CHAPTER 4 JOB COSTING 4-1 Cost poola grouping of individual indirect cost items.

Cost tracingthe assigning of direct costs to the chosen cost object. Cost allocationthe assigning of indirect costs to the chosen cost object. Cost-allocation basea factor that links in a systematic way an indirect cost or group of indirect costs to cost objects.

4-2 In a job-costing system, costs are assigned to a distinct unit, batch, or lot of a product or service. In a process-costing system, the cost of a product or service is obtained by using broad averages to assign costs to masses of identical or similar units. 4-3 An advertising campaign for Pepsi is likely to be very specific to that individual client. Job costing enables all the specific aspects of each job to be identified. In contrast, the processing of checking account withdrawals is similar for many customers. ere, process costing can be used to compute the cost of each checking account withdrawal. 4-4 !he seven steps in job costing are" #$% identify the job that is the chosen cost object, #&% identify the direct costs of the job, #'% select the cost(allocation bases to use for allocating indirect costs to the job, #)% identify the indirect costs associated with each cost(allocation base, #*% compute the rate per unit of each cost(allocation base used to allocate indirect costs to the job, #+% compute the indirect costs allocated to the job, and #,% compute the total cost of the job by adding all direct and indirect costs assigned to the job. 4-5 -ajor cost objects that managers focus on in companies using job costing are a product such as a speciali.ed machine, a service such as a repair job, a project such as running the /0po, or a task such as an advertising campaign. 4-6 !hree major source documents used in job(costing systems are #$% job cost record or job cost sheet, a document that records and accumulates all costs assigned to a specific job, starting when work begins #&% materials re1uisition record, a document that contains information about the cost of direct materials used on a specific job and in a specific department2 and #'% labor(time sheet, a document that contains information about the amount of labor time used for a specific job in a specific department. 4-7 !he main advantages of using computeri.ed source documents for job cost records are the accuracy of the records and the ability to provide managers with instantaneous feedback to help control job costs. 4-8 a. b. !wo reasons for using an annual budget period are !he numerator reasonthe longer the time period, the less the influence of seasonal patterns in overhead costs, and !he denominator reasonthe longer the time period, the less the effect of variations in output levels or 1uantities of the cost(allocation bases on the allocation of fi0ed costs.

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4-9

Actual costing and normal costing differ in their use of actual or budgeted indirect cost rates"

3irect(cost rates Indirect(cost rates

Actual Co t!"# Actual rates Actual rates

No$%al Co t!"# Actual rates 4udgeted rates

/ach costing method uses the actual 1uantity of the direct(cost input and the actual 1uantity of the cost(allocation base. 4-1& A house construction firm can use job cost information #a% to determine the profitability of individual jobs, #b% to assist in bidding on future jobs, and #c% to evaluate professionals who are in charge of managing individual jobs. 4-11 !he statement is false. In a normal costing system, the -anufacturing 5verhead 6ontrol account will not, in general, e1ual the amounts in the -anufacturing 5verhead Allocated account. !he -anufacturing 5verhead 6ontrol account aggregates the actual overhead costs incurred while -anufacturing 5verhead Allocated allocates overhead costs to jobs on the basis of a budgeted rate times the actual 1uantity of the cost(allocation base. 7nderallocation or overallocation of indirect #overhead% costs can arise because of #a% the 8umerator reasonthe actual overhead costs differ from the budgeted overhead costs, and #b% the 3enominator reasonthe actual 1uantity used of the allocation base differs from the budgeted 1uantity. 4-12 3ebit entries to 9ork(in(Process 6ontrol represent increases in work in process. /0amples of debit entries under normal costing are #a% direct materials used #credit to -aterials 6ontrol%, #b% direct manufacturing labor billed to job #credit to 9ages Payable 6ontrol%, and #c% manufacturing overhead allocated to job #credit to -anufacturing 5verhead Allocated%. 4-13 Alternative ways to make end(of(period adjustments to dispose of underallocated or overallocated overhead are as follows" #i% Proration based on the total amount of indirect costs allocated #before proration% in the ending balances of work in process, finished goods, and cost of goods sold. #ii% Proration based on total ending balances #before proration% in work in process, finished goods, and cost of goods sold. #iii% :ear(end write(off to 6ost of ;oods <old. #iv% !he adjusted allocation rate approach that restates all overhead entries using actual indirect cost rates rather than budgeted indirect cost rates. 4-14 A company might use budgeted costs rather than actual costs to compute direct labor rates because it may be difficult to trace direct labor costs to jobs as they are completed #for e0ample, because bonuses are only known at the end of the year%. 4-15 -odern technology of electronic data interchange #/3I% is helpful to managers because it ensures that a purchase order is transmitted 1uickly and accurately to suppliers with minimum paperwork and costs. ).$+ #$= min% Jo' o$()$ co t!"#* +$oc) co t!"#,

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a. b. c. d. e. f. g. h. i. j. k.

Job costing Process costing Job costing Process costing Job costing Process costing Job costing Job costing #but some process costing% Process costing Process costing Job costing

l. m. n. o. p. 1. r. s. t. u.

Job costing Process costing Job costing Job costing Job costing Job costing Process costing Job costing Process costing Job costing

)('

4-17

#&= min.% Actual co t!"#* "o$%al co t!"#* accou"t!"# -o$ %a"u-actu$!"# o.)$/)a(, 4udgeted manufacturing overhead rate
4udgeted manufacturing overhead costs 4udgeted direct manufacturing labor costs

$.

>

>

?&, ,==, === > $.@= or $@=A ?$,*==, ===

Actual manufacturing overhead costs Actual direct manufacturing labor costs

Actual manufacturing overhead rate

>

&.

?&, ,**, === > $.B or $B=A ?$, )*=, === 6osts of Job +&+ under actual and normal costing follow" > Actual Co t!"# No$%al Co t!"# ? )=,=== '=,=== *),=== ?$&),===

3irect materials 3irect manufacturing labor costs -anufacturing overhead costs ?'=,=== $.B=2 ?'=,=== $.@= !otal manufacturing costs of Job +&+ '. !otal manufacturing overhead allocated under normal costing >

? )=,=== '=,=== *,,=== ?$&,,===

Actual manufacturing 4udgeted overhead rate labor costs

> ?$,)*=,=== $.@= > ?&,+$=,=== 7nderallocated manufacturing > overhead Actual manufacturing -anufacturing overhead allocated overhead costs

> ?&,,**,=== ?&,+$=,=== > ?$)*,=== !here is no under( or overallocated overhead under actual costing because overhead is allocated under actual costing by multiplying actual manufacturing labor costs and the actual manufacturing overhead rate. !his, of course e1uals the actual manufacturing overhead costs. All actual overhead costs are allocated to products. ence, there is no under( or overallocated overhead.

)()

4-18 $.

#&= ('= min.% Jo' co t!"#* "o$%al a"( actual co t!"#, 4udgeted indirect( cost rate > 4udgeted indirect costs #assembly support% ?@,'==,=== > 4udgeted direct labor(hours $++,=== hours

> ?*= per direct labor(hour Actual indirect( cost rate > ?+,*&=,=== Actual indirect costs #assembly support% > $+',=== hours Actual direct labor(hours

> ?)= per direct labor(hour !hese rates differ because both the numerator and the denominator in the two calculations are differentCone based on budgeted numbers and the other based on actual numbers. &a. 8ormal costing 3irect costs 3irect materials 3irect labor Indirect costs Assembly support #?*= B+=2 ?*= $,=*=% !otal costs Actual costing 3irect costs 3irect materials 3irect labor Indirect costs Assembly support #?)= B+=2 ?)= $,=*=% !otal costs 0a#u"a 1o()l ?$=+,,+= '+,B*= $)',,$= )@,=== ?$B$,,$= ?$=+,,+= '+,B*= $)',,$= '@,)== ?$@&,$$= 1! !o" 1o()l ?$&,,**= )$,'&= $+@,@,= *&,*== ?&&$,',= ?$&,,**= )$,'&= $+@,@,= )&,=== ?&$=,@,=

&b.

'. 8ormal costing enables Amesbury to report a job cost as soon as the job is completed, assuming that both the direct materials and direct labor costs are known at the time of use. 5nce the B+= direct labor(hours are known for the Daguna -odel #June &=$$%, Amesbury can compute the ?$B$,,$= cost figure using normal costing. Amesbury can use this information to manage the costs of the Daguna -odel job as well as to bid on similar jobs later in the year. In contrast, Amesbury has to wait until the 3ecember &=$$ year(end to compute the ?$@&,$$= cost of the Daguna -odel using actual costing. Although not re1uired, the following overview diagram summari.es Amesbury 6onstructionEs job(costing system.

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4-19 $.

#$= min.% Bu(#)t)( %a"u-actu$!"# o.)$/)a( $at)* allocat)( %a"u-actu$!"# o.)$/)a(, 4udgeted manufacturing overhead rate > > 4udgeted manufacturing overhead 4udgeted machine hours ?), &==, === > ?&) per machine(hour $,*, === machine(hours 4udgeted manufacturing overhead rate

&.

-anufacturing overhead allocated

>

Actual machine(hours

> $,=,=== F ?&) > ?),=@=,=== '. <ince manufacturing overhead allocated is greater than the actual manufacturing overhead costs, ;ammaro overallocated manufacturing overhead" -anufacturing overhead allocated Actual manufacturing overhead costs 5verallocated manufacturing overhead ?),=@=,=== ),=*=,=== ? '=,===

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4-2& $.

