Strategic Accounting for Management

Chapter 5 solutions to the essential activities

Solutions to:
Questions 5.1, 5.4, 5.5, 5.8, 5.9, 5.10
Exercises 5.15, 5.17, 5.22 (only point 1), 5.25, 5.26
Self-assessment Problem 5.38, 5.39
Question 5.1
In a job-costing system, costs are assigned to a distinct unit, batch, or lot
of a product or service. In a process-costing system, the cost of a product
or service is obtained by using broad averages to assign costs to masses of
identical or similar units.
Question 5.4
Two reasons for using an annual budget period are
a.
The numerator reasonthe longer the time period, the less the
influence of seasonal patterns, and
b.
The denominator reasonthe longer the time period, the less the
effect of variations in output levels on the allocation of fixed costs.
Question 5.5
Actual costing and normal costing differ in their use of actual or budgeted
indirect cost rates:
Actual

Normal

Costing

Costing

Direct-cost rates

Actual rates

Actual rates

Indirect-cost rates

Actual rates

Budgeted rates

Each costing method uses the actual quantity of the direct-cost input and
the actual quantity of the cost-allocation base.
Question 5.8
A company might use budgeted costs rather than actual costs to compute
direct labour rates because it may be difficult to trace direct labour costs
to jobs as they are completed (for example, because bonuses are only
known at the end of the year).

Question 5.9
Industries using process costing in their manufacturing area include
chemical processing, oil refining, pharmaceuticals, plastics, brick and tile
manufacturing, semiconductor chips, beverages, and breakfast cereals.
Question 5.10
Equivalent units is a derived amount of output units that takes the quantity
of each input (factor of production) in units completed or in incomplete
units in work in process, and converts the quantity of input into the amount
of completed output units that could be made with that quantity of input.
Each equivalent unit is comprised of the physical quantities of direct
materials or conversion costs inputs necessary to produce output of one
fully completed unit. Equivalent unit measures are necessary since all
physical units are not completed to the same extent at the same time.

Exercise 5.15 Job order costing, process costing

a. Job costing

l.

Job costing

b. Process costing

m.

Process costing

c. Job costing

n.

Job costing

d. Process costing

o.

Job costing

e. Job costing

p.

Job costing

f. Process costing

q.

Job costing

g. Job costing

r.

Process costing

h. Job costing (but some process costing)

s.

Job costing

i. Process costing

t.

Process costing

j. Process costing

u.

Job costing

k. Job costing

Exercise 5.17 - Job costing, normal and actual costing

1. Building Support

Budgeted indirectcost rate

(a)
=

Budgeted indirect costs

A$5 800 000
=
Budgeted direct labour-hours 160 000 hours
= A$36.25 per direct labour-hour

Actual indirect costs

A$7 286 375
=
Actual direct labour-hours
164 200 hours

(b) Actual indirect- =

cost rate

= A$44.375 per direct labour-hour

Logistics:
(a)
materials cost

Budgeted indirect- = Budgeted indirect costs/ budgeted

cost rate
=

A$2 500 000

A$80 000 000

= A$0.03125 per direct material dollar

(b)
direct materials costs
=

Actual indirect- = Actual indirect costs/Actual

cost rate
A$2 454 375
A$82 500 000

= A$0.02975 per direct material dollar

These rates differ because both the numerator and the denominator in the two
calculations are differentone based on budgeted numbers and the other based on
actual numbers.

2.
(a)
Sunrise

Sunset

Model

Model

Normal costing
Direct costs
Direct materials
Direct labour

A$106 450.00

A$127 604.00

36 276.00

41 410.00

142 726.00

169 014.00

32 625.00

36 612.50

3 326.56

3 987.63

A$178 677.56

A$209 614.13

Indirect costs
Building support (A$36.25 x 900; A$36.25 x 1010)
Logistics (A$0.03125 A$106 450 ; A$0.03125 x
$127 604)
Total costs

(b)
Actual costing
Direct costs
Direct materials
Direct labour

A$106 450.00

A$127 604.00

36 276.00

41 410.00

142 726.00

169 014.00

39 937.50

44 818.75

3 166.89

3 796.22

A$185 830.39

A$217 628.97

Indirect costs
Building support (A$44.375 x 900; A$44.375 x
1010)
Logistics (A$0.02975 A$106 450; A$0.02975
A$127 604)
Total costs

3.
Normal costing enables Stegline to report a job cost as soon as the job
is completed, assuming that both the direct materials and direct labour costs
are known at the time of use. Once the 900 direct labour-hours are known for
the Sunrise Model (June 2014), Stegline can compute the A$178 677.56 cost
figure using normal costing. Anderson can use this information to manage the
costs of the Sunrise Model job as well as to bid on similar jobs later in the
year. In contrast, Stegline has to wait until the December 2014 year-end to
compute the A$185 830.39 cost of the Sunrise Model using actual costing.

