Job Costing Chpt4

CHAPTER4
JOBCOSTING
41
Costpoolagroupingofindividualcostitems.
Costtracingtheassigningofdirectcoststothechosencostobject.
Costallocationtheassigningofindirectcoststothechosencostobject.
Costallocationbaseafactorthatlinksinasystematicwayanindirectcostorgroupof
indirectcoststoacostobject.
42 Inajobcostingsystem,costsareassignedtoadistinctunit,batch,orlotofaproductor
service.Inaprocesscostingsystem,thecostofaproductorserviceisobtainedbyusingbroad
averagestoassigncoststomassesofidenticalorsimilarunits.
43 Anadvertisingcampaign forPepsi is likelytobeveryspecifictothatindividualclient.
Job costing enables all the specific aspects of each job to be identified. In contrast, the
processingofcheckingaccountwithdrawalsissimilarformanycustomers.Here,processcosting
canbeusedtocomputethecostofeachcheckingaccountwithdrawal.
44 Thesevenstepsinjobcostingare:(1)identifythejobthatisthechosencostobject,(2)
identify the direct costs of the job, (3) select the costallocation bases to use for allocating
indirectcoststothejob,(4)identifytheindirectcostsassociatedwitheachcostallocationbase,
(5) compute the rate per unit of each costallocation base used to allocate indirect costs tothe
job,(6)computetheindirectcostsallocatedtothejob,and(7)computethetotalcostofthejob
byaddingalldirectandindirectcostsassignedtothejob.
45 Two major cost objects that managers focus on in companies using job costing are (1)
productsorjobs,and(2)responsibilitycentersordepartments.
46 Threemajorsourcedocumentsusedinjobcostingsystemsare(1)jobcostrecordorjob
costsheet,adocumentthatrecordsandaccumulatesallcostsassignedtoaspecificjob,starting
whenworkbegins(2) materialsrequisitionrecord,adocumentthatcontains informationabout
thecostofdirectmaterialsusedonaspecificjobandinaspecificdepartmentand(3)labortime
record,adocumentthatcontainsinformationaboutthelabortimeusedonaspecificjobandina
specificdepartment.
47 The mainconcernwiththe sourcedocumentsof jobcostrecordsistheaccuracyofthe
records. Problems occurring in this area include incorrect recording of quantity or dollar
amounts,materialsrecordedononejobbeingborrowedandusedonotherjobs,anderroneous
jobnumbersbeingassignedtomaterialsorlaborinputs.
48
a.
b.
Tworeasonsforusinganannualbudgetperiodare
The numerator reasonthe longer the time period, the less the influence of seasonal
patterns,and
Thedenominatorreasonthe longerthetimeperiod,the lesstheeffectof variations in
outputlevelsontheallocationoffixedcosts.
41
49 Actualcostingand normalcostingdiffer intheir useofactualorbudgeted indirectcost

