Brisson Company provides further practice in setting up accounts for a standard cost system and preparing financial statements. Landau Company contrasts vari le costing and full absorption costing. Lynch's Chicken Ranch is a joint cost case. It emphasizes conceptual understanding more than numerical analysis (this case is new in the Twelfth edition.) Problems Problem 19-1: Veronica Company a. Overhead rate = Estimated overhead ___ $180,000 Estimated direct labor hours — 20,000 hours = $9 per direct labor hour 6 Jobs rm Direct materia $10,000 $10,000 Direct labor 28,000 32,000 Overhead 21,600* _25.200+ Total production cost $5600 $67.200 2.400 hours @ § +2800 hours a8 © JobG JobH Production cost. $ 59,600 $ 67,200 Selling price (180 $107,280 $120,960 Problem 19-2: Vermont Sugar Enterprises a. Selling price of sugar—1,000 @ $2.00... Traceable costs (after split-off) Gross margin $2,000.00 280.00 $1,720.00 Total syrup cost: Process costs ($12,280 + $100,000). $112,280 Less sugar gross margin se 1,720 Cost allocated to syrup... ‘$10,560 b. Joint product costs: Syrup Sugar Sales value... $300,000 $2,000 Less costs aft . 12,000 280 Adjusted sales value... $288,000 $1,720 Cost allocation: Syrup: 288,000/289,720 x 100,000 = $ 99,406 $99,406 +$12,000 = SLL1L406 Sugar: 1,720/289,720 x 100,000 $594) 594 + 280 $874 361Problem 19-3: Monrad Corporation Allocation Allocated DL Hours Rate/Hourt Expenses Cost of goods sold. 30,000 Sid $420,000 IVEMIOTY sn 3,000 14 42,000 33,000 462,000 *8462,000 + 33.000 DI. hours = $14/Diret labor hour a. dr. Finished Goods Inventory. 42,000 Cost of Goods Sold... 420.000 er. Nonvariable Production Costs. 462,000 b AS the above entry shows, full costing eiapitalizes” $42,000 of the nonvariable costs in FtOty: Father than treating the entire $462,000 as an expense: hence. in this, fall costing will result in $42,000 higher pretax income thay will variable costing. articular year, ® Finished goods inventory (full costs) = $75,000 + 42,000 = $1 17,000 | Problem 19-4: Nemad Company | Approach } ‘This problem raises an issue not discussed in the text: building normal materials waste and worker idle } time into standard costs. The ease is not difficult Enough to justify spending an entire class session on it. 1 | use tin the same session as the Amurath Company case, I " discuss materials frst. The relevant materials figures are these: |. Each assembly requires eight levers, To get eight good levers, 8 / 90% = 8 8/9 levers must be produced. oF to a year-end total of $4.16) If ly during the year will a, he appropriate standard cost if the standard is to be left unchanged for the Frat half gnats of course, that the company should expect faerie materials price variances for the First half of the year. unfavorable ones for the second half. and zero for the year. (This would not ‘ecessarily be rue if the ease did not state that production is level throughout the year), 3: The current price is $.45 per lever or $4.00 per assembly, Turning to direct labor, the relevant facts are these: 1. The standard workweek is 40 hours, 2. Daily breaks reduce this by 2.5 hours per week, to 37.5 hours. (Apparently a lunch break is not part of the standard 8-hour day.) 3. Only 85 percent ofthe nominal productive hours are in fact productive, oF interruptions: 37.5 * 85% = 31.875 hours,ion time is 12 minutes. Management believes this represents only 90 percent of practical efficiency; i.e., if not being watched, the workers could perform the operation 10/9 times in 12 minutes, or one time in 10.8 minutes. 5. 31.875 hrs/wk * 60 min/hr / 10.8 min/unit waiting time to 40 hours rather than 37.5, thi 177.08 units/week. (If a student applied the 15 percent will be 188.9 units/week,) 6. Weekly pay averages 40 * 18 = $720; so standard labor per operation = $720 / 177.08 = $4.07 (or $3.81 for the alternative interpretation of waiting time). Cases Case 19-1: Bennett Body Company, Note: This case is unchanged from the Eleventh Edition. Approach This case contrasts a standard cost system with an actual job cost system, and thereby brings out several Points about cost accounting, including: the purposes for which cost accounting data are used; the Paperwork involved in cost accounting: the use of costs for pricing: the problem of controlling costs under the two types of systems; and the problem of the normal overhead rate. ‘Students may have difficulty in seeing that: (1) in the Conley standard cost system, costs are not traceable to individual bodies or models, and therefore no comparison of actual and standard costs by models is possible; (2) the Conley system easily could be changed to permit comparison of actual and standard labor and material costs by models, but