Exercise 5.22

1)
1.

Accounting for manufacturing overhead (only point

Budgeted manufacturing overhead rate

= 8,520,000/ 240000 =

= $35.5 per machine-hour

Exercise 5-25
normal costing

Job costing; actual, normal, and variation from

1. Actual direct cost rate for professional labour = $69 per professional
labour-hour
Actual indirect cost rate = 744,000/15,000 = $49.60 per professional
labour-hour
= 992,000/15,500 = $64 per professional labour-hour
Budgeted indirect cost rate =852,500/15,500
professional labour-hour

Direct-Cost Rate

$55 per

(a)

(b)

(c)

Actual

Normal

Variation of

Costing

Costing

Normal Costing

$69

$69

$64

(Actual

(Actual rate)

(Budgeted rate)

$49.60

$55

$55

(Actual

(Budgeted rate)

(Budgeted rate)

(a)

(b)

(c)

Actual

Normal

Variation of

Costing

Costing

Normal Costing

$69 120 =

$69 120 = $

$64 120 = $

$ 8,280

8,280

7,680

rate)
Indirect-Cost Rate

rate)
2.

Direct Costs
Indirect Costs
Total Job Costs

49.60 120

$55 120 =

= 5,952

6,600

$14,232

$14,880

55 120 =
6,600
$14,280

All three costing systems use the actual professional labour time of 120
hours. The budgeted 110 hours for the Pierre Enterprises audit job is not
used in job costing. However, Chirac may have used the 110 hour number in
bidding for the audit.
The actual costing figure of $14,232 is less than the normal costing figure of
$14,880 because the actual indirect-cost rate ($49.60) is less than the
budgeted indirect-cost rate ($55). The normal costing figure of $14,880 is

more than the variation of normal costing (based on budgeted rates for
direct costs) figure of $14,280, because the actual direct-cost rate ($69) is
more than the budgeted direct-cost rate ($64).
Although not required, the following overview diagram summarises Chiracs
job-costing system.

INDIRECT
COST
POOL

Audit
Support

COST
ALLOCATION
BASE

Professional
Labour-Hours

COST OBJECT:
JOB FOR
AUDITING
PIERRE
& CO.

Indirect Costs
Direct Costs

DIRECT
COST
Professional
Labour

Exercise 5.26
Job order costing: actual, normal, and variation
from normal costing
1.
a. Actual costing
Direct cost rate = Actual professional labour costs Actual professional
labour-hours
= $4893000 23,300 hours
= $210 per professional-hour
Indirect cost rate = Actual support costs Actual professional labour-hours
= $2,400,000 22,000 hours
= $103.00 per professional-hour
b. Normal costing
Budgeted professional hours = Budgeted hours per lawyer Number of
lawyers
= 2650 8 = 21,200 hours
Direct cost rate

= Actual professional labour costs Actual professional

labour-hours
= $4,893,000 23,300 hours
= $210 per professional-hour

Indirect cost rate = Budgeted support costs Budgeted professional labourhours

= $2,000,000 21,200 hours
= $94.34 per professional-hour
1c. Variation from normal costing that uses budgeted rates for direct costs
Direct cost rate = Budgeted professional labour costs Budgeted
professional labour-hours
= $4,240,000 21,200 hours
= $200 per professional-hour
Indirect cost rate = Budgeted support costs Budgeted professional labourhours
= $2,000,000 21,200 hours
= $94.34 per professional-hour
2. The costs of Bill Doors will under each method follow:
Actual Costing
Direct costs 400 hours $210 per hour
Indirect costs 400 hours $103 per hour
Total costs

$84,000
41,200
$125,200

Normal Costing
Direct costs 400 hours $210 per hour
Indirect costs 400 hours $94.34 per hour
Total costs

$84,000
37,736
$121,736

Variation from normal costing

Direct costs 400 hours $200 per hour

$80,000

Indirect costs 400 hours $94.34 per hour

37,736

Total costs

$117,736

Self-assessment problem 5.38

INDIRECT
COST
POOL
COST
ALLOCATION
BASE
COST OBJECT:
JOB FOR
CLIENT

DIRECT
COST

Service industry, job costing, law firm

Legal
Support

Professional
Labour-Hours

Indirect Costs
Direct Costs

}
Professional
Labour

2.

