Professional Documents
Culture Documents
Chapter
Job
Costing
Solutions to Review Questions
7-1.
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.
7-2.
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.
7-3.
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.
7-4.
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.
7-5.
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.
7-1
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
7-6.
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.
7-7.
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.
7-2
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
7-12.
Answers will vary.
7-13.
They would most likely use job costing since their jobs are typically easily identifiable and
relatively unique.
7-14.
Yes, a trial is a job for costing purposes.
7-15.
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).
7-16.
Answers will vary. Common responses are (labor) time, materials cost, wall area, and so
on.
7-17.
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
7-3
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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
718. (30 min.)Assigning Costs to Jobs: Pawnee Workshops.
a.
1. Materials Inventory............................................................
Accounts Payable..........................................................
2. Manufacturing Overhead Control......................................
Materials Inventory.........................................................
3. Materials Inventory............................................................
Accounts Payable..........................................................
4. Accounts Payable..............................................................
Cash...............................................................................
5. Work-in-ProcessDirect Materials...................................
Materials Inventory.........................................................
6. Work-in-ProcessDirect Labor.........................................
Wages Payable..............................................................
7. Manufacturing Overhead Control......................................
Cash...............................................................................
8. Work-In-Process Overhead ($20,000 x 125%)..............
Applied Manufacturing Overhead...............................
9. Manufacturing Overhead Control......................................
Accumulated DepreciationProperty, Plant, and
Equipment.................................................................
16,000
16,000
800
800
11,200
11,200
16,000
16,000
13,600
13,600
20,000
20,000
21,200
21,200
25,000
25,000
10,000
10,000
7-4
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7-18. (continued)
b.
Materials Inventory
Balance 10/1
1.
3.
Balance 10/31
29,640
16,000
11,200
42,440 *
6,600
13,600
20,000
25,000
17,080
800
21,200
10,000
16,000
Cash
16,000 1.
11,200 3.
16,000 4.
21,200 7.
Wages Payable
20,000 6.
7-18. (continued)
7-5
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Accumulated Depreciation
Property, Plant, and Equipment
10,000 9.
Finished Goods Inventory
Balance 10/1
Goods completed
Balance 10/31
33,200
48,120 *
28,640
of Goods Sold
52,680
20,000
20,000
1,000
1,000
25,000
25,000
20,000
20,000
30,000
30,000
25,000
25,000
21,500
21,500
31,250
31,250
5,000
5,000
7-6
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7-19. (continued)
b.
Materials Inventory
Balance 6/1
1.
3.
Balance 6/30
9,000
20,000
25,000
23,000 *
16,500
30,000
25,000
31,250
58,250
1,000
21,500
5,000
20,000
Cash
20,000 1.
25,000 3.
20,000 4.
21,500 7.
Wages Payable
25,000 6.
7-19. (continued)
7-7
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Accumulated Depreciation
Property, Plant, and Equipment
5,000 9.
Finished Goods Inventory
Balance 6/1
Goods completed
Balance 6/30
65,000
44,500 *
36,500
of Goods Sold
73,000
17,000
17,000
16,800
16,800
1,200
1,200
17,000
17,000
2,200
2,200
31,000
31,000
17,200
17,200
35,000
35,000
28,830
28,830
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Balance 1/1
1.
5.
Balance 1/31
11,400 *
17,000
2,200
12,600
2,200 5.
79,000 Transferred to
Finished Goods
1,200
17,200
35,000
17,000
Cash
17,000 1.
17,200 7.
17,000 4.
31,000 6.
7-9
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7-20. (continued)
Accumulated Depreciation
Property, Plant, and Equipment
35,000 8.
Finished Goods Inventory
Balance 1/1
Goods completed
Balance 1/31
2,600
79,000 *
7,100
of Goods Sold
74,500
7-10
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
The credit from Finished Goods Inventory for $120,000 plus $6,000 underapplied
overhead.
f.
BB = EB TI + TO
BB = $400,000 ($402,000 + $350,000 + $250,000) + $822,000
BB = $220,000
$1,020,000
Sales....................................................................
$809,000
Cost of Goods Solda...........................................
222,000
1,031,000
S&A costs............................................................
($11,000)
Operating profit....................................................
The credit from Finished Goods Inventory for $819,000 minus $10,000 overapplied
overhead.
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e.
f.