it is doubtful that such information would be useful for control; (3) the variances have no meaning unless the standard costs for each model are reasonable; (4) the overhead variance in Exhibit | is meaningless; and (5) the paperwork involved in the Conley system is less than that in the Bennett system. Comments on Questions (Numbered as in Mr. Bennett's memorandum) I. It may be well to discuss the Bennett system first. The subject may be broken down into records of ‘material, labor, and overhead cost, and the job-cost sheet. Enough hints are given in the case so that students should be able to visualize the contents of the documents needed to record the incurrence of each type of cost and how information is recorded on the job-cost sheet. They should also see that the work involved is not great (perhaps they can even estimate roughly the number of pieces of paper required). Presumably somewhat less work would be required in the Conley system since only actual ‘aggregate labor, material, and overhead costs by department would be compiled, plus information on the number of units produced, plus also the paperwork necessary for the annual calculation of standard cost figures for the 12 models. There is no need to collect separate costs for each job at Conley, but this is potentially useful for pricing at Bennett. 2. Conley's direct cost variances could be caused by changes in material prices or labor rates, by ‘material waste or savings, ot by labor costs being more or less efficient than was assumed when the standard cost sheets were developed. Since “actual overhead” in Exhibit I is not actual, but is actual direct labor times the predetermined rate, actual overhead behavior does not show up on Exhibit 1, and we can make no useful statements about the overhead variance in Exhibit 1. ‘There is no evidence that Conley in fact decomposes the labor and materials variances into price and ‘usage components, nor that the net overhead variance (which would be identified when the overhead 363 |Case 19-2: Black Meter Company Note: This case is unchanged from the Eleventh Edition. Approach The Black Meter Company description provides a useful vehicle for understanding a standard cost system, and it may be desirable to discuss it in considerable detail. The description in the text does not cover every number, but it should be adequate so that the students can deduce for themselves where each ‘number on the exhibits comes from, and in particular, how one exhibit relates to others, Questions 1 through 4 are designed to facilitate and build on this detailed analysis and should be assigned only if the instructor intends to spend considerable time (a large fraction of one class meeting) on the Black Meter case. Question 5 asks for a “consultants appraisal” of the system, and raises the discussion to a more managerial level. With all five questions, a full class period is definitely required, Question 1 This question (and questions 2 through 4) should be used only ifthe instructor wants to go into the Black Meter Company description in detail. Students can answer it based on information in the text and tracing the numbers from one illustration to the next, . Question 2 {in a standard cost system, the calculations in Illustrations 19-6 through 19-8 are made once a year, or ‘whenever standard costs are changed. The resulting cost, $5,035.29 for 100 meters (Illustration 19-8 used without change for carrying these meters in inventory and for calculating cost of goods sold. Similarly, the cost of each component is derived from this calculation and used for carrying these components in inventory. If an actual cost system were used, records similar to those in Illustrations 19-6 through 19-8 would have to be maintained for each meter order and each part production order, with actual costs being collected on such records. This would probably require much more recordkeeping than the standard cost system requires. An actual cost system would provide one piece of information that the standard cost system does not provide, namely the actual cost of specific production orders. This might be useful to management if, for example, it showed that actual costs were tending to drift upward throughout the year. However, there are other ways of identifying possible inefficiencies, such as the difference between actual and standard direct labor cost, as indicated in Illustration 19-9, Question 3 This question js more difficult than it may appear, as it entails developing the flowchart shown in Exhibit A on page 56. The greatest subtlety in Exhibit A is the accounting for Materials Inventory. This account is debited based on actual quantities at standard prices but is credited