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CHAPTER 4
DISCUSSION QUESTIONS

Q4-1. The five parts are:
(a) Direct materials section
(b) Direct labor section
(c) Factory overhead
(d) Work in process inventories
(e) Finished goods inventories
Q4-2. The balance sheet is a statement of financial
position; the income statement is a statement
of activity. The income statement is complementary to the balance sheet, accounting in
particular for the change in the proprietary
equity as a result of operations during the year.
In that respect, the income statement is essentially nothing more than a major section of the
retained earnings account. Therefore, the revenue and expense accounts in the income
statement have been termed “explanatory”
accounts, explaining the ebb and flow of revenues and expenses that lead to the new
income (or loss) and to the new retained earnings balance in the balance sheet.
Q4-3. The ordinary balance sheet and income
statement are intended to provide information as to financial position and results of
operation of a business, in accordance with
several assumptons that are made in preparing the statements. From the standpoint of
the criticisms made, the most important of
these assumptions are that cost less appropriate amortization of cost measures unexpired cost, and that a business may be
assumed to be going to continue operations
indefinitely into the future. Accounting statements are usually prepared on the theory
that a sale or some other definite event is
essential before revenue is recognized.

one year will not represent earning power.
Changes in law or local zoning ordinances
may result in a marked change in the earning
power of a business. Likewise, changes in
public taste, development of new products,
appearance of new competition, acquisition of
subsidiaries, changes in management and
the like, all may change earning power and
yet not be clearly reflected, if reflected at all,
in one income statement.
The accounting use of historical, rather
than current, dollars in measuring depreciation and cost of goods sold may result in distorting any view of earning power obtained
from a single income statement.
In regard to plant assets, it can be said that
their value to a going concern is usually
dependent upon the earning power of the
business. Such a value is not necessarily the
same as liquidation value, cost, cost less
amortization, replacement value, or any other

4-1


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4-2

Q4-4.

Q4-5.

actual historical amounts, while standard
costing measures product costs by using predetermined amounts of resources to be consumed and predetermined prices of those
resources.
Process costing accumulates costs for each
process or department in the factory and
maintains detailed records and calculations of
the costs of work in process. Job order costing accumulates costs for each job, lot, batch,
or contract and maintains detailed records
and calculations of the costs of work in
process. Backflush costing accumulates costs
by working backwards through the available
information after production is completed (i.e.,
at the end of the accounting period) and
maintains no detailed records of the costs of
work in process.
Actual costing is more common than standard
costing in defense-related industries, while
standard costing is somewhat more common
elsewhere.
Super-full absorption or super absorption
refers to the income tax requirement that
some purchasing and storage costs be allocated to inventory accounts.
Job order costing would be common in repair
shops, building construction, and printing; and

Q4-11.

Q4-12.

Q4-13.

Flexible manufacturing systems consist of an
integrated collection of automated production
processes, automated materials movement,
and computerized system controls to utilize
facilities in efficiently manufacturing a highly
flexible variety of products.
The advantages of a flexible manufacturing
system over the other systems include short
(near zero) setup times, the absence of a
learning curve, lower lead times to shipment,
lower direct labor cost per unit, lower direct
labor cost in total, and lower work in process
inventories.
The initial cost of creating a flexible manufacturing system is much higher than that of
other manufacturing systems.
Manufacturing settings suited for backflush
costing are distinguished by very fast processing speeds, which remove both the
incentive and the opportunity to track the
detailed costs of work in process.


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Chapter 4

4-3

EXERCISES
E4-1


$190
90
$100
150
$250
120
$130

$ 90
60
80
$230
250
$480
210
$270
340
$610
300
$310


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4-4

E4-3
(1)

(2)


Cost of goods manufactured (from (1))......................
Add finished goods inventory, beginning ..................
Cost of goods available for sale .................................
Less finished goods inventory, ending ......................
Cost of goods sold.......................................................

$386,000
27,000
$413,000
26.000
$387,000

E4-4
(1)

Factory overhead incurred in May:
Indirect labor ........................................................................................
Heat, light, and power..........................................................................
Factory rent ..........................................................................................
Factory insurance ................................................................................
Supplies used* .....................................................................................
Supervisor’s salary ..............................................................................
Overtime premium** ............................................................................
Total overhead......................................................................................
*($5,600 + $16,500 – $5,180 = $16,920
** (.5 × $22 per hr.) × 250 hrs. = $2,750

$22,000
11,220


$ 10,250
105,000
$115,250
12,700
$102,550
93,500
78,390
$274,440
60,420
$334,860
52,800
$282,060

Ending balance of finished goods:
Finished
goods,
April 30

+

Cost of
goods
manufactured

–

Finished
goods,
May 31

(a)
(b)

(c)
(d)
(e)

(f)

Materials ...............................................................
Accounts Payable .......................................