BB + TI TO = EB
EB = $100,000 + ($190,000 + $187,500 + $150,000) $345,000
EB = $282,500
$600,000
Sales....................................................................
$256,000
Cost of Goods Solda...........................................
105,000
361,000
S&A costs............................................................
$239,000
Operating profit....................................................
The credit from Finished Goods Inventory for $251,000 plus $5,000 underapplied
overhead.
$700,000c
800,000b
500,000a
$2,000,000
Supporting Computations
a Applied
manufacturing overhead:
$500,000 = 25% x total manufacturing cost (25% x $2,000,000).
b Direct
c Direct
material used equals total manufacturing cost less direct labor and manufacturing
overhead applied [$2,000,000 ($800,000 + $500,000) = $700,000].
$90,000
= 45% of direct labor
$200,000
$50,000 x .45 =
75,000 x .45 =
100,000 x .45 =
$22,500
33,750
45,000
$101,250
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% of Total
Applied
10%
30
60
100%
(= $10,125 $101,250)
(= $30,375 $101,250)
(= $60,750 $101,250)
Second, allocate the overapplied overhead to each account and record as follows:
Applied manufacturing overhead....................................
Work-in-process inventory (10% x $4,250)....
Finished goods inventory (30% x $4,250)......
Cost of good sold (60% x $4,250)..................
$101,250
425
1,275
2,550
$97,000
$625,000
= 125% of direct labor
$500,000
Job 2-1:.............
$195,000 x 1.25 =
Job 2-2:.............
325,000 x 1.25 =
Job 2-3:.............
130,000 x 1.25 =
$243,750
406,250
162,500
$812,500
7-13
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Applied
Overhead
$162,500
406,250
243,750
$812,500
% of
Total
Applied
20%
50
30
100%
(= $162,500 $812,500)
(= $406,250 $812,500)
(= $243,750 $812,500)
Second, allocate the overapplied overhead to each account and record as follows:
Applied manufacturing overhead....................................
Work-in-process inventory (20% x $12,500)...................
Finished goods inventory (50% x $12,500)....................
Cost of good sold (30% x $12,500)................................
$812,500
2,500
6,250
3,750
$825,000
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
70,200
421,200
262,600
315,120
237,120* *
$210,000
35,000 hours
Applied
Total
Overhead
(@60%)
$23,040
+
$13,824 =
$36,864
SY-400.................................................................
15,120 +
$9,072 =
$24,192
SY-403.................................................................
During month
Additional
Direct
Labor
Additional
Beginning
Applied
Total
Overhead
(@60%)
$36,864 +
$25,200 +
$15,120 =
SY-400.................................................................
Total
$24,192 +
$72,000 +
$43,200 =
SY-403.................................................................
$139,392
$77,184
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b.
Direct
Labor
Applied
Overhead
Total
(@60%)
$51,120*
SY-404.................................................................
+ $30,672 = $81,792
Wages Payable
600,000a
Work in Process
600,000a 672,000c
72,000b
Cost of
Services Billed
672,000c 12,000d
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
dClosing
actual)
b.
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Sales revenue......................................................
$672,000
Cost of services billed.........................................
Subtract: Overapplied service overhead............. 12,000
Gross margin.......................................................
Marketing and administration..............................
Operating profit....................................................
a$1,200,000
$1,200,000 a
660,000
$540,000
240,000
$300,000
Wages Payable
220,000a
Work in Process
220,000a 264,000c
44,000b
Cost of
Services Billed
264,000c 2,000d
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
dClosing
actual).
b.
Allocation Busters
Income Statement
For the Month Ended March 31
Sales revenue......................................................
$264,000
Cost of services billed.........................................
Subtract: Overapplied service overhead............. 2,000
Gross margin.......................................................
Marketing and administration..............................
Operating profit....................................................
a$550,000
$550,000 a
262,000
$288,000
200,000
$88,000
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Wages Payable
65,625a
Work in Process
65,625a 105,000c
39,375b
Cost of
Services Billed
105,000c 4,375d
b$45
cSum
dClosing
actual).
b.
TechMaster
Income Statement
For the Month Ended August 31
Sales revenue......................................................
$105,000
Cost of services billed.........................................
Subtract: Overapplied service overhead............. 4,375
Gross margin.......................................................
Marketing and administration..............................