#&=('= min.% Jo' co t!"#* accou"t!"# -o$ %a"u-actu$!"# o.)$/)a(* 'u(#)t)( $at) , An overview of the product costing system is
IN D IR E C T C O S T P O O L

M a c h in in gD e p a rtm e n t A s s e m b lyD e p a rtm e n t M a n u fa c tu rin gO v e rh e a d M a n u fa c tu rin gO v e rh e a d

C O S T A L L O C A T IO N B A S E

} } }

M a c h in e -H o u rs

D ire c tM a n u f. L a b o rC o s t

C O S TO B J E C T : P R O D U C T

In d ire c tC o s ts D ire c tC o s ts

D IR E C T C O S T

D ire c t M a te ria ls

D ire c t M a n u fa c tu rin g L a b o r

4udgeted manufacturing overhead divided by allocation base" -achining overhead" Assembly overhead" &.
?$,@==,=== > ?'+ per machine(hour *=,=== ?',+==,=== > $@=A of direct manuf. labor costs ?&,===,===

-achining department, &,=== hours ?'+ Assembly department, $@=A ?$*,=== !otal manufacturing overhead allocated to Job )B) Actual manufacturing overhead -anufacturing overhead allocated, ?'+ **,=== machine(hours $@=A ?&,&==,=== 7nderallocated #5verallocated% 1ac/!"!"# ?&,$==,=== $,B@=,=== C ? $&=,===

?,&,=== &,,=== ?BB,=== A )%'l2 ? ',,==,=== C ',B+=,=== ? #&+=,===%

'.

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4-21 $.

#&=&* min.% Jo' co t!"#* co" ult!"# -!$%, 4udgeted indirect(cost rate for client support can be calculated as follows" 4udgeted indirect(cost rate > ?$',+==,=== G ?*,'$&,*== > &*+A of professional labor costs

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6lient 6onsulting 6onsulting <upport <upport <upport

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Professional Professional Dabor Dabor6osts 6osts

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Indirect 6osts 3irect 6osts

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Professional Dabor

&.

At the budgeted revenues of ?&$,&*=,=== !aylorEs operating income of ?&,'',,*== e1uals $$A of revenues. -arkup rate > ?&$,&*=,=== G ?*,'$&,*== > )==A of direct professional labor costs

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4udgeted costs 3irect costs" 3irector, ?$B@ ) ? ,B& Partner, ?$=$ $, $,,$, Associate, ?)B )& &,=*@ Assistant, ?'+ $*' *,*=@ Indirect costs" 6onsulting support, &*+A ?$=,=,* !otal costs

?$=,=,* &*,,B& ?'*,@+,

As calculated in re1uirement &, the bid price to earn an $$A income(to(revenue margin is )==A of direct professional costs. !herefore, !aylor should bid ) ?$=,=,* > ?)=,'== for the Ied Iooster job. 4id price to earn target operating income(to(revenue margin of $$A can also be calculated as follows" Det I > revenue to earn target income I =.$$I > ?'*,@+, =.@BI > ?'*,@+, I > ?'*,@+, G =.@B > ?)=,'== 5r 3irect costs Indirect costs 5perating income #=.$$ ?)=,'==% 4id price ?$=,=,* &*,,B& ),)'' ?)=,'==

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4-22 $.
#$% #&% #'% #)%

#$*&= min.% T!%) +)$!o( u )( to co%+ut) !"(!$)ct co t $at) ,

3ua$t)$ 3 $*= ,* ?$=,*==

Pools sold 3irect manufacturing labor hours #=.* Iow $% Hi0ed manufacturing overhead costs 4udgeted fi0ed manufacturing overhead rate per direct manufacturing labor hour #?$=,*== Iow &%

1 ,== '*= ?$=,*==

2 *== &*= ?$=,*==

4 $*= ,* ?$=,*==

A""ual $,*== ,*= ?)&,===

?'=

?)&

?$)=

?$)=

?*+

3irect material costs #?,.*= *== pools2 $*= pools% 3irect manufacturing labor costs #?$+ &*= hours2 ,* hours% Jariable manufacturing overhead costs #?$& &*= hours2 ,* hours% Hi0ed manufacturing overhead costs #?)& &*= hours2 ?$)= F ,* hours% !otal manufacturing costs 3ivided by pools manufactured each 1uarter -anufacturing cost per pool

Bu(#)t)( Co t Ba )( o" 3ua$t)$l2 1a"u-actu$!"# O.)$/)a( Rat) 2"( 3ua$t)$ 3$( 3ua$t)$ ? ',,*= ? $,$&* ),=== ',=== $=,*== ?&$,&*= G *== ? )&.*= $,&== B== $=,*== ?$',,&* G $*= ? B$.*=

&.
Bu(#)t)( Co t Ba )( o" A""ual 1a"u-actu$!"# O.)$/)a( Rat) 2"( 3ua$t)$ 3$( 3ua$t)$ ? ',,*= ?$,$&* ),=== ',=== $),=== ?&),,*= *== ? )B.*= $,&== B== ),&== ?,,)&* $*= ?)B.*=

3irect material costs #?,.*= *== pools2 $*= pools% 3irect manufacturing labor costs #?$+ &*= hours2 ,* hours% Jariable manufacturing overhead costs #?$& &*= hours2 ,* hours% Hi0ed manufacturing overhead costs #?*+ &*= hours2 ,* hours% !otal manufacturing costs 3ivided by pools manufactured each 1uarter -anufacturing cost per pool

)($=

'.
2"( 3ua$t)$ Prices based on 1uarterly budgeted manufacturing overhead rates calculated in re1uirement $ #?)&.*= $'=A2 ?B$.*= $'=A% Price based on annual budgeted manufacturing overhead rates calculated in re1uirement & #?)B.*= $'=A2 ?)B.*= $'=A% 3$( 3ua$t)$

?**.&*

?$$@.B*

?+).'*

?+).'*

<plash should use the budgeted annual manufacturing overhead rate because capacity decisions are based on longer annual periods rather than 1uarterly periods. Prices should not vary based on 1uarterly fluctuations in production. <plash could vary prices based on market conditions and demand for its pools. In this case, <plash would charge higher prices in 1uarter & when demand for its pools is high. Pricing based on 1uarterly budgets would cause <plash to do the oppositeC to decrease rather than increase pricesK

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4-23 $.

#$=$* min.% Accou"t!"# -o$ %a"u-actu$!"# o.)$/)a(, 4udgeted manufacturing overhead rate > ?,,*==, === &*=,=== machine(hours

> ?'= per machine(hour &. 9ork(in(Process 6ontrol -anufacturing 5verhead Allocated #&)*,=== machine(hours ?'= per machine(hour > ?,,'*=,===% ,,'*=,=== ,,'*=,===

'. ?,,'*=,=== ?,,'==,=== > ?*=,=== overallocated, an insignificant amount of actual manufacturing overhead costs ?*=,=== G ?,,'==,=== > =.+@A. -anufacturing 5verhead Allocated -anufacturing 3epartment 5verhead 6ontrol 6ost of ;oods <old ,,'*=,=== ,,'==,=== *=,===

)($&

4-24

#'*)* min.% Jo' co t!"#* 4ou$"al )"t$!) ,

<ome instructors may also want to assign /0ercise )(&*. It demonstrates the relationships of the general ledger to the underlying subsidiary ledgers and source documents. $. An overview of the product costing system is"

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-anufacturing 5verhead

65<! ADD56A!I58 4A</

} } }

3irect -anufacturing Dabor 6osts

65<! 54J/6!" PII8! J54

Indirect 6osts 3irect 6osts

3II/6! 65<!

3irect -aterials

3irect -anuf . Dabor

)($'

&. L '. !his answer assumes 65;< given of ?),=&= does not include the writeoff of overallocated manufacturing overhead. &.
#$% -aterials 6ontrol Accounts Payable 6ontrol #&% 9ork(in(Process 6ontrol -aterials 6ontrol #'% -anufacturing 5verhead 6ontrol -aterials 6ontrol #)% 9ork(in(Process 6ontrol -anufacturing 5verhead 6ontrol 9ages Payable 6ontrol #*% -anufacturing 5verhead 6ontrol Accumulated 3epreciationbuildings and manufacturing e1uipment #+% -anufacturing 5verhead 6ontrol -iscellaneous accounts #,% 9ork(in(Process 6ontrol -anufacturing 5verhead Allocated #$.+= ?$,'== > ?&,=@=% #@% Hinished ;oods 6ontrol 9ork(in(Process 6ontrol #B% Accounts Ieceivable 6ontrol #or 6ash% Ievenues #$=% 6ost of ;oods <old Hinished ;oods 6ontrol #$$% -anufacturing 5verhead Allocated -anufacturing 5verhead 6ontrol 6ost of ;oods <old @== @== ,$= ,$= $== $== $,'== B== &,&== )== )== **= **= &,=@= &,=@= ),$&= ),$&= @,=== @,=== ),=&= ),=&= &,=@= $,B*= $'=

)($)

'.
4al. $M$M&=$$ #$% Accounts Payable 6ontrol #Purchases% 4al. $&M'$M&=$$ -aterials 6ontrol $== #&% 9ork(in(Process 6ontrol #-aterials used% @== #'% -anufacturing 5verhead 6ontrol #-aterials used% B= 9ork(in(Process 6ontrol += #@% Hinished ;oods 6ontrol #;oods completed% ,$= $,'== &,=@= '= Hinished ;oods 6ontrol *== #$=% 6ost of ;oods <old ),$&= +== 6ost of ;oods <old #$$% -anufacturing 5verhead ),=&= Allocated #Adjust for overallocation% ',@B= -anufacturing 5verhead 6ontrol #$$% !o close $== B== )== **= = ,$= $==

4al. $M$M&=$$ #&% -aterials 6ontrol #3irect materials% #)% 9ages Payable 6ontrol #3irect manuf. labor% #,% -anuf. 5verhead Allocated 4al. $&M'$M&=$$

),$&=

4al. $M$M&=$$ #@% 9IP 6ontrol #;oods completed% 4al. $&M'$M&=$$

),=&=

#$=% Hinished ;oods 6ontrol #;oods sold% 4al. $&M'$M&=$$

$'=

#'% -aterials 6ontrol #Indirect materials% #)% 9ages Payable 6ontrol #Indirect manuf. labor% #*% Accum. 3eprn. 6ontrol #3epreciation% #+% Accounts Payable 6ontrol #-iscellaneous% 4al.

