Chap008 Systems Design Job-Order Costing

8/9/2019 Chap008 Systems Design Job-Order Costing

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Chapter 8Systems Design: Job-Order Costing

Solutions to Questions

8-1 By defnition, manuacturingoverhead consists o costs that cannot bepractically traced to jobs. Thereore, ithese costs are to be assigned to jobs, theymust be allocated rather than traced.

8-2 Job-order costing is used in

situations where many dierent products orservices are produced each period. rocesscosting is used in situations where a single,homogeneous product, such as cement,bric!s, or gasoline, is produced or longperiods.

8-3 The job cost sheet is used to recordall costs that are assigned to a particular

job. These costs include direct materialscosts traced to the job, direct labor coststraced to the job, and manuacturingoverhead costs applied to the job. "hen a

job is completed, the job cost sheet is usedto compute the unit product cost.

8-4 # predetermined overhead rate isused to apply overhead cost to jobs. $t iscomputed beore a period begins bydividing the period%s estimated totalmanuacturing overhead by the period%sestimated total amount o the allocationbase. Thereater, overhead cost is appliedto jobs by multiplying the predeterminedoverhead rate by the actual amount o theallocation base that is recorded or each

job.

8- # sales order is issued ater anagreement has been reached with acustomer on &uantities, prices, andshipment dates or goods. The sales orderorms the basis or the production order.

The production order specifes what is to beproduced and orms the basis or the job

cost sheet. The job cost sheet, in turn, isused to summari'e the various productioncosts incurred to complete the job. Thesecosts are entered on the job cost sheetrom materials re&uisition orms, directlabor time tic!ets, and by applyingoverhead.

8-! (ome production costs such as aactory manager%s salary cannot be tracedto a particular product or job, but rather areincurred as a result o overall productionactivities. $n addition, some productioncosts such as indirect materials cannot beeasily traced to jobs. $ these costs are tobe assigned to products, they must beallocated to the products.

8-" $ actual manuacturing overheadcost is applied to jobs, the company must

wait until the end o the accounting periodto apply overhead and to cost jobs. $ thecompany computes actual overhead ratesmore re&uently to get around this problem,the rates may )uctuate widely due toseasonal actors or variations in output. *orthis reason, most companies usepredetermined overhead rates to applymanuacturing overhead costs to jobs.

8-8 The measure o activity used as theallocation base should drive the overheadcost+ that is, the allocation base shouldcause the overhead cost. $ the allocationbase does not really cause the overhead,then costs will be incorrectly attributed toproducts and jobs and product costs will bedistorted.

8-# #ssigning manuacturing overheadcosts to jobs does not ensure a proft. Theunits produced may not be sold and i they

The craw-/ill 0ompanies, $nc., 1231

44 anagerial #ccounting, #n #sian erspective


2/81

are sold, they may not be sold at pricessu5cient to cover all costs. $t is a myth thatassigning costs to products or jobs ensuresthat those costs will be recovered. 0osts arerecovered only by selling to customers6notby allocating costs.

8-1$ The anuacturing 7verheadaccount is credited when overhead cost isapplied to "or! in rocess. enerally, theamount o overhead applied will not be thesame as the amount o actual cost incurredbecause the predetermined overhead rateis based on estimates.

8-11 8nderapplied overhead occurs whenthe actual overhead cost e9ceeds theamount o overhead cost applied to "or! inrocess inventory during the period.

7verapplied overhead occurs when theactual overhead cost is less than theamount o overhead cost applied to "or! inrocess inventory during the period.8nderapplied or overapplied overhead isdisposed o by either closing out theamount to 0ost o oods (old or byallocating the amount among 0ost o oods(old and ending inventories in proportion tothe applied overhead in each account. Theadjustment or underapplied overheadincreases 0ost o oods (old :andinventories; whereas the adjustment or

overapplied overhead decreases 0ost ooods (old :and inventories;.

8-12 anuacturing overhead may beunderapplied or several reasons. 0ontrolover overhead spending may be poor. 7r,

some o the overhead may be f9ed and theactual amount o the allocation base maybe less than estimated at the beginning othe period. $n this situation, the amount ooverhead applied to inventory will be lessthan the actual overhead cost incurred.

8-13 8nderapplied overhead implies thatnot enough overhead was assigned to jobsduring the period and thereore cost ogoods sold was understated. Thereore,underapplied overhead is added to cost ogoods sold. 7n the other hand, overappliedoverhead is deducted rom cost o goodssold.

8-14 # plantwide overhead rate is a singleoverhead rate used throughout a plant. $n amultiple overhead rate system, each

production department may have its ownpredetermine overhead rate and its ownallocation base. (ome companies usemultiple overhead rates rather thanplantwide rates to more appropriatelyallocate overhead costs among products.ultiple overhead rates should be used, ore9ample, in situations where onedepartment is machine intensive andanother department is labor intensive.

8-1 "hen automated e&uipmentreplaces direct labor, overhead increases

and direct labor decreases. This results inan increase in the predetermined overheadrate6particularly i it is based on directlabor.

The craw-/ill 0ompanies, $nc., 1231

4< anagerial #ccounting, #n #sian erspective


3/81

%&er'ise 8-1 :32 minutes;

a. rocess costing g. Job-order costingb. Job-order costing h. rocess costing=c. rocess costing i. Job-order costing

d. rocess costing j. rocess costing=e. rocess costing !. Job-order costing. Job-order costing l. Job-order costing

= (ome o the listed companies might use either a processcosting or a job-order costing system, depending on the natureo their operations and how homogeneous the fnal product is.*or e9ample, a chemical manuacturer would typically operatewith a process costing system, but a job-order costing system

might be used i products are manuactured in relatively smallbatches. The same thing might be true o the tiremanuacturing plant in item j.

The craw-/ill 0ompanies, $nc., 1231. #ll rights reserved.

