Acct 303 Chapter 4

CHAPTER 4JOB COSTING

4-16 (10 min) Job order costing, process costing.

a. Job costing l. Job costingb. Process costing m. Process costingc. Job costing n. Job costingd. Process costing o. Job costinge. Job costing p. Job costingf. Process costing q. Job costingg. Job costing r. Process costingh. Job costing (but some process costing) s. Job costingi. Process costing t. Process costingj. Process costing u. Job costingk. Job costing

4-17 (20 min.) Actual costing, normal costing, accounting for manufacturing overhead.

1. =

= = 1.80 or 185%

=

= = 1.9 or 190%

2. Costs of Job 626 under actual and normal costing follow:

Actual NormalCosting Costing

Direct materials $ 40,000 $ 40,000Direct manufacturing labor costs 30,000 30,000Manufacturing overhead costs $30,000 1.90; $30,000 1.80 57,000 54,000Total manufacturing costs of Job 626 $127,000 $124,000

4-1

3. =

= $1,450,000 1.80

= $2,610,000

= –

= $2,755,000 $2,610,000 = $145,000

There is no under- or overallocated overhead under actual costing because overhead is allocated under actual costing by multiplying actual manufacturing labor costs and the actual manufacturing overhead rate. This, of course equals the actual manufacturing overhead costs. All actual overhead costs are allocated to products. Hence, there is no under- or overallocatead overhead.

4-18 (20 -30 min.) Job costing, normal and actual costing.

1. = =

= $50 per direct labor-hour

= =

= $42 per direct labor-hour

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

2a. Laguna Model

Mission Model

Normal costingDirect costs

Direct materialsDirect labor

Indirect costsAssembly support ($50 900; $50 1,010)

Total costs

$106,450 36,276 142,726

45,000 $187,726

$127,604 41,410 169,014

50,500 $219,514

4-2

2b. Actual costingDirect costs

Direct materialsDirect labor

Indirect costsAssembly support ($42 900; $42 1,010)

Total costs

$106,450 36,276 142,726

37,800 $180,526

$127,604 41,410 169,014

42,420 $211,434

3. Normal costing enables Anderson to report a job cost as soon as the job is completed, assuming that both the direct materials and direct labor costs are known at the time of use. Once the 900 direct labor-hours are known for the Laguna Model (June 2007), Anderson can compute the $187,726 cost figure using normal costing. Anderson can use this information to manage the costs of the Laguna Model job as well as to bid on similar jobs later in the year. In contrast, Anderson has to wait until the December 2007 year-end to compute the $180,526 cost of the Laguna Model using actual costing.

Although not required, the following overview diagram summarizes Anderson Construction’s job-costing system.

4-3

4-19 (10 min.) Budgeted manufacturing overhead rate, allocated manufacturing overhead.

1. Budgeted manufacturing overhead rate =

= = $20 per machine-hour

= 195,000 × $20 = $3,900,000

3. Since manufacturing overhead allocated is greater than the actual manufacturing overhead costs, Waheed overallocated manufacturing overhead:

Manufacturing overhead allocated $3,900,000Actual manufacturing overhead costs 3,860,000Overallocated manufacturing overhead $ 40,000

4-4

4-20 (20-30 min.) Job costing, accounting for manufacturing overhead, budgeted rates.

1. An overview of the product costing system is

Budgeted manufacturing overhead divided by allocation base:

Machining overhead = $36 per machine-hour

Assembly overhead: = 180% of direct manuf. labor costs

2. Machining department, 2,000 hours $36 $72,000Assembly department, 180% $15,000 27,000Total manufacturing overhead allocated to Job 494 $99,000

3. Machining AssemblyActual manufacturing overhead $2,100,000 $ 3,700,000Manufacturing overhead allocated,

55,000 $36 1,980,000 — 180% $2,200,000 — 3,960,000

Underallocated (Overallocated) $ 120,000 $ (260,000)

4-5

4-21 (2025 min.) Job costing, consulting firm.

1. Budgeted indirect-cost rate = $13,000,000 ÷ $5,000,000 = 260% of professional labor costs

2. At the budgeted revenues of $20,000,000, Taylor’s operating income of $2,000,000 equals 10% of revenues.

Markup rate = $20,000,000 ÷ $5,000,000 = 400% of direct professional labor costs

4-6

COSTALLOCATION

BASE

ConsultingSupport

ConsultingSupport

COST OBJECT:JOB FOR

CONSULTINGCLIENT

DIRECTCOSTS

Indirect Costs

Direct Costs

INDIRECTCOSTPOOL

ProfessionalLabor Costs

ProfessionalLabor Costs

ProfessionalLabor

ClientSupport

3. Budgeted costsDirect costs:

Director, $200 3 $ 600Partner, $100 16 1,600Associate, $50 40 2,000Assistant, $30 160 4,800 $ 9,000

Indirect costs:Consulting support, 260% $9,000 23,400

Total costs $32,400

As calculated in requirement 2, the bid price to earn a 10% income-to-revenue margin is 400% of direct professional costs. Therefore, Taylor should bid 4 $9,000 = $36,000 for the Red Rooster job.

Bid price to earn target operating income-to-revenue margin of 10% can also be calculated as follows:

Let R = revenue to earn target income R – 0.10R = $32,4000.90R = $32,400R = $32,400 ÷ 0.90 = $36,000

or, Direct costs $ 9,000 Indirect costs 23,400 Operating income 3,600 Bid price $36,000

4-7

4-22 (15–20 min.) Service industry, time period used to compute indirect cost rates.