$,B*=

#$$% !o close

-anufacturing 5verhead Allocated &,=@= #,% 9ork(in(Process 6ontrol #-anuf. overhead allocated% 4al.

&,=@= =

)($*

4-25 $.

5'* minutes% Jou$"al )"t$!) * T-accou"t * a"( ou$c) (ocu%)"t .

i. 3irect -aterials 6ontrol $&),=== Accounts Payable 6ontrol <ource 3ocument" Purchase Invoice, Ieceiving Ieport <ubsidiary Dedger" 3irect -aterials Iecord, Accounts Payable

$&),===

ii. 9ork in Process 6ontrol a $&&,=== 3irect -aterials 6ontrol $&&,=== <ource 3ocument" -aterial Ie1uisition Iecords, Job 6ost Iecord <ubsidiary Dedger" 3irect -aterials Iecord, 9ork(in(Process Inventory Iecords by Jobs iii. 9ork in Process 6ontrol @=,=== -anufacturing 5verhead 6ontrol *),*== 9ages Payable 6ontrol $'),*== <ource 3ocument" Dabor !ime <heets, Job 6ost Iecords <ubsidiary Dedger", -anufacturing 5verhead Iecords, /mployee Dabor Iecords, 9ork(in( Process Inventory Iecords by Jobs iv. -anufacturing 5verhead 6ontrol $&B,*== <alaries Payable 6ontrol &=,=== Accounts Payable 6ontrol B,*== Accumulated 3epreciation 6ontrol '=,=== Ient Payable 6ontrol ,=,=== <ource 3ocument" 3epreciation <chedule, Ient <chedule, -aintenance wages due, Invoices for miscellaneous factory overhead items <ubsidiary Dedger" -anufacturing 5verhead Iecords v. 9ork in Process 6ontrol &==,=== -anufacturing 5verhead Allocated #?@=,=== ?&.*=% <ource 3ocument" Dabor !ime <heets, Job 6ost Iecord <ubsidiary Dedger" 9ork(in(Process Inventory Iecords by Jobs &==,===

vi. Hinished ;oods 6ontrol b '@,,=== 9ork in Process 6ontrol '@,,=== <ource 3ocument" Job 6ost Iecord, 6ompleted Job 6ost Iecord <ubsidiary Dedger" 9ork(in(Process Inventory Iecords by Jobs, Hinished ;oods Inventory Iecords by Jobs vii. 6ost of ;oods <old c )'&,=== Hinished ;oods 6ontrol <ource 3ocument" <ales Invoice, 6ompleted Job 6ost Iecord <ubsidiary Dedger" Hinished ;oods Inventory Iecords by Jobs )'&,===

)($+

viii.

-anufacturing 5verhead Allocated -anufacturing 5verhead 6ontrol #?$&B,*== N ?*),*==% 6ost of ;oods <old <ource 3ocument" Prior Journal /ntries

&==,=== $@),=== $+,===

i0. Administrative /0penses ,,=== -arketing /0penses $&=,=== <alaries Payable 6ontrol '=,=== Accounts Payable 6ontrol B=,=== Accumulated 3epreciation, 5ffice /1uipment ,,=== <ource 3ocument" 3epreciation <chedule, -arketing Payroll Ie1uest, Invoice for Advertising, <ales 6ommission <chedule. <ubsidiary Dedger" /mployee <alary Iecords, Administration 6ost Iecords, -arketing 6ost Iecords.
a

4eginning direct /nding direct -aterials used > materials inventory N Purchases materials inventory > ?B,=== N ?$&),=== ?$$,=== > ?$&&,===

6ost of 4eginning 9IP -anufacturing /nding 9IP N inventory goods manufactured > inventory cost > ?+,=== N #?$&&,=== N ?@=,=== N ?&==,===% ?&$,=== > ?'@,,===

4eginning finished 6ost of goods /nding finished 6ost of goods sold > goods inventory N manufactured goods inventory > ?+B,=== N ?'@,,==== ?&),=== > ?)'&,===

)($,

&.

!(accounts 4al. $M$M&=$$ #$% Accounts Payable 6ontrol #Purchases% 4al. $&M'$M&=$$ 4al. $M$M&=$$ #&% -aterials 6ontrol #3irect materials used% #'% 9ages Payable 6ontrol #3irect manuf. labor% #*% -anuf. 5verhead Allocated 4al. $&M'$M&=$$ 4al. $M$M&=$$ #+% 9IP 6ontrol #6ost of goods manuf.% 4al. $&M'$M&=$$ #,% Hinished ;oods 6ontrol #;oods sold% 3irect -aterials 6ontrol B,=== #&% 9ork(in(Process 6ontrol #-aterials used% $&),=== $$,=== 9ork(in(Process 6ontrol +,=== #+% Hinished ;oods 6ontrol #6ost of goods $&&,=== manufactured% @=,=== &==,=== &$,=== Hinished ;oods 6ontrol +B,=== #,% 6ost of ;oods <old '@,,=== &),=== 6ost of ;oods <old #@% -anufacturing 5verhead )'&,=== Allocated #Adjust for overallocation% )'&,===

$&&,===

'@,,===

$+,===

-anufacturing 5verhead 6ontrol #'% 9ages Payable 6ontrol #@% !o close #Indirect manuf. labor% *),*== #)% <alaries Payable 6ontrol #-aintenance% &=,=== #)% Accounts Payable 6ontrol #-iscellaneous% B,*== #)% Accum. 3eprn. 6ontrol #3epreciation% '=,=== #)% Ient Payable 6ontrol #Ient% ,=,=== 4al. = #@% !o close -anufacturing 5verhead Allocated &==,=== #*% 9ork(in(Process 6ontrol #-anuf. overhead allocated% 4al. )($@

$@),===

&==,=== =

4-26

#)* min.% Jo' co t!"#* 4ou$"al )"t$!) ,

<ome instructors may wish to assign Problem )(&). It demonstrates the relationships of journal entries, general ledger, subsidiary ledgers, and source documents. $. An overview of the product(costing system is
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-anufacturing 5verhead

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-achine( ours

65<! 54J/6! PI5376!

Indirect 6osts 3irect 6osts

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3irect -aterials

3irect -anuf. Dabor

&. #$% #&% #'% #)% #*% #+% #,% #@% #B% #$=a% #$=b%

Amounts in millions. -aterials 6ontrol Accounts Payable 6ontrol 9ork(in(Process 6ontrol -aterials 6ontrol -anufacturing 3epartment 5verhead 6ontrol -aterials 6ontrol 9ork(in(Process 6ontrol 9ages Payable 6ontrol -anufacturing 3epartment 5verhead 6ontrol 9ages Payable 6ontrol -anufacturing 3epartment 5verhead 6ontrol Accumulated 3epreciation -anufacturing 3epartment 5verhead 6ontrol Jarious liabilities 9ork(in(Process 6ontrol -anufacturing 5verhead Allocated Hinished ;oods 6ontrol 9ork(in(Process 6ontrol 6ost of ;oods <old Hinished ;oods 6ontrol Accounts Ieceivable 6ontrol #or 6ash % Ievenues $*= $*= $)* $)* $= $= B= B= '= '= $B $B B B +' +' &B) &B) &B& &B& )== )==

)($B

!he posting of entries to !(accounts is as follows" 4al #$% 4al. -aterials 6ontrol $& #&% $*= #'% , $)* $= 4al. #&% #)% #@% 4al. #$=a% #$$% 9ork(in(Process 6ontrol & #B% $)* B= +' + 6ost of ;oods <old &B& * &B)

4al. #B% 4al.

Hinished ;oods 6ontrol + #$=a% &B) @ -anufacturing 3epartment 5verhead 6ontrol $= #$$% '= $B B Accounts Payable 6ontrol #$% Accumulated 3epreciation #+%

&B&

#'% #*% #+% #,%

+@

-anufacturing 5verhead Allocated #$$% +' #@% +'

$*=

9ages Payable 6ontrol #)% #*% Jarious Diabilities #,% Ievenues #$=b%

B= '= B

$B

Accounts Ieceivable 6ontrol #$=b% )== !he ending balance of 9ork(in(Process 6ontrol is ?+. '.

)==

#$$% -anufacturing 5verhead Allocated 6ost of ;oods <old -anufacturing 3epartment 5verhead 6ontrol /ntry posted to !(accounts in Ie1uirement &.

