Strategic Cost Management Chap007

2

Chapter 7Job CostingSolutions to Review Questions

Companies using a job order cost system are likely to be performing services or manufacturing products according to specific customer orders and product specifications. Construction contractors, manufacturers of special equipment, aircraft manufacturers, CPA firms, attorneys, and hospitals all employ job order cost systems.

There are two primary reasons that cost allocation bases using direct labor are common. First, direct labor historically was the most important resource used in manufacturing. Second, direct labor usage is already recorded for products, meaning no additional record keeping is required.

The Manufacturing Overhead account is used to accumulate the actual manufacturing overhead costs as they are incurred. Manufacturing Overhead Applied represents the estimate of overhead that is used as a basis for computing work in process and other inventory costs. The applied account is used to facilitate recordkeeping during the period.

A materials requisition is used to document the authorization for issuances of materials from the storeroom while the source document (or receiving slip) is used to indicate quantities and descriptions of materials purchased and received. A time card or time record is used to record labor time for the product or service.

The job costing procedure is basically the same in both types of organizations, except that service firms use less direct materials. Also, service firms typically do not show inventories on their balance sheets, and use a Cost of Services Billed account rather than Cost of Goods Sold.

The costs of a product using normal costing are: Actual direct materials cost. Actual direct labor cost. Applied overhead, which is calculated as: Predetermined overhead rate x actual allocation base.

Mega has choices to make about the allocation base and the cost pools used to accumulate the overhead. This does not mean Mega can choose to do whatever it wants. The government has a set of contracting rules and an audit agency to enforce the rules. However, some interpretation is always required when classifying costs. Solutions to Critical Analysis and Discussion Questions

Actual costing requires knowing the actual costs of overhead as well as the actual direct cost for a job. By the time the actual overhead is known, the information is not timely for decision-making. In addition, actual costing requires allocations of many overhead costs to jobs, so it is only the total costs that are actual, not the job costs.

If materials costs are not properly assigned to jobs, management may later be misled in estimating the actual costs to complete future, similar jobs. Thus, profit planning may be in error. Profitable jobs may be rejected because errors in cost assignments have made the jobs look unprofitable or less profitable. If the company prepares bids on jobs, the bids may be in error if they are based on the wrong costs.

The allocation of overhead matters because decisions are made about individual products. Different allocations result in different reported product costs.

Answers will vary. Expect the managers in small construction firms to base their estimates on their own experience, not a formal model.

Answers will vary.

They would most likely use job costing since their jobs are typically easily identifiable and relatively unique.

Yes, a trial is a job for costing purposes.

Answers will vary. The steps might include:a.Measure the area of the walls;b.Multiply the area by the amount (fractions of a gallon) of paint required per square foot;c.Determine the number of coats of paint required;d.Multiply the amount of paint in step b by the number of coats in step c;e.Determine the costs of miscellaneous supplies (drop cloths, paint brushes, etc.);f.Estimate the labor time for painting by multiplying the area in step a by the amount of time per square foot;g.Multiply the time estimate in step f by the number of coats from step c;h.Multiply the time in step g by the cost of labor per hour;i.Estimate the time required for miscellaneous tasks (preparation, cleanup, etc.);j.Multiply the time from step i by the cost per hour;k. Add the cost of your time (supervision, quality check).

Answers will vary. Common responses are (labor) time, materials cost, wall area, and so on.

Answers will vary. In general, the answer is that this is not ethical. Although the correct allocation basis is subjective, it is difficult to justify the choice by the outcome. There might be other reasons, such as more valuable employees or other resources are used

on jobs for the larger company or that the larger company, being more complex, requires more overhead resources.However, the larger company might require fewer resources, because of economies of scale.Solutions to Exercises(30 min.)Assigning Costs to Jobs: Pawnee Workshops.a.

1.Materials Inventory16,000

Accounts Payable16,000

2.Manufacturing Overhead Control800

Materials Inventory800



4.Accounts Payable16,000

Cash16,000

5.Work-in-ProcessDirect Materials13,600

Materials Inventory13,600

6.Work-in-ProcessDirect Labor20,000

Wages Payable20,000

7.Manufacturing Overhead Control21,200

Cash21,200

8.Work-In-Process Overhead ($20,000 x 125%)25,000

Applied Manufacturing Overhead25,000


Accumulated DepreciationProperty, Plant, and Equipment 10,000

7-18. (continued)b.

Materials Inventory

Balance 10/129,640800 2. Ind. materials

1.16,00013,600 5. Direct materials

3.11,200

Balance 10/3142,440*

*$42,440 = $29,640 + $16,000 + $11,200 $800 $13,600

Work-in-process inventory

Balance 10/16,600

5. Direct materials13,60048,120 Per Finished

6. Direct labor20,000Goods T-account

8. Overhead applied25,000

Balance 10/3117,080

Manufacturing Overhead Control

2.800

7.21,200

9.10,000

Applied Manufacturing Overhead

25,0008.

Accounts Payable

4.16,00016,0001.

11,2003.

Cash

16,0004.

21,2007.

Wages Payable

20,0006.

7-18. (continued)

Accumulated DepreciationProperty, Plant, and Equipment

10,0009.

Finished Goods Inventory

Balance 10/133,200

Goods completed48,120*52,680Transfer to Cost

Balance 10/3128,640of Goods Sold

*$48,120 = $52,680 + $28,640 $33,200

Cost of Goods Sold

Balance 10/3152,680

(20 min.)Assigning Costs to Jobs: Fast Wheels, Inc.a.








Cash20,000




Wages Payable25,000


Cash21,500

8.Work-In-ProcessOverhead ($25,000 x 125%)31,250



Accumulated DepreciationProperty, Plant, and Equipment 5,000

7-19. (continued)b.

Materials Inventory

Balance 6/19,0001,000 2. Ind. materials


3.25,000

Balance 6/3023,000*

*$23,000 = $9,000 + $20,000 + $25,000 $1,000 $30,000


Balance 6/116,500

5. Direct materials30,00044,500 Per Finished

6. Direct labor25,000Goods T-account

8. Overhead applied31,250

Balance 6/3058,250


2.1,000

7.21,500

9.5,000


31,2508.

Accounts Payable

4.20,00020,0001.

25,0003.

Cash

20,0004.