Operating profit....................................................
a$175,000
$175,000 a
100,625
$74,375
55,000
$19,375
7-18
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Solutions to Problems
7-35. (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.
7-36. (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 Control
234,000
(given as actual =
expected)
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7-20
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56,400
Work-in-Process Inventory
(given)
(b)
(b)
(d)
(h)
Balance 11/1
Direct materials
Direct labor
Overhead applied
Balance 11/30
Proration
Balance 11/30
32,600
86,200
176,000
264,000
184,400
6,270
190,670
374,400 (d)
Balance 11/30
Proration
Balance 11/30
129,600
374,400
101,000
3,762
104,762
(c) 403,000
Proration
403,000
15,048
(h)
16,400
26,000
48,200
198,480
289,080 (h)
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7-39. (continued)
Wages Payable
176,000
(b)
26,000
(e)
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 costs
Overhead applied = 150% X
$264,000 = 150% X
X = $176,000
(c)Let X = Cost of goods sold
Sales = 180% X
$725,400 = 180% X
X = $403,000
(d)Finished goods BB = Finished Goods EB + $28,600
BB = 101,000 + 28,600
BB = $129,600
Finished goods EB + Cost of goods sold
Finished Goods BB
= $101,000 + $403,000 $129,600
= $374,400
= $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)
Finished goods
(15% x $25,080)
Cost of goods sold (60% x $25,080)
$6,270
3,762
15,048
$25,080
$475,500.
$162,000
Beginning balance...............................................
135,000
Direct materials....................................................
84,000 *
Direct labor..........................................................
94,500 **
Overhead applied................................................
$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.
d.
e.
$220,500.
$18,000
Supplies...............................................................
51,000
Indirect labor wages............................................
108,000
Supervisory salaries............................................
19,500
Factory facilities...................................................
24,000
Factory equipment costs.....................................
$220,500
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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................
Cost of Goods Sold.....................
Work-in-Process Inventory..........
Finished Goods Inventory...........
$0
2,937,000*
114,000
246,000
*$2,940,000 $3,000
If it were material, then the proper answer would be to prorate it between work-inprocess inventory, finished goods inventory, and cost of goods sold.
7-40. (40 min.)Analysis Of Overhead Using A Predetermined Rate: UCD
Company.
a.
$980,000
$49 per DLH.
= $49 per DLH
20,000
b.
$890,300.
$91,300
Beginning balance...............................................
281,000
Direct materials....................................................
168,000 *
Direct labor..........................................................
350,000 **
Overhead applied................................................
$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.
d.
e.
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
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20% (= $8 million $40 million for cost of goods sold) for Finished Goods
Inventory. This yields:
Underapplied Overhead..............
Cost of Goods Sold.....................
Work-in-Process Inventory..........
Finished Goods Inventory...........
$0
$30,100,000*
4,300,000**
8,600,000***
$564,000
$672,000
$66,000
$606,000
Cost of
Ending Finished
=
Goods Sold
Goods Inventory
Cost of
=
$66,000
Goods Sold
= Cost of Goods Sold
= Cost of Goods Sold
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9,600
Managing
Direct Overhead
Cost
950
200
375
1,200
(= $15 x 80)
Officiating Direct
Overhead Cost
875
300
1,000
1,875
(= $15 x
125)
Training Direct
Overhead Cost
Dispute
Resolution
Direct Labor Cos
1,350
(= $15 x 90)
Dispute
Resolution Direct
Overhead Cost
700
250
150
5,060
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10
200
50
7-43. (continued)
Income Statement
Youth Athletic Services
Income Statement
For Month Ending July 31
Managing
Revenue..............................................................
Cost of Services:
Labora..............................................................
Direct Overheadb.............................................
Indirect Overheadc...........................................
Total costs of services..................................
Department margin.............................................
Less other costs:
Unassigned labor costs (idle time)d.................
Unassigned overhead indirect costse..............
Marketing and administrative costsf................
Operating profit....................................................
aAmounts
$6,950
$4,800
1,525
384
$6,709
$ 241
Dispute
Resolution
Total
Officiating
Training
$3,000
$1,000
$18,850
$1,200
2,175
96
$3,471
$4,429
$1,875
1,100
150
$3,125
$(125)
$1,350
260
108
$1,718
$(718)
$15,023
$3,827
$7,900
375
30
6,075
$(2,653)
equal $15 per hour times direct labor-hours according to the problem (managing, $15 x 320 hours; etc.)
bAmounts
25 hours.
