing Satarelli Corporationa) Equivalent Units Units transferred out Ending WIP 2,000 x 100% 2,000 x 90% 2,000 x 70% 2,000 x 35% Costs in opening WIP Costs added Cost per unit Total cost/unit = $65.00 Cost of goods transferred out Units transferred out: 4,000 x $65.00 Cost of ending inventory Transferred in costs: 2,000 x $32.00 Direct materials: 1,800 x $20.00 Direct labour: 1,400 x $8.00 Manufacturing overhead: 700 x $5.00 T-Account Perspective WIP - Assembly B $64,700 260,000 TO TI 160,000 CA 150,000 E 114,700 WIP Finishing TI 260,000 $260,000 $64,000 36,000 11,200 3,500 $114,700 Transferred In Costs 4,000 2,000 Direct Materials 4,000 1,800 5,800 $ 20,000 96,000 $116,000 $20.00 Direct Labour 4,000 Mfg Overhead 4,000

1,400 5,400 $ 7,200 36,000 $43,200 $8.00

6,000 $32,000 160,000 $192,000 $32.00

700 4,700 $ 5,500 18,000 $23,500 $5.00

CMA Ontario

S- 409

b) Equivalent Units Units in Opening WIP 1,000 x 0% 1,000 x 0% 1,000 x 40% 1,000 x 50% Units Started and Compl Ending WIP 2,000 x 100% 2,000 x 90% 2,000 x 70% 2,000 x 35% Costs added Cost per unit Total cost/unit = $63.7857

Transferred In Costs -0-

Direct Materials

Direct Labour

Mfg Overhead

-03,000 1,800 4,800 $96,000 $20.00

400 3,000

3,000 2,000

500 3,000

1,400 4,800 $36,000 $7.50

5,000 $160,000 $32.00

700 4,200 $18,000 $4.2857

Cost of goods transferred out Costs in opening WIP Cost to complete opening WIP Direct labour: 400 x $7.50 Manufacturing overhead: 500 x $4.2857 Units started and completed: 3,000 x $63.7857 Cost of ending inventory Transferred in costs: 2,000 x $32.00 Direct materials: 1,800 x $20.00 Direct labour: 1,400 x $7.50 Manufacturing overhead: 700 x $4.2857 T-Account Perspective B TI CA E WIP - Assembly $64,700 261,200 TO 160,000 150,000 113,500 WIP - Finishing TI 261,200

$64,700 3,000 2,143 69,843 191,357 $261,200 $64,000 36,000 10,500 3,000 $113,500

CMA Ontario

S- 410

MA20 Solution: Process Costing Tsizis CorporationTotal spoilage = WIP beginning Started Transferred out WIP ending Less normal spoilage Abnormal spoilage 4,000 16,000 (15,000) (3,000) 2,000 1,300 700 Direct Materials 11,000 1,300 700 3,000 16,000 $81,600 $5.10 Conversion Costs 1,000 11,000 -0-01,000 13,000 $196,690 $15.13

Equivalent Units To complete opening WIP: 4,000 x 25% Good units started and completed Normal spoilage Abnormal spoilage Ending WIP: 3,000 x 100% | 3,000 x 33 1/3 % Costs added* Cost per unit Total cost = $20.23 * Materials used From opening inventory: 2,000 kg. From Nov 3 purchase: 10,000 kg. From Nov 18 purchase 4,000 kg. x $51,500 / 10,000 Cost of units transferred out to Finished Goods Inventory Cost in opening WIP Cost to complete opening WIP 1,000 x $15.13 Cost of units started and completed 11,000 x $20.23 Cost of normal spoilage 1,300 x $5.10

$10,000 51,000 20,600 $81,600 $69,310 15,130 $84,440 222,530 6,630 $313,600

CMA Ontario

S- 411

Cost of ending WIP Direct materials: 3,000 x $5.10 Conversion costs: 1,000 x $15.13 Cost of abnormal spoilage 700 x $5.10 T-Account Perspective WIP B $69,310 DM 81,600 OH 196,690 E 30460 313,600 TO 3,570 AS Finished Goods TI 313,600

$15,300 15,130 $30,430 $3,570

CMA Ontario

S- 412

MA21 Solution: Process Costing Gagnon CompanyPart (a) Total spoilage = WIP beginning Started Transferred out WIP ending Less normal spoilage Abnormal spoilage Transf-in Costs 15,000 46,000 (48,500) (9,000) 3,500 1,500 2,000 Direct Materials Conversion Costs 6,000 33,500 1,125 1,500 2,250 44,375 $382,956 $8.63

Equivalent Units To complete opening WIP: 9,000 x 40% Good units started and completed Normal spoilage Abnormal spoilage Ending WIP 9,000 x 100% | 9,000 x 25% Costs added Cost per unit Total cost = $27.57

33,500 1,500 2,000 9,000 46,000 $298,540 $6.49

33,500 1,500 2,000 37,000 $460,650 $12.45

Cost of units transferred out to Finished Goods Inventory Cost in opening WIP Cost to complete opening WIP CC: 6,000 x $8.63 Cost of units started and completed 33,500 x $27.57 Cost of normal spoilage TI: 1,500 x $6.49 DM: 1,500 x $12.45 CC: 1,125 x $8.63

$361,770 51,780 $413,550 923,595 $ 9,735 18,675 9,709

38,119 $1,375,264

CMA Ontario

S- 413

Cost of ending WIP TI: 9,000 x $6.49 CC: 2,250 x $8.63 Cost of abnormal spoilage TI: 2,000 x $6.49 DM: 2,000 x $12.45 CC: 1,500 x $8.63 T-Account Perspective B DM CC E WIP - Assembly $361,770 1,375,264 TI 50,825 298,540 460,650 382,956 77,826 TO AS WIP - Finishing TI 1,375,264