21,5007.

Wages Payable

25,0006.

7-19. (continued)


5,0009.


Balance 6/165,000



*$44,500 = $36,500 + $73,000 $65,000

Cost of Goods Sold

Balance 6/3073,000

(20 min.)Assigning Costs to Jobs: Tarnsdale Fabricators.a.








Cash17,000


Work-in-ProcessDirect Materials2,200


Cash31,000




Accumulated DepreciationPlant35,000

9.Work-In-ProcessOverhead ($31,000 x 93%)*28,830


* The predetermined rate is 93% (= $403,620 $434,000).7-20. (continued)b.

Materials Inventory

Balance 1/111,400*


5.2,2001,200 3. Indirect materials

Balance 1/3112,600

* Beginning Balance = Ending Balance Additions + Uses $11,400 = $12,600 $17,000 $2,200 + $16,800 + $1,200


Balance 1/115,070*

2. Direct materials16,8002,2005.

6. Direct labor31,00079,000 Transferred to

9. Overhead applied28,830 Finished Goods

Balance 1/3110,500

*$15,070 = $10,500 $16,800 $31,000 $28,830 + $2,200 + $79,000


3.1,200

7.17,200

8.35,000


28,8309.

Accounts Payable

4.17,00017,0001.

17,2007.

Cash

17,0004.

31,0006.

7-20. (continued)


35,0008.


Balance 1/12,600



*$79,000 = $7,100 + $74,500 $2,600

Cost of Goods Sold

Balance 1/3174,500

(25 min.)Assigning Costs to Jobs: Cardinals, Inc.a.$96,000, the credit side of the Materials Inventory account.b.$72,000.Direct labor$90,000

Labor rate$30 per hour

Direct labor-hours$90,000 $30 = 3,000 hours

Manufacturing overhead applied3,000 x $24=$72,000

c.$180,000, the debit addition to the Finished Goods Inventory account.d.$138,000.BB + TI TO = EB

EB=$60,000 + ($96,000 + $90,000 + $72,000) $180,000

EB=$138,000

e.$6,000 (underapplied) = $78,000 $72,000.f.$96,000.Sales$270,000

Cost of Goods Solda$126,000

S&A costs48,000174,000

Operating profit$96,000

a The credit from Finished Goods Inventory for $120,000 plus $6,000 underapplied overhead.

1. (25 min.)Assigning Costs to Jobs: Blake Corporation.a.$447,000, the debit side of the Materials Inventory account.b.$10,000 overapplied (the difference between overhead control and overhead applied).c.$25/direct-labor hour (= $250,000 Applied 10,000 [= $350,000 $35] Direct Labor Hours).d.$822,000, the debit addition to the Finished Goods Inventory account.e. BB = EB TI + TO

BB=$400,000 ($402,000 + $350,000 + $250,000) + $822,000

BB=$220,000

f. Sales$1,020,000


S&A costs222,0001,031,000

Operating profit($11,000)

a The credit from Finished Goods Inventory for $819,000 minus $10,000 overapplied overhead.(25 min.)Assigning Costs to Jobs: Pine Ridge Corporation.a.$190,000, the credit side of the Materials Inventory account.b.$5,000 underapplied (= $155,000 Control $150,000 Applied).c. 80% (= $150,000 Applied $187,500 Direct Labor Cost).d.$345,000, the debit addition to the Finished Goods Inventory account.

e. BB + TI TO = EB

EB=$100,000 + ($190,000 + $187,500 + $150,000) $345,000

EB=$282,500

f. Sales$600,000


S&A costs105,000361,000


a The credit from Finished Goods Inventory for $251,000 plus $5,000 underapplied overhead.(10 min.)Predetermined Overhead Rates: Tappan, Inc.

Direct material used$700,000c

Direct labor800,000b

Manufacturing overhead applied500,000a

Total manufacturing cost during the year$2,000,000

Supporting Computationsa Applied manufacturing overhead: $500,000 = 25% x total manufacturing cost (25% x $2,000,000).b Direct labor: 62.5% of direct labor equals $500,000, so direct labor was $800,000 (= $500,000 62.5%).c Direct material used equals total manufacturing cost less direct labor and manufacturing overhead applied [$2,000,000 ($800,000 + $500,000) = $700,000].(15 min.)Predetermined Overhead Rates: Mark Corp.a. Application rate:$90,000 = 45% of direct labor

$200,000

Job 301:$50,000 x .45 =$22,500

Job 302:75,000 x .45 =33,750

Job 303: 100,000 x .45 =45,000

$101,250

b.$97,000 $101,250 = $4,250 overapplied manufacturing overhead.(10 Min.) Prorate Under- or Overapplied Overhead: Mark Corp.First, determine the percentage of overhead applied is in each account:

Applied Overhead% of Total Applied

Work in process inventory$10,12510%(= $10,125 $101,250)

Finished goods30,37530(= $30,375 $101,250)

Cost of goods sold 60,750 60(= $60,750 $101,250)

Total$101,250100%

Second, allocate the overapplied overhead to each account and record as follows:

Applied manufacturing overhead$101,250

Work-in-process inventory (10% x $4,250)425

Finished goods inventory (30% x $4,250)1,275

Cost of good sold (60% x $4,250)2,550

Manufacturing overhead control$97,000

(15 min.)Predetermined Overhead Rates: Aspen Company.a. Application rate:$625,000 = 125% of direct labor

$500,000

Job 2-1:$195,000 x 1.25 =$243,750

Job 2-2:325,000 x 1.25 =406,250

Job 2-3: 130,000 x 1.25 =162,500

$812,500

b.$825,000 $812,500 = $12,500 underapplied manufacturing overhead.