+ $2,250 + $600 + $225)
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.
7-43. (25 min.)Job CostsService Company: Bay Accountants.
a.
Unassigned
Costs (not
required)
Martys Marina
State Prison
System
(= 2,000 x $160)
(= 600 x $160)
(= 1,000 x $160)
$60,000
$24,000
(= 2,000 x $60)
(= 600 x $60)
(= 1,000 x $60)
(= 400 x $60)
$170,000
$51,000
Margin.............................................................................
$85,000
Lake Lumber
$320,000
$96,000
Revenue.........................................................................
$120,000
$36,000
Labor...............................................................................
$30,000
$9,000
Overheada......................................................................
a$30,000
$160,000
$15,000
6,000
Total
$576,000
240,000
60,000
7-28
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7-44. (continued)
b.
Bay Accountants
Income Statement
For Month Ending January 31
Revenue from clients.............................................
Less cost of services to clients:
Labor..................................................................
Overhead...........................................................
Total cost of services to clients......................
Gross margin.........................................................
Less other costs:
Labor..................................................................
Overhead...........................................................
Marketing and administrative costs...................
Total other costs.............................................
Operating profit......................................................
$576,000
$216,000
54,000
270,000
$306,000
$24,000
6,000
40,000
70,000
$236,000
8,472
Work-in-Process Inventory
7,270 Job PP-24
19,616 Job PP-30
9,510
4,080
13,296
10,872
Balance 9/30
10,872
6,600
7,270
19,616
Balance 9/30
26,886
6,600
Sold
(c)
(e)
Materials Inventory.........................................................
Accounts Payable.......................................................
(2) Manufacturing Overhead...............................................
Materials Inventory.....................................................
(3) Accounts Payable..........................................................
Cash...........................................................................
(4) Work in ProcessDirect Materials................................
Materials Inventory.....................................................
(5) Payroll............................................................................
Payroll Taxes Payable................................................
Cash...........................................................................
(6) Payroll............................................................................
Fringe Benefits Payable.............................................
(7) Work in Process (60% x $63,000).................................
Manufacturing Overhead (30% x $63,000)....................
Administrative and Marketing Costs (10% x $63,000)...
Payroll ($21,000 + $42,000).......................................
(8) Manufacturing Overhead...............................................
Cash...........................................................................
(9) Work in ProcessOverhead ($37,800 x 175%)............
Applied Manufacturing Overhead.............................
(10) Manufacturing Overhead Control...................................
Accumulated DepreciationProperty, Plant, and
Equipment............................................................
53,700
53,700
1,500
1,500
53,700
53,700
25,500
25,500
42,000
13,500
28,500
21,000
21,000
37,800
18,900
6,300
63,000
32,400
32,400
66,150
66,150
17,250
17,250
7-46. (continued)
b.
Balance 1/1
(1)
Balance 1/31
a$82,275
Materials Inventory
1,500 (2)
55,575
25,500 (4)
53,700
82,275 a
Work-in-Process Inventory
12,375
86,325 Per Finished Goods
Balance 1/1
25,500
(4) Direct Materials
T-account
37,800
(7) Direct Labor
(9) Overhead Applied 66,150
55,500 b
Balance 1/31
b$55,500
(3)
Accounts Payable
53,700
53,700 (1)
7-46. (continued)
Cash
53,700 (3)
28,500 (5)
32,400 (8)
Payroll
42,000
21,000
63,000 (7)
(5)
(6)
(7)
Balance 1/1
Goods Completed
Balance 1/31
a$86,325
Finished Goods
62,250
86,325 a 98,775
49,800
Balance 1/31
7-46.
a. T accounts.
Materials Inventory
137,200 (1a)
93,000 (1b)
94,000 (1c)
Wages Payable
490,000 (2a)
312,400 (2b)
197,600 (2c)
Work-in-Process Inventory
324,200
761,100
1,000,000
521,100
62,000
209,200
b521,100
(a)
(b)
7-47. (continued)
(a)
(b)
$4,000,000
$20 per Hour
= 200,000 hours.