(olutions anual, 0hapter 4


4/81

%&er'ise 8-2 :3> minutes;

3. The direct materials and direct labor costs listed in the e9ercisewould have been recorded on our dierent documents? thematerials re&uisition orm or Job "@>A, the time tic!et or

Jamie 8nser, the time tic!et or elissa 0han, and the job costsheet or Job "@>A.

1. The costs or Job "@>A would have been recorded as ollows?

aterials re&uisition orm?

Quantity

Unit Cost

TotalCost

Blan!

s

12 3>.22 C22

Dibs @42 3.1> A22

C.E> A

Job 0ost (heet or Job "@>A

Firect materials.... ...



5/81


The predetermined overhead rate is computed as ollows?

Gstimated total manuacturing overhead. . 3C@,222

H Gstimated total direct labor hours:FI/s;..................................................... 12,222 FI/s redetermined overhead rate................ A.E2 per FI/




6/81


a. Kaw aterials................ 42,222#ccounts ayable...... 42,222

b. "or! in rocess.............. A1,222anuacturing7verhead....................... ,222

Larious #ccounts....... 3E>,222



7/81


8/81

%&er'ise 8-! :12 minutes;

3.

0ost o oods anuactured

Firect materials?

Kaw materials inventory, beginning....... 31,222

#dd? urchases o raw materials............ C2,222 Total raw materials available.................. @1,222Feduct? Kaw materials inventory,ending.................................................. 34,222

Kaw materials used in production.......... 1@,222Iess indirect materials included inmanuacturing overhead...................... >,222

34,222anuacturing overhead applied to wor! inprocess inventory.....................................

4E,222

Total manuacturing costs.......................... 3A@,222

#dd? Beginning wor! in process inventory.. >A,222

112,222

Feduct? Gnding wor! in process inventory.. A>,22

20ost o goods manuactured...................... 3>>,2

22

1.

0ost o oods (old

*inished goods inventory, beginning.......... C>,222

#dd? 0ost o goods manuactured.............. 3>>,222

oods available or sale............................. 3


9/81

#dd? 8nderapplied overhead...................... @,222

#djusted cost o goods sold........................ 3>1,222




10/81


11/81


3. #ctual direct labor-hours..................... 33,>22M redetermined overhead rate.......... 34.12 anuacturing overhead applied..... 12,222

:>,E22;

anuacturing overheadunderapplied.................................... >,E22

1. Because manuacturing overhead is underapplied, the cost ogoods sold would increase by >,E22 and the gross margin

would decrease by >,E22.




12/81

%&er'ise 8-# :32 minutes;

Nes, overhead should be applied to value the "or! in rocessinventory at year-end.

Because A,222 o overhead was applied to Job L on the basis o4,222 o direct labor cost, the company%s predeterminedoverhead rate must be E>O o direct labor cost.

Job " direct labor cost.............................................. @,222M redetermined overhead rate................................ M 2.E> anuacturing overhead applied to Job " at year-

end......................................................................... C,222



13/81

%&er'ise 8-1$ :3> minutes;

3. redetermined overhead rates?

0ompany P?

Gstimated total manuacturing overhead costredetermined overhead rate Gstimated total amount o the allocation base

>CA,222 A.E2 per FI/

42,222 FI/s

0ompany N?


C3>,222 @.>2 per /

E2,222 /s

0ompany Q?


@42,222 3A2O o direct materials costC22,222 direct materials cost

1. #ctual overhead costs incurred.......................>C2,22

27verhead cost applied to "or! in rocess?

A.E2 per hour M E4,222= actual hours........ >11,A2

2

8nderapplied overhead cost...........................

E,@22

=31,222 hours S CA,222 hours S C2,222 hours E4,222 hours


(olutions anual, 0hapter 4 322


14/81


3. $tem :a;? #ctual manuacturing overhead costs or the year.$tem :b;? 7verhead cost applied to wor! in process or the

year.

$tem :c;? 0ost o goods manuactured or the year.$tem :d;? 0ost o goods sold or the year.

1. 0ost o oods (old....................................E2,22

2

anuacturing 7verhead......................E2,22

2

C. The underapplied overhead will be allocated to the other

accounts on the basis o the amount o overhead appliedduring the year in the ending balance o each account?

"or! in rocess......... 322 > O*inished oods......... >4,>22 3>0ost o oods (old.... C31,222 42

Total cost.................. C


15/81

%&er'ise 8-12 :C2 minutes;

3. The predetermined overhead rate is computed as ollows?

Gstimated total manuacturing overhead costredetermined

overhead rate Gstimated total amount o the allocation base

3


16/81

%&er'ise 8-12 :continued;

@. "hen overhead is applied using a predetermined rate based onmachine-hours, it is assumed that overhead cost is proportionalto machine-hours. "hen the actual machine-hours turn out to

be E>,222, the costing system assumes that the overhead willbe E>,222 machine-hours M 1.@2 per machine-hour, or342,222. This is a drop o 31,222 rom the initial estimatedmanuacturing overhead cost o 3


17/81


Firect material.................... 32,222Firect labor......................... 31,222anuacturing overhead?

31,222 M 31>O............... 3>,222 Total manuacturing cost..... CE,2228nit product cost?

CE,222 H 3,222 units...... CE


(olutions anual, 0hapter 4 32@


18/81


3. a. Kaw aterials $nventory.................... 132,222

#ccounts ayable............................ 132,222

b. "or! in rocess.................................. 3E4,222

anuacturing 7verhead................... 31,222Kaw aterials $nventory.................. 312,222

h. 0ost o oods (old............................. @42,222

*inished oods................................ @42,222

#ccounts Keceivable.......................... A22,222

(ales............................................... A22,222@42,222 M 3.1> A22,222.


32> anagerial #ccounting, #n #sian erspective


19/81


1.anuacturing 7verhead "or! in rocess

:b;

31,222 :;

1@2,22

2

Bal

. @1,222 :g;

>12,22

2:c; 332,222 :b; 3E4,222:d; @2,222 :c;


20/81


3. Because 312,222 o studio overhead was applied to "or! inrocess on the basis o E>,222 o direct sta costs, thepredetermined overhead rate was 3A2O?