1. Jan–March April–June July–Sept Oct–Dec TotalDirect labor costs $400,000 $280,000 $250,000 $270,000 $1,200,000Variable overhead costs as

a percentage of direct labor costs 90% 60% 60% 60%

Variable overhead costs (Percentage direct labor costs) $360,000 $168,000 $150,000 $162,000 $ 840,000Fixed overhead costs 300,000 300,000 300,000 300,000 1,200,000Total overhead costs $660,000 $468,000 $450,000 $462,000 $2,040,000Total overhead costs as a percentage of direct labor costs 165% 167% 180% 171% 170%

Budgeted Overhead Rate Used

Job 332Jan–March

RateJuly–Sept

RateAverage

Yearly RateDirect materials $10,000 $10,000 $10,000Direct labor costs 6,000 6,000 6,000Overhead allocated (variable + fixed) (165%; 180%; 170% of $6,000) 9,900 10,800 10,200Full cost of Job 332 $25,900 $26,800 $26,200

(a) The full cost of Job 332, using the budgeted overhead rate of 165% for January–March, is $25,900.

(b) The full cost of Job 332, using the budgeted overhead rate of 180% for July–September, is $26,800.

(c) The full cost of Job 332, using the annual budgeted overhead rate of 170%, is $26,200.

2.Budgeted fixed overhead rate based on annual fixed overhead costs and annual direct labor costs = $1,200,000 $1,200,000 = 100%

Budgeted Variable Overhead Rate Used

Job 332January–March

rateJuly–Sept

rateDirect materials $10,000 $10,000Direct labor costs 6,000 6,000Variable overhead allocated (90%; 60%; of $6,000) 5,400 3,600Fixed overhead allocated (100% of $6,000) 6,000 6,000Full cost of Job 332 $27,400 $25,600

4-8

(a) The full cost of Job 332, using the budgeted variable overhead rate of 90% for January–March and an annual fixed overhead rate of 100%, is $27,400.

(b) The full cost of Job 332, using the budgeted variable overhead rate of 60% for July–September and an annual fixed overhead rate of 100%, is $25,600.

3. If Printers, Inc. sets prices at a markup of costs, then prices based on costs calculated as in Requirement 2 (rather than as in Requirement 1) would be more effective in deterring clients from sending in last-minute, congestion-causing orders in the January–March time frame. In this calculation, more variable manufacturing overhead costs are allocated to jobs in the first quarter, reflecting the larger costs of that quarter caused by higher overtime and facility and machine maintenance. This method better captures the cost of congestion during the first quarter.

4-23 (10–15 min.) Accounting for manufacturing overhead.

1. Budgeted manufacturing overhead rate =

= $30 per machine-hour

2. Work-in-Process Control 7,350,000 Manufacturing Overhead Allocated 7,350,000(245,000 machine-hours $30 per machine-hour = $7,350,000)

3. $7,350,000– $7,300,000 = $50,000 overallocated, an insignificant amount of actual manufacturing overhead costs $50,000 ÷ $7,300,000 = 0.66%.

Manufacturing Overhead Allocated 7,350,000 Manufacturing Department Overhead Control 7,300,000 Cost of Goods Sold 50,000

4-9

4-24 (3545 min.) Job costing, journal entries.

Some instructors may also want to assign Exercise 4-25. It demonstrates the relationships of the general ledger to the underlying subsidiary ledgers and source documents.

1. An overview of the product costing system is:

4-10

2. & 3.This answer assumes COGS given of $4,020 does not include the writeoff of overallocated manufacturing overhead.

2. (1) Materials Control Accounts Payable Control

800800

(2) Work-in-Process Control Materials Control

710 710

(3) Manufacturing Overhead Control Materials Control

100 100

(4) Work-in-Process ControlManufacturing Overhead Control Wages Payable Control

1,300900

2,200(5) Manufacturing Overhead Control

Accumulated Depreciation––buildings and manufacturing equipment

400

400(6) Manufacturing Overhead Control

Miscellaneous accounts 550

550(7) Work-in-Process Control

Manufacturing Overhead Allocated (1.60 $1,300 = $2,080)

2,0802,080

(8) Finished Goods Control Work-in-Process Control

4,1204,120

(9) Accounts Receivable Control (or Cash) Revenues

8,0008,000

(10) Cost of Goods Sold Finished Goods Control

4,0204,020

(11) Manufacturing Overhead Allocated Manufacturing Overhead Control Cost of Goods Sold

2,0801,950

130

4-11

3.Materials Control

Bal. 12/31/2008(1) Purchases

100800

(2) Issues(3) Issues

710100

Bal. 12/31/2009 90

Work-in-Process ControlBal. 12/31/2008(2) Direct materials(4) Direct manuf. labor(7) Manuf. overhead

allocated

60710

1,300

2,080

(8)Goods completed 4,120

Bal. 12/31/2009 30

Finished Goods ControlBal. 12/31/2008(8) Goods completed

5004,120

(10) Goods sold 4,020

Bal. 12/31/2009 600

Cost of Goods Sold(10) Goods sold 4,020 (11) Adjust for overallocation 130

Bal. 12/31/2009 3,890

Manufacturing Overhead Control(3) Indirect materials(4) Indirect manuf. labor(5) Depreciation(6) Miscellaneous

100900400

550

(11) To close 1,950

Bal. 0

Manufacturing Overhead Allocated(11) To close 2,080 (7) Manuf. overhead allocated 2,080

Bal. 0

4-12

4-25 (35 minutes) Journal entries, T-accounts, and source documents.1.

i. Direct Materials Control 124,000Accounts Payable Control 124,000

Source Document: Purchase Invoice, Receiving ReportSubsidiary Ledger: Direct Materials Record, Accounts Payable

ii. Work in Process Control a 122,000Direct Materials Control 122,000

Source Document: Material Requisition Records, Job Cost RecordSubsidiary Ledger: Direct Materials Record, Work-in-Process Inventory, Records by Jobs

iii. Work in Process Control 80,000Manufacturing Overhead Control 54,500

Wages Payable Control 134,500Source Document: Labor Time Records, Job Cost RecordsSubsidiary Ledger:, Manufacturing Overhead Records, Employee Labor Records, Work-in-Process Inventory Records by Jobs

iv. Manufacturing Overhead Control 129,500Salaries Payable Control 20,000Accounts Payable Control 9,500Accumulated Depreciation Control 30,000Rent Payable Control 70,000

