Case 2B-4 (continued)
6. One can argue that whether the ―hat trick‖ is unethical depends on the
level of sophistication of the owners of the company and others who
read the financial statements. If they understand the effects of excess
production on net operating income and are not misled, it can be
argued that the hat trick is not unethical. However, if that were the
case, there does not seem to be any reason to use the hat trick. Why
would the owners want to tie up working capital in inventories just to
artificially attain a target net operating income for the period? And
increasing the rate of production toward the end of the year is likely to
increase overhead costs due to overtime and other costs. Building up
inventories all at once is very likely to be much more expensive than
increasing the rate of production uniformly throughout the year. In this
case, we assumed that there would not be an increase in overhead
costs due to the additional production, but that is likely not to be true.
In our opinion, the hat trick is unethical unless there is a good reason
for increasing production other than to artificially boost the current
period’s net operating income. It is certainly unethical if the purpose is
to fool users of financial reports such as owners and creditors or if the
purpose is to meet targets so that bonuses will be paid to top managers.
Chapter 3
Job-Order Costing: Cost Flows and External
Reporting
Questions
3-1 The link that connects these two on a predetermined overhead rate that is based
schedules is the cost of goods manufactured. It is on estimates made at the beginning of the period.
calculated within a schedule of cost of goods
manufactured and then it plugs into the schedule 3-3 Underapplied overhead occurs when the
of cost of goods sold to enable calculating the actual overhead cost exceeds the amount of
cost of goods available for sale. overhead cost applied to Work in Process
inventory during the period. Overapplied
3-2 The Manufacturing Overhead clearing overhead occurs when the actual overhead cost is
account is credited when overhead cost is applied less than the amount of overhead cost applied to
to Work in Process. The applied overhead cost for Work in Process inventory during the period.
the period will probably not equal the actual Underapplied or overapplied overhead is disposed
overhead cost because overhead application relies of by either closing out the amount to Cost of
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 3 145
,Goods Sold or by allocating the amount among 3-10 Direct labor costs are added to Work in
Cost of Goods Sold and ending Work in Process Process as goods are being manufactured. Once
and Finished Goods inventories in proportion to goods are completed, their manufacturing costs
the applied overhead in each account. The (including direct labor) are transferred to Finished
adjustment for underapplied overhead increases Goods. Once goods are sold to customers their
Cost of Goods Sold (and the two inventories) manufacturing costs (including direct labor) are
whereas the adjustment for overapplied overhead transferred to Cost of Goods Sold.
decreases Cost of Goods Sold (and the two
inventories).
3-4 Manufacturing overhead may be
underapplied for several reasons. Control over
overhead spending may be poor. Or, some of the
overhead may be fixed and the actual amount of
the allocation base may be less than estimated at
the beginning of the period. In this situation, the
amount of overhead applied to inventory will be
less than the actual overhead cost incurred.
3-5 Underapplied overhead implies that not
enough overhead was assigned to jobs during the
period. Thus, cost of goods sold is understated so
we add underapplied overhead to cost of goods
sold. On the other hand, overapplied overhead is
deducted from cost of goods sold.
3-6 The raw materials used in production is
calculated by taking the beginning raw materials
inventory plus raw material purchases to derive
the raw materials available. From this amount,
subtract the ending raw materials inventory to
derive the raw materials used in production.
3-7 The total manufacturing costs added to
production include the direct materials used in
production, the direct labor cost, and the
manufacturing overhead applied to work in
process.
3-8 The beginning work in process inventory
plus the total manufacturing costs (which includes
the direct materials used production, the direct
labor cost, and the manufacturing overhead
applied to work in process) minus the ending
work in process inventory equals the cost of
goods manufactured.
3-9 Beginning finished goods inventory plus
the cost of goods manufactured equals the cost
of goods available for sale. From this amount,
subtract the ending finished goods inventory to
derive the unadjusted cost of goods sold.
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 3
,Chapter 3: Applying Excel
The completed worksheet is shown below.
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 3 147
, Chapter 3: Applying Excel (continued)
The completed worksheet, with formulas displayed, is shown below.
[Note: To display formulas in cells instead of their calculated amounts,
consult Excel Help.]