(tudio overhead applied 312,222 3A2O rate

Firect sta costs incurred E>,222

1. The Ie9ington ardens roject is the only job remaining in "or!in rocess at the end o the month+ thereore, the entireC>,222 balance in the "or! in rocess account at that pointmust apply to it. Kecogni'ing that the predetermined overheadrate is 3A2O o direct sta costs, the ollowing computation canbe made?

Total cost in the Ie9ington ardensroject.................................................... C>,222

Iess?

Firect sta costs............................. A,>22

(tudio overhead cost :A,>22 M3A2O;........................................... 32,@22 3A,


21/81

%&er'ise 8-1! :C2 minutes;

3. a. Kaw aterials................................... C1>,222#ccounts ayable......................... C1>,222

b. "or! in rocess................................. 1C1,222anuacturing 7verhead.................. >4,222Kaw aterials.............................. 1,222#ccumulated Fepreciation........... E>,222

e. anuacturing 7verhead.................. A1,222

#ccounts ayable......................... A1,222

. "or! in rocess................................. C22,222anuacturing 7verhead.............. C22,222


@,422,222 12 per /

1@2,222 /s

3>,222 / M 12 per / C22,222

1.

anuacturing 7verhead "or! in rocess

:b; >4,222 :; C22,222 :b; 1C1,222:c; 312,222 :c; A2,222:d; E>,222 :; C22,222:e; A1,222

C. The cost o the completed job is >


22/81

>


23/81

%&er'ise 8-1" :3> minutes;

3. #ctual manuacturing overhead costs.@EC,22

2anuacturing overhead cost applied?

3 per /.................

@4>,22

2

7verapplied overhead cost.................

31,222

1. 0hang 0ompany(chedule o 0ost o oods anuactured

Firect materials?Kaw materials inventory, beginning. 12,222#dd purchases o raw materials........ @22,222

Kaw materials available or use........ @12,222Feduct raw materials inventory,

ending............................................ C2,222Kaw materials used in production..... C,222CE>,22

2Firect labor......................................... A2,222anuacturing overhead cost applied

to wor! in process............................ @4>,222 Total manuacturing costs...................


24/81


3. #s suggested, the costing problem does indeed lie withmanuacturing overhead cost. Because manuacturingoverhead is mostly f9ed, the cost per unit increases as the

level o production decreases. This apparent problem can beUsolvedV by using a predetermined overhead rate, which shouldbe based on e9pected activity or the entire year. (omestudents will use units o product in computing thepredetermined overhead rate, as ollows?



25/81


1. 8sing a predetermined overhead rate, the unit product costswould be?

Quarter First Second Third Fourth

Firect materials............1@2,22

2312,22

2

A2,222342,22

2Firect labor................... 314,222 A@,222 C1,222


26/81

%&er'ise 8-1# :C2 minutes;

3. Harris Chan JamesFesigner-hours...................... 312 322


27/81

%&er'ise 8-2$ :3> minutes;

3. 0utting Fepartment?



CA2,222 E.>2 per /

@4,222 /s

*inishing Fepartment?


@4A,222 342O o direct labor cost1E2,222 direct labor cost

1. Oerhead Applied

0utting Fepartment? 42 /s M E.>2 per/............................................................ A22

*inishing Fepartment? 3>2 M 342O.......... 1E2 Total overhead cost applied........................ 4E2

C. Nes+ i some jobs re&uire a large amount o machine time andlittle labor cost, they would be charged substantially lessoverhead cost i a plantwide rate based on direct labor costwere used. $t appears, or e9ample, that this would be true o

Job 12C which re&uired considerable machine time to complete,but re&uired only a small amount o labor cost.


(olutions anual, 0hapter 4 33@


28/81

(roblem 8-21 :A2 minutes;

3. and 1.

0ash #ccounts Keceivable

Bal.

AC,222 :m; E4>,222 Bal.

321,222:l;

4>2,222

:l; 4>2,222 :!; ,222Bal.

314,222 Bal.

3EE,222

Kaw aterials repaid $nsuranceBal.

C2,222 :b; 122,222 Bal.

,222

Bal. 1,222

Bal.

3>,222

Lideos in rocess *inished oodsBal.

@>,222:j;

>>2,222 Bal. 43,222 :!;

A22,222

:b; 3E2,222

:j;>>2,222

:; 41,222 Bal. C3,222

:i; 1


29/81

:c; E1,222:d; AC,222:; 332,22

2:g; >,A22 $nsurance G9pense:n;


30/81

(roblem 8-21 :continued;

#dministrative (alariesG9pense

(ales

:; ,222

:!;

,22

2

0ost o oods (old #ccounts ayable:!; A22,22

2 :n;22,222 Bal

.3A2,222

:a; 34>,222Bal.

>>,A22

(alaries W "ages ayable:m; 14>,22

2 :;14E,222

Bal. 1,222

0apital (toc! Ketained Garnings

Bal.@12,222 Bal

.1E2,222

C. 7verhead is overapplied or the year by


31/81

Fepreciation e9pense......................... 13,222#dvertising e9pense........................... 3C2,222#dministrative salaries....................... ,222$nsurance e9pense.............................. 3,@22iscellaneous e9pense....................... 4,A22 1>A,222

Det operating income............................ E4,@22




32/81


3. a. Kaw aterials................................... 1E>,2220ash............................................. 1E>,222

b. "or! in rocess................................. 112,222anuacturing 7verhead.................. A2,222Kaw aterials.............................. 142,222

c. "or! in rocess................................. 342,222anuacturing 7verhead.................. E1,222(ales 0ommissions G9pense............. AC,222(alaries G9pense............................... ,222

d. anuacturing 7verhead.................. 3C,222

Kent G9pense.................................... >,2220ash............................................. 34,222

e. anuacturing 7verhead.................. >E,2220ash............................................. >E,222

. #dvertising G9pense......................... 3@2,2220ash............................................. 3@2,222

g. anuacturing 7verhead.................. 44,222Fepreciation G9pense....................... 31,222

#ccumulated Fepreciation........... 322,222

h. "or! in rocess................................. 1O Kmb1


33/81


i. *inished oods.................................. AE>,222"or! in rocess............................ AE>,222

j. 0ash.................................................. 3,1>2,222(ales............................................ 3,1>2,2220ost o oods (old............................ E22,222

*inished oods............................. E22,222

1.Kaw aterials "or! in rocess

Bal. 1>,222 :b;

142,222

Bal. 32,222 :i;

AE>,222

:a; 1E>,222 :b; 112,222

Bal. 12,222

:c;342,222

:h; 1,222 :d; 3C,222

:e; >E,222:g; 44,222

Bal.