+' * +@

)(&=

4-27 $.

#$* min.%

Jo' co t!"#* u"!t co t* )"(!"# 6o$7 !" +$o#$) , ?&+ ?&= Jo' 11 ?&,',=== $=,*== ?&$=,=== Jo' 11 ? ,@,=== &,',=== &$=,=== ?*+$,=== $,$== ?*$= *+$,=== *+$,=== Jo' 12 ?&=@,=== @,=== ?$+=,=== Jo' 12 ? *$,=== &=@,=== $+=,=== ?)$B,===

3irect manufacturing labor rate per hour -anufacturing overhead cost allocated per manufacturing labor(hour 3irect manufacturing labor costs 3irect manufacturing labor hours #?&,',=== ?&+2 ?&=@,=== ?&+% -anufacturing overhead cost allocated #$=,*== ?&=2 @,=== ?&=% Jo' Co t 1a2 2&11 3irect materials 3irect manufacturing labor -anufacturing overhead allocated !otal costs &. 8umber of pipes produced for Job -$ 6ost per pipe #?*+$,=== $,$==% '. Hinished ;oods 6ontrol 9ork(in(Process 6ontrol

). Iafael 6ompany began -ay &=$$ with no work(in(process inventory. 3uring -ay, it started and finished -$. It also started -&, which is still in work(in(process inventory at the end of -ay. -&Es manufacturing costs up to this point, ?)$B,===, remain as a debit balance in the 9ork(in(Process Inventory account at the end of -ay &=$$.

)(&$

4-28 $.

#&='= min.% Jo' co t!"#8 actual* "o$%al* a"( .a$!at!o" -$o% "o$%al co t!"#, Actual direct cost rate for professional labor > ?*B per professional labor(hour Actual indirect cost rate hour
4udgeted direct cost rate for professional labor

>

?,'*,=== $,,*== hours

>

?)& per professional labor(

>

?BB=,=== $@,=== hours >

> ?** per professional labor(hour > ?)' per professional labor(

4udgeted indirect cost rate hour

?,,),=== $@,=== hours

3irect(6ost Iate Indirect(6ost Iate &. 3irect 6osts Indirect 6osts !otal Job 6osts

5a9 5'9 Actual No$%al Co t!"# Co t!"# ?*B ?*B #Actual rate% #Actual rate% ?)& ?)' #Actual rate% #4udgeted rate%

5c9 :a$!at!o" oNo$%al Co t!"# ?** #4udgeted rate% ?)' #4udgeted rate%

5a9 5'9 5c9 Actual No$%al :a$!at!o" oCo t!"# Co t!"# No$%al Co t!"# ?*B $+= > ? B,))= ?*B $+= > ? B,))= ?** $+= > ? @,@== ?)& $+= > +,,&= ?)' $+= > +,@@= ?)' $+= > +,@@= ?$+,$+= ?$+,'&= ?$*,+@=

All three costing systems use the actual professional labor time of $+= hours. !he budgeted $*= hours for the Pierre /nterprises audit job is not used in job costing. owever, 6hico may have used the $*= hour number in bidding for the audit. !he actual costing figure of ?$+,$+= is less than the normal costing figure of ?$+,'&= because the actual indirect(cost rate #?)&% is less than the budgeted indirect(cost rate #?)'%. !he normal costing figure of ?$+,'&= is more than the variation of normal costing #based on budgeted rates for direct costs% figure of ?$*,+@=, because the actual direct(cost rate #?*B% is more than the budgeted direct(cost rate #?**%.

)(&&

Although not re1uired, the following overview diagram summari.es 6hicoEs job(costing system.
INDIRECT COST POOL Audit Support

COST ALLOCATION BASE

Professional Labor-Hours

COST OBJECT: JOB FOR AUDITING PIERRE & CO.

Indirect Costs Direct Costs

DIRECT COST Professional Labor

)(&'

4-29 $.

#&='= min.% Jo' co t!"#8 actual* "o$%al* a"( .a$!at!o" -$o% "o$%al co t!"#, Actual direct cost rate for architectural labor > ?B& per architectural labor(hour Actual indirect cost rate hour
4udgeted direct cost rate for professional labor

>

?$, ,&B,*== '),*B=

>

?*= per architectural labor(

>

$ 2 , 8 8 0 , 0 0 0 > ?B= per architectural labor(hour 3 2 , 0 0 0

4udgeted indirect cost rate hour

>

$ 1 ,7 2 8 , 0 0 0 > 3 2 , 0 0 0

?*) per architectural labor(

3irect(6ost Iate Indirect(6ost Iate &. 3irect 6osts Indirect 6osts !otal Job 6osts

5a9 5'9 Actual No$%al Co t!"# Co t!"# ?B& ?B& #Actual rate% #Actual rate% ?*= ?*) #Actual rate% #4udgeted rate%

5c9 :a$!at!o" oNo$%al Co t!"# ?B= #4udgeted rate% ?*) #4udgeted rate%

5a9 Actual Co t!"# ?B& &*= > ?&',=== ?*= &*= > $&,*== ?'*,*==

5'9 5c9 No$%al :a$!at!o" oCo t!"# No$%al Co t!"# ?B& &*= > ?&',=== ?B= &*= > ?&&,*== ?*) &*= > $',*== ?*) &*= > $',*== ?'+,*== ?'+,===

All three costing systems use the actual architectural labor time of &*= hours. !he budgeted &,* hours for the 6hamp !ower job is not used in job costing. owever, 4raden 4rothers may have used the budgeted number of hours in bidding for the job.

)(&)

4,3& #'= min.% P$o$at!o" o- o.)$/)a(. $. 4udgeted manufacturing

overhead rate

>

4udgeted manufacturing overhead cost 4udgeted direct manufacturing labor cost ?$&*, === = *=A of direct manufacturing labor cost ?&*=, ===

&. 5verhead allocated > *=A Actual direct manufacturing labor cost > *=A ?&&@,=== > ?$$),=== 7nderallocated manufacturing overhead > Actual manufacturing overhead costs Allocated plant overhead costs

> ?$$,,=== ?$$),=== > ?',=== 7nderallocated manufacturing overhead > ?',=== 'a. All underallocated manufacturing overhead is written off to cost of goods sold. 4oth work in process #9IP% and finished goods inventory remain unchanged.
;)c, 31* 2&11 Bala"c) 5B)-o$) P$o$at!o"9 519 ? *=,,== &)*,=*= *)B,&*= ?@)*,=== P$o$at!o" o- <3*&&& ="()$allocat)( 1a"u-, O.)$/)a( 529 ? = = ',=== ?',=== ;)c, 31* 2&11 Bala"c) 5A-t)$ P$o$at!o"9 539 > 519 N 529 ? *=,,== &)*,=*= **&,&*= ?@)@,===

Accou"t 9IP Hinished ;oods 6ost of ;oods <old !otal

'b. 7nderallocated manufacturing overhead prorated based on ending balances"

;)c, 31* 2&11 Accou"t Bala"c) 5B)-o$) P$o$at!o"9 519 ? *=,,== &)*,=*= *)B,&*= ?@)*,=== Accou"t Bala"c) a a P)$c)"t o- Total 529 > 519 ? <845*&&& =.=+ =.&B =.+* $.== P$o$at!o" o- <3*&&& ="()$allocat)( 1a"u-, O.)$/)a( 539 > 529 <3*&&& =.=+ ?',=== > ? $@= =.&B ?',=== > @,= =.+* ?',=== > $,B*= ?',=== ;)c, 31* 2&11 Accou"t Bala"c) 5A-t)$ P$o$at!o"9 549 > 519 N 539 ? *=,@@= &)*,B&= **$,&== ?@)@,===

Accou"t 9IP Hinished ;oods 6ost of ;oods <old !otal

)(&*

'c. 7nderallocated manufacturing overhead prorated based on &=$$ overhead in ending balances"
Allocat)( 1a"u-, O.)$/)a( !" ;)c, 31* 2&11 Bala"c) 5B)-o$) P$o$at!o"9 529 ? $=,&+=a &B,+)=b ,),$==c ?$$),===

Accou"t 9IP Hinished ;oods 6ost of ;oods <old !otal

;)c, 31* 2&11 Accou"t Bala"c) 5B)-o$) P$o$at!o"9 519 ? *=,,== &)*,=*= *)B,&*= ?@)*,===

Allocat)( 1a"u-, O.)$/)a( !" ;)c, 31* 2&11 Bala"c) a a P)$c)"t o- Total 539 > 529 ? <114*&&& =.=B =.&+ =.+* $.==

P$o$at!o" o- <3*&&& ="()$allocat)( 1a"u-, O.)$/)a( 549 > 539 <3*&&& =.=B ?',=== > ? &,= =.&+ ?',=== > ,@= =.+* ?',=== > $,B*= ?',===

;)c, 31* 2&11 Accou"t Bala"c) 5A-t)$ P$o$at!o"9 559 > 519 N 549 ? *=,B,= &)*,@'= **$,&== ?@)@,===

a,b,c

5verhead allocated > 3irect manuf. labor cost *=A > ?&=,*&=2 ?*B,&@=2 ?$)@,&== *=A

). 9riting off all of the underallocated manufacturing overhead to 6ost of ;oods <old #6;<% is usually warranted when 6;< is large relative to 9ork(in(Process and Hinished ;oods Inventory and the underallocated manufacturing overhead is immaterial. 4oth these conditions apply in this case. I59 should write off the ?',=== underallocated manufacturing overhead to 6ost of ;oods <old Account.