Source Document: Depreciation Schedule, Rent Schedule, Maintenance wages due, Invoices for miscellaneous factory overhead itemsSubsidiary Ledger: Manufacturing Overhead Records

v. Work in Process Control 200,000Manufacturing Overhead Allocated 200,000($80,000 $2.50)

Source Document: Labor Time Records, Job Cost RecordSubsidiary Ledger: Work-in-Process Inventory Records by Jobs

vi. Finished Goods Control b 387,000Work in Process Control 387,000

Source Document: Job Cost Record, Completed Job Cost RecordSubsidiary Ledger: Work-in-Process Inventory Records by Jobs, Finished Goods Inventory Records by Jobs

vii. Cost of Goods Sold c 432,000Finished Goods Control 432,000

Source Document: Sales Invoice, Completed Job Cost RecordSubsidiary Ledger: Finished Goods Inventory Records by Jobs

viii. Manufacturing Overhead Allocated 200,000Manufacturing Overhead Control 184,000Cost of Goods Sold 16,000

4-13

Source Document: Prior Journal Entries

ix. Administrative Expenses 7,000Marketing Expenses 120,000

Salaries Payable Control 30,000Accounts Payable Control 90,000Accumulated Depreciation, Office Equipment 7,000

Source Document: Depreciation Schedule, Marketing Payroll Request, Invoice for Advertising, Sales Commission Schedule.

Subsidiary Ledger: Employee Salary Records, Administration Cost Records, Marketing Cost Records.

4-14

2. T-accounts

Direct Materials ControlBal. 1/1/2008(1) Purchases

9,000124,000

(2) Materials used 122,000

Bal. 12/31/2008 11,000

Work-in-Process ControlBal. 1/1/2008(2) Direct materials used(3) Direct manuf. labor(5) Manuf. overhead

allocated

6,000122,00080,000

200,000

(6) Cost of goods manufactured 387,000

Bal. 12/31/2008 21,000

Finished Goods ControlBal. 1/1/2008(6) Cost of goods manuf.

69,000387,000

(7) Cost of goods sold 432,000

Bal. 12/31/2008 24,000

Cost of Goods Sold(7) Goods sold 432,000 (8) Adjust for overallocation 16,000

Manufacturing Overhead Control(3)Indirect labor(4) Supplies(4) Miscellaneous(4 Depreciation(4) Rent

54,50020,0009,500

30,00070,000

(8) To close 184,000

Bal. 0

Manufacturing Overhead Allocated(8) To close 200,000 (5) Manuf. overhead allocated 200,000

Bal. 0

4-15

4-26 (45 min.) Job costing, journal entries.

Some instructors may wish to assign Problem 4-24. It demonstrates the relationships of journal entries, general ledger, subsidiary ledgers, and source documents.

1. An overview of the product-costing system is

2. Amounts in millions.

(1) Materials ControlAccounts Payable Control

150150

(2) Work-in-Process ControlMaterials Control

145145

(3) Manufacturing Department Overhead ControlMaterials Control

10 10

(4) Work-in-Process ControlWages Payable Control

90 90

(5) Manufacturing Department Overhead ControlWages Payable Control

30 30

(6) Manufacturing Department Overhead ControlAccumulated Depreciation

19 19

(7) Manufacturing Department Overhead ControlVarious liabilities

9 9

(8) Work-in-Process ControlManufacturing Overhead Allocated

63 63

(9) Finished Goods ControlWork-in-Process Control

294294

(10a) Cost of Goods SoldFinished Goods Control

292292

(10b) Accounts Receivable Control (or Cash )Revenues

400400

4-16

Manufacturing Overhead

Machine-Hours

Indirect CostsDirect Costs

DirectMaterials

DirectManuf. Labor

INDIRECTCOSTPOOL

COSTALLOCATION

BASE

COST OBJECTPRODUCT

DIRECTCOSTS

The posting of entries to T-accounts is as follows:

Materials Control Work-in-Process ControlBal. 12(1) 150

(2) 145(3) 10

Bal. 2(2) 145(4) 90(8) 63

(9) 294

Bal. 6

Finished Goods Control Cost of Goods SoldBal. 6(9) 294

(10a) 292 (10a) 292(11) 5

Manufacturing DepartmentOverhead Control Manufacturing Overhead Allocated

(3) 10(5) 30(6) 19(7) 9

(11) 68 (11) 63 (8) 63

Accounts Payable Control Wages Payable Control(1) 150 (4) 90

(5) 30

Accumulated Depreciation Various Liabilities(6) 19 (7) 9

Accounts Receivable Control Revenues(10b) 400 (10b) 400

The ending balance of Work-in-Process Control is $6.

3. (11) Manufacturing Overhead Allocated 63Cost of Goods Sold 5

Manufacturing Department Overhead Control 68

Entry posted to T-accounts in Requirement 2.

4-17

4-27 (15 min.) Job costing, unit cost, ending work in progress.

1. Direct manufacturing labor rate per hour $25 Manufacturing overhead cost allocated per manufacturing labor-hour $20 Job M1 Job M2Direct manufacturing labor costs $275,000 $200,000Direct manufacturing labor hours ($275,000 $25; $200,000 $25) 11,000 8,000Manufacturing overhead cost allocated (11,000 $20; 8,000 $20) $220,000 $160,000

Job Costs May 2009 Job M1 Job M2Direct materials $ 75,000 $ 50,000 Direct manufacturing labor 275,000 200,000 Manufacturing overhead allocated 220,000 160,000 Total costs $570,000 $410,000

2.Number of pipes produced for Job M1 1,500 Cost per pipe ($570,000 1,500) $380

3. Finished Goods Control 570,000

Work-in-Process Control 570,000

4. Raymond Company began May 2009 with no work-in-process inventory. During May, it started and finished M1. It also started M2, which is still in work-in-process inventory at the end of May. M2’s manufacturing costs up to this point, $410,000, remain as a debit balance in the Work-in-Process Inventory account at the end of May 2009.

4-18

4-28 (2030 min.) Job costing; actual, normal, and variation from normal costing.