E,222

0ost o oods (old:j; E22,222

C. anuacturing overhead is overapplied by KmbE,222 or theyear. The entry to close this balance to 0ost o oods (oldwould be?




34/81

anuacturing 7verhead.............................. E,2220ost o oods (old.................................. E,222


313 anagerial #ccounting, #n #sian erspective


35/81


@.old Dest 0ompany$ncome (tatement

(ales.................................................Kmb3,1>2,22

20ost o goods sold

:KmbE22,222 - KmbE,222;............. A>E,222(elling and administrative e9penses?

(ales commissions.......................... KmbAC,222#dministrative salaries................... ,222

#dvertising e9pense....................... 3@2,222Fepreciation e9pense..................... 31,222 C32,222

Det operating income........................Kmb 1@E,22

2




36/81


3. a. Kaw aterials.................................. 3E2,222#ccounts ayable....................... 3E2,222

b. "or! in rocess............................... 3@@,222anuacturing 7verhead................. CA,222Kaw aterials............................. 342,222

c. "or! in rocess............................... 122,222anuacturing 7verhead................. 41,222(alaries G9pense............................. 2,222anuacturing 7verhead............ C>2,222 122,222 actual direct labor cost M 3E>O C>2,222 overheadapplied

i. *inished oods................................ E22,222"or! in rocess.......................... E22,222

j. #ccounts Keceivable....................... 3,222,222(ales.......................................... 3,222,222

0ost o oods (old.......................... E12,222

*inished oods........................... E12,222


31C anagerial #ccounting, #n #sian erspective


37/81


1.Kaw aterials *inished oods

Bal

.

C1,222 :b; 342,22

2

Bal

.

@4,222 :j; E12,22

2:a; 3E2,222 :i; E22,222Bal.

11,222 Bal.

14,222

"or! in rocess anuacturing 7verheadBal.

12,222 :i; E22,222

:b; CA,222 :h; C>2,222

:b; 3@@,222 :c; 41,222

:c; 122,222 :d; A>,222:h; C>2,222 :; 34,222Bal.

3@,222 :g; 3>C,222

Bal.

@,222

0ost o oods (old:j; E12,222

C. 7verhead is underapplied by @,222 or the year. The entry toclose this balance to 0ost o oods (old would be?

0ost o oods (old............................... @,222anuacturing 7verhead................. @,222

@.#lmeda roducts, $nc.

$ncome (tatement *or the Near Gnded arch C3

(ales.......................................................3,222,22

20ost o goods sold :E12,222 S @,222;. E1@,222ross margin........................................... 1EA,222(elling and administrative e9penses?

(alary e9pense.....................................


38/81

#dvertising e9pense............................. 322,222$nsurance e9pense................................ 1,222Fepreciation e9pense........................... 1E,222 13E,222


31> anagerial #ccounting, #n #sian erspective


39/81


3. and 1.

0ash #ccounts Keceivable

Bal.

E,222 :m; 1C@,222 Bal.

34,222:l;

1@>,222

:l; 1@>,222 :!; 1>2,222Bal.

34,222 Bal.

1C,222

Kaw aterials repaid $nsuranceBal.


40/81

:; 32,222:g; 1,@22 $nsurance G9penseBal.

@,122 :n; @,122 :g; A22

=E,>22 / M 4 per / A2,222

#dvertising G9pense iscellaneous G9pense:e; @4,222 :h; 22


31E anagerial #ccounting, #n #sian erspective


41/81


#dministrative (alariesG9pense

(ales

:; C2,222

:!;

1>2,22

2

0ost o oods (old #ccounts ayable:!;

3C2,222:m; 3>2,222 Bal

.C4,222

:n; @,122 :a; @2,222Bal. 3C@,122

:c; 3


42/81

#dministrative salaries e9pense........... C2,222$nsurance e9pense................................ A22iscellaneous e9pense......................... 22


43/81

(roblem 8-2 :@> minutes;

3. Kesearch W Focuments predetermined overhead rate?



4@2,222 C> per hour

1@,222 hours

Iitigation predetermined overhead rate?


CA2,222 @2O o direct attorney cost per hour............................ ,E22 M @2O. . 1,142 Total overhead cost....................................... C,3,222

Fepartmental overhead costapplied?


(olutions anual, 0hapter 4 3C2


44/81

1A,222 hours M C> per hour......... 2,222 M @2O............................. C22,222

8nderapplied :or overapplied;overhead........................................ :@2,222; 3>,222


3C3 anagerial #ccounting, #n #sian erspective


45/81

(roblem 8-2! :A2 minutes;

3.Kaw aterials "or! in rocess

Bal. C2,222 :a; 3A,422 Bal

.

@3,222

=

:e; C4,C22

:a; 3C,122:b; 12,222:d; 14,222Bal.

AC,2,222 :a; C,A22 :d; 14,222

:e; C4,C22 :b; E,222:c; 3


46/81

(roblem 8-2! :continued;

c. anuacturing 7verhead.................3


47/81

(roblem 8-2! :continued;

@. The total cost o job 124 was?

Firect materials.....................................................