)(&+

4-31 #&='= min% $. &.

Jo' co t!"#* accou"t!"# -o$ %a"u-actu$!"# o.)$/)a(* 'u(#)t)( $at) ,

An overview of the job(costing system is" 4udgeted manufacturing overhead divided by allocation base" a. -achining 3epartment" ?$=,++=,=== > ?*& per machine(hour &=*,=== machine(hours b. Hinishing 3epartment" ?,,',&,=== ?',@==,=== > $B)A of direct manufacturing labor costs
COST OBJECT: JOB

'.

-achining 3epartment overhead, ?*& $'= machine(hours ?+,,+= Hinishing 3epartment overhead, $B)A of ?$,$== &,$') !otal manufacturing overhead allocated ?@,@B)

)(&,

).

!otal costs of Job )'$" 3irect costs" 3irect materials-achining 3epartment Hinishing 3epartment 3irect manufacturing labor C-achining 3epartment CHinishing 3epartment Indirect costs" -achining 3epartment overhead, ?*& $'= Hinishing 3epartment overhead, $B)A of ?$,$== !otal costs

?$*,*== *,=== )== $,$== ? +,,+= &,$')

?&&,===

@,@B) ?'=,@B)

!he per(unit product cost of Job )'$ is ?'=,@B) G )== units > ?,,.&'* per unit !he point of this part is #a% to get the definitions straight and #b% to underscore that overhead is allocated by multiplying the actual amount of the allocation base by the budgeted rate. *. -anufacturing overhead incurred #actual% -anufacturing overhead allocated &$=,=== hours ?*& $=,B&=,=== $B)A of ?),)==,=== 7nderallocated manufacturing overhead ? $*=,=== 5verallocated manufacturing overhead !otal overallocated overhead > ?'==,=== ?$*=,=== > ?$*=,=== 1ac/!"!"# ?$$,=,=,=== @!"! /!"# ?@,&'+,=== @,*'+,=== ? '==,===

+. A homogeneous cost pool is one where all costs have the same or a similar cause(and( effect or benefits(received relationship with the cost(allocation base. Hasano likely assumes that all its manufacturing overhead cost items are not homogeneous. <pecifically, those in the -achining 3epartment have a cause(and(effect relationship with machine(hours, while those in the Hinishing 3epartment have a cause(and(effect relationship with direct manufacturing labor costs. Hasano believes that the benefits of using two cost pools #more accurate product costs and better ability to manage costs% e0ceeds the costs of implementing a more comple0 system.

)(&@

4-32 $.

#$*&= min.% S)$.!c) !"(u t$2* 4o' co t!"#* la6 -!$%,

&.

4udgeted direct labor compensation per professional 4udgeted professional > labor(hour direct cost rate 4udgeted direct labor(hours per professional ?$=),=== > $,+== hours > ?+* per professional labor(hour

8ote that the budgeted professional labor(hour direct(cost rate can also be calculated by dividing total budgeted professional labor costs of ?&,+==,=== #?$=),=== per professional &* professionals% by total budgeted professional labor(hours of )=,=== #$,+== hours per professional &* professionals%, ?&,+==,=== )=,=== > ?+* per professional labor(hour. '. 4udgeted indirect cost rate 4udgeted total costs in indirect cost pool 4udgeted total professional labor(hours ?&,&==,=== > $,+== hours per professional &* professionals ?&,&==,=== > )=,=== hours > ?** per professional labor(hour > R!c/a$( o" ? +,*== *,*== ?$&,=== Pu"c/ ? B,,*= @,&*= ?$@,===

). 3irect costs" Professional labor, ?+* $==2 ?+* $*= Indirect costs" Degal support, ?** $==2 ?** $*=

)(&B

4-33

#&*'= min.% S)$.!c) !"(u t$2* 4o' co t!"#* t6o (!$)ct- a"( !"(!$)ct-co t cat)#o$!) * la6 -!$% 5co"t!"uat!o" o- 4-329,

Although not re1uired, the following overview diagram is helpful to understand OeatingEs job( costing system.
I83II/6! 65<! P55D 65<! ADD56A!I58 4A</ 65<! 54J/6!" J54 H5I 6DI/8!

} } } P

;eneral <upport

<ecretarial <upport

Professional Dabor( ours

Partner Dabor( ours

Indirect 6osts 3irect 6osts

3II/6! 65<!

Professional Partner Dabor

Professional Associate Dabor

$. 4udgeted compensation per professional 3ivided by budgeted hours of billable time per professional 4udgeted direct(cost rate

P$o-) !o"al Pa$t")$ 0a'o$ ? &==,=== G$,+== ?$&* per hourQ

P$o-) !o"al A oc!at) 0a'o$ ?@=,=== G$,+== ?*= per hourR

> ?$&* > ? *=

A6an also be calculated as !otal budgeted partner labor ( hours

?&==,=== * > $,+== *
R

!otal budgeted partner labor costs

?$,===,=== @,===

>

!otal budgeted associate labor costs !otal budgeted associate labor ( hours ?@=,=== &= ?$,+==,=== > > $,+== &= '&,===

6an also be calculated as

&. 4udgeted total costs 3ivided by budgeted 1uantity of allocation base 4udgeted indirect cost rate

G)")$al S)c$)ta$!al Su++o$t Su++o$t ?$,@==,=== ?)==,=== G )=,=== hours G @,=== hours ?)* per hour ?*= per hour

)('=

'. 3irect costs" Professional partners, ?$&* += hr.2 ?$&* '= hr. Professional associates, ?*= )= hr.2 ?*= $&= hr. 3irect costs Indirect costs" ;eneral support, ?)* $== hr.2 ?)* $*= hr. <ecretarial support, ?*= += hr.2 ?*= '= hr. Indirect costs !otal costs ). <ingle direct <ingle indirect #from Problem )('&% -ultiple direct -ultiple indirect #from re1uirement ' of Problem )(''% 3ifference

R!c/a$( o" ?,,*== &,=== ? B,*== ),*== ',=== ,,*== ?$,,=== R!c/a$( o" ?$&,=== $,,=== ? *,=== undercosted

Pu"c/ ?',,*= +,=== ? B,,*= +,,*= $,*== @,&*= ?$@,=== Pu"c/ ?$@,=== $@,=== ? = no change

!he Iichardson and Punch jobs differ in their use of resources. !he Iichardson job has a mi0 of +=A partners and )=A associates, while Punch has a mi0 of &=A partners and @=A associates. !hus, the Iichardson job is a relatively high user of the more costly partner(related resources #both direct partner costs and indirect partner secretarial support%. !he Punch job, on the other hand, has a mi0 of partner and associate(related hours #$ " )% that e0actly e1uals the mi0 of partner and associate hours for the firm as a whole. !he refined(costing system in Problem )( '' increases the reported cost in Problem )('& for the Iichardson job by )$.,A #from ?$&,=== to ?$,,===% while it happens to correctly cost the Punch job.

)('$

4-34

#&=&* min.% P$o$at!o" o- o.)$/)a(,

$. 4udgeted manufacturing overhead rate is ?),@==,=== G @=,=== hours > ?+= per machine(hour. &. -anufacturing overhead -anufacturing overhead -anufacturing overhead > underallocated incurred allocated > ?),B==,=== ?),*==,===Q > ?)==,=== 9rite(off to 6ost of ;oods <old
;)c, 31* 2&11 Accou"t Bala"c) 5B)-o$) P$o$at!o"9 529 ? ,*=,=== $,&*=,=== @,===,=== ?$=,===,=== B$!t)-o-o- <4&&*&&& ="()$allocat)( 1a"u-actu$!"# O.)$/)a( 539 ? = = )==,=== ?)==,=== ;)c, 31* 2&11 Accou"t Bala"c) 5A-t)$ P$o$at!o"9 549 > 529 C 539 ? ,*=,=== $,&*=,=== @,)==,=== ?$=,)==,===

Q?+= ,*,=== actual machine(hours > ?),*==,===

a.

Accou"t 519 9ork in Process Hinished ;oods 6ost of ;oods <old !otal

b. Proration based on ending balances #before proration% in 9ork in Process, Hinished ;oods and 6ost of ;oods <old.
P$o$at!o" o- <4&&*&&& ;)c, 31* 2&11 ="()$allocat)( Accou"t Bala"c) 1a"u-actu$!"# 5B)-o$) P$o$at!o"9 O.)$/)a( 529 539 ? ,*=,=== # ,.*A% =.=,* ?)==,=== > ? '=,=== $,&*=,=== #$&.*A% =.$&* ?)==,=== > *=,=== @,===,=== #@=.=A% =.@== ?)==,=== > '&=,=== ?$=,===,=== $==.=A ?)==,=== ;)c, 31* 2&11 Accou"t Bala"c) 5A-t)$ P$o$at!o"9 549 > 529 C 539 ? ,@=,=== $,'==,=== @,'&=,=== ?$=,)==,===