1. Actual direct cost rate for professional labor = $58 per professional labor-hour

Actual indirect cost rate = = $48 per professional labor-hour

= = $60 per professional labor-hour

Budgeted indirect cost rate = = $45 per professional labor-hour

(a)ActualCosting

(b)NormalCosting

(c)Variation of

Normal CostingDirect-Cost Rate $58

(Actual rate)$58

(Actual rate)$60

(Budgeted rate)Indirect-Cost Rate $48

(Actual rate)$45

(Budgeted rate)$45

(Budgeted rate)

2. (a)ActualCosting

(b)NormalCosting

(c)Variation of

Normal CostingDirect CostsIndirect CostsTotal Job Costs

$58 120 = $ 6,960

48 120 = 5,760

$12,720

$58 120 = $ 6,960

45 120 = 5,400

$12,360

$60 120 = $ 7,200 45 120 = 5,400

$12,600

All three costing systems use the actual professional labor 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 $12,720 exceeds the normal costing figure of $12,360 because the actual indirect-cost rate ($48) exceeds the budgeted indirect-cost rate ($45). The normal costing figure of $12,360 is less than the variation of normal costing (based on budgeted rates for direct costs) figure of $12,600, because the actual direct-cost rate ($58) is less than the budgeted direct-cost rate ($60).

4-19

Although not required, the following overview diagram summarizes Chirac’s job-costing system.

4-20

4-29 (30 min.) Job order costing: actual, normal, and variation from normal costing.

1a. Actual costing

Direct cost rate = Actual professional labor costs ÷ Actual professional labor-hours = $1,320,000 ÷ 22,000 hours = $60 per professional-hour

Indirect cost rate = Actual support costs ÷ Actual professional labor-hours = $2,400,000 ÷ 22,000 hours

= $109.09 per professional-hour

1b. Normal costing

Budgeted professional hours = Budgeted hours per lawyer Number of lawyers = 2500 8 = 20,000 hours

Direct cost rate = Actual professional labor costs ÷ Actual professional labor-hours = $1,320,000 ÷ 22,000 hours

= $60 per professional-hour

Indirect cost rate = Budgeted support costs ÷ Budgeted professional labor-hours = $2,000,000 ÷ 20,000 hours = $100 per professional-hour

1c. Variation from normal costing that uses budgeted rates for direct costs

= $1,100,000 ÷ 20,000 hours = $55 per professional-hour

Indirect cost rate = Budgeted support costs ÷ Budgeted professional labor-hours = $2,000,000 ÷ 20,000 hours = $100 per professional-hour

2. The costs of Ari Apostolus’ will under each method follow:a. Actual CostingDirect costs 4,000 hours $60 per hour $240,000Indirect costs 4,000 hours $109.09 per hour 436,360Total costs $676,360

b. Normal CostingDirect costs 4,000 hours $60 per hour $240,000Indirect costs 4,000 hours $100 per hour 400,000Total costs $640,000

c. Variation from normal costingDirect costs 4,000 hours $55 per hour $220,000Indirect costs 4,000 hours $100 per hour 400,000Total costs $620,000

4-21

4-30 (30 min.) Proration of overhead.

=

2. Overhead allocated = 50% Actual direct manufacturing labor cost = 50% $220,000 =$110,000

Overallocated plant overhead = Actual plant overhead costs – Allocated plant overhead costs = $106,000 – $110,000 = –$4,000

Overallocated plant overhead = $4,000

3a. All overallocated plant overhead is written off to cost of goods sold.

Both work in process (WIP) and finished goods inventory remain unchanged.

Account

Dec. 31, 2009 Balance(Before Proration)

(1)

Proration of $4,000Overallocated

Manuf. Overhead (2)

Dec. 31, 2009 Balance

(After Proration) (3) = (1) – (2)

WIP $ 50,000 $ 0 $ 50,000Finished Goods 240,000 0 240,000Cost of Goods Sold 560,000 4,000 556,000Total $850,000 $4,000 $846,000

3b. Overallocated plant overhead prorated based on ending balances:

Account


(Before Proration) (1)

Balance as a Percent of Total

(2) = (1) ÷ $850,000


Manuf. Overhead (3) = (2) $4,000


(After Proration) (4) = (1) – (3)

WIP $ 50,000 0.0588 0.0588 $4,000 =$ 235 $ 49,765Finished Goods 240,000 0.2824 0.2824 $4,000 = 1,130 238,870Cost of Goods Sold 560,000 0.6588 0.6588 $4,000 = 2,635 557,365Total $850,000 1.0000 $4,000 $846,000

3c. Overallocated plant overhead prorated based on 2009 overhead in ending balances:

Account

Dec. 31, 2009 Balance(Before

Proration) (1)

Allocated Manuf.

Overhead inDec. 31, 2009

Balance (2)

Allocated Manuf. Overhead in Dec. 31, 2009 Balance

as a Percent of Total (3) = (2) ÷ $110,000

Proration of $4,000 Overallocated

Manuf. Overhead (4) = (3) $4,000

Dec. 31, 2009 Balance(After

Proration) (5) = (1) – (4)

WIP $ 50,000 $ 10,000a 0.0909 0.0909 $4,000=$ 364 $ 49,636Finished Goods 240,000 30,000b 0.2727 0.2727 $4,000= 1,091 238,909Cost of Goods Sold 560,000 70,000c 0.6364 0.6364 $4,000=$2,545 557,455Total $850,000 $110,000 1.0000 $4,000 $846,000

4-22

a,b,c Overhead allocated = Direct manuf. labor cost 50% = $20,000; 60,000; 140,000 50%

4. Writing off all of the overallocated plant overhead to Cost of Goods Sold (CGS) is usually warranted when CGS is large relative to Work-in-Process and Finished Goods Inventory and the overallocated plant overhead is immaterial. Both these conditions apply in this case. ROW should write off the $4,000 overallocated plant overhead to Cost of Goods Sold Account.

4-31 (2030 min) Job costing, accounting for manufacturing overhead, budgeted rates.