K8K 2

2Firect labor :K8K4,222 S K8K@,222;..................... 31,222anuacturing overhead applied :K8K31,222 M

3@2O;.................................................................. 3A,422

Total cost...............................................................K8KC4,C2

2

The entry to record the transer o the completed job isYrecorded as entry :e; in the T-accounts aboveZ?

*inished oods............................ C4,C22

"or! in rocess...................... C4,C22

>. #s shown in the above T-accounts, the balance at June C2 wasK8KAC,


48/81

(roblem 8-2" :A2 minutes;

3. a.

Gstimated total manuacturing overhead costredeterminedoverhead rate Gstimated total amount o the allocation base

422,222 3A2O

>22,222 direct materials cost

b. Beore the underapplied or overapplied overhead can becomputed, we must determine the amount o directmaterials used in production or the year.

Kaw materials inventory, beginning............. 12,222#dd, urchases o raw materials................... >32,222Kaw materials available................................ >C2,222Feduct? Kaw materials inventory, ending..... 42,222Kaw materials used in production................. @>2,222

#ctual manuacturing overhead costs?$ndirect labor.............................................. 3E2,222roperty ta9es............................................ @4,222Fepreciation o e&uipment......................... 1A2,222

aintenance.............................................. ,222$nsurance................................................... E,222Kent, building............................................. 342,222

Total actual costs.......................................... EA2,222#pplied manuacturing overhead costs?

@>2,222 M 3A2O...................................... E12,2228nderapplied overhead................................ @2,222


3C> anagerial #ccounting, #n #sian erspective


49/81

(roblem 8-2" :continued;

1. itano roducts(chedule o 0ost o oods anuactured

Firect materials?

Kaw materials inventory, beginning.......

12,222#dd purchases o raw materials............. >32,222

Total raw materials available.................. >C2,222Feduct raw materials inventory, ending. 42,222

Kaw materials used in production............. @>2,22

2Firect labor...............................................


50/81

1@,422 M 31>O C3,222 price to the customer


3CE anagerial #ccounting, #n #sian erspective


51/81

(roblem 8-2" :continued;

>. The amount o overhead cost in "or! in rocess was?1@,222 direct materials cost M 3A2O C4,@22

The amount o direct labor cost in "or! in rocess is? Total ending wor! in process......... E2,222Feduct? Firect materials............... 1@,222 anuacturing overhead... C4,@22 A1,@22Firect labor cost............................ E,A22

The completed schedule o costs in "or! in rocess was?

Firect materials............................. 1@,222Firect labor................................... E,A22anuacturing overhead................ C4,@22

"or! in process inventory............. E2,222


(olutions anual, 0hapter 4 3C4


52/81


53/81


@. )oldin$!ept*

+aintin$!ept*

anuacturing overhead incurred.... . >E2,222 E>2,222

anuacturing overhead applied?A>,222 /s M 4.A2 per /........... >>O EAC,222

8nderapplied :or overapplied;overhead........................................ 33,222 : 3C,222;


(olutions anual, 0hapter 4 3@2


54/81

(roblem 8-2# :A2 minutes;

3. a.Gstimated total manuacturing overhead costredetermined


4@2,222 3@2O o direct labor costA22,222 direct labor cost

b. 22 M 3@2O 3C,C22

1. a.

Fabricatin$

!epartment

)achinin$!epartme

nt

Assembly !epartme

nt

Gstimatedmanuacturingoverhead cost :a;...... C>2,222 @22,222 O @22O C2O

b. *abricating Fepartment?1,422 M 3E>O......................... @,22 M @22O............................ 1,222#ssembly Fepartment?

A,122 M C2O........................... 3,4A2 Total applied overhead................ 4,EA2

C. The bul! o the labor cost on the [oopers job is in the #ssemblyFepartment, which incurs very little overhead cost. The

department has an overhead rate o only C2O o direct laborcost as compared to much higher rates in the other twodepartments. Thereore, as shown above, use o departmentaloverhead rates results in a relatively small amount o overheadcost being charged to the job.

8se o a plantwide overhead rate in eect redistributes


3@3 anagerial #ccounting, #n #sian erspective


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overhead costs proportionately between the three departments:at 3@2O o direct labor cost; and results in a large amount ooverhead cost being charged to the [oopers job, as shown inart 3. This may e9plain why the company


(olutions anual, 0hapter 4 3@1


56/81

(roblem 8-2# :continued;

bid too high and lost the job. Too much overhead cost wasassigned to the job or the !ind o wor! being done on the jobin the plant.

7n jobs that re&uire a large amount o labor in the *abricatingor achining Fepartments the opposite will be true, and thecompany will tend to charge too little overhead cost to the jobsi a plantwide overhead rate is being used. The reason is thatthe plantwide overhead rate :3@2O; is much lower than therates would be i these departments were consideredseparately.

@. The company%s bid was?

Firect materials..................................... @,A22Firect labor........................................... 22anuacturing overhead applied

:above;............................................... 3C,C22 Total manuacturing cost....................... 1E,@22Bidding rate........................................... M 3.>

Total bid price........................................ @3,322

$ departmental overhead rates had been used, the bid wouldhave been?

Firect materials..................................... @,A22Firect labor........................................... 22anuacturing overhead applied

:above;............................................... 4,EA2 Total manuacturing cost....................... 11,4A2Bidding rate........................................... M 3.>

Total bid price........................................ C@,1. a. #ctual overhead cost................................. 4A@,222#pplied overhead cost :>42,222 M

3@2O;..................................................... 431,222


3@C anagerial #ccounting, #n #sian erspective


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8nderapplied overhead cost..................... >1,222


(olutions anual, 0hapter 4 3@@


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(roblem 8-2# :continued;

b. !epartment Fabricatin

$)achinin

$ Assemb

ly Total+lant

#ctual overheadcost.................... CA2,222 @12,222 4@,222 4A@,222

#pplied overheadcost?...................132,222 M

3E>O................ CAE,>22324,222 M

@22O................ @C1,2221A1,222 M

C2O.................. E4,A22 4E4,3228nderapplied:overapplied;overhead cost..... : E,>22;

: 31,222; >,@22 : 3@,322;


3@> anagerial #ccounting, #n #sian erspective


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(roblem 8-3$ :@> minutes;

3. The cost o raw materials put into production was?

Kaw materials inventory, 33.......... 3>,222

Febits :purchases o materials;....... 312,222aterials available or use.............. 3C>,222Kaw materials inventory, 31C3....... 1>,222aterials re&uisitioned or

production.................................... 332,222

1. 7 the 332,222 in materials re&uisitioned or production,. The 0ost o oods (old or the year was?