$58,410 19,417 $77,827 $12,980 24,900 12,945 $50,825

CMA Ontario

S- 414

Part (b) Transf-in Costs 48,500 1,500 2,000 9,000 61,000 $396,190 $6.49492 Direct Materials 48,500 1,500 2,000 52,000 $647,100 $12.44423 Conversion Costs 48,500 1,125 1,500 2,250 53,375 $460,626 $8.63000

Equivalent Units Units Transferred Out Normal spoilage Abnormal spoilage Ending WIP 9,000 x 100% | 9,000 x 25% Costs in OP WIP + Costs Added Cost per unit Total cost = $27.56915

Cost of units transferred out to Finished Goods Inventory Cost of units transferred out 48,500 x $27.56915 Cost of normal spoilage TI: 1,500 x $6.49492 DM: 1,500 x $12.44423 CC: 1,125 x $8.63000 Cost of ending WIP TI: 9,000 x $6.49492 CC: 2,250 x $8.63000 Cost of abnormal spoilage TI: 2,000 x $6.49492 DM: 2,000 x $12.44423 CC: 1,500 x $8.63000 T-Account Perspective B DM CC E WIP - Assembly $361,770 1,375,221 TI 50,823 298,540 460,650 382,956 77,872 TO AS WIP - Finishing TI 1,375,221

$1,337,104 $ 9,742 18,666 9,709

38,117 $1,375,221 $58,455 19,417 $77,872 $12,990 24,888 12,945 $50,823

CMA Ontario

S- 415

MA22 Solution: Process Costing Fortis Manufacturing LimitedProduction costs are: (a) Ending inventory (b) Goods transferred to finished goods inventory (c) Normal spoilage (d) Abnormal spoilage

$169,000 $1,577,480 $116,480 $37,520

See the following page for a complete production cost schedule. The bolded items in the schedule are calculated values.

CMA Ontario

S- 416

PHYSICAL FLOW OF PRODUCTION Physical Units W-I-P, beginning Units started To account for Total spoiled units (normal & abnormal) 4,000 60,000 64,000 5,500

EQUIVALENT UNITS DM Conversion

5,500 52,000 6,500 64,000 (4,000) 60,000

5,500 52,000 5,200 (6500x 80%) 62,700 (1,000) 61,700

Good units completed 52,000 W-I-P, ending 6,500 Accounted for 64,000 Work done to date Less: work done on beginning inv. in prior periods: DM (4,000 x 100%) Conversion (4,000 x 25%) Work done during current periood only FINANCIAL FLOW OF PRODUCTION Total W-I-P, beginning (76 + 11) $ 87,000 Current costs 1,697,000 To account for Divide by equivalent units Cost per equivalent unit Application of total costs: Units completed & trfrd to FG inv.: WIP, beginning Cost to complete beg WIP: Good units started & completed (52,000-4,000) Normal spoilage 52,000 x 8% = 4,160 Total transferred to FG inv. Abnormal spoilage (write off) (5,500 4,160=1,340) Ending W-I-P Total costs accounted for $1,784,000 $28.00

Calculated value: 64,000 52,000-6,500. Equiv units at 100% b/c inspection is at 100%.

Calculated value Calculated value

Calculated value

Cost of Production DM Conversion $1,080,000 $617,000 $1,080,000 60,000 $18.00 $617,000 61,700 $10.00 Calculated value

87,000 30,000 1,344,000 116,480 1,577,480 37,520 169,000 1,784,000

76,000 864,000

(4,000-1000) x $10

11,000 30,000

(48,000 x 18)

(48,000 x 10)

480,000

(4,160 x 18)

74,880

(4,160 x 10)

41,600

(1,340 x 18) (6,500 x 18)

24,120

(1,340 x 10) (5,200 x 10)

13,400

117,000

52,000

1,156,000 DM & conversion cost check: Current period costs Beg inventory costs All costs accounted for 1,080,000 76,000 1,156,000

628,000 617,000 11,000 628,000

CMA Ontario

S- 417

Note to candidates: When doing problems, consider how the problem could be asked in a MCQ format. This question could easily be stated as: The cost of abnormal spoilage for March is: (a) (b) (c) (d) (e) $24,120 incorrect 1340 x 18 -> calculated abnormal spoilage using only the DM rate of $ 18 $37,520 Correct 5500 4160 = 1340 x 28 $74,880 incorrect 4160 x 18 -> calculated normal spoilage using the DM rate $116,480 incorrect 4160 x 28 -> calculated normal spoilage $154,000 incorrect 5500 x 28 -> calculated total spoilage

Each of the incorrect solutions contains common errors that candidates make. This MCQ is the level of difficulty to expect on the entrance exam. A MCQ such as this should take a maximum of 2 minutes. If a candidate understands process costing well, this question could easily be done in less than 2 minutes.

CMA Ontario

S- 418

MA23 Solution: Process Costing Transferred In, No Spoilage - MCIPart 1 FIFO Department A - FIFOPHYSICAL FLOW OF PRODUCTION WIP, beginning (65% complete) Units started To account for Units completed and transferred WIP, ending (75% complete) Physical Units 200 10,000 10,200 8,000 2,200 10,200 EQUIVALENT UNITS DM Conversion

8,000 2,200 10,200 (200) 10,000

(2,200 75%)

8,000 1,650

Total Units accounted for Work done to date Less: Work done on beginning inventory in prior period: DM (100% applied) Conversion (65% applied) Work done during current period

9,650 (130)

(200 65%)

9,520 SEE NOTE 1 BELOW

FINANCIAL FLOW OF PRODUCTION WIP, beginning (DM 2,000 + ConC 6,240) Current costs To account for Divide by equivalent units Cost per equivalent unit Application of Total Costs (See Note 2 below): Units started & completed (8,000 - 200 = 7,800) Cost to complete beginning inventory: Beginning inventory carry forward Material added to complete (0% added) Conversion Cost added to complete (35% to complete) Total cost of goods transferred to Dept B Ending WIP Total costs accounted for DM & Conversion cost reconciliation

