ACC 403

Cost Accounting

Tutorials with solutions

Prof. Dr. Jannis Bischof

University of Mannheim

FSS 2023

The tutorial questions are partly based on:

- Bhimani, A., C.T. Horngren, S.M. Datar and M.V. Rajan (2018): Management and Cost Accounting,
7th edition, Harlow / UK: Pearson Education.
- Datar, S. M., Rajan, M. (2021): Horngren’s Cost Accounting: A Managerial Emphasis. 17th edition
(global edition), Harlow / UK: Pearson Education.

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 1

 Session 3

Question 1

Matt Agos, the name partner of the law firm Agos & Associates, is examining ways to calculate indirect
cost rates. He collects the following information from the budget for the year:

- Budgeted variable indirect costs: 10 € per hour of professional labor time

- Budgeted fixed indirect costs: 50,000 € per quarter

The budgeted billable professional labor-hours per quarter are:

January - March 20,000 hours

April - June 10,000 hours
July - September 4,000 hours
October - December 6,000 hours

Agos pays all lawyers on an hourly basis (30 € per hour).

The firm’s job-costing system has a single direct cost category (professional labor at 30 € per hour) and
a single indirect cost pool (office support that is allocated based on budgeted professional labor-hours).
Agos & Associates charges clients 65 € per professional labor-hour.

a) Please calculate the budgeted indirect cost rates per professional labor-hour using:
1) Quarterly budgeted billable hours as the cost-allocation base
2) Annual budgeted billable hours as the cost-allocation base

b) Please calculate the operating profit for the following four customers,
Cary Lockhart: 10 hours in March
Viola Florrick: 6 hours in February and 4 hours in April
Will Gold: 4 hours in May and 6 hours in July
Eli Gardner: 5 hours in February, 2 hours in August, and 3 hours in October,
using:
1) The budgeted quarterly indirect cost rates
2) The budgeted annual indirect cost rate

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 2

Solution:

a)

Budgeted total indirect costs (€) Budgeted Budgeted total indirect

billable hours cost rate (€/hour)
1) Jan-March 10 x 20,000 + 50,000 = 250,000 20,000 12.50
April-June 10 x 10,000 + 50,000 = 150,000 10,000 15.00
July-Sept 10 x 4,000 + 50,000 = 90,000 4,000 22.50
October-Dec. 10 x 6,000 + 50,000 = 110,000 6,000 18.33
2) Jan-Dec 10 x 40,000 + 4 x 50,000 = 600,000 40,000 15.00

b)
1)

Lockhart Florrick Gold Gardner

Revenues (€) 650.00 650.00 650.00 650.00
Direct costs (€) 300.00 300.00 300.00 300.00
Quarterly-based indi- 125.00 135.00 195.00 162.50
rect costs (€)
Operating profit (€) 225.00 215.00 155.00 187.50

2) Using annual-based indirect job cost rates, all four clients will have the same operating profit:

Revenues, 65 € x 10 650 €
Direct costs, 30 € x 10 300 €
Indirect costs, 15 € x 10 150 €
Total costs 450 €
Operating profit 200 €

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 3

Question 2

The Snapshot GmbH produces high-quality digital cameras. There are two different types of cameras: A
high-quality reflex camera with 12 million pixels and a simple digital camera with 9 million pixels. The
models differ in their complexity. While the reflex camera is composed of 30 parts, the digital camera is
only produced with 12 parts. The indirect costs for the materials in the production process, however, are
equally high for all parts. Altogether indirect material costs of 162,000 € are planned. The projected direct
material costs and the quantity of cameras can be seen in the following table:

Direct material costs per unit (€/unit) Production quantity (units)

Reflex camera 400 200
Digital camera 250 400

a) Please calculate the total indirect material costs and the indirect material costs per unit for each cam-
era using an overhead rate based on direct material costs.

b) What is the overhead rate if the amount of parts of a camera is used as the allocation base (the cost
driver)?

c) How do the results of the overhead calculation under a) and b) differ? Explain the effect that causes
the differences.