(10 Min.) Prorate Over- or Underapplied Overhead: Aspen Company.First, determine the percentage of overhead applied in each account:

Applied Overhead% of Total Applied

Work in process inventory (Job 2-3)$162,50020%(= $162,500 $812,500)

Finished goods (Job 2-2)406,25050(= $406,250 $812,500)

Cost of goods sold (Job 2-1) 243,750 30(= $243,750 $812,500)

Total$812,500100%

Second, allocate the overapplied overhead to each account and record as follows:

Applied manufacturing overhead$812,500

Work-in-process inventory (20% x $12,500)2,500

Finished goods inventory (50% x $12,500)6,250

Cost of good sold (30% x $12,500)3,750

Manufacturing overhead control$825,000

(20 min.)Applying Overhead Using a Predetermined Rate: Marys Landscaping.Since Job No. 3318 is the only job in the account, the ending balance of the account must equal the total cost of the job. We can find the accounts ending balance using the basic cost equation:BB + TI TO = EBEB=$12,500 + ($81,000 + $54,000 + $43,200) $162,000

EB=$28,700

We are told that direct labor for Job No. 3318 is $3,375 and that overhead is applied at a rate of 80% of direct labor cost. So,Factory overhead=80% x $3,375

=$2,700

To solve for direct materials we set up the cost equation,Total cost=direct materials + direct labor + factory overhead

$28,700=direct materials + $3,375 + $2,700

Direct materials=$28,700 $3,375 $2,700

Direct materials=$22,625

(10 min.)Applying Overhead Using a Predetermined Rate: Turco Products.The ending balance in Work in Process can be determined from the following T-acocunt:


Balance 9/170,200

Direct materials421,200832,000 To Finished Goods Inventory

Direct labor262,600

Overhead applied315,120

Balance 9/30237,120**

* $237,120 = $70,200 + $421,200 + $262,600 + $315,120 $832,000$237,120 = Materials + Direct Labor + Applied overhead for job 9-27;Materials = $237,120 $35,100 ($35,100 x 120%) = $159,900.(10 min.)Calculating Over- or Underapplied Overhead: Tonys Textiles.

Application rate:$210,000= $6.00 per machine hour

35,000 hours

Overhead applied = 38,500 hours x $ 6.00 = $231,000Overhead incurred = $227,500Overapplied overhead = $227,500 $231,000 = $3,500(25 min.)Job Costing in a Service Organization: Arthurs Olde Consulting Corporation.a.Beginning of monthDirect LaborApplied Overhead(@60%)Total

SY-400$23,040+$13,824=$36,864

SY-40315,120+$9,072=$24,192

During monthBeginning TotalAdditional DirectLaborAdditional Applied Overhead(@60%)

Total

SY-400$36,864+$25,200+$15,120=$77,184

SY-403$24,192+$72,000+$43,200=$139,392

b.Direct LaborApplied Overhead(@60%)Total

SY-404$51,120*+$30,672=$81,792

*$51,120 = $148,320 $25,200 $72,000c.Overhead applied during month:

SY-400$ 15,120

SY-40343,200

SY-40430,672

Total$88,992

Under- or overapplied amount = $88,992 applied $90,000 actual = $1,008 underapplied.(30 min.)Job Costing In A Service Organization: RCMP.

a.Wages PayableWork in ProcessCost of Services Billed

600,000a600,000a672,000c672,000c12,000d

72,000b

Service Overhead ControlApplied Service O.H.

60,00060,000d72,000d72,000b

a$200 per hour x 900 hours for Alberta Company, and $200 per hour x 2,100 hours for Ontario Corp.b$24 per hour x 900 hours for Alberta Company, and $24 per hour x 2,100 hours for Ontario Corp.cSum of work done during August, all billed to clients.dClosing entry to record overapplied overhead of $12,000 (= $72,000 applied $60,000 actual)

b.Royal Consulting and Mediation PracticeIncome StatementFor the Month Ended August 31

Sales revenue$1,200,000a

Cost of services billed$672,000

Subtract: Overapplied service overhead12,000660,000

Gross margin$540,000

Marketing and administration240,000


a$1,200,000 = 3,000 hours x $400(30 min.)Job Costing In A Service Organization: AB.


220,000a220,000a264,000c264,000c2,000d

44,000b


42,00042,000d44,000d44,000b

a$200 per hour x 440 hours for Massive Airframes, and $200 per hour x 660 hours for Gigantic Drydocks.b$40 per hour x 440 hours for Massive Airframes, and $40 per hour x 660 hours for Gigantic Drydocks Corp.cSum of work done during March, all billed to clients.dClosing entry to record overapplied overhead of $2,000 (= $44,000 applied $42,000 actual).

b.Allocation BustersIncome StatementFor the Month Ended March 31

Sales revenue$550,000a






a$550,000 = 1,100 hours x $500

(30 min.)Job Costing In A Service Organization: TechMaster.


65,625a65,625a105,000c105,000c4,375d

39,375b


35,00035,000d39,375d39,375b

a$75 per hour x 875 hours.b$45 per hour x 875 hours.cSum of work done during August, all billed to clients.dClosing entry to record overapplied overhead of $4,375 (= $39,375 applied $35,000 actual).

b.TechMasterIncome StatementFor the Month Ended August 31

Sales revenue$175,000a



Gross margin$74,375



a$175,000 = 875 hours x $200

Solutions to Problems(15 min.)Estimate Machine-Hours Worked From Overhead Data: Sydney Corp.With $80,000 in fixed costs expected and 20,000 machine hours expected, the application rate for the fixed costs was $4.00 per machine hour (= $80,000 20,000 hours). Overhead applied = Budgeted overhead + Overapplied overhead = $80,000 + $11,000 = $91,000. = Machine hours worked x $4 per machine hour.Machine hours worked = $91,000 $4 = 22,750 machine hours.(25 min.)Estimate Hours Worked From Overhead Data: Valley Corp.60,450 direct labor-hours were worked. With $234,000 in fixed costs expected and 58,500 direct-labor-hours expected, the application rate for the fixed costs was $4.00 per direct labor-hour. If the underapplied overhead, all due to production volume, is $3,900, then 975 fewer than expected direct labor-hours were worked ($3,900 $4 per hour). Consequently, 57,525 (= 58,500 975) direct labor-hours were worked.Also, see T accounts below:

Manufacturing Overhead ControlApplied Manufacturing Overhead

234,000(given as actual = expected)230,100(= $4 x Actual hours worked)

From these accounts, we solve for actual hours worked: Actual hours worked = $230,100 $4 = 57,525 hours worked.