$ 8,240 596,400 $604,640 $ 62.04000 $483,912 8,240 0 3,500 $495,652 108,988 $604,640

COST OF PRODUCTION $120,400 $476,000 10,000 $ 12.0400 $ 93,912 2,000 0 26,488 9,520 $ 50.00000 $390,000 6,240 3,500

(200 x 35% x 50.0000)

(2,200 12.0400)

(1,650 50.00000)

82,500

$122,400 Current costs Beginning inventory costs All costs accounted for $120,400 2,000 $122,400

$482,240 $476,000 6,240 $482,240

CMA Ontario

S- 419

Note 1: Candidates should note that applying logic will quickly and easily yield the answer (as opposed to memorization, which will fail you on the entrance exam). As an example, using logic to calculate the equivalent units for conversion results in the following: Dept A FIFO Since FIFO isolates the work that is done during the month, the question is What conversion was added this month? Solution, using logic and not memorization: Note that conversion is added evenly throughout the process, and that beginning WIP was 65% complete with respect to conversion and ending WIP is 75% complete with respect to conversion. Conversion added to units that were in beginning WIP the beginning WIP was 65% complete and conversion occurs evenly, therefore conversion that would be added to the units this month is 200 x 35% last month 65% of conversion was added, so that means that this month the remainder, 35% (calculated as 100% - 65%) must be added Conversion added to units that were started and completed First it is necessary to calculate how many units were started and completed: Units started Units in ending WIP Therefore, units started and completed = since the units were completed, conversion must have been added to all of them Conversion added to units that are in ending WIP: In ending WIP there are 2,200 units that are 75% complete with respect to conversion since conversion occurs evenly, and the units are 75% complete, these units have 2,200 x 75% conversion applied to them. This is the EU with respect to conversion for ending WIP. Total units that have conversion in them where the conversion was applied this month this is the total EU for conversion in Dept A under FIFO 70

10,000 (2,200) 7,800

7,800

1,650

9,520

CMA Ontario

S- 420

Note 2: Often candidates have difficulty understanding the application of total costs using FIFO. These costs can be determined using logic. Recall that under FIFO, the cost per equivalent unit (EU) is calculated based on costs incurred this month. The question then is what happens to the cost of beginning WIP? These costs are merely added to the cost of the units started and completed this month. The below table shows how to think about this logically: Application of total costs: 1. Units started and completed this month: Since these units were started and completed, all costs (DM & Conversion) related to these units are applied to them. Firstly, it is necessary to determine the units that were started and completed this month: Units started Units in ending WIP inventory Units started and completed this month Cost of the units started and completed: 7,800 x 62.040 2. Since FIFO isolates the work and cost that was done this month, it is necessary to determine the cost incurred this month to finish the units that were in beginning WIP inventory Beginning WIP inventory was 100% complete with respect to DM. Therefore, the DM cost incurred this month to finish WIP inventory is zero Beginning WIP inventory was 65% complete with respect to conversion. That means that this month 35% of conversion on the beginning WIP units of 200 took place, or 70 EU [200 x 35%]. Therefore, the conversion cost that was incurred this month to finish beginning WIP inventory is 70 x $ 50.00 per EU Cost of beginning WIP At the beginning of this month, there was $ 8,240 in beginning WIP. The question posed earlier was what happens to this cost?. This cost is merely carried forward and added to the costs that were incurred this month, so that the total cost of the units transferred to Department B can be determined. Total cost transferred

10,000 (2,200) 7,800 $483,912

0 3,500 3,500

3.

8,240

$ 495,652

CMA Ontario

S- 421

PHYSICAL FLOW OF PRODUCTION WIP, beginning (90% complete) Units Transferred in To account for Good units completed & transferred to FG WIP ending : 1,000 units 75% completed 400 units 95% completed Accounted for Work done to date Physical Units 400 8,000 8,400 7,000 1,000 400 8,400 Transf. In

Department B - FIFO


7,000 1,000 400 8,400 (400) 8,000

7,000(1,000 0%) (400 100%)

7,000(1,000 75%) (400 95%)

0

750

400

380

7,400 -7,400 SEE NOTE 1 BELOW COST OF PRODUCTION -14,800 $14,800 7,400 $ 2.00 $13,200 -800

8,130

Less: Work done on beginning inventory in prior period: DM (DM added at 95% completion) Conversion (400 x 90%) Work done during current period

(360) 7,770

FINANCIAL FLOW OF PRODUCTION WIP, beginning(Con $6,000 + Tran $24,800)

$ 30,800 638,402 $669,202 $ 80.4236 $530,796 30,800 800 659 563,055

-495,652 $495,652 8,000 $ 61.9565 $408,913 24,800

-127,950 $127,950 7,770 $ 16.4671 $108,683 6,000(400 x 10% x 16.4671)

Current costs To account for Divide by equivalent units Cost per equivalent unit Application of total costs: Units started & completed (7,000 400) Cost to complete beginning inventory: Beginning inventory - completed Material (100% added) Conversion Cost (10% added) Total cost of goods transferred to FG Ending WIP: 1,000 units 75% completedDM added after 95% completion

(400 x 2)

659

74,307 31,840 106,147 $669,202

(1,000 61.9565) (400 61.9565)

61,957

(1,000 0% 2) (400 100% 2)

0

(1,000 75% 16.4671) (400 95% 16.4671)

12,350

400 units 95% completed

Total ending WIP

24,783

800

6,257

Total costs accounted for (Minor differences due to rounding)