7-47. (continued)
c. T accounts
Materials Inventory
137,200 (1a)
93,000 (1b)
94,000 (1c)
Wages Payable
490,000 (2a)
312,400 (2b)
197,600 (2c)
Overapplied (5)
(Actual)
62,000
16,000
(Applied)
38,220 (3a)
24,367 (3b)
15,413 (3c)
(Applied)
89,180
56,857
35,963
27,200
(4a)
(4b)
(4c)
(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)
(2)
(3)
(4)
Work-in-Process Inventory
324,200
754,600 (a)
1,000,000
486,624 (b)
78,000
182,000
7-47. (continued)
(a)
(b)
1,241,224
d.
Actual
$1,400,000
Sales Revenue....................................................
(1,282,200)
Less Cost of Goods Sold....................................
$117,800
Gross Margin.......................................................
Less:
Normal
$1,400,000
(1,241,224)
$158,776
(11,200)
(112,000)
$35,576
12,500
12,500
9,400
9,400
130,000
130,000
75,000
75,000
650
650
155
155
2,520
600
2,670
450
15,300
18,750
5,625
15,300
18,750
5,625
100,200
57,300
33,000
9,900
7-48. (continued)
b. Overhead analysis:
$5,625
Applied (Entry 7)..............................................
Incurred
$650
Entry 4..........................................................
155
Entry 5..........................................................
2,520
Entry 6..........................................................
3,325
$2,300
Overapplied.........................................................
c.Inventory balances
Balance 5/1
(2)
Balance 5/31
Balance 5/1
Current charges (7)
Balance 5/31
(8)
Balance 5/31
29,945
Work-in-process inventory
119,550 *
39,675
59,025
overhead
97,900
172,400
140,628
135,400
66,600
107,000 Transferred to
(d)
(f)
finished goods
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
( c) Direct labor
(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
(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
goods
and,
M*
L*
O3
6/1
L1
O4
6/30
Wages Payable
128,000 *
M5
L6
O7
6/30
Overhead
Actual
Applied
64,000 9
80,000 *
M*
L*
O8
6/30
Work-in-Process
Job No. 61
8,000
38,400
19,200
65,600
8,000
76,800
38,400
M*
L
O2
38,400
19,200
0
Job No. 62
12,000
48,000
24,000
0
12,000
48,000
24,000
Job No. 63
6,400
41,600
20,800
68,800
M
L
O
Job No. 62
12,000
48,000
24,000
84,000
Underapplied Overhead
16,00010
7-52. (continued)
M refers to direct materials
L refers to direct labor
O refers to manufacturing overhead
*Numbers given in the problem
1Labor
to complete job is $76,800 since the beginning inventory was 50% complete
2Applied overhead = $123,200 $8,000 $76,800
= $38,400
Applied overhead
$38,400
$76,800
= 50%
of direct labor dollars
=
3Overhead
4Overhead
5Materials
6Labor
7Overhead
8Overhead
7-52. (continued)
9Applied
10Underapplied
overhead
= Actual Applied
= $80,000 $64,000
= $16,000
7-52. (25 min.) Job Costing and Ethics: Old Port Shipyards.
(This problem is based on actual experience.)
a.
Overhead cost..................
Direct labor-hours.............
Predetermined rate...........
(Overhead Hours).........
Olde Town
$20,000,000
200,000
$100 per hour
(= $20,000,000
200,000)
Newton
$80,000,000
200,000
$400 per hour
(= $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.
7-53. (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.)
7-54. (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.
7-55. (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 labor.........................
Manufacturing overhead....
Job MC-270 is the only job in finished goods. It has accumulated the following
costs:
Direct materials.................. $270,000 (Given)
Direct labor.........................
Manufacturing overhead....
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 material. . .
Additional direct labor........
57,000 (given)
5,100 (= $17 x 300 hours)
Manufacturing overhead....
c. $1,240,000 overapplied.
Overhead applied
Overhead incurred
Overapplied overhead
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 3
74,000 (Given)
7,40
0
4,44
0
Percentage
Work in process
Finished goods
6 (= 4,440 74,000)
Cost of sales
84 (= 62,160 74,000)
Allocation
$124,000 (= .10 x $1,240,000)
74,400 (= .06 x $1,240,000)
1,041,600 (= .84 x $1,240,000)
$1,240,00
0
124,000
74,400
1,041,600
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
74,000 54,000
$1,560,000
20,000
= $78 per direct labor-hour
$9,120,000
(5,772,000)
$3,348,000