rates:
Actual
Normal
Costing
Costing
Directcostrates
Actualrates
Actualrates
Indirectcostrates
Actualrates
Budgetedrates
Eachcosting methodusestheactualquantityofthedirectcostinputandtheactualquantityof
thecostallocationbase.
410 Ahouseconstructionfirmcanusejobcostinformation(a)todeterminetheprofitability
of individual jobs,(b)toassist inbiddingon futurejobs,and(c)toevaluateprofessionalswho
areinchargeofmanagingindividualjobs.
411 Thestatementisfalse.Inanormalcostingsystem,theManufacturingOverheadControl
account will not, in general, equal the amounts in the Manufacturing Overhead Allocated
account. The Manufacturing Overhead Control account aggregates the actual overhead costs
incurredwhileManufacturingOverheadAllocatedallocatesoverheadcoststojobsonthebasis
ofabudgetedrate timestheactualquantityofthecostallocationbase.
Underallocationoroverallocationofindirect(overhead)costscanarisebecauseof (a)the
Numerator reasonthe actual overhead costs differ from the budgetedoverhead costs, and (b)
the Denominator reasonthe actual quantity used of the allocation base differs from the
budgetedquantity.
412 Debit entries to WorkinProcess Control represent increases in work in process.
Examplesofdebitentriesundernormalcostingare(a)directmaterialsused(credittoMaterials
Control),(b)directmanufacturinglaborbilledtojob(credittoWagesPayableControl),and(c)
manufacturingoverheadallocatedtojob(credittoManufacturingOverheadAllocated).
413 Alternativewaystomakeendofperiodadjustmentsforunderallocatedoroverallocated
overheadareasfollows:
(i) Proration basedonthetotalamountof indirectcostsallocated(beforeproration) in
theendingbalancesofworkinprocess,finishedgoods,andcostofgoodssold.
(ii) Proration based on total ending balances (before proration) in work in process,
finishedgoods,andcostofgoodssold.
(iii) YearendwriteofftoCostofGoodsSold.
(iv) Restatement of all overhead entries using actual indirect cost rates rather than
budgetedindirectcostrates.
414 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
example,becausebonusesareonlyknownattheendoftheyear).
415 Modern technology such as electronic data interchange (EDI) is helpful to managers
because it provides them with quick and accurate productcost information that facilitates the
managementandcontrolofjobs.
42
416 (10min)Jobordercosting,processcosting.
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
Jobcosting
Processcosting
Jobcosting
Processcosting
Jobcosting
Processcosting
Jobcosting
Jobcosting(butsomeprocesscosting)
Processcosting
Processcosting
Jobcosting
l. Jobcosting
m. Processcosting
n. Jobcosting
o. Jobcosting
p. Jobcosting
q. Jobcosting
r. Processcosting
s. Jobcosting
t. Processcosting
u. Jobcosting
417 (20min.) Actualcosting,normalcosting,accountingformanufacturingoverhead.
1.
Budgetedmanufacturing
overheadcosts
Budgetedmanufacturing
=
overheadrate
Budgeteddirectmanufacturing
laborcosts
=
Actualmanufacturing
overheadrate
$2, 700, 000

=1.80or185%
$1,500, 000
Actualmanufacturing
overheadcosts
=
Actualdirectmanufacturing
laborcosts
$2, 755, 000

=1.9or190%
$1, 450,000
CostsofJob626underactualandnormalcostingfollow:
=
2.
Directmaterials
Directmanufacturinglaborcosts
Manufacturingoverheadcosts
$30,000 1.90$30,000 1.80
TotalmanufacturingcostsofJob626
43
Actual
Costing
Normal
Costing
$40,000
30,000
$40,000
30,000
57,000
$127,000
54,000
$124,000
3.
Totalmanufacturingoverhead
Actualmanufacturing Budgeted
allocatedundernormalcosting =
laborcosts
overheadrate
= $1,450,000 1.80
= $2,610,000
Underallocatedmanufacturing = Actualmanufacturing Manufacturing
overhead
overheadcosts
overheadallocated
= $2,755,000 -$2,610,000=$145,000
There is no under or overallocated overhead under actual costing because overhead is
allocated under actual costing by multiplying actual manufacturing labor costs and the actual
manufacturingoverheadrate.This,ofcourseequalstheactualmanufacturingoverheadcosts.All
actual overhead costs are allocated to products. Hence, there is no under or overallocatead
overhead.
418 (2030min.) Jobcosting,normalandactualcosting.