$520,453

$14,800

$133,949

CMA Ontario

S- 422

Note 1: Candidates should note that applying logic will quickly and easily yield the answer (as opposed to memorization, which will fail you on the entrance exam). As an example, using logic to calculate the equivalent units for DM results in the following: Dept B FIFO Since FIFO isolates the work that is done during the month, the question is What DM was added this month? Solution, using logic and not memorization: Note that DM is added at 95% complete in Department B. DM added to units that were in beginning WIP the beginning WIP was 90% complete and DM is added at 95% complete, therefore DM would be added to the units this month DM added to units that were started and completed First it is necessary to calculate how many units were started and completed: Units started (these are the units that were transferred from A) Units in ending WIP Therefore, units started and completed = since the units were completed, DM must have been added to all of them DM added to units that are in ending WIP: 1. 1,000 units are 75% complete since DM is added at 95% these units have no DM in them 2. 400 units are 95% complete since DM is added at 95% these units have DM in them Total units that have DM in them this is the EU for DM in Dept B under FIFO 400

8,000 (1,400) 6,600

6,600

0 400 7,400

CMA Ontario

S- 423

Part 2 Weighted Average Department A Weighted AveragePHYSICAL FLOW OF PRODUCTION WIP, beginning Units started To account for Units completed and transferred WIP, ending Total Units accounted for Work done to date FINANCIAL FLOW OF PRODUCTION WIP, beginning Current costs To account for Divide by equivalent units Cost per equivalent unit Application of Total Costs: Units completed and transferred to Dept B Ending WIP Physical Units 200 10,000 10,200 8,000 2,200 10,200 EQUIVALENT UNITS DM Conversion

8,000 2,200 10,200

(2,200 75%)

8,000 1,650 9,650

$ 8,240 596,400 $604,640 $61.97306 $495,784 108,856 $604,640

COST OF PRODUCTION $ 2,000 $ 6,240 120,400 476,000 $122,400 10,200 $ 12.0000 $ 96,000 $482,240 9,650 $ 49.97306 $399,784

(8,000 12)

(8,000 49.97306)

(2,200 12)

26,400

82,456(1,650 49.97306)

$122,400 DM & Conversion cost reconciliation

$482,240

Current costs Beginning inventory costs All costs accounted for

$120,400 2,000 $122,400

$476,000 6,240 $482,240

CMA Ontario

S- 424

Department B Weighted AveragePHYSICAL FLOW OF PRODUCTION WIP, beginning Units Transferred in To account for Good units completed & transferred WIP ending 1,000 units 75% completedDM added after 95% completion

EQUIVALENT UNITS Physical Units 400 8,000 8,400 7,000 1,000 400 8,400 Transf. In DM Conversion

7,000 1,000 400 8,400

7,000(1,000 0%) (400 100%)

7,000(1,000 75%) (400 95%)

0

750

400 units 95% completed Accounted for Work done to date FINANCIAL FLOW OF PRODUCTION WIP, beginning(Con $6,000 + Tran $24,800)

400

380

7,400 COST OF PRODUCTION $ 0 14,800 $14,800 7,400 $ 2.00 $14,000 0

8,130

$ 30,800 638,534 $669,334 $ 80.45021 $563,151 74,331

$ 24,800 495,784 $ 520,584 8,400 $ 61.9742 $433,819 61,974

$ 6,000 127,950 $133,950 8,130 $ 16.47601 $115,332 12,357

Current costs

To account for Divide by equivalent units Cost per equivalent unit Application of total costs: Units completed & transferred to FG (7000) Ending WIP: 1,000 units 75% completed 400 units 95% completed Total ending WIP

(1,000 61.9742) (400 61.9742)

(1,000 0% 2) (400 100% 2)

(1,000 75% 16.4760) (400 95% 16.4760)

31,851 106,182 $669,333

24,790

800

6,261

Total costs accounted for (Minor differences due to rounding)

$520,583

$14,800

$133,950

CMA Ontario

S- 425

MA24 Solution: Process Costing - Transferred In Costs & Spoilage WargoDepartment APHYSICAL FLOW OF PRODUCTION WIP, beginning (60% complete) Units started To account for Good units completed and transferred WIP, ending (75% complete) Total Spoilage (Normal & Abnormal) Total Units accounted for Work done to date FINANCIAL FLOW OF PRODUCTION WIP, beginning Current costs To account for Divide by equivalent units Cost per equivalent unit Application of Total Costs: Good Units completed & transferred (165,000) Normal Spoilage (165,000 2% = 3,300) Total cost of goods transferred to Dept B Abnormal Spoilage (5,000 - 3,300 = 1,700) Ending WIP Total costs accounted for (difference of $ 1 due to rounding) DM & Conversion cost reconciliation(200,000 - 165,000 - 30,000)

EQUIVALENT UNITS Physical Units 25,000 175,000 200,000 165,000 30,000 5,000 200,000 DM Conversion

165,000 30,000 5,000 200,000

(30,000 75%) (5,000 80%)

165,000 22,500 4,000

191,500

$ 182,500 1,583,250 $1,765,750 $ 9.06

COST OF PRODUCTION $ 97,500 $ 85,000 612,500 970,750 $710,000 200,000 $ 3.55000 $585,750 $1,055,750 191,500 $ 5.51305 $909,653 14,554

$1,495,403 26,269 $1,521,672 13,533 230,544 $1,765,749

(165,000 3.55) (3,300 3.55)

(165,000 5.51305) (3,300 80% 5.51305)

11,715

(1,700 3.5500)

6,035

(1,700 80% 5.51305) (30,000 75% 5.51305)

7,498

(30,000 x 3.5500)