based on standard quantities at standard prices. If you ask students to assume a month where purchased quantities and standard quantities issued are equal, they should see that any material usage variance will be “buried” in this account. You can then explain (or get them to realize) that when a physical count is taken and costed at standard, then the difference between this amount and the book value of materials inventory includes material usage Variance. (It will also include accounting errors and pilferage.) This inventory adjustment restores this account's beginning balance for the next period to actual quantity at standard prices, and the debit ot credit which makes this adjustment has its counterpart in an entry to Cost of Sales. We know from the {ext that this inventory is taken semiannually, and from Illustration 19-11 that this “usage” variance is closed to the income statement. This is a difficult concept, which can be reviewed in the C.F. Church ease in Chapter 20. imilarly students should see that the direct labor variance account combines efficiency and rate variances. These components of total labor variance are not mentioned in the text, but I have found that 365Exhibit A Flowchart for Black Meter Company Accounts Payable Materials Inventory Act. Quy. @ ‘Act. Price Material Price Variance tet Balance to Cost of Sales Every 6 mos. a physical inventory is taken 4nd costed at standard. Any difference between this amount and the “book” balance is an inventory adjustment which is closed to Cost of Sales Work in Process Inventory* _ | Material (@ Std.) @std. Act. His. @ Labor ‘Act. Rate Direct Labor Variance Std. Hrs. Overhead Balance to Cost of Sales Overhead (@ ‘Actual Std. His. x Std.) Overhead Rate Overhead Variance ‘Any month-end balance in this». account closed to Overhead -Materials inventory Variance Balance to Cost of Sales, adjustments (“usage”) -Direct Labor meter pars, costs Tow af standard from Work in Process to Finished Goods. and then to Cost of Sale The Gaga -Overhead is descriptive of complete meters, which are made to order and hence are not inventoried prior wo shipment to thewent” them prior to their formal presentation in Chapter 20. By the same token, witively that the overhead variance combines spending and volume effects. better students can “ some students can see i Comparing Exhibit A with the text’s Ilustration 19-2, one sees the two flowcharts are the same except for materials usage variance. In Illustration 19-2, this variance “falls out” explicitly, since Materials Inventory is credited at actual quantity issued costed at standard prices whereas Work in Process is debited at standard quantity at standard prices. Both methods are seen in practice; the text’s method seems superior to Black Meter’s, in that usage variance is identified in a more timely fashion and is not “muddied” by pilferage and accounting errors. Question 4 This question illustrates the work involved in changing standard costs, and is also helpful in tracing amounts from one illustration to another. In Illustration 19-6, the cost of chamber rings would be increased by 1.76 hours * $1 = $1.76. The cost therefore becomes $249.24 + $1.76 = $251. This increase carries through to Illustration 19-7, making the cost $861.34 + $1.76 = $863.10. Finally, it carries through to Illustration 19-8, In addition, Illustration 19-8 is increased by the $1 per hour increase in labor for Department 131. Since there are 10.2 hours of labor, the increase is $10.20. The total cost for 100 meters in Illustration 19-8 therefore becomes: As given... $5,035.29 ‘Add from 120A 1.76 ‘Add from 131 10.20 ‘Adjusted costs. $5,047.25 366Question 5 This or any other system cannot be evaluated without identifying the purposes the system is supposed to fulfill. Although not explicitly stated, 1 think it is reasonabie to impute the following purposes: (1) to provide monthly operating statements; (2) to control costs: and (3) to help on a variety: of necessary “chores” that have to be done, such as paying employees what is due them, keeping track of orders and material, paying suppliers. and billing customers. Since these jobs have to be done anyway, we may be able to get figures that will help accomplish the first two purposes as an inexpensive by-product of doing them, ‘Monthly Operating Statements If we hew strictly to the defin and selling the same goods that ar n that net profit is the difference hetween sales and the cost of making the sales figure, this system does not provide net profit because: a. The purchase price v 1c is related to material purchased in the month. b. The labor and overhead variances are related to the products worked on in the month. ‘c. Various