Accou"t 519 9ork in Process Hinished ;oods 6ost of ;oods <old !otal

c. Proration based on the allocated overhead amount #before proration% in the ending balances of 9ork in Process, Hinished ;oods, and 6ost of ;oods <old. ;)c, 31* 2&11 Allocat)( O.)$/)a( ;)c, 31* 2&11 Accou"t I"clu()( !" Accou"t Bala"c) ;)c, 31* 2&11 P$o$at!o" o- <4&&*&&& Bala"c) 5B)-o$) Accou"t Bala"c) ="()$allocat)( 5A-t)$ Accou"t P$o$at!o"9 5B)-o$) P$o$at!o"9 1a"u-actu$!"# O.)$/)a( P$o$at!o"9 519 529 539 549 559 569 > 529 C 559 a =.=*'' ?)==,=== > ? &$,'&= ? &)=,=== #*.''A% 9ork in Process ? ,*=,=== ? ,,$,'&=
Hinished ;oods 6ost of ;oods <old !otal
a

$,&*=,=== @,===,=== ?$=,===,===

++=,===b ',+==,===c ?),*==,===

#$).+,A% =.$)+,?)==,=== > *@,+@= #@=.==A% =.@===?)==,=== > '&=,=== $==.==A ?)==,===

$,'=@,+@= @,'&=,=== ?$=,)==,===

?+= ),=== machine(hours2 b?+= $$,=== machine(hours2 c?+= +=,=== machine(hours

)('&

'. Alternative #c% is theoretically preferred over #a% and #b% because the underallocated amount and the balances in work(in(process and finished goods inventories are material. Alternative #c% yields the same ending balances in work in process, finished goods, and cost of goods sold that would have been reported had actual indirect cost rates been used. 6hapter ) also discusses an adjusted allocation rate approach that results in the same ending balances as does alternative #c%. !his approach operates via a restatement of the indirect costs allocated to all the individual jobs worked on during the year using the actual indirect cost rate. 4-35 $a. #$* min.% No$%al co t!"#* o.)$/)a( allocat!o"* 6o$7!"# 'ac76a$(, -anufacturing overhead allocated > &==A F 3irect manufacturing labor cost ?',+==,=== > & F 3irect manufacturing labor cost 3irect manufacturing labor cost > b.
?',+==,=== > ?$,@==,=== &

!otal manufacturing 3irect material 3irect manufacturing -anufacturing > N N overhead allocated cost used labor cost ?@,===,=== 3irect material used > 3irect material used N ?$,@==,=== N ?',+==,=== > ?&,+==,===

&.

!otal 9ork in process 6ost of goods 9ork in process N > manufacturing cost $M$M&=$$ manufactured N $&M'$M&=$$ 3enote 9ork in process on $&M'$M&=$$ by S ?'&=,=== N ?@,===,=== > ?,,B&=,=== N S S > ?)==,=== 9ork(in(process inventory, $&M'$M$$ > ?)==,===.

)(''

).'+ #)= min.% P$o$at!o" o- o.)$/)a( 6!t/ t6o !"(!$)ct co t +ool , $.a. -olding department" 5verhead allocated > ?),+=& N ?B*, N ?$&,)@B > ?$@,=)@ 5verallocated overhead > Actual overhead costs 5verhead allocated > ?$,,&)@ ?$@,=)@ > ?@== overallocated $.b. Painting department" 5verhead allocated > ?&,'=+ N ?$,@B, N ?&),B@& > ?&B,$@* 7nderallocated overhead > Actual overhead costs 5verhead allocated > ?'$,)@* ?&B,$@* > ?&,'== underallocated &a. All underMoverallocated overhead is written off to cost of goods sold. 4oth 9ork in Process and Hinished goods inventory remain unchanged. Accou"t Bala"c) 5B)-o$) P$o$at!o"9 519 ? &,,,&=.== $*,*&'.&= $$*,$*+.@= ?$*@,)==.== P$o$at!o" o- <1*5&& ="()$allocat)( O.)$/)a( 529 = = ?@== N ?&,'== ? $,*== Accou"t Bala"c) 5A-t)$ P$o$at!o"9 539 > 519 C 529 ? &,,,&=.== $*,*&'.&= $$+,+*+.@= ?$*B,B==.==

Accou"t 9IP Hinished ;oods 6ost of ;oods <old !otal

&b. 7nderallocated overhead prorated based on ending balances

Accou"t Bala"c) 5B)-o$) P$o$at!o"9 519 ? &,,,&=.== $*,*&'.&= $$*,$*+.@= ?$*@,)==.== Accou"t Bala"c) 5A-t)$ P$o$at!o"9 549 > 519 C 539 ? &,,B@&.*= $*,+,=.&= $$+,&),.'= ?$*B,B==.==

Accou"t
9IP Hinished ;oods 6ost of ;oods <old !otal

Accou"t Bala"c) a a P)$c)"t o- Total 529 > 519 ? <2*&&&*&&& =.$,* =.=B@ =.,&, $.===

P$o$at!o" o- <1*5&& ="()$allocat)( O.)$/)a( 539 > 529 1&*&&& =.$,* ?$,*== > ? &+&.*= =.=B@ ?$,*== > $),.== =.,&, ?$,*== > $,=B=.*= ?$,*==.==

&c. 7nderMoverallocated overhead prorated based on overhead in ending balances. #8ote" overhead must be allocated separately from each department. !his can be done using the number of machine hoursMdirect labor hours as a surrogate for overhead in ending balances.%

)(')

Hor -olding department"

Allocat)( O.)$/)a( !" Accou"t Bala"c) 519 ? ),+=& B*, $&,)@B ?$@,=)@ Allocat)( O.)$/)a( !" Accou"t Bala"c) a a P)$c)"t o- Total 529 > 519 ? <18*&48 =.&** =.=*' =.+B& $.=== P$o$at!o" o- <8&& O.)$allocat)( O.)$/)a( 539 > 529 <8&& =.&** ?@== > ?&=).== =.=*' ?@== > )&.)= =.+B& ?@== > **'.+= ?@==.==

Accou"t 9IP Hinished ;oods 6ost of ;oods <old !otal

Hor finishing department"

Allocat)( O.)$/)a( !" Accou"t Bala"c) 549 ? &,'=+ $,@B, &),B@& ?&B,$@* Allocat)( O.)$/)a( !" Accou"t Bala"c) a a P)$c)"t o- Total 559 > 549 ? <29*185 =.=,B =.=+* =.@*+ $.=== P$o$at!o" o- <2*3&& ="()$allocat)( O.)$/)a( 569 > 559 <2*3&& =.=,B ?&,'== > ? $@$.,= =.=+* ?&,'== > $)B.*= =.@*+ ?&,'== > $,B+@.@= ?&,'==.==

Accou"t 9IP Hinished ;oods 6ost of ;oods <old !otal

Accou"t 9IP Hinished ;oods 6ost of ;oods <old !otal

Accou"t Bala"c) 5B)-o$) P$o$at!o"9 579 ?&,,,&=.== $*,*&'.&= $$*,$*+.@= ?$*@,)==.==

="()$allocat)(D O.)$allocat)( O.)$/)a( 589 > 539 E 569 ?&=) N ?$@$.,= > ? #&&.'=% ?)&.)= N ?$)B.*= > $=,.$= ?**'.+= N ?$,B+@.@= > $,)$*.&= ?$,*==.==

Accou"t Bala"c) 5A-t)$ P$o$at!o"9 599 > 579 C 589 ? &,,+B,.,= $*,+'=.'= $$+,*,&.== ?$*B,B==.==

'. !he first method is simple and 6ost of ;oods <old accounts for almost ,'A of the three account amounts. !he amount of overallocated and underallocated overhead is also immaterial. Allocation to the other two accounts is minimal. !herefore, write(off to cost of goods sold is the most cost effective alternative.

)('*

4-37

#'* min.% G)")$al l)(#)$ $)lat!o" /!+ * u"()$- a"( o.)$allocat!o",

!he solution assumes all materials used are direct materials. A summary of the !(accounts for 8eedham 6ompany before adjusting for under( or overallocation of overhead follows" 3irect -aterials 6ontrol
$($(&=$$ Purchases $&('$(&=$$ '=,=== -aterial used for )==,=== manufacturing '@=,=== *=,===

9ork(in(Process 6ontrol
$($(&=$$ 3irect materials 3irect manuf. Dabor -anuf. overhead allocated $&('$(&=$$ &=,=== !ransferred to '@=,=== finished goods B)=,=== '+=,=== )@=,=== '==,===

Hinished ;oods 6ontrol

$($(&=$$ $=,=== 6ost of goods !ransferred in sold from 9IP B)=,=== $&('$(&=$$ *=,=== B==,=== Hinished goods sold

6ost of ;oods <old

B==,===

-anufacturing 5verhead 6ontrol

-anufacturing overhead costs *)=,===

-anufacturing 5verhead Allocated

-anufacturing overhead allocated to work in process

)@=,===

$.

Hrom 3irect -aterials 6ontrol !(account, 3irect materials issued to production > ?'@=,=== that appears as a credit.
3irect manufacturing labor costs 3irect manufacturing wage rate per hour ?'+=,=== > &),=== hours ?$* per hour

&.

3irect manufacturing labor(hours > >

-anufacturing overhead > allocated

> '. ).

-anufacturing 3irect manufacturing overhead rate labor hours &),=== hours ?&= per hour > ?)@=,===

Hrom the debit entry to Hinished ;oods !(account, 6ost of jobs completed and transferred from 9IP > ?B)=,=== Hrom 9ork(in(Process !(account, 9ork in process inventory > ?&=,=== N ?'@=,=== N ?'+=,=== N ?)@=,=== ?B)=,=== on $&M'$M&=$$ > ?'==,===

*. Hrom the credit entry to Hinished ;oods 6ontrol !(account, 6ost of goods sold #before proration% > ?B==,===

)('+

+.