106,500

124,044

$710,000

$1,055,749


$612,500 97,500 $710,000

$ 970,750 85,000 $1,055,750

CMA Ontario

S- 426

Department BPHYSICAL FLOW OF PRODUCTION WIP, beginning (90% complete) Units Transferred in To account for Good units completed & transferred WIP ending (50% complete) Total Spoilage (Normal & Abnormal) Accounted for Work done to date FINANCIAL FLOW OF PRODUCTION WIP, beginning Current costs To account for Divide by equivalent units Cost per equivalent unit Application of total costs: Good Units completed & trfrd (160,000 units) Normal Spoilage (160,000 5% = 8,000) Total cost of goods transferred to FG Abnormal Spoilage Write off Ending WIP Total costs accounted for (Difference of $ 2 due to rounding)(10,000-8,000 = 2,000) (180,000 - 160,000 - 10,000)

EQUIVALENT UNITS Physical Units 15,000 165,000 180,000 160,000 10,000 10,000 180,000 Transf. In DM Conversion

160,000 10,000 10,000 180,000

160,000 0 0 160,000

(10,000 50%) (10,000 95%)

160,000 5,000 9,500

174,500

$ 297,900 4,610,424 $4,908,324 $ 28.04

COST of PRODUCTION $ 135,900 $ 0 1,521,672 384,000 $1,657,572 180,000 $ 9.20873 $1,473,397 73,670 $384,000 160,000 $ 2.40 $384,000 0

$ 162,000 2,704,750 $2,866,750 174,500 16.42837 $2,628,539

$

$4,485,936 198,526 $4,684,462 49,631 174,229 $4,908,322

(8,000 95% 16.42837)

124,856

(2,000 9.20873) (10,000 9.20873)

18,417

0 0

(2,000 95% 16.42837) (5,000 16.42837)

31,214

92,087

82,142

$1,657,571

$384,000

$2,866,751

CMA Ontario

S- 427

MA25 Solution: Process Costing Transferred In Costs and Spoilage JerdisDepartment A FIFOPHYSICAL FLOW OF PRODUCTION WIP, beginning (75% complete) Units started To account for Good Units completed and transferred WIP, ending (80% complete) Spoilage, inspection at 90% (24,000 - 22,500 = 1,500): Normal Spoilage (19,000 5% = 950) Abnormal Spoilage (1,500 - 950 = 550) (only 90% of conversion cost applied to spoilage b/c inspection at 90%) Total Units accounted for Work done to date Less: Work done on beginning inventory in prior period: DM (100% applied) Conversion (75% applied) Work done during current period FINANCIAL FLOW OF PRODUCTION WIP, beginning (DM 42,000 + ConC 21,000) Current costs To account for Divide by equivalent units Cost per equivalent unit Application of Total Costs: Good Units started & completed Physical Units 4,000 20,000 24,000 19,000 3,500 22,500 950 550 24,000 950 550 24,000 (4,000) 20,000(950 x .90)


19,000 3,500

(3,500 80%)

19,000 2,800

855

(550 x 90%)

495

23,150 (3,000) 20,150

(4,000 75%)

$ 63,000 365,230 $428,230 $ 18.20

Cost of Production $200,000 $165,230 20,000 $ 10.00(15,000 x 10.00)

$

20,150 8.20

(19,000 4,000)

$273,000 63,000 0 8,200 16,511 $360,711 9,559 57,960 $428,230

$150,000 42,000 0 (950 x 10.00)

$123,000(15,000 x 8.20)

Beginning inventory costs: Beginning inventory previously completed Material (0% added b/c added last period) Conversion Cost (25% added b/c 75% done last period) Cost of Normal Spoilage Total cost of goods transferred to Dept B Abnormal cost (write off) Ending WIP Total costs accounted for DM & Conversion cost reconciliation

(4,000 x 25% x 8.20)

21,000 8,200 7,011

9,500

(855 x 8.20)

$201,500 5,500 35,000

(550 10.00)

$159,211 4,059 22,960

(495 8.20)

(3,500 10.00)

(2,625 8.20)


$186,230 $165,230 21,000 $186,230

CMA Ontario

S- 428

Department B - FIFOPHYSICAL FLOW OF PRODUCTION WIP, beginning (70% complete) Units Transferred in To account for Good units completed & transferred WIP ending (85% complete); DM added at 98% Spoilage (Total = 1,000 units): Normal Spoilage (17,500 4%) Abnormal Spoilage (1,000 - 700) (No DM added & 95% conv. applied) (No DM added & 95% conversion applied) Physical Units 2,500 19,000 21,500 17,500 3000 700 300 Transf. In


17,500 3,000 700 300 21,500(2,500 x 100%)

(3000 0%)

17,500 0

(3,000 85%)

17,500 2,550 665 285

0 0 17,500 0 17,500

(700 x 95%)

(300 x 95%)

Work done to date 21,500 Less: Work done on beginning inventory in prior period No material (added this period), all transfer in, conversion at 70% Work done during current period FINANCIAL FLOW OF PRODUCTION WIP, beginning (Con $26,250 + Tran $45,500) Current costs To account for Divide by equivalent units Cost per equivalent unit Application of total costs: Units started & completed (17,500 - 2,500 = 15,000) Beginning inventory costs: Beginning inventory - previously completed transfer in (0% added) Material (100% added this period) Conversion Cost (30% added this period) Normal Spoilage Total cost of goods transferred to FG Abnormal Spoilage Ending WIP 85% completed Total costs accounted for (difference of $ 1 due to rounding)

21,000(2,500 x 70%)

(2,500) 19,000

(1750)

19,250

$ 71,750 674,836 $746,586 $ 35.53 $532,886 71,750 0 6,125 10,568 22,659 $643,988 9,711 92,886 $746,585

-$360,711 $360,711 19,000 $ 18.98479 $284,772 45,500 0 (700 x 18.98479)

COST of PRODUCTION --$42,875 $271,250 $42,875 17,500 $ 2.45 $36,750 0 6,125 0 $271,250 19,250 $ 14.09091 $211,364 26,250 (2,500 x 30% x 14.09091)

(15,000 x 18.98479)