(40 min.)Assigning CostsMissing Data.(a)$100,000, the other side of the credit to the Accounts PayableMaterials Suppliers account.(b)$94,000, From the Materials Inventory account, $8,000 + $100,000 $4,300 $9,700 = $94,000.(c)$121,000 = $162,000 + $119,500 $124,300 $36,200.(d)$180,500, the charge to Work-in-process inventory that is not due to direct materials or direct labor.(e)From the Work-in-Process Inventory account:

$400,100 = $22,300 + $180,500 + $121,000 + $94,000 $17,700.(f)$402,800 from the Cost of Goods account.(g)$11,500 = $14,200 + $400,100 (from e) $402,800 (from f).(h)$31,600 (charged to Manufacturing Overhead Control) = $235,700 $204,100.(i)$3,200 (charged to Manufacturing Overhead Control) = $24,300 $21,100.

(50 min.)Assigning CostsMissing Data.Materials Inventory

Balance 11/145,400(a)86,200Direct materials

Purchases113,600(a)16,400Indirect materials

Balance 11/3056,400

Work-in-Process Inventory

Balance 11/132,600

(given)Direct materials86,200

(b)Direct labor176,000374,400 (d)

(b)Overhead applied264,000

(d)Balance 11/30184,400

(h)Proration6,270

Balance 11/30190,670


Balance 11/1129,600

(d)374,400(c)403,000

Balance 11/30101,000

(h)Proration3,762

Balance 11/30104,762

Cost of Goods Sold

(c)403,000

(h)Proration15,048


(a)16,400

(e)26,000

(f)48,200

(g)198,480289,080(h)


(given)264,000

(h)264,000

7-39. (continued)

Wages Payable

(b)176,000

(e)26,000

Sales Revenue

(given)725,400

(a)From the work in process account, we obtain the $86,200 in direct materials issued. The beginning balance equals the ending balance of $56,400 minus the increase of $11,000 equals $45,400. The unaccounted balance represents indirect materials and is determined as:$45,400 + $113,600 $56,400 $86,200 (debit to work in process)

=$16,400

(b)Let X = Direct labor costsOverhead applied=150% X

$264,000=150% X

X=$176,000

(c)Let X = Cost of goods soldSales=180% X

$725,400=180% X

X=$403,000

(d)Finished goods BB = Finished Goods EB + $28,600BB=101,000 + 28,600

BB=$129,600

Cost of goods manufactured=Finished goods EB + Cost of goods sold Finished Goods BB

=$101,000 + $403,000 $129,600

=$374,400

Work in process EB=$32,600 + $86,200 + $176,000 + $264,000 $374,400

=$184,400

(e)Indirect labor=Total credits to Wages Payable Direct labor

=$202,000 $176,000

=$26,000

7-39. (continued)(f)Charge factory depreciation to manufacturing overhead.(g)Charge overhead to manufacturing overhead.(h)Proration to:Work-in-process(25% x $25,080)$6,270

Finished goods(15% x $25,080)3,762

Cost of goods sold (60% x $25,080)15,048

$25,080

(40 min.)Analysis Of Overhead Using A Predetermined Rate: Kansas Company.a.$10.60 per DLH. $1,908,000 = $10.60 per DLH

180,000

b.$475,500.Beginning balance$162,000

Direct materials135,000

Direct labor84,000*

Overhead applied94,500**

$475,500

*The wage rate for direct labor is $8.00 per hour. $8.00 x 10,500 hours = $84,000.**$9.00 x 10,500 direct labor-hours.c. $54,000 (= $9.00 x 6,000 direct labor-hours)d. $229,500 (= $9.00 x 25,500 direct labor-hours)

e.$220,500.Supplies$18,000

Indirect labor wages51,000

Supervisory salaries108,000

Factory facilities19,500

Factory equipment costs24,000

$220,500

f.Credit it to cost of goods sold. The amount is clearly not material (0.1% of cost of goods sold), so it is not worth the effort involved in prorating.

Overapplied Overhead$0

Cost of Goods Sold2,937,000*

Work-in-Process Inventory114,000

Finished Goods Inventory246,000

*$2,940,000 $3,000

If it were material, then the proper answer would be to prorate it between work-in-process inventory, finished goods inventory, and cost of goods sold.(40 min.)Analysis Of Overhead Using A Predetermined Rate: UCD Company.a.$49 per DLH. $980,000 = $49 per DLH

20,000

b.$890,300.Beginning balance$91,300

Direct materials281,000

Direct labor168,000*

Overhead applied350,000**

$890,300

*The wage rate for direct labor is $24.00 per hour. $24.00 x 7,000 hours = $168,000.**$50.00 x 7,000 direct labor-hours.c. $92,500 (= $50.00 x 1,850 direct labor-hours)d. $595,000 (= $50.00 x 11,900 direct labor-hours)e.$344,500.Supplies$76,700

Indirect labor wages63,000

Supervisory salaries128,000

Factory facilities36,900

Factory equipment costs39,900

$344,500

f.In this case, the underapplied overhead is relatively large (it is greater than 10% of cost of goods sold, so the company might consider it material and decide to prorate it. (The decision depends, at least in part, on the how the resulting information will be used and who would be using it.) Without more detailed information on the direct labor (or applied overhead), we will allocate the underapplied overhead based on account balances. The share would be 70% (= $28 million $40 million for cost of goods sold), 10% (= $4 million $40 million for Work-In-Process Inventory), and 20% (= $8 million $40 million for cost of goods sold) for Finished Goods Inventory. This yields:

Underapplied Overhead$0

Cost of Goods Sold$30,100,000*

Work-in-Process Inventory4,300,000**

Finished Goods Inventory8,600,000***

*$28,000,000 + (70% x $3,000,000)

**$4,000,000 + (10% x $3,000,000)

***$8,000,000 + (20% x $3,000,000)

(30 min.)Finding Missing Date: BackupsRntUsa.February 29: Ending Work-in-process inventory: only one job is remaining in ending Work-in-process inventory.

