Managerial Accounting in class exercise chapter 4 solution

1. In Class Exercise--- Chapter 4_Solution
1. For a manufacturer, beginning work in process would be equal to
A) Manufacturing costs incurred in the period - ending work in process inventory.
B) Cost of goods manufactured - ending work in process inventory + manufacturing costs
incurred in the period.
C) Ending work in process inventory + manufacturing costs incurred in the period.
D) Cost of goods manufactured + ending work in process inventory - manufacturing costs
incurred in the period.
Solution:
D
This question essentially wants to test your understanding on cost of good manufactured,
introduced in Chapter 2 of this book. Chapter 2 provides the basic managerial accounting
concepts, such as cost object, indirect cost, direct cost, and manufacturing overhead. On the basis
of this cost information (DM, DL, and MOH in particular), managers can get the cost of goods
sold information to prepare the income statement for external financial statement users.
Beginning work in process (WIP) inventory
+ Direct materials used (DM used)
+ Direct labor (DL)
+ Manufacturing overhead (MOH)
= Total manufacturing costs (TMC)
- Ending work in process(WIP) inventory
= Cost of goods manufactured (COGM)
Beginning finished goods (FG) inventory
+ Cost of goods manufactured
= Cost of goods available for sale
- Ending finished goods inventory
= Cost of goods sold
2. Tom is the manager of a startup company, Simply Healthy, which produces fresh high protein
high fiber food for customers. At the end of the year, in order to raise more capital, Tom wanted
to use the initial data to get summarized information as required by potential new shareholders.
Would you please help Tom to prepare the summarized information as required in the following

2. questions? (Suppose that property plant tax is prepaid, salaries, utility bill and shipping cost are
on account)
Revenue $2,280,000
Beginning of year work in progress inventory $35,000
Beginning finished goods inventory $55,000
Direct materials used for Product 1 in the year $50,000
Direct materials used for Product 2 in the year $16,000
Direct materials used for Product 3 in the year $12,300
Direct labor used for Product 1 in the year $30,000
Direct labor used for Product 2 in the year $11,000
Direct labor used for Product 3 in the year $10,000
Sales commissions $7,500
Factory supervisor’s salary $60,000
Ending work in process inventory $ 18,000
Ending finished goods inventory $12,000
Insurance on plant $ 2,000
Total estimated manufacturing overhead for the year $ 90,000
Total estimated direct labor cost for the year $ 50,000
Cost for delivering the prepared meals to customers $ 10,000
Plant property tax $ 10,000
Plant utility $ 21,000
R&D expense $ 11,000
Cost for marketing $ 12,000
Cost for shipping the raw materials (e.g., nuts, wholegrain
buns) to the factory
$ 8,000
1. Calculate the actual MOH for the year ended December 31.
Solution:
This question wants to check your understanding on manufacturing overhead (MOH).
Manufacturing overhead is the indirect cost incurred during the production process
(within the factory) for manufacturing companies. Note that indirect cost is the cost that
cannot be conveniently (or easily) traced to the cost object.
MOH
Factory supervisor’s salary $60,000
Insurance on plant $2,000
Plant property tax $10,000
Plant utility $21,000

3. Cost for shipping the raw materials
(e.g., nuts, wholegrain buns) to the
factory
$8,000
Total MOH $101,000
Note that “cost of shipping the raw materials” in the above can be classified as direct
material cost if the material above is direct material. As I did not make it clear that the
material is direct material, so I classify it as MOH in this question. Note that, in general,
freight-in cost for a merchandiser is direct material cost.
2. Suppose Tom plans to use direct labor cost to allocate MOH, would you please calculate
the MOH for Product 1, Product 2, and Product 3?
Solution:
This question wants to refresh your memory of the MOH allocation. This question
informs that direct labor cost is the cost driver used to allocation MOH, so we allocate the
MOH based on direct labor cost. Note that predetermined overhead rate is estimated by
ESTIMATED numbers rather than actual numbers. We need to use total estimated
manufacturing overhead costs and total estimated amount of allocation base to determine
POHR.
POHR=
Total estimated mfg overhead costs
Total estimated amount of allocation base
=90,000/50,000=1.8 dollar MOH per dollar of direct labor
Product 1:
Allocated MOH= POHR * Actual amount of allocation base used by the job
=1.8 dollar MOH per dollar of direct labor * 30,000 dollars of direct labor
=54,000 dollars MOH
Product 2:
Allocated MOH= 1.8* 11,000=$19,800
Product 3:
Allocated MOH= 1.8*10,000=$18,000
3. Compare the difference between actual MOH and the allocated MOH.
Solution:
Total amount of allocated MOH = 54,000 + 19,800 + 18,000= $91,800
Actual MOH= $101,000
Therefore, MOH is undercosted by $9,200.