(15,000 x 2.45)

(15,000 x 14.09)

(2,500 x 2.45)

10,568

13,289

(700 x 95% x 14.09)

9,370

(300 x 18.98479)

5,695

0 0 $42,875

(300 x 95% x 14.09091)

4,016

(3,000 x 18.98479)

56,954

(3,000 x 85% x 14.09091)

35,932

$406,210

$297,500

CMA Ontario

S- 429

Department A

- Weighted Average MethodEQUIVALENT UNITS Physical Units 4,000 20,000 24,000 19,000 3,500 950 550 24,000 DM Conversion

PHYSICAL FLOW OF PRODUCTION WIP, beginning (75% complete) Units started To account for Units completed and transferred WIP, ending (80% complete) Spoilage (24,000 - 22,500 = 1,500): Normal Spoilage (19,000 5% = 950) Abnormal Spoilage (1,500 - 950 = 550) (only 90% of conversion cost applied to spoilage) Total units accounted for Work done to date FINANCIAL FLOW OF PRODUCTION WIP, beginning Current costs To account for Divide by equivalent units Cost per equivalent unit Application of Total Costs: Good units completed and transferred (19,000) Cost of Normal Spoilage Total cost of goods transferred to Dept B Abnormal Cost (write off) Ending WIP Total costs accounted for (difference of $ 1 due to rounding) DM & Conversion cost reconciliation

19,000 3,500 950 550 24,000

(3,500 80%)

19,000 2,800 855

(950 x 90%)

(550 x 90%

495

23,150

$ 63,000 365,230 $428,230 $ 18.12782 $344,428 16,457 $360,885 9,528 57,817 $428,231

COST OF PRODUCTION $ 42,000 $ 21,000 200,000 165,230 $242,000 24,000 $ 10.08333 $191,583 $186,230 23,150 $ 8.04449 $152,845

(19,000 x 10.08333)

(19,000 x 8.04449)

(950 x 10.08333)

9,579

(855 x 8.04449)

6,878

5,546(550 x 10.08333)

3,982(455 x 8.04449)

35,292(3,500 10.08333)

22,525(2,800 8.04449)


$186,230 $165,230 21,000 $186,230

CMA Ontario

S- 430

Department B - Weighted Average MethodPHYSICAL FLOW OF PRODUCTION WIP, beginning Units Transferred in To account for Good units completed & transferred WIP ending (85% complete); DM added at 98% Spoilage (1,000 units): Normal Spoilage (17,500 4%) Abnormal Spoilage (1,000 - 700) (No DM added & 95% conversion applied) Accounted for Work done to date FINANCIAL FLOW OF PRODUCTION WIP, beginning Current costs To account for Divide by equivalent units Cost per equivalent unit Application of total costs: Good units completed & transferred (17,500) Normal Spoilage Total cost of goods transferred to FG Abnormal Spoilage Ending WIP 85% completed Total costs accounted for Physical Units 2,500 19,000 21,500 17,500 3,000 700 300 21,500 Transf. In


17,500 3,000 700 300 21,500

17,500(3,000 0%)

17,500(3,000 85%)

0

2,550 665 285

0 0 17,500

(700 x 95%)

(300 x 95%)

21,000

$ 71,750 675,010 $746,760 $ 35.51829 $621,570 22,652 $644,222 9,708 92,830 $746,760

COST of PRODUCTION $ 45,500 $ 0 360,885 42,875 $406,385 21,500 $18.90162 $330,778 13,231 $42,875 17,500 $ 2.45 $42,875 0

$ 26,250 271,250 $297,500 21,000 $14.16667 $247,917 9,421

(17,500 x 18.90162)

(17,500 x 2.45)

(17,500 x 14.16667)

(700 x 18.90162)

(665 x 14.16667)

(300 x 18.90162)

5,670

0 0 $42,875

(285 x 14.16667)

4,038

(3,000 x 18.90162)

56,705

(2,550 x 14.16667)

36,125

$406,384

$297,501

CMA Ontario

S- 431

MA26 Solution: Process Costing Transferred In Costs and Spoilage - Rauz Department APHYSICAL FLOW OF PRODUCTION WIP, beginning Units started To account for Units completed and transferred WIP, ending Spoilage (67,500 - 64,000 = 3,500): Normal Spoilage (60,000 5% = 3,000) Abnormal Spoilage (3,500 - 3,000 = 500)(only 85% of conversion applied to spoilage)

EQUIVALENT UNITS Physical Units 3,100 64,400 67,500 60,000 4,000 3,000 500 DM Conversion

60,000 4,000 3,000 500 67,500 (3,100) 64,400

(4,000 35%)

60,000 1,400 2,550 425

(3,000 X 85%)

(500 X 85%)

Total Units accounted for 67,500 Work done to date Less: Work done on beginning inventory in prior period: DM (100% applied b/c DM added last period) Conversion (70% applied b/c 70% added last period) Work done during current period FINANCIAL FLOW OF PRODUCTION WIP, beginning (DM 21,700 + Conv 11,935) Current costs To account for Divide by equivalent units Cost per equivalent unit Application of Total Costs: Units started & completed (60,000 3,100) Cost of beginning inventory: Beg. inventory - previously completed Material (0% added b/c added last period) Conversion Cost (30% added this period) Cost of Normal Spoilage Total cost of goods transferred to Dept B Abnormal cost (write off) Ending WIP Total costs accounted for(Difference of $ 1 due to rounding)

64,375 (2,170)

(3,100 70%)

62,205

$ 33,635 314,975 $348,610 $ 4.96306 $282,398 33,635 0 1,969 13,937 $331,939 $ 2,323 14,349 $348,611 $

COST OF PRODUCTION $183,300 $131,675 64,400 2.84627(56,900 x 2.84627)

$

62,205 2.11679(56,900 x 2.11679)