Solution:

a) Cost allocation base: direct material costs

Direct material costs: 400 € * 200 + 250 € * 400 = 180,000 €
Overhead rate: 162,000 € / 180,000 € = 90%
Indirect material costs of the reflex camera: 80,000 € * 90% = 72,000 €
Per unit: 400 € * 90% = 360 €/unit
Indirect material costs of the digital camera: 100,000 € * 90% = 90,000 €
Per unit: 250 € * 90% = 225 €/unit

b) Cost allocation base: amount of parts

Quantity of parts: 200 * 30 + 400 * 12 = 10,800
Overhead rate: 162,000 € / 10,800 parts = 15 €/part

c) Effect

Direct material Indirect material Indirect material Effect (€)

costs per unit costs (€/unit) costs (€/unit)
(€/unit) - Overhead - Process
90% costs 15
€/part
Reflex camera 400 360 450 + 90
Digital camera 250 225 180 - 45

The overhead rate in b) reflects the different quantity of parts that is needed for each type of camera. For
the reflex camera way more parts have to be ordered than for the digital camera. The indirect cost allo-
cation in b) leads in contrast to the overhead allocation in a) to a lower result for the digital camera and to
a higher result for the reflex camera.

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 4

Question 3

Look at the following data for the car assembly division of BMW:

Physical units Direct materials (€) Conversion Costs (€)

(Cars)
Opening work in process 8 4,968,000 928,000
(March 1) *
Started in March 50
Completed during March 46
Closing work in process 12
(March 31) **
Costs added during March 32,200,000 13,920,000

* Degree of completion: direct materials, 90%; conversion costs, 40%

** Degree of completion: direct materials, 60%; conversion costs, 30%

a) Please calculate equivalent units of work done in March for direct materials and conversion costs.
Show physical units in the first column.

b) Please calculate cost per equivalent unit of opening work in process and of work done in March for
direct materials and conversion costs.

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 5

Solution:

a) Steps 1 and 2: Summarize output in physical units and calculate equivalent units

Step 1 Step 2: Equivalent units

Flow of production Physical units Direct materials Conversion costs
Completed and transferred out 46 46.0 46.0
during March
Add work in process, closing 12
12 x 60%; 12 x 30% 7.2 3.6
Total accounted for 58 53.2 49.6
Deduct work in process, opening 8
8 x 90%; 8 x 40% 7.2 3.2
Started during March 50
Work done in March 46.0 46.4

b) Step 3: Calculate equivalent-unit costs

Direct materials Conversion Costs

Equivalent costs per unit of opening work in process
Work in process, opening 4,968,000 € 928,000 €
Divide by equivalent units of
opening work in process / 7.2 / 3.2
Cost per equivalent unit of opening work in process 690,000 €/eq. unit 290,000 €/eq. unit

Equivalent costs per unit of work done in March

Costs added during March 32,200,000 € 13,920,000€
Divide by equivalent units of work done in
March / 46 / 46.4
Cost per equivalent unit of work done in March 700,000 €/eq. unit 300,000 €/eq. unit

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 6

Question 4

Adidas is a manufacturer of soccer jerseys. Adidas’ process-costing system has a single direct cost cat-
egory (direct materials) and a single indirect cost category (conversion costs). Each jersey passes through
two departments – the Tailoring Department and the Testing Department. Direct materials are added at
the opening of the process in Tailoring. Conversion costs are added evenly throughout the two depart-
ments. When the Tailoring Department finishes work on each jersey, it is immediately transferred to Test-
ing. Adidas uses process costing. Data for the Tailoring Department for October 2022 are:

Physical units Direct materials (€) Conversion Costs (€)

(Jerseys)
Opening work in process, 20 460,000 120,000
(October 1) *
Started during October 80
Completed during October 90
Closing work in process, 10
(October 31) **
Costs added during Octo- 2,000,000 935,000
ber

* Degree of completion: direct materials, 100%; conversion costs, 60%

** Degree of completion: direct materials, 100%; conversion costs, 70%

a) Please calculate the equivalent units of work done in October for direct materials and conversion costs.
Show physical units in the first column.

b) Please calculate cost per equivalent unit of opening work in process and of work done in October 2022
for direct materials and conversion costs.

c) Summarize the total Tailoring Department costs for October 2022 and assign these costs to units
completed (and transferred out) and to units in closing work in process using the weighted-average
method.

d) Summarize the total Tailoring Department costs for October 2022 and assign these costs to units
completed (and transferred out) and to units in closing work in process using the FIFO method. Com-
pare your results of this task to your results of task c).