1.
Budgetedindirectcosts
$8,000,000
Budgetedindirect =
=
costrate
Budgeteddirectlaborhours 160,000hours
= $50perdirectlaborhour
Actualindirect
costrate
$6,888,000
Actualindirectcosts
=
Actualdirectlaborhours
164,000hours
= $42perdirectlaborhour
These rates differ because both the numerator and the denominator in the two calculations are
differentonebasedonbudgetednumbersandtheotherbasedonactualnumbers.
2a.
Laguna
Model
Mission
Model
$106,450
36,276
142,726
$127,604
41,410
169,014
Indirectcosts
45,000
Assemblysupport($50 900$50 1,010)
$187,726
Totalcosts
50,500
$219,514
Normalcosting
Directcosts
Directmaterials
Directlabor
44
2b. Actualcosting
Directcosts
Directmaterials
Directlabor
$106,450
36,276
142,726
$127,604
41,410
169,014
Indirectcosts
37,800
Assemblysupport($42 900$42 1,010)
$180,526
Totalcosts
42,420
$211,434
3.
Normal costing enables Anderson to report a job cost as soonas the job is completed,
assumingthatboththedirectmaterialsanddirectlaborcostsareknownatthetimeofuse.Once
the900directlaborhoursareknownfortheLagunaModel(June2007),Andersoncancompute
the$187,726costfigureusingnormalcosting.Andersoncanusethisinformationtomanagethe
costs of the Laguna Model job as well as to bid on similar jobs later in the year. In contrast,
Anderson has to wait until the December 2007 yearend to compute the $180,526 cost of the
LagunaModelusingactualcosting.
Although not required, the following overview diagram summarizes Anderson
Constructionsjobcostingsystem.
INDIRECT
COST
POOL
Assembly
Support
COST
ALLOCATION
BASE
Direct
LaborHours
IndirectCosts
COSTOBJECT:
RESIDENTIAL
HOME
DIRECT
COSTS
DirectCosts
Direct
Materials
45
Direct
Manufacturing
Labor
419 (10min.) Budgetedmanufacturingoverheadrate,allocatedmanufacturingoverhead.

1.
Budgetedmanufacturingoverheadrate =
Budgetedmanufacturingoverhead
Budgetedmachinehours
$4, 000, 000
= $20per machinehour
200, 000machinehours
2.Manufacturingoverheadallocated=ActualmachinehoursBudgetedmanufacturingoverheadrate
=195,000$20=$3,900,000
3.
Sincemanufacturingoverheadallocatedisgreaterthantheactualmanufacturingoverhead
costs,Waheedoverallocatedmanufacturingoverhead:
Manufacturingoverheadallocated
Actualmanufacturingoverheadcosts
Overallocatedmanufacturingoverhead
46
$3,900,000
3,860,000
$40,000
420 (2030min.) Jobcosting,accountingformanufacturingoverhead,budgetedrates.

1.
Anoverviewoftheproductcostingsystemis
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
MachiningDepartment
AssemblyDepartment
ManufacturingOverhead ManufacturingOverhead
MachineHours
IndirectCosts
COSTOBJECT:
PRODUCT
DIRECT
COST
DirectManuf.
LaborCost
DirectCosts
Direct
Materials
Direct
Manufacturing
Labor
Budgetedmanufacturingoverheaddividedbyallocationbase:
$1,800,000
=$36permachinehour
50,000
$3,600,000
Assemblyoverhead:
=180%ofdirectmanuf.laborcosts
$2,000,000
Machiningoverhead
2.
Machiningdepartment,2,000hours $36
Assemblydepartment,180% $15,000
TotalmanufacturingoverheadallocatedtoJob494
3.
Actualmanufacturingoverhead
Manufacturingoverheadallocated,
55,000 $36
180% $2,200,000
Underallocated(Overallocated)
47
$72,000
27,000
$99,000
Machining
$2,100,000
Assembly
$3,700,000
1,980,000
$120,000
3,960,000
$(260,000)
421 (20-25min.) Jobcosting,consultingfirm.