-anufacturing overhead underallocated

>

3ebits to -anufacturing 6redit to -anufacturing 5verhead Allocated 5verhead 6ontrol

> ?*)=,=== ?)@=,=== > ?+=,=== underallocated ,. a. b. 9rite(off to 6ost of ;oods <old will increase #debit% 6ost of ;oods <old by ?+=,===. ence, 6ost of ;oods <old > ?B==,=== N ?+=,=== > ?B+=,===. Proration based on ending balances #before proration% in 9ork in Process, Hinished ;oods, and 6ost of ;oods <old.

Account balances in each account after proration follows"

Accou"t Bala"c) 5B)-o$) P$o$at!o"9 529 ? '==,=== #&)A% *=,=== # )A% B==,=== #,&A% ?$,&*=,=== $==A P$o$at!o" o- <6&*&&& ="()$allocat)( 1a"u-actu$!"# O.)$/)a( 539 =.&) ?+=,=== > ?$),)== =.=) ?+=,=== > &,)== =.,& ?+=,=== > )',&== ?+=,=== Accou"t Bala"c) 5A-t)$ P$o$at!o"9 549>529C539 ? '$),)== *&,)== B)',&== ?$,'$=,===

Accou"t 519 9ork in Process Hinished ;oods 6ost of ;oods <old

@. 8eedhamEs operating income using write(off to 6ost of ;oods <old and Proration based on ending balances #before proration% follows"
B$!t)-o-- to Co t o- Goo( Sol( Ievenues 6ost of goods sold ;ross margin -arketing and distribution costs 5perating incomeM#loss% ?$,=B=,=== B+=,=== $'=,=== $)=,=== ? #$=,===% P$o$at!o" Ba )( o" E"(!"# Bala"c) ?$,=B=,=== B)',&== $)+,@== $)=,=== ? +,@==

B. If the purpose is to report the most accurate inventory and cost of goods sold figures, the preferred method is to prorate based on the manufacturing overhead allocated component in the inventory and cost of goods sold accounts. Proration based on the balances in 9ork in Process, Hinished ;oods, and 6ost of ;oods <old will e1ual the proration based on the manufacturing overhead allocated component if the proportions of direct costs to manufacturing overhead costs are constant in the 9ork in Process, Hinished ;oods and 6ost of ;oods <old accounts. /ven if this is not the case, the prorations based on 9ork in Process, Hinished ;oods, and 6ost of ;oods <old will better appro0imate the results if actual cost rates had been used rather than the write(off to 6ost of ;oods <old method. Another consideration in 8eedhamEs decision about how to dispose of underallocated manufacturing overhead is the effects on operating income. !he write(off to 6ost of ;oods <old will lead to an operating loss. Proration based on the balances in 9ork in Process, Hinished ;oods, and 6ost of ;oods <old will help 8eedham avoid the loss and show an operating income. !he main merit of the write(off to 6ost of ;oods <old method is its simplicity. owever, accuracy and the effect on operating income favor the preferred and recommended proration approach.

)(',

4-38

#)=** min.% O.)$.!)6 o- #)")$al l)(#)$ $)lat!o" /!+ ,

$. Adjusting entry for $&M'$ payroll. #a% 9ork(in(Process 6ontrol -anufacturing 3epartment 5verhead 6ontrol 9ages Payable 6ontrol !o recogni.e payroll costs #b% 9ork(in(Process 6ontrol -anufacturing 5verhead Allocated !o allocate manufacturing overhead at $&=A ?',@*= > ?),+&= on ?',@*= of direct manufacturing labor incurred on $&M'$ ',@*= B*= ),@==

),+&= ),+&=

Note" <tudents tend to forget entry #b% entirely. <tress that a budgeted overhead allocation rate is used consistently throughout the year. !his point is a major feature of this problem. &. a(e An effective approach to this problem is to draw !(accounts and insert all the known figures. !hen, working with !(account relationships, solve for the unknown figures. /ntries #a% and #b% are posted into the !(accounts that follow. 4eginning balance $&M$ Purchases 4alance $&M'= a ?$,&== N ?+*,)== ?,,+== > ?*B,=== #a% -aterials 6ontrol $,&== +*,)== *B,===a ,,+==

-aterials re1uisitioned

3irect materials re1uisitioned into work in process during 3ecember e1uals ?*B,=== because no materials are re1uisitioned on 3ecember '$.

9ork(in(Process 6ontrol 4eginning balance $&M$ *,@== 3irect materials ?*B,=== 3irect manf. labor ,+,*==b -anf. overhead allocated B$,@==b &&,,'== &&*,=== 4alance $&M'= @,$== #a% 3irect manuf. labor $&M'$ payroll ',@*= #b% -anuf. overhead allocated $&M'$ ),+&=c /nding balance $&M'$ $+,*,=
b

6ost of goods manufactured

3irect manufacturing labor and manufacturing overhead allocated are unknown. Det x > 3irect manufacturing labor up to $&M'= payroll, then manufacturing overhead allocated up to $&M'= payroll > $.&=x

)('@

7se the !(account e1uation and solve for x" ?*,@== N ?*B,=== N x N $.&=x ?&&*,=== > ?@,$== &.&=x > ?@,$== ?*,@== ?*B,=== N ?&&*,=== > ?$+@,'== ?$+@,'== = ?,+,*== x> &.& 3irect manufacturing labor up to $&M'= payroll > ?,+,*== -anufacturing overhead allocated up to $&M'= > $.&=x F ?,+,*== > ?B$,@== !otal direct manufacturing labor for 3ecember > ?,+,*== N ?',@*= #direct manufacturing labor for $&M'$ calculated in re1uirement $% > ?@=,'*= !otal manufacturing overhead allocated for 3ecember > ?B$,@== N ?),+&=c > ?B+,)&= ?',@*= $&=A > ?),+&=, manufacturing overhead allocated on ?',@*= of direct manufacturing labor incurred on $&M'$.
c

#b% #c% #d%

!otal direct manufacturing labor for 3ecember > ?@=,'*=. !otal manufacturing overhead allocated #recorded% in work in process e1uals ?B+,)&=. /nding balance in work(in(process inventory on 3ecember '$ e1uals ?@,$== N ?',@*= #direct manufacturing labor added on $&M'$, re1uirement $% N ?),+&= #manufacturing overhead allocated on $&M'$, re1uirement $% > ?$+,*,=.

An alternative approach to solving re1uirements &b, &c, and &d is to calculate the work(in( process inventory on 3ecember '$, recogni.ing that because no new units were started or completed, no direct materials were added and the direct manufacturing labor and manufacturing overhead allocated on 3ecember '$ were added to the work(in(process inventory balance of 3ecember '=. 9ork(in(process inventory on $&M'$ 9ork(in(process inventory on $&M'= 3irect manufacturing labor incurred on $&M'$ -anufacturing overhead allocated on $&M'$

>

> ?@,$== N ?',@*= N ?),+&= > ?$+,*,= 9e can now use the !(account e1uation for work(in(process inventory account from $&M$ to $&M'$, as follows. Det x > 3irect manufacturing labor for 3ecember !hen $.&=x > -anufacturing overhead allocated for 3ecember
9ork(in( 3irect 3irect -anufacturing 9ork(in( 6ost of goods process materials manufacturing overhead process N N N manufactured > inventory added in labor added in allocated in inventory on in 3ecember on $&M$ 3ecember 3ecember 3ecember $&M'$

?*,@== N ?*B,=== N x N $.&=x ?&&*,=== > ?$+,*,= &.&=x > ?$+,*,= ?*,@== ?*B,=== N ?&&*,=== &.&=x > ?$,+,,== ?$,+, ,== = ?@=,'*= x> &.&= )('B

!otal direct manufacturing labor for 3ecember > ?@=,'*= !otal manufacturing overhead allocated in 3ecember > $.&= ?@=,'*= > ?B+,)&= Hinished ;oods 6ontrol 4eginning balance $&M$ ',*== 6ost of goods manufactured &&*,=== &$=,===c 4alance $&M'= $@,*== c ?',*== N ?&&*,=== ?$@,*== > ?&$=,=== #e%

6ost of goods sold

6ost of goods sold for 3ecember before adjustments for under( or overallocated overhead e1uals ?&$=,===" 6ost of ;oods <old &$=,=== $,)== #c% 6losing entry

6ost of goods sold

-anufacturing 3epartment 5verhead 6ontrol 4alance through $&M'= B),=,= #a% Indirect manufacturing labor $&M'$ B*= B*,=&= #c% 6losing entry #c% 6losing entry -anufacturing 5verhead Allocated B+,)&= B$,@== 4alance through $&M'= ),+&= #b% -anufacturing overhead allocated, $&M'$ 9ages Payable 6ontrol ),@==

#a% $&M'$ payroll

'. 6losing entries" #c% -anufacturing 5verhead Allocated B+,)&= -anufacturing 3epartment 5verhead 6ontrol B*,=&= 6ost of ;oods <old $,)== !o close manufacturing overhead accounts and overallocated overhead to cost of goods sold

)()=

4-39 #'= min.% Allocat!o" a"( +$o$at!o" o- o.)$/)a(. $. 4udgeted overhead rate > 4udgeted overhead costs G 4udgeted labor costs > ?$@=,=== G ?$*=,=== > $&=A of labor cost &. /nding work in process 3irect material costs 3irect labor costs 5verhead #$.&= F 3irect labor costs% !otal costs Jo' 1 ? ',+&= ),*== *,)== ?$',*&= Jo' 2 ? +,@'= ,,&*= @,,== ?&&,,@= Total ?$=,)*= $$,,*= $),$== ?'+,'==