1. An overview of the job-costing system is:

2. Budgeted manufacturing overhead divided by allocation base:

a. Machining Department:

= $50 per machine-hour

b. Finishing Department:

= 200% of direct manufacturing labor costs

4-23

COST OBJECT:JOB

3. Machining Department overhead, $50 130 hours $6,500Finishing Department overhead, 200% of $1,250 2,500Total manufacturing overhead allocated $9,000

4. Total costs of Job 431:Direct costs:

Direct materials––Machining Department $14,000––Finishing Department 3,000

Direct manufacturing labor —Machining Department 600—Finishing Department 1,250 $18,850

Indirect costs:Machining Department overhead, $50 130 $6,500Finishing Department overhead, 200% of $1,250 2,500 9,000

Total costs $27,850

The per-unit product cost of Job 431 is $27,850 ÷ 200 units = $139.25 per unit

The point of this part is (a) to get the definitions straight and (b) to underscore that overhead is allocated by multiplying the actual amount of the allocation base by the budgeted rate.

5.

Machining FinishingManufacturing overhead incurred (actual) $11,200,000 $7,900,000Manufacturing overhead allocated

220,000 hours $50 11,000,000200% of $4,100,000 8,200,000

Underallocated manufacturing overhead $ 200,000Overallocated manufacturing overhead $ 300,000Total overallocated overhead = $300,000 – $200,000 = $100,000

6. A homogeneous cost pool is one where all costs have the same or a similar cause-and-effect or benefits-received relationship with the cost-allocation base. Solomon likely assumes that all its manufacturing overhead cost items are not homogeneous. Specifically, those in the Machining Department have a cause-and-effect relationship with machine-hours, while those in the Finishing Department have a cause-and-effect relationship with direct manufacturing labor costs. Solomon believes that the benefits of using two cost pools (more accurate product costs and better ability to manage costs) exceeds the costs of implementing a more complex system.

4-24

4-32 (1520 min.) Service industry, job costing, law firm.

1.

2. =

=

= $65 per professional labor-hour

Note that the budgeted professional labor-hour direct-cost rate can also be calculated by dividing total budgeted professional labor costs of $2,600,000 ($104,000 per professional 25 professionals) by total budgeted professional labor-hours of 40,000 (1,600 hours per professional 25 professionals), $2,600,000 40,000 = $65 per professional labor-hour.

=

=

=

= $55 per professional labor-hour

4. Richardson PunchDirect costs:

Professional labor, $65 100; $65 150Indirect costs:

Legal support, $55 100; $55 150

$ 6,500

5,500 $12,000

$ 9,750

8,250 $18,000

4-25

3.

4-33 (25–30 min.) Service industry, job costing, two direct- and indirect-cost categories, law firm (continuation of 4-32).

Although not required, the following overview diagram is helpful to understand Keating’s job-costing system.

1. ProfessionalPartner Labor

ProfessionalAssociate Labor

Budgeted compensation per professionalDivided by budgeted hours of billable time per professionalBudgeted direct-cost rate

$ 200,000

÷1,600 $125 per hour*

$80,000

÷1,600 $50 per hour†

*Can also be calculated as =

= = $125

†Can also be calculated as =

= = $ 50

2. GeneralSupport

SecretarialSupport

Budgeted total costsDivided by budgeted quantity of allocation baseBudgeted indirect cost rate

$1,800,000÷ 40,000 hours$45 per hour

$400,000÷ 8,000 hours$50 per hour

4-26

ProfessionalLabor-Hours

GeneralSupport

COST OBJECT:JOB FOR

CLIENT

INDIRECTCOSTPOOL

COSTALLOCATION

BASE

}

DIRECTCOST

Indirect Costs

Direct Costs

PartnerLabor-Hours

SecretarialSupport

ProfessionalAssociate Labor

ProfessionalPartner Labor

3. Richardson PunchDirect costs:

Professional partners, $125 60; $125 30Professional associates, $50 40; $50 120

Direct costsIndirect costs:

General support, $45 100; $45 150Secretarial support, $50 60; $50 30

Indirect costsTotal costs

$7,500 2,000

$ 9,500

4,500 3,000

7,500$17,000

$3,750 6,000

$ 9,750

6,750 1,500

8,250$18,000

4. Richardson PunchSingle direct - Single indirect (from Problem 4-32)Multiple direct – Multiple indirect (from requirement 3 of Problem 4-33)

Difference

$12,000

17,000

$ 5,000undercosted

$18,000

18,000

$ 0 no change

The Richardson and Punch jobs differ in their use of resources. The Richardson job has a mix of 60% partners and 40% associates, while Punch has a mix of 20% partners and 80% associates. Thus, the Richardson 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 4-32 increases the reported cost in Problem 4-32 for the Richardson job by 41.7% (from $12,000 to $17,000).

4-27

4-34 (2025 min.) Proration of overhead.

2. = –

= $4,900,000 – $4,500,000*= $400,000

*$60 75,000 actual machine-hours = $4,500,000

a. Write-off to Cost of Goods Sold

Account(1)

AccountBalance

(Before Proration)(2)

Write-off of $400,000

UnderallocatedManufacturing

Overhead(3)

AccountBalance

(After Proration)(4) = (2) + (3)

Work in ProcessFinished GoodsCost of Goods SoldTotal

$ 750,0001,250,000

8,000,000 $10,000,000

$ 00

400,000 $400,000

$ 750,0001,250,000

8,400,000 $10,400,000

b. Proration based on ending balances (before proration) in Work in Process, Finished Goods and Cost of Goods Sold.

Account(1)

Account Balance(Before Proration)

(2)

Proration of $400,000UnderallocatedManufacturing

Overhead(3)

AccountBalance


Work in ProcessFinished GoodsCost of Goods SoldTotal

$ 750,0001,250,000

8,000,000 $10,000,000

( 7.5%)(12.5%)(80 .0% )100 .0%

0.075 $400,000 = $ 30,0000.125 $400,000 = 50,0000.800 $400,000 = 320,000

$400,000

$ 780,0001,300,000

8,320,000 $10,400,000

c. Proration based on the allocated overhead amount (before proration) in the ending balances of Work in Process, Finished Goods, and Cost of Goods Sold.