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 7

Solution:

a) Steps 1 and 2: Summarize output in physical units and calculate equivalent units

Flow of production Physical units Direct materials* Conversion Costs

Completed and transferred out
during October 90 90 90
Add work in process, closing 10
10 x 100%; 10 x 70% 10 7

Total accounted for 100 100 97

Deduct work in process, opening 20
20 x 100%*; 20 x 60% 20 12
Started during October 80
Work done in October 80 85**

(* Direct materials are 100% complete in work-in-process stock since all direct materials are introduced
at the beginning of the assembly process.)

(** Difference to Physical units and Direct materials:40% * 20 = 8 not completed in the beginning of Oc-
tober, but 30% * 10 = 3 not completed in the end of October. Therefore, we must account for 8 – 3 = 5
equivalent-units of conversion costs more in October compared to the actual Physical units )

b) Step 3: Calculate equivalent-unit costs

Direct materials Conversion Costs

Opening work in process
Work in process, opening 460,000 € 120,000 €
Divide by equivalent units of opening work in process / 20 / 12
Cost per equivalent unit of opening work in process 23,000 €/eq. unit 10,000 €/eq. unit

Equivalent unit costs of work done in current period only

Costs added in current period 2,000,000 € 935,000 €
Divide by equivalent units of work done in current period / 80 / 85
Cost per equivalent unit of work done in October 25,000 €/eq. unit 11,000 €/eq. unit

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 8

c) Step 4 and 5: Summarize the total costs to account for and assign these costs to units completed and
units in closing work in process using the weighted-average method

Direct materials Conversion costs

Equiva- Cost per Total Equiva- Cost per Total Total pro-
lent units equivalent costs (€) lent units equivalent costs (€) duction
unit (€/eq. unit (€/eq. costs (€)
unit) unit)
(1) (2) (3)=(1)x(2) (4) (5) (6)=(4)x(5) (7)=(3)+(6)
Total costs to account for
Opening 20 23,000 460,000 12 10,000 120,000 580,000
work in
process
Work 80 25,000 2,000,000 85 11,000 935,000 2,935,000
done in
October
To ac- 100 24,600 * 2,460,000 97 10,876.29 1,055,000 3,515,000
count for **
Assignment of costs
Com- 90 24,600 2,214,000 90 10,876.29 978,866 3,192,866
pleted
and trans-
ferred out
Closing 10 24,600 246,000 7 10,876.29 76,134 322,134
work in
process
Ac- 100 2,460,000 97 1,055,000 3,515,000
counted
for

* = 2,460,000 / 100
** = 1,055,000 / 97

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 9

d) Summarize the total Tailoring Department costs for October 2019 and assign these costs to units com-
pleted (and transferred out) and to units in closing work in process using the FIFO method. Compare your
results of this task to your results of task c).

Direct materials Conversion costs

Equiva- Cost per Total Equiva- Cost per Total Total pro-
lent units equivalent costs (€) lent units equivalent costs (€) duction
unit (€/eq. unit (€/eq. costs (€)
unit) unit)
(1) (2) (3)=(1)x(2) (4) (5) (6)=(4)x(5) (7)=(3)+(6)
Total costs to account for
Opening 20 23,000 460,000 12 10,000 120,000 580,000
work in
process
Work 80 25,000 2,000,000 85 11,000 935,000 2,935,000
done in
October
To ac- 100 2,460,000 97 1,055,000 3,515,000
count for
Assignment of costs
Com- 90 2,210,000 90 978,000 3,188,000
pleted Thereof: Thereof:
and trans- 20* 23,000 460,000 12 10,000 120,000
ferred out 70** 25,000 1,750,000 78 11,000 858,000

Closing 10 25,000 250,000 7 11,000 77,000 327,000

work in
process
Ac- 100 2,460,000 97 1,055,000 3,515,000
counted
for

* = Opening work in process is transferred out first

** = Afterward, work done in October is transferred out

Comparison of result to c):

Only step 6 (assignment of costs) differs. The costs assigned to the work completed and transferred out
are lower, while the costs assigned to the closing work in process are higher. Reason: The equivalent-
unit costs of the opening work in progress are lower than the costs of the work done in October. In contrast
to c), in d) the costs assigned to the opening work in process are transferred out of the work in process
balance first.

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 10