discrepancies creep in that are uncovered by a physical inventory only every six months If, however, we ask: “How could you get the actual profit if you wanted to?” we find the answer is difficult, if not impossible. Suppose an actual cost system were used. Then. for each production order of each item there would have to be a set of calculations similar to those in Hlustrations 19-6 to 19-8, whereas under the standard cost system, these calculations are made only once a year. (Students usually find it hard to believe that a standard cost system is much simpler than an actual cost system and requires much less paperwork in a situation of the kind described.) If we try to find actual profit by the direct determination of inventories, we could throw out the cost accounting system entirely but would have to take a physical inventory every month: the job of costing the work in process would be significant. Furthermore, even if the “profit” resulting from this system differs somewhat from the strict definition above, the income statement may, nevertheless. be a useful device, since it reports the variances that occurred during the month (except material usage). This is earlier than they would be reported according to the strict definition, and of course. these variances would not show up at all if a standard cost system were not used. Control No system controls costs. At best, a system provides information that responsible people can use in the control process. People contro. The system provides no summary figure on material usage in a month when no physical inventory of materials is taken, and the June and December income statements are distorted by including usage variance for the previous six months. This situation could be improved quite easily as follows: if material in excess of standard is needed, « requisition should be filled out for this excess. The amounts of such requisitions can be totaled monthly. with Materiais Inventory credited by this amount, and “true” Materials Usage Variance account debited. Then the semiannual physical inventory will result in @ variance including accounting errors and pilferage, but not usage. This should largely eliminate the distortions in the monthly’ income statements 368which are created by the current procedure. Alternatively. Materials Inventory could be credited at actual quantity times standard price, and Work in Process debited at standard quantity times standard price (as in Mlustration 19-2). ‘The system provides a total figure on the direct labor variance. Although there is no routine report that breaks this variance down, it would be possible to reclassify with little difficulty. Labor rate and efficiency variances could also be broken down from timecards by department, by job, or even by operation, but management apparently feels that this is not worth the effort Because the overhead costs are allocated and because expected costs will not vary propor production volume, the overhead variance is not of much use for contro! purposes. This is characteristic of overhead costs in a standard full cost system, and some students may see the need for special devices (variable budgets and collection of costs by responsible department) to handle this situ however, we can only touch on this matter. The key control is collecting actual costs by responsibility center, not by product. | illustrate with a matrix, both in this case and Bennett Body Company. Both Black Meter and Conley can determine variances by responsibility center, whereas itis not clear that Bennett can. Similarly, Bennett needs actual product costs for frequent pricing decisions, whereas Black Meter and Conley do not. Case 19-3: Brisson Company Note: This case is unchanged from the Eleventh Edition, Approach This problem takes the student through a complete cycle of transactions in a standard cost system in a simple setting, It shows how such a system works, including the development of variances. and ties cost accounting to the accounting cycle the student learned in Part | of the book. (Brisson’s system is the same as the one depicted in Illustration 19-2.) This seems to be a valuable exercise, especially in helping to minimize the omnipresent problems students have with production cost variance analysis in the next chapter. If not assigned for class. this makes a good exam case. (For ease in grading, | suggest you prepare forms with all needed T accounts preprinted on them.) Question 1 Materials Inventory Work in Process Inventory Bal. 50.250 | (4) 118.810 Bal. 75,600 | (9) 267,684 Q) 104,980 36,420 @ 116,696 Bal. 36,420 (5a,8) 8) 99,000 102,812 Finished Goods Inventory Bal. Bal 155,400 | (10b) 232.602 e 267,684 190,482 Bal. 190,482 369