Direct Materials$15,600

Direct Labor10,800 ($36 per hour x 300 hours)

Manufacturing Overhead5,400 ($18 per hour x 300 hours)

Total Cost of Ending Work in Process Inventory $31,800

b.Direct materials purchased during February:Since the accounts payable account is used only for direct material purchases, the months purchases can be determined from analyzing the accounts payable account:Beginning Balance+Transfers InTransfers Out=Ending Balance

$36,000+Transfers In$252,000=$54,000

Transfers In=$270,000

c.Actual manufacturing overhead incurred during February:$18 per hour x 5,200 total direct labor-hours = $93,600

d.Cost of goods sold during February:Beginning FinishedGoods Inventory+Cost of GoodsManufacturedCost of Goods Sold=Ending Finished Goods Inventory

$108,000+$564,000Cost of Goods Sold=$66,000

$672,000$66,000=Cost of Goods Sold

$606,000=Cost of Goods Sold

Chapter 07 - Job Costing

Chapter 07 - Job Costing

7-26 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

7-1 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.(30 min.)Cost AccumulationService: Youth Athletic Services.T-accounts (Not requiredsee next page for income statement)Wages, Salaries,and AccountsPayableManaging Direct Labor CostOfficiatingDirect Labor CostTraining Direct Labor CostDispute ResolutionDirect Labor CostUnassignedLabor Cost

4,8001,2001,8751,350375

(= $15 x 320)(= $15 x 80)(= $15 x 125)(= $15 x 90)(= $15 x 25)

9,600ManagingDirect Overhead CostOfficiating Direct Overhead CostTraining Direct Overhead CostDispute Resolution DirectOverhead Cost

5,060950200375

8753001,000

7002501501020050

7-43. (continued)Income StatementYouth Athletic ServicesIncome StatementFor Month Ending July 31ManagingOfficiatingTrainingDispute ResolutionTotal

Revenue$6,950$7,900$3,000$1,000$18,850

Cost of Services:

Labora$4,800$1,200$1,875$1,350

Direct Overheadb1,5252,1751,100260

Indirect Overheadc 384 96 150 108

Total costs of services$6,709$3,471$3,125$1,718$15,023

Department margin$ 241$4,429$(125)$(718)$3,827

Less other costs:

Unassigned labor costs (idle time)d375

Unassigned overhead indirect costse30

Marketing and administrative costsf6,075

Operating profit$(2,653)

aAmounts equal $15 per hour times direct labor-hours according to the problem (managing, $15 x 320 hours; etc.)bAmounts equal the sum of direct overhead items given in the problem.cRate =Total cost=$768 = $1.20 per hour. For managing, $1.20 x 320 hours = $384, etc.

Total hours640 hours worked

(including idle time)

d$375 = $15 x 25 hourse$30 = $768 $384 $96 $150 $108 = $1.20 x 25 hours.fSum of marketing and administrative costs ($3,000 + $2,250 + $600 + $225)

The McGraw-Hill Companies, Inc., 201328Fundamentals of Cost Accounting

7-43.(continued)Only Managing and Officiating are clearly profitable. Training is losing a small amount of money. The problem is in Dispute Resolution where the revenue is less than the direct labor. The company should reconsider the pricing policy for Dispute Resolution or consider dropping the service. The company should also consider the role of Mayes assistant considering the salary and the revenues.(25 min.)Job CostsService Company: Bay Accountants.

a.

Lake Lumber

Martys MarinaState Prison SystemUnassigned Costs (not required)

Total

Revenue$320,000$96,000$160,000$576,000

(= 2,000 x $160)(= 600 x $160)(= 1,000 x $160)

Labor$120,000$36,000$60,000$24,000240,000

(= 2,000 x $60)(= 600 x $60)(= 1,000 x $60)(= 400 x $60)

Overheada$30,000$9,000$15,0006,00060,000

Margin$170,000$51,000$85,000

a$30,000 = (2,000 4,000) x $60,000; $9,000 = (600 4,000) x $60,000; and so on.

7-48 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

7-44. (continued)b.Bay AccountantsIncome StatementFor Month Ending January 31

Revenue from clients$576,000

Less cost of services to clients:

Labor$216,000

Overhead54,000

Total cost of services to clients270,000


Less other costs:

Labor$24,000

Overhead6,000

Marketing and administrative costs40,000

Total other costs70,000


(50 min.)Job Costs In A Service Company: Petes Patios.Materials Inventory

Balance 9/1 (given)11,040192Indirect Materials

Purchases (given)1,3923,768Requisition

Balance 9/308,472


(a) Balance 9/19,5107,270Job PP-24(c)

(b) Job PP-244,08019,616Job PP-30(e)

(d) Job PP-3013,296

(f) New Job(s)10,872

Balance 9/3010,872


Balance 1/1 ($4,704 + $1,896)6,600

(c) Job PP-247,2706,600Sold

(e) Job PP-3019,616

Balance 9/3026,886

a.Direct Materials + Direct Labor + Applied Overhead

=$2,038 + $1,280 + $768 + $3,360 + [50% ($768 + $3,360)]

=$9,510.

b.To complete Job PP-24:

$2,720 Direct Labor + ($2,720 x 50%) Applied Overhead

=$4,080.

c.Transfer to Finished Goods: Job PP-24 Beginning Inventory Cost + Current Cost

=$3,190 + $2,720 + 50%($2,720)

=$7,270.

d.To complete Job PP-30: $1,296 Materials + $8,000 Direct Labor + (50% x $8,000) Applied Overhead

=$1,296 + $8,000 + $4,000

=$13,296.

e.Transfer of Job PP-30: Beginning Inventory Cost + Current Cost

=[$1,280 + $3,360 + 50%($3,360)] + [$1,296 + $8,000 + 50%($8,000)]

=$19,616

7-45. (continued)

f.New Job Cost = Current Charges to WIP less Current Charges for Jobs PP-24 and PP-30:

=Current Materials + Direct Labor + Overhead Job PP-24 Current Cost Job PP-30 Current Cost

=$3,768 + $16,320 + $50%($16,320) $4,080(b)* $13,296(d)*

=$10,872

*These letters refer to solution parts b and d above.