$161,953 21,700 0 -

$120,445 11,935 1,969 5,398 900

(3,100 x 30% x 2.11679)

(3,000 x 2.84627)

8,539

(2,550 x 2.11679)

(500 x 2.84627)

$ 1,423

(425 x 2.11679)

$

(4,000 x 2.84627)

11,385

(1,400 x 2.11679)

2,964

$205,000 $183,300 21,700 $205,000

$143,611 $131,675 11,935 $143,610

DM & Conversion cost reconciliation


CMA Ontario

S- 432

Department BPHYSICAL FLOW OF PRODUCTION WIP, beginning (60% complete) Units Transferred in To account for Good units completed & transferred W-I-P, ending (80% complete) DM added @ 75% Spoilage (64,500 - 58,500 = 6,000): Normal spoilage (52,000 8%) Abnormal spoilage (6,000 4,160) Physical Units 4,500 60,000 64,500 52,000 6,500 4,160 1,840 Transf. In


& CC evenly

52,000 6,500 4,160 1,840 64,500 (4,500) 0 60,000

52,000 6,500 4,160 1,840 64,500 0 0 64,500

(6,500 80%)

52,000 5,200 3,952

(4,160 x 95%)

(1,840 x 95%)

1,748

Work done to date 64,500 Less: work done on beginning inv. in prior period: No material added b/c added last perid, all trnsfrd in completed last period Conversion (60% complete in prior period) Work done during current period FINANCIAL FLOW OF PRODUCTION WIP, beginning (Con $46,000 + Tran $24,000) Current costs To account for Divide by equivalent units Cost per equivalent unit Application of total costs: Good units started & completed (52,000 - 4,500 = 47,500) Cost of beginning inventory: Beginning Inventory completed in prior period Additional costs to complete beg inventory this period: Beginning Inventory Transfer in (0% added) Material (100% added) Conversion Cost (40% added) Normal spoilage Total goods transferred to FG

62,900 0 (2,700) 60,200

(4,500 x 60%)

$ 70,000 2,028,939 $2,098,939 $32.5268 $1,544,970 70,000 0 75,349 18,449 133,175 $1,841,943 58,904 198,093 $2,098,940

COST of PRODUCTION ---$331,939 $1,080,000 $617,000 $331,939 60,000 $ 5.53232(47,500 x 5.53232)

$1,080,000 64,500 $16.74419(47,500 x 16.74419)

$617,000 60,200 $10.24917(47,500 x 10.24917)

$262,785 24,000

$795,349 0

$486,836 46,000

0 0 (4,160 x 5.53232)

(4,500 x 16.74419)

0 75,349 -

0 0(4,500 x 40% x 10.24917)

18,449

23,014

(4,160 x 16.74419)

69,656

(3,952 x 10.24917)

40,505

Abnormal spoilage (write off) Ending - 80% completed Total costs accted for (difference of $ 1 due to rounding)

(1,840 x 5.53232)

10,179

(1,840 x 16.74419)

30,809

(1,748 x 10.24917)

17,916

(6,500 x 5.53232)

35,960

(6,500 x 16.74419)

108,837

(5,200 x 10.24917)

53,296

$355,938 DM & conversion cost reconciliation Current period costs Beginning inventory costs All costs accounted for $331,939 24,000 $355,939

$1,080,000 $1,080,000 0 $1,080,000

$663,002 $617,000 46,000 $663,000

CMA Ontario

S- 433

MA27 Solution: Process Costing Multiple Choice Oma Inc.1. 2. 3. (d) (b) (c) $242,000 $682,500 $1,007,500

Supporting calculations are on the next page.

CMA Ontario

S- 434

Supporting Calculations: Note: Bolded items are calculated values (i.e. not given in the question) Omas Inc. Production Cost Report for the month of November 200XPhysical Units 3,000 12,000 15,000 14,000 1,000 15,000 14,000 350 (1,000 @ 35%) (2,250) [3,000 (75%)] 12,100 14,000 200 (1,000 @ 20%) (1,200) [3,000 (40%)] 13,000 Equivalent Units Direct Conversion Materials Costs

Flow of Production Beginning W-I-P Started To account for Completed & transferred out W-I-P, ending Accounted for: Equivalent units for work done in prior period Work done during current period only

Beginning W-I-P Current costs To account for Divide by equivalent units Cost per equivalent unit Application of costs: W-I-P, ending Direct Materials Conversion Completed & transferred out: Beginning W-I-P Costs to complete beginning W-I-P Started & completed in current period (12,000 - 1,000) = 11,000 Accounted for1

$100,500 $924,500 $1,025,000

Production Cost Conversion Direct Materials Costs N/A1 N/A1 $242,000 $682,500 12,100 $20.00 13,000 $52.50

$7,000 10,500 $17,500 $100,500 109,500 797,500 $1,007,500 $1,025,000

350 ($20)

200 ($52.50)

750 ($20) 11,000 ($20)

1800 ($52.50) 11,000 ($52.50)

Not applicable because incurred in prior period (FIFO isolates costs & production to current period only).

CMA Ontario

S- 435

MA28 Solution: Process Costing Normal and Abnormal Spoilage Oil Lite1. 20,200 units (see production cost report on next page). 2. a) $8,900 b) $46,200 c) 20,200 and 20,300 d) $388,300 See production cost report on following pages for detailed calculations. 3. a) $8,799.39 b) $45,650.22 c) 24,200 and 22,300 d) $388,948.86 See production cost report on following pages for detailed calculations.