6ost of goods sold > 4eginning 9IP N -anufacturing costs #Actual direct materials N Actual direct labor N Allocated overhead% /nding 9IP > ?= N #?$&+,*== N ?$)@,,*= N $)@,,*= $.&=% ?'+,'== > ?)$,,)*= '. 5verhead allocated > $.&= ?$)@,,*= > ?$,@,*== 5verallocated overhead > Actual overhead Allocated overhead > ?$,+,=== ?$,@,*== > ?&,*== overallocated ).a. All overallocated overhead is written off to cost of goods sold. 9IP inventory remains unchanged. ;)c, 31* 2&1& Accou"t Bala"c) Accou"t 5B)-o$) P$o$at!o"9 519 529 9ork in Process ? '+,'== 6ost of goods sold )$,,)*= ?)*',,*= )b. B$!t)-o-- o- <2*5&& O.)$allocat)( o.)$/)a( 539 ? = #&,*==% ?#&,*==% ;)c, 31* 2&1& Accou"t Bala"c) 5A-t)$ P$o$at!o"9 549 > 529 C 539 ? '+,'== )$),B*= ?)*$,&*=

5verallocated overhead prorated based on ending balances

;)c, 31* 2&1& Bala"c) 5B)-o$) P$o$at!o"9 529 ? '+,'== )$,,)*= ?)*',,*= Bala"c) a a P)$c)"t o- Total 539 > 529 ? <453*75& =.=@ =.B& $.== P$o$at!o" o- <2*5&& O.)$allocat)( O.)$/)a( 549 > 539 <2*5&& ? #&==% #&,'==% ?#&,*==% ;)c, 31* 2&1& Bala"c) 5A-t)$ P$o$at!o"9 559 > 529 C 549 ? '+,$== )$*,$*= ?)*$,&*=

Accou"t 519 9ork in Process 6ost of ;oods <old

*. 9riting off all of the overallocated overhead to 6ost of ;oods <old #6;<% is warranted when 6;< is large relative to 9ork(in(Process Inventory and Hinished ;oods Inventory and the overallocated overhead is immaterial. 4oth these conditions apply in this case. !amden Inc. should write off the ?&,*== overallocated overhead to 6ost of ;oods <old account.

)()$

4-4& $.

#&= min.% Jo' co t!"#* co"t$act!"#* )t/!c , 3irect manufacturing costs" 3irect materials #?@,=== 0 $*= huts% 3irect manufacturing labor #?+== $*= huts% -anufacturing overhead #?' B=,===% !otal costs -arkup #$*A ?$,*+=,===% !otal bid price 3irect manufacturing costs" 3irect materials 3irect manufacturing labor Production labor Inspection labor <etup labor -anufacturing overhead !otal costs -arkup #$*A of ?$,,B*,&==% !otal bid price ?$,&==,=== B=,=== &,=,=== ?$,*+=,=== &'),=== ?$,,B),===

&.

?$,'@=,=== ?@),=== B,=== $=,@==

$=',@== '$$,)== ?$,,B*,&== &+B,&@= ?&,=+),)@=

3irect materials > #?$,@)=,===M&==% $*= > ?$,'@=,=== 3irect labor > production labor N inspection labor N setup labor Production labor > &@ hours $*= ?&= > ?@),=== Inspection labor > ) hours 0 $*= ?$* > ?B,=== <etup labor > + hours 0 $*= ?$& > ?$=,@== ?$'@, )== $*= huts > ?$=',@== Alternatively, 3irect manufacturing labor = &== huts -anufacturing overhead > #' ?$=',@==% > ?'$$,)== '. !he main discrepancies in costs #before the mark up% in re1uirements $ and & are as follows" a. -aterials are marked up by $*A in the <ept. $*, &==* invoice #?$,'@=,=== ?$,&==,===%M?$,&==,=== > $*A. b. 6osts are double(counted based on the <ept. $*, &==* invoice #inspection and setup costs are included as both a direct cost as part of direct manufacturing labor and in manufacturing overhead allocated at ' times direct manufacturing labor cost%. c. !he standard cost sheet includes '= direct manufacturing labor hours while the <ept. $*, &==* invoice includes &@ hours of production labor. ). According to the I-A Standards of Ethical Conduct for Practitioners of Management ccounting and !inancial Management, the following principles should guide your decision to present the bid based on the retail cost of producing the huts" a. 6ompetence responsibility to provide information that is accurate. b. Integrity refraining from engaging in any conduct that would prejudice carrying out duties ethically or that would discredit the profession.

)()&

c. 6redibility disclose all relevant information. I would go to my boss with the bid in re1uirement $ after checking #a% If any direct material savings is possible and #b% If direct manufacturing labor can be reduced to &@ hours from '= hours. Assuming that only the latter is the case, then the bid I would propose is" 3irect materials ?@== $*= 3irect manufacturing labor &@ hours ?&= $*= -anufacturing overhead !otal costs -ark up at $*A of total costs ?$,&==,=== @),=== &*&,=== $,*'+,=== &'=,)== ?$,,++,)==

)()'

4-41 #'* min.% Jo' co t!"#- )$.!c) !"(u t$2. $. <ignings in Process #<IP% April '=, &=$= 1at)$!al 519 ? *$* *&= $*= ?$,$@* ;!$)ct 0a'o$ 529 ? B,* $,=== &== ?&,$,* O.)$/)a( 539 > 8&F G 529 ? ,@= @== $+= ?$,,)= Total 549 ?&,&,= &,'&= *$= ?*,$==

Aut/o$ sher #?)&* N ?B=2 ?,*= N ?&&*% "ro#n #?&== N ?'&=2 ?**= N ?)*=% Sherman !otal &.

6ost of 6ompleted <ignings #66<% in April &=$= 1at)$!al 519 ? @+= +*= ?$,*$= ;!$)ct 0a'o$ 529 ? +*= )== ?$,=*= O.)$/)a( 539 > 8&F G 529 ? *&= '&= ? @)= Total 549 ?&,='= $,',= ?',)==

Aut/o$ "uc$nell #?,$= N ?$*=2 ?*,* N ?,*% %ing !otal

'. 5verhead allocated > =.@= G $,'*=a > ?$,=@= 7nderallocated overhead > Actual overhead Allocated overhead > ?$,B@= $,=@= > ?B== underallocated
a

!otal direct labor in April > ?&&* N ?,* N ?)*= N ?)== N ?&== > ?$,'*=

)a. 7nderallocated overhead is written off to 66< <IP inventory remains unchanged. A+$!l 3&* 2&1& Bala"c) 5B)-o$) P$o$at!o"9 519 ?*,$== ',)== ?@,*== P$o$at!o" o<9&& ="()$allocat)( O.)$/)a( 529 ? = B== ?B== A+$!l 3&* 2&1& Bala"c) 5A-t)$ P$o$at!o"9 539 > 519 N 529 ?*,$== ),'== ?B,)==

Accou"t <IP 66<

)())

)b.

7nderallocated overhead prorated based on ending balances

A+$!l 3&* 2&1& Bala"c) 5B)-o$) P$o$at!o"9 519 ?*,$== ',)== ?@,*== Bala"c) a a P)$c)"t o- Total 529 > 519 ? <8*5&& =.+= =.)= $.== P$o$at!o" o- <9&& ="()$allocat)( O.)$/)a( 539 > 529 <9&& =.+= ?B== > ?*)= =.)= ?B== > '+= ?B== A+$!l 3&* 2&1& Bala"c) 5A-t)$ P$o$at!o"9 549 > 519 N 539 ?*,+)= ',,+= ?B,)==

Accou"t <IP 66<

)c.

7nderallocated overhead prorated based on April overhead in ending balances

A+$!l 3&* 2&1& Bala"c) 5B)-o$) P$o$at!o"9 519 ?*,$== ',)== ?@,*== O.)$/)a( Allocat)( !" A+$!l I"clu()( !" A+$!l 3&* 2&1& Bala"c) 529 ? ,==a '@=b ?$,=@= O.)$/)a( Allocat)( !" A+$!l I"clu()( !" A+$!l 3&* 2&1& a a P)$c)"t o- Total 539 > 529 ? <1*&8& =.+)@ =.'*& $.=== P$o$at!o" o- <9&& ="()$allocat)( O.)$/)a( 549 > 539 <9&& =.+)@ ?B== > ? *@'.&= =.'*& ?B== > '$+.@= ? B==.== A+$!l 3&* 2&1& Bala"c) 5A-t)$ P$o$at!o"9 559 > 519 N 549 ?*,+@'.&= ',,$+.@= ?B,)==.==

Accou"t <IP 66<

April labor for Asher, 4rown, and <herman @=A > #?&&* N ?)*= N ?&==% F @=A > ?@,* F @=A > ?,== April labor for 4ucknell and Oing @=A > #?,* N ?)==% @=A > ?),* @=A > ?'@=

*. I would choose the method in )c #proration based on overhead allocated% because this method results in account balances based on actual overhead allocation rates. !he account balances before proration in <IP and 66< are significant and underallocated overhead is material. owever, the ratio of ending balances in <IP and 66< is not very different from the ratio of overhead allocated to each of these accounts in April and so method )b #proration based on ending balances in <IP and 66<% and method )c will result in similar overhead allocations and balances after proration.

)()*