(55 min.)Tracing Costs In A Job Company: Dungan Cabinetry

a.(1)Materials Inventory53,700


(2)Manufacturing Overhead1,500


(3)Accounts Payable53,700

Cash53,700

(4)Work in ProcessDirect Materials25,500


(5)Payroll42,000

Payroll Taxes Payable13,500

Cash28,500

(6)Payroll21,000

Fringe Benefits Payable21,000

(7)Work in Process (60% x $63,000)37,800

Manufacturing Overhead (30% x $63,000)18,900

Administrative and Marketing Costs (10% x $63,000)6,300

Payroll ($21,000 + $42,000)63,000

(8)Manufacturing Overhead32,400

Cash32,400

(9)Work in ProcessOverhead ($37,800 x 175%)66,150


(10)Manufacturing Overhead Control17,250

Accumulated DepreciationProperty, Plant, and Equipment17,250

7-46. (continued)b.Materials Inventory

Balance 1/155,5751,500 (2)

(1)53,70025,500 (4)

Balance 1/3182,275a

a$82,275 = $55,575 + $53,700 $1,500 $25,500.Work-in-Process Inventory

Balance 1/112,37586,325Per Finished Goods

(4) Direct Materials25,500T-account

(7) Direct Labor37,800

(9) Overhead Applied66,150

Balance 1/3155,500b

b$55,500 = $12,375 + $25,500 + $37,800 + $66,150 $86,325.


(2)1,500

(7)18,900

(8)32,400

(10)17,250


66,150 (9)

Accounts Payable

(3) 53,70053,700 (1)

7-46. (continued)

Cash

53,700(3)

28,500(5)

32,400(8)

Payroll

(5)42,000

(6)21,00063,000(7)

Payroll Taxes Payable

13,500(5)

Fringe Benefits Payable

21,000(6)

Administrative and Marketing Costs

(7)6,300


17,250(10)

Finished Goods

Balance 1/162,250

Goods Completed86,325a98,775 Cost of Goods Sold

Balance 1/3149,800

a$86,325 = $98,775 + $49,800 $62,250.

Cost of Goods Sold

Balance 1/3198,775

(50 min.)Cost Flows Through Accounts: Brighton Servicesa.T accounts.

Materials Inventory

137,200(1a)

93,000(1b)

94,000(1c)

Wages Payable

490,000(2a)

312,400(2b)

197,600(2c)

Variable Manufacturing Overhead

(Actual)(Applied)

62,00029,900 (3a)

27,500(3b)

4,600(3c)

Fixed Manufacturing Overhead

(Actual)(Applied)

209,200104,000 (4a)

88,200(4b)

17,000(4c)


(1)324,200761,100(a)

(2)1,000,000521,100(b)

(3)62,000

(4)209,200

(1) = the sum of the amounts (1a) + (1b) + (1c)(2) = the sum of the amounts (2a) + (2b) + (2c)(3) = the sum of the amounts (3a) + (3b) + (3c)(4) = the sum of the amounts (4a) + (4b) + (4c)a761,100 = 137,200 + 490,000 + 29,900 + 104,000b521,100 = 93,000 + 312,400 + 27,500 + 88,200

7-47. (continued)


(a)761,100

(b)521,1001,282,200

Cost of Goods Sold

1,282,200

b.Total Direct Labor Costs = $4,000,000.Total Direct labor-hours=$4,000,000 = 200,000 hours.

$20 per Hour

Variable Manufacturing Overhead = .30 x $1,040,000 = $312,000.

Predetermined Variable Overhead Rate=$312,000

200,000

= $1.56 per Direct Labor-Hour.

Fixed Manufacturing Overhead = 0.70 x $1,040,000 = $728,000Predetermined Fixed Overhead Rate=$728,000

200,000

= $3.64 per Direct Labor-Hour.

7-47. (continued)c.T accountsMaterials Inventory

137,200(1a)

93,000(1b)

94,000(1c)

Wages Payable

490,000(2a)

312,400(2b)

197,600(2c)

Variable Manufacturing Overhead*

(Actual)(Applied)

62,00038,220 (3a)

Overapplied (5)16,00024,367(3b)

15,413(3c)

Fixed Manufacturing Overhead*

(Actual)(Applied)

209,20089,180 (4a)

56,857(4b)

35,963(4c)

27,200(5) Underapplied

*These can be divided into two accounts, one for actual and one for applied. We put them in one account to save space.


(1)324,200754,600(a)

(2)1,000,000486,624(b)

(3)78,000

(4)182,000

(1) = the sum of the amounts (1a) + (1b) + (1c) (2) = the sum of the amounts (2a) + (2b) + (2c) (3) = the sum of the amounts (3a) + (3b) + (3c) (4) = the sum of the amounts (4a) + (4b) + (4c)

7-47. (continued)


(a)754,600

(b)486,6241,241,224

Cost of Goods Sold

1,241,224

Under-or Over-Applied Overhead

(5)27,20016,000(5)

d.ActualNormal

Sales Revenue$1,400,000$1,400,000

Less Cost of Goods Sold(1,282,200)(1,241,224)

Gross Margin$117,800$158,776

Less:

(Under-) Overapplied Overhead(11,200)

Marketing and Administrative Costs(112,000)(112,000)

Operating Profit (Loss)$ 5,800$35,576

(60 min.)Show Flow Of Costs To Jobs: Kims Asphalt.a.1.Payment received on account

Cash12,500

Accounts receivable12,500

2.Inventory purchase

Materials and equipment inventory9,400

Accounts payable9,400

3.Billing


Sales revenue130,000

Cash75,000


4.Indirect labor

Manufacturing overheadIndirect labor650

Wages payable650

5.Indirect materials issued

Manufacturing Overhead155

Materials and equipment inventory155

6.Overhead and advertising

Manufacturing Overhead [$550 + $675 + $320 + $200 + $325 + $450]2,520

Selling costsAdvertising600

Cash2,670

Accumulated Depreciation450

7.Charges to Work in Process

Work in processmaterials and equipment[$3,000 + $4,800 + $4,600 + $2,900]15,300

Work in processdirect labor[$4,500 + $6,750 + $5,900 + $1,600]18,750

Work in processoverhead applied [30% x $18,750]5,625

Materials inventory15,300

Wages payable18,750

Overhead applied5,625

8.Transfer of Job 33

Cost of installations completed and sold100,200

Work in processmaterials and equipment [$52,500 + $4,800] 57,300

Work in processdirect labor [$26,250 + $6,750]33,000

Work in processoverhead applied [30% x $33,000]9,900

Note: No finished goods inventory account is required.