40,000

Work in Process...................................................
Factory Overhead Control ..................................
Materials ......................................................

33,000
2,000

Payroll ...................................................................
Accrued Payroll ..........................................

40,000

Accrued Payroll ...................................................
Cash .............................................................

40,000

(g)
(h)

(i)
(j)
(k)

E4-6

(a)
(b)
(c)
(d)

(e)
(f)
(g)
(h)

Factory Overhead Control ..................................
Accounts Payable .......................................

18,000

Factory Overhead Control ..................................
Accumulated Depreciation ........................
Prepaid Expenses.......................................
Accrued Property Taxes.............................

4,130


Work in Process...................................................
Materials ......................................................

17,500

Factory Overhead Control ..................................
Materials ......................................................

1,800

Payroll ...................................................................
Accrued Payroll ..........................................

27,000

Work in Process...................................................
Factory Overhead Control ..................................
Marketing Expenses Control ..............................
Administrative Expenses Control ......................
Payroll ..........................................................

17,000
2,000
5,000
3,000

Factory Overhead Control ..................................
Cash .............................................................


27,000

27,000
2,508
8,500
14,808
60,100


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Chapter 4

4-7

E4-6 (Concluded)
(i)

Accounts Receivable ..........................................
Sales ............................................................

75,000

Cost of Goods Sold* ...........................................
Finished Goods ..........................................
*$15,000 + $60,100 – $15,100 = $60,000

60,000

75,000

260
$ 90
108
60
12
50

Total factory overhead .............................
Total manufacturing cost ..................................
Add work in process, April 30, 20A.........

320
$1,110
150

Less work in process, May 31, 20A .......

$1,260
210

Cost of goods manufactured............................

$1,050


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4-8

Chapter 4

$395,800
24,000
$371,800
180,000
$ 38,400
22,400
19,400
4,800
17,500
100,000
20,000
222,500
$774,300
84,000
$858,300

Less work in process, December 31,
20A .............................................................

30,000

Cost of goods manufactured............................
Add finished goods, January 1, 20A................

$828,300
37,500

Cost of goods available for sale ......................
Less finished goods, December 31,
20A .............................................................

$16
24
20

Total manufacturing cost (a)...............................................................
Add work in process inventory, July 1...............................................

$60
15

Less work in process inventory, July 31 ...........................................

$75
25

Cost of goods manufactured..............................................................
Add finished goods inventory, July 1 (b)...........................................

$50
20

Cost of goods available for sale.........................................................
Less finished goods inventory, July 31 (c)........................................

$70
10

Cost of goods sold ..............................................................................

$60


$70
60

Equals finished goods, ending ................

$10

(b)

(c)


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4-10

Chapter 4

P4-1 (Concluded)
(2)

(a)
(b)

(c)
(d)

(e)
(f)

Accounts Receivable ..........................................
Sales ($60,000 + (75% of $60,000)) ...........

105,000

Cost of Goods Sold.............................................
Finished Goods ..........................................

60,000

25,000

18,000
29,000

29,000
50,000
105,000
60,000


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Chapter 4

4-11

P4-2
(1)


42
$ 1
7
17
2
13

40

Total manufacturing cost (b) .........................................
Add work in process inventory, June 1........................

$110
40

Less work in process inventory, June 30

$150
30

Cost of goods manufactured ........................................
Add finished goods inventory, June 1 (c) ....................

$120
70

Cost of goods available for sale ...................................
Less finished goods inventory, June 30 (d).................

$190

30
$150
40
$110


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4-12

Chapter 4

P4-2 (Concluded)

(2)

(c)

Cost of goods available for sale ........................
Less cost of goods manufactured.....................
Equals finished goods, beginning .....................

$190
120
$ 70

(d)

Cost of goods available for sale ........................
Less cost of goods sold .....................................

7,000

Finished Goods ...................................................
Work in Process..........................................

120,000

Accounts Receivable ..........................................
Sales ($140,000 + (50% of $140,000)) .......

210,000

Cost of Goods Sold.............................................
Finished Goods ..........................................

140,000

(b)

(c)
(d)

(e)
(f)

33,000

29,000

49,000


Less work in process, March 31 .................................
Cost of goods manufactured ......................................