*inished goods inventory, 33.................................... @2,222#dd? 0ost o goods manuactured :rom "or! in

rocess;.................................................................. @E2,222oods available or sale............................................ >32,222*inished goods inventory, 31C3................................ A2,222

0ost o goods sold.....................................................@>2,22

2

A. The predetermined overhead rate was?


1@2,222 3A2O o direct labor cost3>2,222 direct labor cost


(olutions anual, 0hapter 4 3@A


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(roblem 8-3$ :continued;

E. anuacturing overhead was overapplied by 32,222,computed as ollows?

#ctual manuacturing overhead cost or the year:debits;................................................................. 1C2,222#pplied manuacturing overhead cost :rom "or!

in rocess6this would have been the credits totheanuacturing 7verhead account;........................ 1@2,222

7verapplied overhead.............................................:32,222

;

4. The ending balance in "or! in rocess is C2,222. Firect

materials ma!e up


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(roblem 8-31 :312 minutes;

3. a. Kaw aterials............................... 122,222#ccounts ayable..................... 122,222

b. "or! in rocess............................ 34>,222Kaw aterials.......................... 34>,222

c. anuacturing 7verhead.............. AC,2228tilities G9pense........................... E,222

#ccounts ayable..................... E2,222

d. "or! in rocess............................ 1C2,222anuacturing 7verhead..............


62/81


j. *inished oods.............................. EE2,222"or! in rocess........................ EE2,222

!. #ccounts Keceivable..................... 3,122,222

(ales........................................3,122,22

20ost o oods (old........................ 422,222

*inished oods......................... 422,222


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63/81


1.#ccounts Keceivable (ales

:!; 3,122,22

2

:!; 3,122,222

Kaw aterials 0ost o oods (oldBal. C2,222 34>,222 :!; 422,222:a; 122,222 :b;Bal. @>,222

"or! in rocess anuacturing 7verheadBal. 13,222 :j; EE2,222 :c; AC,222 :i; C,222 :d; @,222:i; CA,222 :h; 321,222

Bal. >,222

*inished oods #dvertising G9penseBal. A2,222 :!; 422,222 :; 3CA,222:j; EE2,222Bal. C2,222

#ccumulated Fepreciation 8tilities G9pense:g; ,222 :c; E,222

#ccounts ayable (alaries G9pense:a; 122,222 :d; 332,222:c; E2,222:e; >@,222 Fepreciation G9pense:; 3CA,222 :g; 3


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C. *roya *abri!!er #((chedule o 0ost o oods anuactured

Firect materials?Kaw materials inventory, beginning.. D!r C2,222urchases o raw materials............... 122,222aterials available or use................ 1C2,222Kaw materials inventory, ending.... .. @>,222

aterials used in production.............D!r34>,22

2Firect labor......................................... 1C2,222anuacturing overhead applied to

wor! in process................................. C,222#dd? "or! in process, beginning......... 13,222

41A,222Feduct? "or! in process, ending......... >A,222

0ost o goods manuactured...............D!rEE2,22

2

@. anuacturing 7verhead..................... >,2220ost o oods (old......................... >,222

(chedule o cost o goods sold?*inished goods inventory, beginning. D!r A2,222#dd? 0ost o goods manuactured..... EE2,222oods available or sale.................... 4C2,222Feduct fnished goods inventory,

ending............................................ C2,2228nadjusted cost o goods sold.......... 422,222Feduct? 7verapplied overhead......... >,222

#djusted cost o goods sold..............

D!rE,22

2


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>. *roya *abri!!er #($ncome (tatement

(ales................................................. D!r3,122,2220ost o goods sold............................. E,222ross margin..................................... @2>,222(elling and administrative

e9penses?#dvertising e9pense....................... D!r3CA,2228tilities e9pense............................. E,222(alaries e9pense............................ 332,222Fepreciation e9pense..................... 31,@42 H @ units D!r3C,312 per unit


(olutions anual, 0hapter 4 3>1


66/81

(roblem 8-32 :C2 minutes;

3. The predetermined overhead rate is?



(r,222 /s

1. #ctual manuacturing overhead cost..............(r4>2,22

2anuacturing overhead cost applied to

"or! in rocess during the year? A2,222actual /s M (r31 per /..........................

E12,222

8nderapplied overhead cost...........................(r3C2,22

2

C. 0ost o oods (old.............................. 3C2,222anuacturing 7verhead................ 3C2,222

@. The underapplied balance would be allocated using theollowing percentages?

7verhead applied during the year

in?

"or! in process.............................(r CA,22

2 > O*inished goods.............................. 342,222 1> O

0ost o goods sold......................... >2@,22

2 E2 O

Total................................................(rE12,22

2 322 O

The entry to record the allocation o the underapplied overhead

would be?"or! in rocess :>O M (r3C2,222;... A,>22*inished oods :1>O M (r3C2,222;. . C1,>220ost o oods (old :E2O M

(r3C2,222;..................................... C anagerial #ccounting, #n #sian erspective


67/81


>. 0ost o goods sold i the underappliedoverhead is closed directly to cost o goodssold

:(r3,@22,222 S (r3C2,222;........................ (r3,>C2,2220ost o goods sold i the underapplied

overhead is allocated among the accounts:(r3,@22,222 S (r


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Case 8-33 :@> minutes;

3. (having >O o the estimated direct labor-hours in thepredetermined overhead rate will result in an artifcially highoverhead rate. The artifcially high predetermined overhead

rate is li!ely to result in overapplied overhead or the year. Thecumulative eect o overapplying the overhead throughout theyear is all recogni'ed in Fecember when the balance in theanuacturing 7verhead account is closed out to 0ost o oods(old. $ the balance were closed out every month or every&uarter, this eect would be dissipated over the course o theyear.