7-48. (continued)

b.Overhead analysis:

Applied (Entry 7)$5,625

Incurred

Entry 4$650

Entry 5155

Entry 62,520

3,325

Overapplied$2,300

c.Inventory balances

Materials and Equipment Inventory

Balance 5/136,00015,300(7)

(2)9,400155(5)

Balance 5/3129,945


Balance 5/1119,550*

Current charges (7)39,675100,200(8) Job 33

Balance 5/3159,025

Cost of Goods Sold**

(8)100,200

2,300Overapplied overhead

Balance 5/3197,900

*Job 27 + Job 33 = $32,925 + $86,625 **Not required.

(70 min.)Reconstruct Missing Data: Toledo Farm Implements. This is a challenging problem. We put the work in process account for May on the board for the "big picture," then solve for each item in the account as follows:

Work-in-Process

(a)Balance, beginning172,400

(b)Direct materials140,628107,000Transferred to finished goods(d)

(c)Direct labor135,400408,028Disaster loss(f)

(e)Overhead applied66,600

Balance, ending0

The calculations are shown below. We usually present these using both T-accounts and the following formulas.

(a)Given

(b)Direct materials=Beginning inventory + Purchases Ending inventory Indirect materials

=$98,000a + $132,800* $86,000a $4,172 (from paper scrap)

=$140,628

*Purchases=Accounts payable, ending + Cash payments Accounts payable, beginning

=$100,200a + $75,800a $43,200a

=$132,800

( c)Direct labor=Payroll Indirect labor

=$164,800a $29,400a

=$135,400

(d) Cost transferred to finished goods inventory = Finished goods, ending + Cost of goods sold Finished goods, beginning=$75,000a + ($793,200a $697,200a) $64,000a

=$107,000

7-49. (continued)

(e)Overhead applied=Ending manufacturing overhead beginning manufacturing overhead + overapplied overhead

=$434,000a $369,800a + $2,400a

=$66,600

(f)Loss=$172,400a + $140,628 + $135,400 + $66,600 $107,000

=$408,028

Note: The insurance company may dispute paying the $2,400 overapplied overhead.aGiven in problem(70 min.)Find Missing Data: IYF Corporation. The calculations are shown below. We usually present these using both T-accounts and the following formulas.(a)Beginning inventory + Transfers in = Ending inventory + Transfers Out

Beginning inventory=Ending inventory + Transfers Out Transfers in

=$3,000 + $45,000 $37,000

=$11,000

(b) $8,000. Because any over- or underapplied is written off to Cost of Goods Sold, the difference between the Cost of Goods Sold journal entry ($45,000) and the Cost of Goods Sold amount on the income statement ($45,400) must be the amount of underapplied overhead. Underapplied overhead is 5% of overhead applied for June, so total overhead applied is $8,000 (= $400 5%)

(c)Overhead rate = 80% (= $8,000 $10,000)

(d)Overhead incurred=Overhead applied + Underapplied overhead

=$8,000 + $400

=$8,400

(e) $3,000.Work in process beginning + Manufacturing costs = Work in process ending + Transfers to Finished Goods Inventory.

But, Work in process ending = 2 x Work in process beginning.Therefore, Work in process beginning + Manufacturing costs = 2 x Work in process beginning + Transfers to finished goodsand,

Work in process beginning = Manufacturing costs Transfers to finished goods.

We know the amount of direct labor, but not the amount of direct materials transferred into production. For this, we use the inventory equation for direct materials. Direct materials beginning + Purchases = Direct materials ending + Transfers outDirect materials ending = Direct materials beginning $7,000, so Transfers out = $15,000 + $7,000 = $22,000.Work in process beginning = $22,000 (direct materials) + $10,000 (direct labor) + $8,000 (applied manufacturing overhead) $37,000 (transferred out) = $3,000.(f) $6,000 (= 2 x $3,000 work in process beginning).

(70 min.)Find Missing Data: NIC Enterprises.The calculations are shown below. We usually present these using both T-accounts and the following formulas.(a)Beginning inventory + Transfers in = Ending inventory + Transfers Out

Ending inventory=Beginning inventory + Transfers in Transfers Out

=$148,000 + $1,520,000 $1,460,000

=$208,000

(b) $500,000. Because any over- or underapplied is written off to Cost of Goods Sold, the difference between the Cost of Goods Sold journal entry ($1,460,000) and the Cost of Goods Sold amount on the income statement (the difference between revenues and gross profit or, $1,450,000) must be the amount of overapplied overhead. Overapplied overhead is 2% of overhead applied for September, so total overhead applied is $500,000 (= $10,000 2%)

(c)Overhead rate = 625% (= $500,000 $80,000)

(d)Overhead incurred=Overhead applied Underapplied overhead

=$500,000 $10,000

=$490,000

(e) $568,000.Work in process beginning + Manufacturing costs = Work in process ending + Transfers to Finished Goods Inventory.

But, Work in process ending = 1.25 x Work in process beginning.Therefore, Work in process beginning + Manufacturing costs

= 1.25 x Work in process beginning + Transfers to finished goodsand,

0.25 x Work in process beginning = Manufacturing costs Transfers to finished goods.We know the amount of direct labor, but not the amount of direct materials transferred into production. For this, we use the inventory equation for direct materials. Direct materials beginning + Purchases = Direct materials ending + Transfers outDirect materials ending = Direct materials beginning $25,000, so Transfers out = $1,057,000 + $25,000 = $1,082,000.0.25 x Work in process beginning = $1,082,000 (direct materials) + $80,000 (direct labor) + $500,000 (applied manufacturing overhead) $1,520,000 (transferred out) So, Work in process beginning = $142,000 0.25 = $568,000.(f) $710,000 (= 1.25 x $568,000 work in process beginning).

(45 min.)Incomplete DataJob Costing: Chelsea Household Renovations.The following information should be included (in summary) in a report to management.

Work-in-ProcessCost of Goods Sold

Cash or Accounts PayableJob No. 61Job No. 61

18,400*M*8,0008,000M*8,000

L*38,40076,800L76,800

O319,20038,400O238,400

6/165,600123,200*

L138,400

O419,200

6/300

Wages PayableJob No. 62Job No. 62

128,000*M512,00012,000M12,000

L648,00048,000L48,000

O724,00024,000O24,000

6/30084,000

OverheadJob No. 63Underapplied Overhead

ActualAppliedM*6,40016,00010

80,000*64,0009L*41,600

O820,800

6/3068,800

Note: See footnotes on next page.