4. 4. Prepare journal entries for the use of direct raw material, direct labor, and actual MOH.
(Suppose that salaries are made on account.)
Solution:
This question wants to check journal entry preparation for manufacturing costs. Note that
under a job order costing system, managers prepare a separate ledger for each job for
internal use. To prepare for external financial reporting for this question, you only need to
prepare one combined journal entry for use of DM, DL, and MOH for the three products.
1. Use of direct raw materials
Dr. Work in Process Inventory 78,300
Cr. Raw Materials 78,300 (note: 50,000+16,000+ 12,300=78,300)
2. Use of direct Labor
Dr. Work in Process Inventory 51,000
Cr. Salaries and wages payable 51,000 (note: 30,000+11,000+10,000=51,000)
3. Use of actual MOH
Dr. MOH 101,000
Cr. Salaries and Wages Payable (Supervisor’s) 60,000
Cr. Prepaid Insurance 2,000
Cr. Property Tax Payable 10,000
Cr. Accounts Payable (Utility bills) 21,000
Cr. Accounts Payable (Material shipping bills) 8,000
5. Prepare journal entries for the allocation of MOH into the work in progress account.
Solution:
Dr. Work in Process Inventory 91,800
Cr. MOH 91,800

5. 6. Prepare a schedule of cost of goods manufactured for Simply Healthy for the year ended
December 31. Note that TOM only uses allocated MOH to calculate the asset value of
work in progress inventory, but does not adjust work in progress inventory based on the
difference between actual MOH and allocated MOH.
Solution:
This still checks your understanding on the calculation of “cost of goods manufactured”.
Beginning work in process (WIP) inventory $35,000
+ Direct materials used (DM used) $78,300
+ Direct labor (DL) $51,000
+ Manufacturing overhead (MOH) $91,800
= Total manufacturing costs (TMC) =$256,100
- Ending work in process(WIP) inventory - $ 18,000
= Cost of goods manufactured (COGM) = $238,100
7. Prepare a schedule of cost of goods sold for Simply Healthy for the year ended December
31. Note that to get the accurate value of net operating income, investors require Tom
adjust the difference between actual MOH and allocated MOH.
Solution:
Beginning finished goods (FG) inventory $55,000
+ Cost of goods manufactured $238,100
= Cost of goods available for sale = 293,100
- Ending finished goods inventory - $12,000
= Cost of goods sold = 281,100
As MOH is undercosted by 9,200 as indicated in Q3 of this question, we need to do the
adjustement
Adjustment for COGS
281,100 + (101,000-91,800) = 290,300
8. Prepare the income statement for Simply Healthy.

6. Solution:(Note that the revenue should be 2,280,000. The number in the original ppt
slides 1,280,00 is a typo).
This question refreshes your memory on income statement. Note that cost information is
a very important component in income statement. As this case does not provide more
detailed information such as interest expense and revenue tax, the income statement
provided can only be a simple version.
Simply Healthy
Income Statement
For Year Ending Dec. 31, 2014
Revenue:
$2,280,000
Cost of Goods Sold:
$290,300
Expenses
Selling expenses 1 (Sales commissions) $ 7,500
Selling expenses 2 (Delivering costs) $10,000
Selling expenses 3 (Marketing costs) $12,000
R&D expenses $11,000
Net Operating Income
=$1,949,200