Budgeted professional
=
labour - hour direct cost rate

Budgeted direct labour compensation per professional

Budgeted direct labour - hours per professional
=

170000/1650

$103.03 per professional labour-hour

Note that the budgeted professional labour-hour direct-cost rate can also
be calculated by dividing total budgeted professional labour costs of
$4,250,000 ($170,000 per professional 25 professionals) by total budgeted
professional labour-hours of 41,250 (1,650 hours per professional 25
professionals), $4,250,000 41,250 = $103.03 per professional labour-hour.
3.

Budgeted indirect
cost rate

Budgeted total costs in indirect cost pool

Budgeted total professional labor-hours

A$2 350 000

1650 hours 25

2,350,000/41,250

$56.9697 per professional labour-hour

4.

Direct costs:
Professional labour, A$103.0303 120;
A$103.0303 195
Indirect costs:
Legal support,
A$56.9697
120;
A$56.9697 195

Blighton

Judy
A$ 20 090.91

A$ 12 363.64
6 836.36
A$19 200.00

11 109.09
A$31 200.00

Self-assessment problem 5-39

Service industry, job costing, two
direct- and indirect-cost categories, law firm (continuation of 5-38)
Although not required, the following overview diagram is helpful to
understand Keatings job-costing system.
INDIRECT
COST
POOL
COST
ALLOCATION
BASE

General
Support

Secretarial
Support

Professional
Labour-Hours

Partner
Labour-Hours

COST OBJECT:
JOB FOR
CLIENT

DIRECT
COST

Indirect Costs
Direct Costs

Professional
Professional
Associate Labour

Partner Labour

1.
Professional

Professional

Partner Labour Associate Labour

Budgeted compensation per professional

A$ 345 000

A$127 000

1 650

1 650

A$209.09 per
houra

A$76.9697 per
hourb

Divided by budgeted hours of billable

time per professional
Budgeted direct-cost rate

Can also be calculated as

Total budgeted partner labor costs

=
Total budgeted partner labor - hours

A$345 000 5
1650 5

A$1 725 000

8250

= A$209.09

Can also be calculated as

Total budgeted associate labor costs

=
Total budgeted associate labor - hours

A$127 000 20
1650 20

A$2 540 000

33 000

= A$76.9697
2.

Budgeted total costs

Secretarial

Support

Support

A$1 900 000

A$600 000

41 250 hours

8 250 hours

A$46.0606 per hour

A$72.7272 per hour

Divided by budgeted quantity of

allocation base
Budgeted indirect cost rate

General

3.

Blighton

Judy

Direct costs:
Professional partners,
A$209.09 60; A$209.09 30
Professional associates,
A$76.9697 40; A$76.9697
120

A$12 545.40

A$6 272.70

3 078.79

9 236.36

A$ 15 624.19

A$ 15 509.06

4 606.06

6 909.09

4 363.63

2 181.82

8 969.69

9 090.91

A$24 593.88

A$24 599.97

Direct costs
Indirect costs:
General support, A$46.0606
100; A$46.0606 150
Secretarial support,
A$72.7272 60; A$72.7272
30
Indirect costs
Total costs

4.

Blighton

Judy

Single direct - Single indirect

(from Problem 5-38)

A$19 200.00

A$31 200.00

24 593.88

24 599.97

Multiple direct Multiple indirect

(from requirement 3 of Problem 5-39)
Difference

A$ 5 393.88
Undercosted

A$

6 600.03

Overcosted

The Blighton and Judy jobs differ in their use of resources. The Blighton job
has a mix of 60% partners and 40% associates, while Judy has a mix of 20%
partners and 80% associates. Thus, the Blighton job is a relatively high user of
the more costly partner related resources (both direct partner costs and
indirect partner secretarial support). The refined costing system in Problem 539 increases the reported cost the Blighton job by 28.09% (from A$19 200 to
A$24 593.88). On the other hand, the Judy job was overcosted by the single

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overhead cost pool (A$31 200 versus A$24 599, a reduction of 21.15%) for the
same reasons. Note the implication of this for competitiveness the firm is
likely to attract more customers like Blighton (presumably more complex,
requiring the partners time) and lose customers like Judy that are more
simple.

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