7-52. (continued)M refers to direct materialsL refers to direct laborO refers to manufacturing overhead*Numbers given in the problem1Labor to complete job is $76,800 since the beginning inventory was 50% complete2Applied overhead=$123,200 $8,000 $76,800

=$38,400

Applied overhead=$38,400

$76,800

=50%of direct labor dollars

3Overhead in beginning inventory=0.50 x $38,400

=$19,200

4Overhead applied in June=0.50 x $38,400

=$19,200

5Materials for Job No. 62=Purchases materials for Job No. 63

=$18,400 $6,400

=$12,000

6Labor for Job No. 62=Total direct labor costs Labor for Job No. 61 Labor for Job No. 63

=$128,000 $38,400 $41,600

=$48,000

7Overhead for Job No. 62=0.50 x $48,000

=$24,000

8Overhead for Job No. 63=0.50 x $41,600

=$20,800

7-52. (continued)

9Applied Overhead=$19,200 + $24,000 + $20,800

=$64,000

10Underapplied overhead=Actual Applied

=$80,000 $64,000

=$16,000

(25 min.) Job Costing and Ethics: Old Port Shipyards.(This problem is based on actual experience.) a.Olde TownNewton

Overhead cost$20,000,000$80,000,000

Direct labor-hours200,000200,000

Predetermined rate$100 per hour$400 per hour

(Overhead Hours)(= $20,000,000 200,000)(= $80,000,000 200,000)

b. The supervisor recognizes that if the government audit agency allows the overhead rates to be calculated on a location-specific basis, it will be better for Old Port to do the work at Newton, because the overhead, which will be part of the cost charged, will be higher than if it is done at Olde Town.c. The question is whether there is a functional difference in the two dry docks, so that the work is actually different. If there is not a functional difference or another valid reason for separating the costs, there might be an ethical issue.(25 min.) Job Costing and Ethics: Price and Waters.a.Chuck should refuse to charge the U.S. Department of Defense for work for General Motors. b.The fact that the consulting firm is being reimbursed for the government job and not the General Motors job gives the manager an incentive to try and shift costs to the government job. (If both jobs were fixed price, the total profits would remain the same regardless of the assignment of the costs.)(25 min.) Job Costing and Ethics: Global Partners.a.Because the choice is between direct labor hours and direct labor cost, the circumstance that would cause a difference is if different direct labor employees

were paid different amounts. If all are paid the same rate, the two bases will give the same result. b.In general, the result of the cost allocation is a weak justification for the choice of the base, especially when it means differences in prices charged. If employees are randomly assigned to jobs, hours is probably the better choice, because it avoids the distortion of direct labor rates, which are irrelevant for resource usage (given the random assignment). If different skill sets are required, allocating based on direct labor costs is probably better, because the labor rates will reflect the skill requirements.Solutions to Integrative Case(75 min.) Cost Estimation, Estimating Overhead Rates, Job Costing, and Decision-Making: OLeary Corporation.This problem relates overhead allocation to cost estimation and decision making. It uses some of the methods of Chapters 4 and 5.a. $965,400 (Work-in-Process Inventory) and $637,500 (Finished Goods Inventory).Job MC-275 is the only job in process. It has accumulated the following costs:Direct materials$495,000(Given)

Direct labor54,400(= $17 x 3,200 hours)

Manufacturing overhead416,000(= $130 x 3,200 hours)

$965,400

Job MC-270 is the only job in finished goods. It has accumulated the following costs:Direct materials$270,000(Given)

Direct labor42,500(= $17 x 2,500 hours)

Manufacturing overhead325,000(= $130 x 2,500 hours)

$637,500

b. $1,069,500.The predetermined overhead rate in year 3 is $140 per direct labor-hour. OLeary uses the actual rate from the previous year and $140 = $7,560,000 54,000 hours).Beginning costs $965,400(From requirement (a))

Additional direct material57,000(given)

Additional direct labor5,100(= $17 x 300 hours)

Manufacturing overhead42,000(= $140 x 300 hours)

$1,069,500

c. $1,240,000 overapplied.Overhead applied$10,360,000(= $140 x 74,000 hours)

Overhead incurred 9,120,000(Given)

Overapplied overhead$1,240,000

7-56. (continued)d. A variety of allocations can be used. Because we know how many direct labor hours are in each account from year 3, we will use this basis. Direct labor hours are the basis for applying overhead. If this were unknown, we could use total account balances. First, determine the number of direct labor-hours used in year 3 in each account. Direct labor hours, year 374,000(Given)

In work in process, end of year 37,400(6,100 in MC-397 + 1,300 in MC-399)

In finished goods, end of year 34,44011,840(1,740 in MC-389 + 2,700 in MC-390)

In cost of goods, year 362,160(74,000 11,840)

The allocation is then based on the relative amounts in each account:AccountPercentageAllocation

Work in process10% (= 7,400 74,000)$124,000(= .10 x $1,240,000)

Finished goods6 (= 4,440 74,000)74,400(= .06 x $1,240,000)

Cost of sales84 (= 62,160 74,000)1,041,600(= .84 x $1,240,000)

$1,240,000

Allocate Overapplied Overhead

Overhead applied1,240,000

Work in process124,000

Finished goods74,400

Cost of sales1,041,600

7-56. (continued)e. $567,500.This is a special order problem similar to those discussed in Chapter 4. The minimum bid would be the variable cost of the job, ignoring strategic or other considerations. The variable cost of the job (ignoring sales and administrative costs as instructed in the problem) consists of direct material, direct labor, and variable manufacturing overhead. To estimate the variable portion of overhead, we can use the high-low method discussed in Chapter 5. The high and low years are year 3 and year 4, respectively. (Note that these are also the most recent years, so they might also be the most relevant for the estimation.) Applying the high-low method:

$9,120,000 $7,560,000=$1,560,000

74,000 54,00020,000

=$78 per direct labor-hour

Total overhead (Year 3)$9,120,000

Total variable overhead (74,000 x $78)(5,772,000)

Total fixed overhead$3,348,000

The variable cost of the special job can be estimated as follows:Direct materials$ 92,500(Given)

Direct laborr85,000(= $17 x 5,000 hours)

Variable manufacturing overheadd 390,000(= $78 x 5,000 hours)

Total $567,500

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Strategic Cost Management Chap007