1. This &uestion may generate lively debate. "here should Terri

Konsin%s loyalties lie\ $s she wor!ing or the general manager o the division or or the corporate controller\ $s there anythingwrong with the U0hristmas bonusV\ /ow ar should Terri go inbuc!ing her boss on a new job\

"hile individuals can certainly disagree about what Terri shoulddo, some o the acts are indisputable. *irst, understating directlabor-hours artifcially in)ates the overhead rate. This has theeect o in)ating the 0ost o oods (old in all months prior toFecember and overstating the costs o inventories. $nFecember, the huge adjustment or overapplied overheadprovides a big boost to net operating income. Thereore, thepractice results in distortions in the pattern o net operatingincome over the year. $n addition, because all o the adjustmentis ta!en to 0ost o oods (old, inventories are still overstatedat year-end. This means, o course, that the net operatingincome or the entire year is also overstated.

"hile Terri is in an e9tremely di5cult position, herresponsibilities under the $#%s (tatement o Gthicalroessional ractice seem to be clear. The 0redibility (tandardstates that management accountants have a responsibility toUdisclose all relevant inormation that could reasonably bee9pected to in)uence an intended user%s understanding o thereports, analyses or recommendations.V $n our opinion, Terrishould discuss this situation with her immediate supervisor inthe controller%s o5ce at corporate head&uarters. This step may


3>> anagerial #ccounting, #n #sian erspective


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bring her into direct con)ict with the general manager o thedivision, so it would be a very di5cult decision or her to ma!e.


(olutions anual, 0hapter 4 3>A


70/81

Case 8-33 :continued;

$n the actual situation that this case is based on, the corporatecontroller%s sta were aware o the general manager%saccounting tric!s, but top management o the company

supported the general manager because Uhe comes throughwith the resultsV and could be relied on to hit the annual profttargets or his division. ersonally, we would be veryuncomortable supporting a manager who will resort todeliberate distortions to achieve Uresults.V $ the manager willpull tric!s in this area, what else might he be doing that is&uestionable or even perhaps illegal\


3>E anagerial #ccounting, #n #sian erspective


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Case 8-34 :E> minutes;

3. The revised predetermined overhead rate is determined asollows?

7riginal estimated total manuacturingoverhead................................................... C,@21,222lus? Iease cost o the new machine............ C@4,222lus? 0ost o new technicianprogrammer.... >2,222

Gstimated total manuacturing overhead.....C,422,22

2

7riginal estimated total direct labor-hours... AC,222Iess? Gstimated reduction in direct labor-

hours......................................................... A,222Gstimated total direct labor-hours................ >E,222

Gstimated total manuacturing overheadredetetermined overhead rate Gstimated total amount o the allocation base

C,422,222

>E,222 FI/s

AA.AE per FI/

The revised predetermined overhead rate is higher than the

original rate because the automated milling machine willincrease the overhead or the year :the numerator in the rate;and will decrease the direct labor-hours :the denominator in therate;. This double-whammy eect increases the predeterminedoverhead rate.

1. #c&uisition o the automated milling machine will increase theapparent costs o all jobs6not just those that use the newacility. This is because the company uses a plantwideoverhead rate. $ there were a dierent overhead rate or each

department, this would not happen.

C. The predetermined overhead rate is now considerably higherthan it was. This will penali'e products that continue to use thesame amount o direct labor-hours. (uch products will nowappear to be less proftable and the managers o theseproducts will appear to be doing a poorer job. There may be


(olutions anual, 0hapter 4 3>4


72/81

pressure to increase the prices o these products even thoughthere has in act been no increase in their real costs.


3>< anagerial #ccounting, #n #sian erspective


73/81

Case 8-34 :continued;

@. "hile it may have been a good idea to ac&uire the newe&uipment because o its greater capabilities, the calculationso the cost savings were in error. The original calculations

implicitly assumed that overhead would decrease because othe reduction in direct labor-hours. $n reality, the overheadincreased because o the additional costs o the newe&uipment. # dierential cost analysis would reveal that theautomated e&uipment would increase total cost by aboutC3A,222 a year i the labor reduction is only 1,222 hours.

0ost conse&uences o leasing the automated e&uipment?$ncrease in manuacturing overhead cost?

Iease cost o the new machine.........................

C@4,22

20ost o new technicianprogrammer.................. >2,222

C1,222 and the machine would stillbe an unattractive proposal. The entire A,222-hour reductionmay ultimately be reali'ed as wor!ers retire or &uit. /owever,this is by no means automatic.

There are two morals to this tale. *irst, predeterminedoverhead rates should not be misinterpreted as variable costs.

They are not. (econd, a reduction in direct labor re,uirements does not necessarily lead to a reduction in direct labor hours

paid. $t is oten very di5cult to actually reduce the direct labororce and may be virtually impossible e9cept through naturalattrition in some countries.


(olutions anual, 0hapter 4 3A2


74/81

)esear'h and *ppli'ation 8-3

3. Toll Brothers succeeds frst and oremost because o its productleadership customer value proposition. The annual reportmentions in numerous places that Toll Brothers ocuses on

Iu9ury /omes and 0ommunities and high &uality construction.age 4 o the 32-[ says ]"e believe our mar!eting strategy,which emphasi'es our more e9pensive UGstateV andUG9ecutiveV lines o homes, has enhanced our reputation as abuilder-developer o high-&uality upscale housing.V age 1 othe 32-[ says U"e are the only publicly traded national homebuilder to have won all three o the industry%s highest honors?#merica%s Best Builder :3


75/81

purchase raw materials in large volumes to reali'e purchaseprice discounts.