Account(1)

AccountBalance(Before

Proration)(2)

Allocated OverheadIncluded in

the Account Balance(Before Proration)

(3) (4)

Proration of $400,000Underallocated

Manufacturing Overhead(5)

AccountBalance(After

Proration)(6) = (2) + (5)

Work in Process $ 750,000 $ 240,000a ( 5.33%) 0.0533 $400,000 = $ 21,320 $ 771,320Finished Goods 1,250,000 660,000b (14.67%) 0.1467 $400,000 = 58,680 1,308,680Cost of Goods Sold 8,000,000 3,600,000c (80.00%) 0.8000 $400,000 = 320,000 8,320,000

Total $10,000,000 $4,500,000 100.00 % $400,000 $10,400,000

a$60 4,000 machine-hours; b$60 11,000 machine-hours; c$60 60,000 machine-hours

4-28

3. Alternative (c) is theoretically preferred over (a) and (b). Alternative (c) yields the same ending balances in work in process, finished goods, and cost of goods sold that would have been reported had actual indirect cost rates been used.

Chapter 4 also discusses an adjusted allocation rate approach that results in the same ending balances as does alternative (c). This approach operates via a restatement of the indirect costs allocated to all the individual jobs worked on during the year using the actual indirect cost rate.

4-35 (15 min.) Normal costing, overhead allocation, working backward. 1a. Manufacturing overhead allocated = 200% × Direct manufacturing labor cost

$3,600,000 = 2 × Direct manufacturing labor cost

Direct manufacturing labor cost = = $1,800,000

b. = + +

$8,000,000 = Direct material used + $1,800,000 + $3,600,000

Direct material used = $2,600,000

2. + Total manufacturing cost = Cost of goods manufactured +

Denote Work-in-process on 12/31/2009 by X

$320,000 + $8,000,000 = $7,920,000 + X

X = $400,000

Work-in-process inventory, 12/31/09 = $400,000.

4-29

4-36 (40 min.) Proration of overhead with two indirect cost pools.

1.a. C & A department:

Overhead allocated = $40 4,000 Machine hours = $160,000

Underallocated overhead = Actual overhead costs – Overhead allocated = $163,000 – 160,000 = $3,000 underallocated

1.b. Finishing department:

Overhead allocated = $50 per direct labor-hour 2,000 direct labor-hours = $100,000

Overallocated overhead = Actual overhead costs – Overhead allocated = $87,000 – 100,000 = $13,000 overallocated

2a. All overallocated overhead is written off to cost of goods sold.

Both Work in Process and Finished goods inventory remain unchanged.

Account


(1)


Overhead(2)



WIP $ 150,000 0 $ 150,000Finished Goods 250,000 0 250,000Cost of Goods Sold 1,600,000 +$3,000 –$13,000 1,590,000Total $2,000,000 $ 10,000 $1,990,000

2b. Overallocated overhead prorated based on ending balances

Account


(1)

Balance as a Percent of Total

(2) = (1) ÷ $2,000,000

Proration of $10,000Overallocated Overhead

(3) = (2) 10,000

Dec. 31, 2008 Balance(After Proration)

(4) = (1) – (3)WIP $ 150,000 0.075 0.075 × $10,000 = $ 750 $ 149,250Finished Goods 250,000 0.125 0.125 × $10,000 = 1,250 248,750Cost of Goods Sold 1,600,000 0.800 0.800 × $10,000 = 8,000 1,592,000Total $2,000,000 1.000 $10,000 $1,990,000

2c. Overallocated overhead prorated based on overhead in ending balances. (Note: overhead must be allocated separately from each department. This can be done using the number of machine hours/direct labor hours as a surrogate for overhead in ending balances.)

4-30

For C & A department:

Account

Allocated Overhead in Dec. 31, 2008 Balance

(1)

Allocated Overhead in Dec. 31, 2008 Balance as a Percent of Total(2) = (1) ÷ $160,000

Proration of $3,000Underallocated

Overhead (3) = (2) $3000

WIP 200 $40 = $ 8,000 0.05 0.05 $3,000 = $ 150Finished Goods 600 $40 = 24,000 0.15 0.15 $3,000 = 450Cost of Goods Sold 3,200 $40 = 128,000 0.80 0.80 $3,000 = 2,400Total $160,000 1.00 $3,000

For finishing department:

Account

Allocated Overhead in Dec. 31, 2008 Balance

(4)

Allocated Overheadin Dec. 31, 2008

Balance as a Percent of Total(5) = (4) ÷ $100,000

Proration of $13,000Underallocated Overhead

(6) = (5) $13,000 WIP 100 $50 = $ 5,000 0.05 0.05 $13,000 = $ 650Finished Goods 400 $50 = 20,000 0.20 0.20 $13,000 = 2,600Cost of Goods Sold 1,500 $50 = 75,000 0.75 0.75 $13,000 = 9,750Total $100,000 1.00 $13,000

Account


(7)

Underallocated/ Overallocated

Overhead (8) = (3) – (6)

Dec. 31, 2009 Balance(After Proration)

(9) = (7) + (8)WIP $ 150,000 $150 – $650 = $ (500) $ 149,500Finished Goods 250,000 $450 – $2,600 = (2,150) 247,850Cost of Goods Sold 1,600,000 $2,400 – $9,750 = (7,350) 1,592,650Total $2,000,000 $(10,000) $1,990,000

3. The first method is simple and Cost of Goods Sold accounts for 80% of the three account amounts. The amount of overallocated and underallocated overhead is also immaterial. Allocation to the other two accounts is minimal. Therefore, write-off to cost of goods sold is the most cost effective alternative.

4-31

4-37 (35 min.) General ledger relationships, under- and overallocation.