CMA Ontario

S- 436

Oil-Lite Ltd. Production Cost Report FIFO October 31 Physical Units 4,000 20,200 24,200 500 700 20,000 3,000 24,200

W-I-P, beginning Started Abnormal Spoilage Normal Spoilage Completed & transferred out W-I-P, ending

Equivalent Units Conversion Direct Materials

To account for

500 700 20,000 3,000

(500 x 80%)

400

(3000 x 100%)

(3000 x 40%)

700 20,000 1,200

Units accounted for Work done to date Less: Work done in previous period on beginning inventory Work done in current period only

[4000 x 100%]

24,200 (4,000)

[4000 x 50%]

22,300 (2,000)

20,200 Total Costs Production Cost Direct Materials N/A $262,600 $262,600 20,200 $13.00 500 ($13) 3000 ($13)

20,300

W-I-P, beginning Current costs Divide by equivalent units Cost per equivalent unit Application of Costs: Abnormal Spoilage W-I-P, ending: Direct Materials Conversion

Total costs to account for

$59,000 384,400 $443,400

Conversion Costs N/A $121,800 $121,800 20,300 $6.00 400 ($6) 1,200 ($6) $11,000 2,000 ($6) 16,000 ($6) 700 ($6)

$8,900 $39,000 7,200 $46,200 $59,000 12,000 304,000 13,300 $388,300 $443,400

Completed & transferred out: W-I-P, beginning Cost to complete beginning inventory Good units started & completed during current period Normal Spoilage Costs accounted for:1

1

$48,000 0 16,000 ($13) 700 ($13)

Good units started and completed during current period: units started 20,200 less: normal spoilage ( 700) less: abnormal spoilage ( 500) less: ending W-I-P (3,000) 16,000

CMA Ontario

S- 437

Oil-Lite Ltd. Production Cost Report Weighted Average October 31 Physical Units 4,000 20,200 24,200 500 700 20,000 3,000 24,200 Total Costs W-I-P, beginning Current costs Total costs to account for Divide by equivalent units Cost per equivalent unit Application of Costs: Abnormal Spoilage W-I-P, ending: Direct Materials Conversion Completed & transferred out to FG: Good units 20,000 x $ 18.7898 Normal Spoilage 700 x $ 18.7898 Costs accounted for: $59,000 384,400 $443,400 Equivalent Units Conversion Direct Materials

W-I-P, beginning Started Abnormal Spoilage

To account for

500 700 20,000 3,000

Normal Spoilage Completed & transferred out W-I-P, ending Units accounted for

(500 x 80%)

400

(3000 x 100%)

(3000 x 40%)

700 20,000 1,200

Work done to date

24,200

22,300

Production Cost Direct Materials Conversion Costs 48,000 11,000 $262,600 $121,800 $310,600 $132,800 24,200 22,300 $12.8347 $5.9551 500 ($12.8347) 3000 ($12.8347) 400 ($5.9551) 1,200 ($5.9551)

$8,799.39 $38,504.10 7,146.12 $45,650.22 $ 375,796.00 13,152.86 $388,948.86 $443,398.471

1. Minor difference of $ 1.53 due to rounding.

CMA Ontario

S- 438

MA29 Solution: Direct vs Absorption Costing Broadcast Inc.(a) ABSORPTION COSTING INCOME STATEMENT: Revenue Cost of goods sold: Production costs Less: Ending inventory Cost of goods sold Gross margin Selling, general & administrative expenses Net income before tax Per Unit $86.00 $48.00 (i) $48.00 $48.00 Volume 50,000 65,000 (15,000) 50,000 Total $ 4,300,000 $3120,000 (720,000) $2,400,000 $1,900,000 (ii) 990,000 $910,000

(i) Fixed Overhead Cost per unit = $455,000/ 65,000= $7.00 Total Product Cost per Unit = Direct Material & Direct Labour + Variable Overhead + Fixed Overhead = $28.00 + $13.00 + $7.00 = $48.00 (ii) Total Selling, General, Admin Cost = $765,000+ ($4.50) (50,000 units sold) = $990,000 (b) CONTRIBUTION INCOME STATEMENT: Revenue Variable production costs: Cost of goods sold: Variable Production costs Variable Ending inventory Variable Cost of goods sold Variable selling, general & administrative Total variable costs Contribution margin Fixed costs: Manufacturing Selling, general & administrative Total fixed costs Net income before tax Per Unit $86.00 $41.00 (i) $41.00 $41.00 $4.50 Volume 50,000 65,000 (15,000) 50,000 50,000 Total $4,300,000 $2665,000 (615,000) 2,050,000 225,000 $2.275,000 $2,025,000 $455,000 765,000 $1,220,000 $805,000

(i) Variable Product Cost per Unit = Direct Material & Direct Labour + Variable Overhead = $28.00 + $13.00 = $41.00

CMA Ontario

S- 439

(c) RECONCILIATION OF ABSORPTION AND CONTRIBUTION NET INCOMES Net Income Absorption Before Tax Net Income Contribution Before Tax Difference Units in Ending Inventory Units in Beginning Inventory Change [Increase/(Decrease)] Fixed Overhead Cost/Unit ($455,000 65,000 units) Change in Inventory x Fixed Cost / Unit $910,000 805,000 $105,000 15,000 0 15,000 x $7.00 $105,000

Net Income is higher under Absorption Costing because an additional $ 105,000 of the fixed manufacturing overhead resides in inventory at the end of the period. Any costs assigned to inventory are held on the Balance Sheet and are not expensed on the Income Statement until the units are sold. Alternative Solutions:Formula #1 Absorption Costing Income Variable Costing Income = = = = = = = = = Fixed manufacturing in Ending Inventory (7 x 15,000) 105,000 (Units Produced Units Sold) (65,000-50,000) 105,000 (Ending Inv. Beginning Inv.) (15,000-0) 105,000 Fixed manufacturing in Beginning Inv. (7 x 0)

Formula #2 Absorption Costing Income

Variable Costing Income

x x

Budgeted Fixed Manufac.O/H rate 7

Formula #3 Absorption Costing Income

Variable Costing Income

part 2 -- solutions

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