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 3
6. One can argue that whether the ―hat trick‖ is unethical depends on the
level of sophistication of the owners of the company and others who
read the financial statements. If they understand the effects of excess
production on net operating income and are not misled, it can be
argued that the hat trick is not unethical. However, if that were the
case, there does not seem to be any reason to use the hat trick. Why
would the owners want to tie up working capital in inventories just to
artificially attain a target net operating income for the period? And
increasing the rate of production toward the end of the year is likely to
increase overhead costs due to overtime and other costs. Building up
inventories all at once is very likely to be much more expensive than
increasing the rate of production uniformly throughout the year. In this
case, we assumed that there would not be an increase in overhead
costs due to the additional production, but that is likely not to be true.
In our opinion, the hat trick is unethical unless there is a good reason
for increasing production other than to artificially boost the current
period’s net operating income. It is certainly unethical if the purpose is
to fool users of financial reports such as owners and creditors or if the
purpose is to meet targets so that bonuses will be paid to top managers.
Chapter 3
Job-Order Costing: Cost Flows and External
Reporting
Questions
3-1 The link that connects these two on a predetermined overhead rate that is based
schedules is the cost of goods manufactured. It is on estimates made at the beginning of the period.
calculated within a schedule of cost of goods
manufactured and then it plugs into the schedule 3-3 Underapplied overhead occurs when the
of cost of goods sold to enable calculating the actual overhead cost exceeds the amount of
cost of goods available for sale. overhead cost applied to Work in Process
inventory during the period. Overapplied
3-2 The Manufacturing Overhead clearing overhead occurs when the actual overhead cost is
account is credited when overhead cost is applied less than the amount of overhead cost applied to
to Work in Process. The applied overhead cost for Work in Process inventory during the period.
the period will probably not equal the actual Underapplied or overapplied overhead is disposed
overhead cost because overhead application relies of by either closing out the amount to Cost of
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 3 145
,Goods Sold or by allocating the amount among 3-10 Direct labor costs are added to Work in
Cost of Goods Sold and ending Work in Process Process as goods are being manufactured. Once
and Finished Goods inventories in proportion to goods are completed, their manufacturing costs
the applied overhead in each account. The (including direct labor) are transferred to Finished
adjustment for underapplied overhead increases Goods. Once goods are sold to customers their
Cost of Goods Sold (and the two inventories) manufacturing costs (including direct labor) are
whereas the adjustment for overapplied overhead transferred to Cost of Goods Sold.
decreases Cost of Goods Sold (and the two
inventories).
3-4 Manufacturing overhead may be
underapplied for several reasons. Control over
overhead spending may be poor. Or, some of the
overhead may be fixed and the actual amount of
the allocation base may be less than estimated at
the beginning of the period. In this situation, the
amount of overhead applied to inventory will be
less than the actual overhead cost incurred.
3-5 Underapplied overhead implies that not
enough overhead was assigned to jobs during the
period. Thus, cost of goods sold is understated so
we add underapplied overhead to cost of goods
sold. On the other hand, overapplied overhead is
deducted from cost of goods sold.
3-6 The raw materials used in production is
calculated by taking the beginning raw materials
inventory plus raw material purchases to derive
the raw materials available. From this amount,
subtract the ending raw materials inventory to
derive the raw materials used in production.
3-7 The total manufacturing costs added to
production include the direct materials used in
production, the direct labor cost, and the
manufacturing overhead applied to work in
process.
3-8 The beginning work in process inventory
plus the total manufacturing costs (which includes
the direct materials used production, the direct
labor cost, and the manufacturing overhead
applied to work in process) minus the ending
work in process inventory equals the cost of
goods manufactured.
3-9 Beginning finished goods inventory plus
the cost of goods manufactured equals the cost
of goods available for sale. From this amount,
subtract the ending finished goods inventory to
derive the unadjusted cost of goods sold.
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 3
,Chapter 3: Applying Excel
The completed worksheet is shown below.
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 3 147
, Chapter 3: Applying Excel (continued)
The completed worksheet, with formulas displayed, is shown below.
[Note: To display formulas in cells instead of their calculated amounts,
consult Excel Help.]
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 3