The solution assumes all materials used are direct materials. A summary of the T-accounts for Needham Company before adjusting for under- or overallocation of overhead follows:

Direct Materials Control Work-in-Process Control1-1-2008 30,000Purchases 400,000

Material used for manufacturing 380,000

1-1-2008 20,000Direct materials 380,000

Transferred to finished goods 940,000

12-31-2008 50,000 Direct manuf. Labor 360,000Manuf. overhead allocated 480,00012-31-2008 300,000

Finished Goods Control Cost of Goods Sold1-1-2008 10,000Transferred in from WIP 940,000

Cost of goods sold 900,000

Finished goods sold 900,000

12-31-2008 50,000

Manufacturing Overhead Control Manufacturing Overhead AllocatedManufacturing overhead costs 540,000

Manufacturing overhead allocated to work in process 480,000

1. From Direct Materials Control T-account,Direct materials issued to production = $380,000 that appears as a credit.

2. Direct manufacturing labor-hours =

= = 24,000 hours

=

= 24,000 hours $20 per hour = $480,000

3. From the debit entry to Finished Goods T-account, Cost of jobs completed and transferred from WIP = $940,000

4. From Work-in-Process T-account,

= $20,000 + $380,000 + $360,000 + $480,000 – $940,000

= $300,000

5. From the credit entry to Finished Goods Control T-account, Cost of goods sold (before proration) = $900,000

4-32

6. = –

= $540,000 – $480,000= $60,000 underallocated

7. a. Write-off to Cost of Goods Sold will increase (debit) Cost of Goods Sold by $60,000. Hence, Cost of Goods Sold = $900,000 + $60,000 = $960,000.

b. Proration based on ending balances (before proration) in Work in Process, Finished Goods, and Cost of Goods Sold.

Account balances in each account after proration follows:

Account(1)

Account Balance(Before Proration)

(2)

Proration of $60,000 Underallocated

Manufacturing Overhead(3)

Account Balance(After Proration)

(4)=(2)+(3)Work in Process $ 300,000 (24%) 0.24 $60,000 = $14,400 $ 314,400Finished Goods 50,000 ( 4%) 0.04 $60,000 = 2,400 52,400Cost of Goods Sold 900,000 (72 % ) 0.72 $60,000 = 43,200 943,200

$1,250,000 100 % $60,000 $1,310,000

8. Needham’s operating income using write-off to Cost of Goods Sold and Proration based on ending balances (before proration) follows:

Write-off to Proration BasedCost of Goods on Ending

Sold Balances

Revenues $1,090,000 $1,090,000Cost of goods sold 960,000 943,200Gross margin 130,000 146,800Marketing and distribution costs 140,000 140,000Operating income/(loss) $ (10,000) $ 6,800

9. If the purpose is to report the most accurate inventory and cost of goods sold figures, the preferred method is to prorate based on the manufacturing overhead allocated component in the inventory and cost of goods sold accounts. Proration based on the balances in Work in Process, Finished Goods, and Cost of Goods Sold will equal the proration based on the manufacturing overhead allocated component if the proportions of direct costs to manufacturing overhead costs are constant in the Work in Process, Finished Goods and Cost of Goods Sold accounts. Even if this is not the case, the prorations based on Work in Process, Finished Goods, and Cost of Goods Sold will better approximate the results if actual cost rates had been used rather than the write-off to Cost of Goods Sold method.

Another consideration in Needham’s decision about how to dispose of underallocated manufacturing overhead is the effects on operating income. The write-off to Cost of Goods Sold will lead to an operating loss. Proration based on the balances in Work in Process, Finished Goods, and Cost of Goods Sold will help Needham avoid the loss and show an operating income.

The main merit of the write-off to Cost of Goods Sold method is its simplicity. However, accuracy and the effect on operating income favor the preferred and recommended proration approach.

4-33

4-38 (4055 min.) Overview of general ledger relationships.

1. & 3. An effective approach to this problem is to draw T-accounts and insert all the known figures. Then, working with T-account relationships, solve for the unknown figures (here coded by the letter X for beginning inventory figures and Y for ending inventory figures).

Materials ControlXPurchases

15,00085,000

(1) 70,000

100,000 70,000Y 30,000

Work-in-Process ControlX(1) DM 70,000(2) DL 150,000(3) Overhead 90,000

10,000

310,000

(4) 305,000

(a)(c)

320,0005,0003,000

305,000

Y 23,000

Finished Goods ControlX(4)

20,000305,000

(5) 300,000

325,000 300,000Y 25,000

Cost of Goods Sold(5) 300,000 (d) 6,000

Manufacturing Department Overhead Control

(a)(b)

85,0001,0001,000

(d) 87,000

Manufacturing Overhead Allocated(d) 93,000 (3)

(c)90,0003,000

Manufacturing overhead cost rate = $90,000 ÷ $150,000 = 60%

Wages Payable Control(a) 6,000

Various Accounts(b) 1,000

4-34

2. Adjusting and closing entries:

(a) Work-in-Process Control 5,000Manufacturing Department Overhead Control 1,000

Wages Payable Control 6,000To recognize payroll costs

(b) Manufacturing Department Overhead Control 1,000Various accounts 1,000

To recognize miscellaneous manufacturing overhead

(c) Work-in-Process Control 3,000Manufacturing Overhead Allocated 3,000

To allocate manufacturing overhead

Note: Students tend to forget entry (c) entirely. Stress that a budgeted overhead allocation rate is used consistently throughout the year. This point is a major feature of this problem.

(d) Manufacturing Overhead Allocated 93,000Manufacturing Department Overhead Control 87,000Cost of Goods Sold 6,000

To close manufacturing overhead accounts and overallocated overhead to cost of goods sold

An overview of the product-costing system is

3. See the answer to 1.

4-35

4-39 (30 min.) Allocation and proration of overhead.

1. Budgeted overhead rate = Budgeted overhead costs ÷ Budgeted labor costs = £1,500 ÷ £2,000 = 75% of labor cost

2. Ending work in process

Job 1 Job 2 TotalDirect material costs £25 £15 £ 40Direct labor costs 20 32 52Overhead (0.75 × Direct labor costs) 15 24 39Total costs £60 £71 £131

Cost of goods sold = Beginning WIP + Manufacturing costs – Ending WIP = £0 + (£900 + £1,800 + £1,800 × 0.75) – £131 = £3,919

3. Overhead allocated = 0.75 × £1,800 = £1,350

Overallocated overhead = Actual overhead – Allocated overhead = £1,250 – £1,350 = £100 overallocated

4.a. All overallocated overhead is written off to cost of goods sold.