(olutions anual, 0hapter 4 3A1


76/81

)esear'h and *ppli'ation 8-3 :continued;

• Kis!? (ubcontractors may perorm substandard wor!

resulting in warranty claims and dissatisfed customers.0ontrol activities? Gmploy a project manager within eachcommunity who serves in a &uality assurance capacity.

C. Toll Brothers would use job-order costing because its homes areuni&ue rather than homogeneous. Gach home being built wouldbe a considered a job. Toll Brothers% standard )oor plans dierrom one another particularly across its main product lines suchas ove-8p, Gmpty Dester, #ctive #dult, 8rban $n-*ill, /igh-Fensity (uburban, and (econd /omes :see pages > and < othe annual report;. $n 122@, Toll Brothers introduced 4E new

home models :see page @ o the 32-[;.Beyond the act that Toll Brothers oers a wide variety o )oorplans, homes are urther distinguished rom one another bycustomer upgrades that add an average o 32C,222 to theprice o a home :see page 3 o the annual report;. 8pgradesinclude items such as additional garages, guest suites, e9trafreplaces, and fnished lots :see page @ o 32-[;.

@. G9amples o direct materials used in Toll Brothers%

manuacturing acilities include lumber and plywood or wallpanels, roos, and )oor trusses, as well as other items such aswindows and doors :see page 31 o the 32-[;. G9amples odirect materials used at the home sites include shingles,e9terior fnishes such as stone, stucco, siding, or bric!, !itchencabinets, cement or the oundation, bathroom f9tures, etc.

The standard bill o materials :e.g., prior to considering aspecifc customer%s upgrade re&uests; or each home woulddier. *or e9ample, dierences in the s&uare ootage o homes

would drive numerous dierences in their bills o materials.Bigger homes would re&uire more lumber, sheet roc!, electricalwiring, etc. Bills o materials are also li!ely to dier acrossgeographic regions o the country. *or e9ample, homes in*lorida typically do not have basements whereas homes in DewGngland are li!ely to have basements. *ront porches may bemore prevalent in (outh 0arolina than in 7hio. Fierent grades


3AC anagerial #ccounting, #n #sian erspective


77/81

o windows and insulation may be used in homes in the Dorththan in the (outh.


(olutions anual, 0hapter 4 3A@


78/81


>. Toll Brothers incurs two types o direct labor costs. Thecompany employs its own direct laborers in its manuacturingacilities in orrisville, a. and Gmporia, La. The costs o these

wor!ers can be traced to specifc items such as roo trussesthat can in turn be traced to particular houses. "or! at thehome sites is perormed by subcontractors. The labor costembedded in a subcontractor%s f9ed price contract is directlytraceable to the home being built. /owever, the direct laborersare not employed by Toll Brothers. Toll Brothers would not useemployee time tic!ets at its home sites because thesubcontractors are not employees o Toll Brothers, $nc. and theyare paid a f9ed price that is unaected by the amount o hours

wor!ed.

A. There are numerous e9amples o overhead costs mentioned inthe annual report and 32-[. (ome e9amples are? landac&uisition costs, land development costs :e.g., grading andclearing;, road construction costs, underground utilityinstallation costs, swimming pools, gol courses, tennis courts,marinas, community entrances, model home costs :includingconstruction, urnishing and sta5ng;, and project managersalaries. These costs are incurred to create housing

communities but they cannot be easily and conveniently tracedto specifc homes.

E. $t appears that Toll Brothers does not use cost-plus pricing toestablish selling prices or its base models. age 4 o the 32-[says U$n determining the prices or our homes, we utili'e, inaddition to management%s e9tensive e9perience, an internallydeveloped value analysis program that compares our homeswith homes oered by other builders in each local mar!etingarea.V $n other words, the value to the customer andcompetitive conditions determine prices6not the cost obuilding a particular home.

age > o the annual report says U"hen there is strongdemand, we beneft rom e9ceptional pricing power becausewe have greater ability to raise prices than those builders whotarget buyers on tight budgets? it%s easier to hit doubles, triples


3A> anagerial #ccounting, #n #sian erspective


79/81

and home runs selling to lu9ury buyers.V This &uote impliesthat pricing is driven by the customers% willingness and abilityto pay and not by the cost o building a particular house.


(olutions anual, 0hapter 4 3AA


80/81


4. Based on inormation contained in the 32-[, it appears that TollBrothers assigns overhead to cost objects in two ways. *irst,page 3A o the 32-[ says UIand, land development and related

costs :both incurred and estimated to be incurred in the uture;are amorti'ed to the cost o homes closed based upon the totalnumber o homes to be constructed in each community.V $nother words, each home is assigned an e&ual share o overheadcosts. age 3A also says, UThe estimated land, common areadevelopment and related costs o master planned communities:including the cost o gol courses, net o their estimatedresidual value; are allocated to individual communities within amaster planned community on a relative sales value basis.V $n

other words, higher priced communities within a masterplanned community are assigned a greater portion o masterplanned community overhead costs.

$n master planned communities, the allocation o overheadappears to ta!e place in two stages. *irst, the overhead costscommon to all communities contained with the master plannedcommunity are assigned to communities based on relativesales value. Then, all overhead costs related to a particularcommunity within the master planned community are assignede&ually to each home site.

The company needs to assign overhead costs to homes so thatit can derive a cost o sales number or the income statementand an inventory number or the balance sheet. age 1< o theannual report shows the components o the company%s endinginventory balance o C.4E4 billion. $nventoriable costs includeland and land development costs :3.1@1 billion;, constructionin progress :1.3E4 billion;, sample homes and sales o5ces:124 million;, land deposits and costs o uture development:1CE million;, and other :31 million;. 0onstruction in progressis similar to wor! in process or a manuacturing company.7verhead costs :as well as direct costs; )ow through theconstruction in progress account and hit cost o home saleswhen a customer has a closing and ta!es possession o thehome.


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Documents

Chap008 Systems Design Job-Order Costing