344,000
$394,000
46,000
$348,000*

* Cost of goods sold ($345,000) + ending finished goods inventory
($105,000) – beginning finished goods inventory ($102,000) = $348,000.
** Purchases of materials during March ($110,000) + beginning materials
inventory ($20,000) – ending materials inventory ($26,000) = $104,000.
*** Production costs for March ($344,000) – direct materials ($104,000) = direct
labor and factory overhead ($240,000).
Let x
1.5x
x
.5x
(2)

(3)

=
=
=
=

direct labor
$240,000

Finished goods inventory, January 1 ................
Cost of goods manufactured .............................

$ 600,000
3,800,000

Cost of goods available for sale ........................
Finished goods inventory, December 31...........

$4,400,000
1,200,000

$4,000,000

Cost of goods sold..............................................

3,200,000

Gross profit (20% of sales ...........................................

$ 800,000

Company B:
Cost of goods available for sale .................................
Less finished goods ending inventory.......................

$1,490,000
190,000

Cost of goods sold.......................................................

(4)
346,000
380,000
End. 30,000

350,000

Materials and Supplies
Beg.
20,000
20,000
65,000
(1)
50,000
85,000
70,000
End. 15,000

Work in Process
Beg.
7,000
M
50,000
L(2)
200,000
FOH
100,000
357,000
End. 11,000


(6)

Factory Overhead Control
20,000
(3)
100,000
55,000
10,000
2,000
13,000
100,000
Payroll
55,000
200,000
255,000
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)

55,000
200,000
255,000

Accounts Payable
77,000 Beg.


P4-6
Work in Process ...........................................................
Materials .............................................................
Cost of goods sold ............................................
Add finished goods inventory increase ..........

84,000
84,000
$140,000
17,000

Cost of goods manufactured............................ $157,000
Add work in process inventory increase ........
2,000
Total manufacturing cost ..................................
Less: Factory overhead .................. $35,000
Direct labor.............................
40,000

$159,000

Materials used in manufacturing .....................

$84,000

75,000

Materials ..........................................................................
Accounts Payable ..............................................

Work in Process ...........................................................
Factory Overhead Control ................................

35,000

Finished Goods (12,000 + 84,000 + 40,000 +
35,000 – 14,000) .................................................
Work in Process.................................................
Cost of Goods Sold (28,000 + 157,000 – 45,000).........
Finished Goods..................................................

40,000
40,000
35,000
35,000
157,000
157,000
140,000
140,000

CGA-Canada (adapted). Reprint with permission.


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Chapter 4

4-17

P4-7

Cash ......................................................................

88,250

(d)

Work in Process...................................................
Factory Overhead Control ..................................
Materials ......................................................

82,500
8,300

Work in Process...................................................
Factory Overhead Control .........................

47,330

Finished Goods ...................................................
Work in Process..........................................

188,000

Accounts Receivable ..........................................
Sales ............................................................

241,150

Cost of Goods Sold.............................................
Finished Goods ..........................................


(i)

(j)

92,000
26,530
86,000

86,000
88,250

90,800
47,330
188,000
241,150
185,500

212,920

30,000
104,000


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4-18

Chapter 4


197,500
12,000
1/1 Bal.
(c)
(d)
(e)

(c)

Work in Process
4,500
(f)
60,500
82,500
47,330
194,830
6,830
Accrued Payroll
88,250
1/1 Bal.
(c)
Sales
(g)

(h)

(c)
(i)

1/1 Bal.


Retained Earnings
1/1 Bal.

2,250
86,000

241,150

90,800

Accumulated Depreciation
1/1 Bal.
10,000

185,500

Sales Discounts
4,258
Common Stock
1/1 Bal.

Materials
1/1 Bal.
10,000 (d)
(a)
92,000
102,000
11,200


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Chapter 4

4-19

P4-7 (Concluded)
(3)

STEPHANOWICZ COMPANY
Trial Balance
January 31

Cash ...........................................................................................
Accounts Receivable ................................................................
Finished Goods .........................................................................
Work in Process ........................................................................
Materials.....................................................................................
Machinery ..................................................................................
Accounts Payable......................................................................
Accumulated Depreciation .......................................................
Common Stock..........................................................................
Retained Earnings.....................................................................
Sales ...........................................................................................
Sales Discounts ........................................................................
Cost of Goods Sold .................................................................
Marketing Expenses Control....................................................
Administrative Expenses Control............................................

$36,412