WIP inventory remains unchanged.

Account(1)

Dec. 31, 1762Account Balance


Write-off of £100Overallocated

overhead(3)

Dec. 31, 1762Account Balance(After Proration)

(4) = (2) + (3)Work-in-Process £ 131 £ 0 £ 131Cost of goods sold 3,919 (100) 3,819

£4,050 £(100) £3,950

4b. Overallocated overhead prorated based on ending balances

Account(1)



Balance as a Percent of Total(3) = (2) ÷ £4,050

Proration of £100Overallocated

Overhead (4) = (3) £100


(After Proration) (5) = (2) + (4)

Work-in-Process £ 131 0.03 £ (3) £ 128Cost of Goods Sold 3,919 0.97 (97) 3,822

£4,050 1.00 £(100) £3,950

5. Writing off all of the overallocated overhead to Cost of Goods Sold (CGS) is warranted when CGS is large relative to Work-in-Process Inventory and Finished Goods Inventory and the overallocated overhead is immaterial. Both these conditions apply in this case. Franklin & Son Printing should write off the £100 overallocated overhead to Cost of Goods Sold account.

4-36

4-40 (20 min.) Job costing, contracting, ethics.

1. Direct manufacturing costs:Direct materialsDirect manufacturing labor

Indirect manufacturing costs,150% $6,000

Total manufacturing costs

$25,000 6,000 $31,000

9,000 $40,000

Aerospace bills the Navy $52,000 ($40,000 130%) for 100 X7 seats or $520 ($52,000 100) per X7 seat.

2.Direct manufacturing costs: Direct materials Direct manufacturing labora

Indirect manufacturing costs, 150% $5,000Total manufacturing costs

$25,000

5,000 $30,000

7,500 $37,500

a$6,000 – $400 ($25 16) setup – $600 ($50 12) design

Aerospace should have billed the Navy $48,750 ($37,500 130%) for 100 X7 seats or $487.50 ($48,750 100) per X7 seat.

3. The problems the letter highlights (assuming it is correct) include the following:

a. Costs included that should be excluded (design costs)b. Costs double-counted (setup included as both a direct cost and in an indirect cost

pool)c. Possible conflict of interest in Aerospace Comfort purchasing materials from a

family-related company

Steps the Navy could undertake include the following:

(i) Use only contractors with a reputation for ethical behavior as well as quality products or services.

(ii) Issue guidelines detailing acceptable and unacceptable billing practices by contractors. For example, prohibiting the use of double-counting cost allocation methods by contractors.

(iii) Issue guidelines detailing acceptable and unacceptable procurement practices by contractors. For example, if a contractor purchases from a family-related company, require that the contractor obtain quotes from at least two other bidders.

(iv)Employ auditors who aggressively monitor the bills submitted by contractors.(v) Ask contractors for details regarding determination of costs.

4-37

4-41 (35 min.) Job costing-service industry.

1. Tours in Process (TIP) June 30, 2009

2. Cost of

Completed Tours (CCT) in June 2009

BandMaterials

(1)Labor

(2)Overhead

(3) = 150% × (2)Total

(4)Grunge Express $ 400 $ 700 $1,050 $2,150Different Strokes 475 700 1,050 2,225Maybe Tomorrow 275 400 600 1,275Total $1,150 $1,800 $2,700 $5,650

3. Overhead allocated = 1.50 × 1,400a = $2,100Underallocated overhead = Actual overhead – Allocated overhead

= $2,500 – 2,100 = $400 underallocated

a Total labor in June = $100+$300+$400+$200+$400 = $1,400

4a. Underallocated overhead is written off to CCT

CIP inventory remains unchanged.

Account

June 30, 2009 Balance


Proration of $400

UnderallocatedOverhead

(2)

June 30, 2009 Balance(After

Proration) (3) = (1) + (2)

CIP $2,100 $ 0 $2,100CCT 5,650 400 6,050

$7,750 $400 $8,150

4b. Underallocated overhead prorated based on ending balances

Account



Balance as a Percent of Total(2) = (1) ÷ $7,750

Proration of $400Underallocated

Overhead (3) = (2) $400


(After Proration) (4) = (1) + (3)

TIP $2,100 0.271 0.271 $400 =$108 $2,208CCT 5,650 0.729 0.729 $400 = 292 5,942

$7,750 1.000 $400 $8,150

4-38

BandMaterials

(1)Labor

(2)Overhead

(3) = 150% × (2)Total

(4)As I Lay Dieing $250 $400 $600 $1,250Ask Me Later 350 200 300 850Total $600 $600 $900 $2,100

4c. Underallocated overhead prorated based on June overhead in ending balances

Account



Overhead allocated in June Included in


(2)

Overhead allocated in June Included in June 30, 2009 as a Percent of Total(3) = (2) ÷ $2,100

Proration of $400Underallocated

Overhead(4) = (3) $400

June 30, 2009 Balance(After

Proration) (5) = (1) + (4)

TIP $2,100 $ 900a 0.43 0.43 $400 =$172 $2,272CCT 5,650 1,200b 0.57 0.57 $400 = 228 5,878

$7,750 $2,100 1.00 $400 $8,150

aJune labor for As I Lay Dieing and Ask Me Later × 150%= ($400 + $200) × 150% = $600 × 150% = $900

bJune labor for Grunge Express, Different Strokes and Maybe Tomorrow × 150%= ($100 + $300 + $400) × 150% = $800 × $150 = $1,200

5. I would choose the method in 4c because this method results in account balances based on actual overhead allocation rates. The account balances before proration in TIP and CCT are significant and underallocated overhead is material. Furthermore, the ratio of ending balances in TIP and CCT is different from the ratio of overhead allocated to each of these accounts in June.

4-39

Documents

Acct 303 Chapter 4