1.
Budgetedindirectcostrate=$13,000,000$5,000,000=260%ofprofessionallaborcosts
Client
Consulting
Consulting
Support
Support
Support
Professional
Professional
LaborCosts
LaborCosts
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
COSTOBJECT:
JOBFOR
CONSULTING
CLIENT
IndirectCosts
DirectCosts
DIRECT
COSTS
2.
Professional
Labor
At the budgeted revenues of $20,000,000, Taylors operating income of $2,000,000

equals10%ofrevenues.
Markuprate =$20,000,000$5,000,000=400%ofdirectprofessionallaborcosts
48
3.
Budgetedcosts
Directcosts:
Director,$200 3
$600
Partner,$100 16
1,600
Associate,$50 40
2,000
Assistant,$30 160
4,800
Indirectcosts:
Consultingsupport,260% $9,000
Totalcosts
$9,000
23,400
$32,400
Ascalculatedinrequirement2,thebidpricetoearna10%incometorevenuemarginis400%
of direct professional costs. Therefore, Taylor should bid 4 $9,000 = $36,000 for the Red
Roosterjob.
Bid price to earn target operating incometorevenue margin of 10% can also be
calculatedasfollows:
or,
LetR=revenuetoearntargetincome
R0.10R=$32,400
0.90R=$32,400
R=$32,4000.90=$36,000
Directcosts
$ 9,000
Indirectcosts
23,400
Operatingincome
3,600
Bidprice
$36,000
49
422 (1520min.) Serviceindustry,timeperiodusedtocomputeindirectcostrates.

1.
Directlaborcosts
Variable overhead costsas
apercentageofdirect
laborcosts
Variableoverheadcosts
(Percentage direct
laborcosts)
Fixedoverheadcosts
Totaloverheadcosts
Totaloverheadcostsasa
percentageofdirectlabor
costs
JanMarch
$400,000
AprilJune
$280,000
90%
60%
$360,000
300,000
$660,000
JulySept
$250,000
60%
$168,000
300,000
$468,000
165%
Job332
Directmaterials
Directlaborcosts
Overheadallocated(variable+fixed)
(165%180%170%of$6,000)
FullcostofJob332
OctDec
$270,000
$150,000
300,000
$450,000
167%
Total
$1,200,000
60%
$162,000
300,000
$462,000
180%
$ 840,000
1,200,000
$2,040,000
171%
170%
BudgetedOverheadRateUsed
JanMarch
JulySept
Average
Rate
Rate
YearlyRate
$10,000
$10,000
$10,000
6,000
6,000
6,000
9,900
$25,900
10,800
$26,800
10,200
$26,200
(a)
ThefullcostofJob332,usingthebudgetedoverheadrateof165%forJanuaryMarch,is
$25,900.
(b)
ThefullcostofJob332,usingthebudgetedoverheadrateof180%forJulySeptember,
is$26,800.
(c)
ThefullcostofJob332,usingtheannualbudgetedoverheadrateof170%,is$26,200.
2.
Budgetedfixedoverheadratebasedonannual fixedoverheadcostsandannual
directlaborcosts=$1,200,000 $1,200,000=100%
Job332
Directmaterials
Directlaborcosts
Variableoverheadallocated
(90%60%of$6,000)
Fixedoverheadallocated
(100%of$6,000)
FullcostofJob332
BudgetedVariableOverheadRateUsed
JanuaryMarch
JulySept
rate
rate
$10,000
$10,000
6,000
6,000
410
5,400
3,600
6,000
$27,400
6,000
$25,600
(a)
ThefullcostofJob332,usingthebudgetedvariableoverheadrateof90%forJanuary
March andanannual fixedoverheadrateof100%,is$27,400.
(b)
The full cost of Job 332, using the budgeted variable overhead rate of 60% for July
Septemberandanannual fixedoverheadrateof100%,is$25,600.
3.
IfPrinters,Inc.setspricesatamarkupofcosts,thenpricesbasedoncostscalculatedas
inRequirement2(ratherthanasinRequirement1)wouldbemoreeffectiveindeterringclients
fromsendinginlastminute,congestioncausingordersintheJanuaryMarchtimeframe.Inthis
calculation,morevariablemanufacturingoverheadcostsareallocatedtojobsinthefirstquarter,
reflecting the larger costs of that quarter caused by higher overtime and facility and machine
maintenance.Thismethodbettercapturesthecostofcongestionduringthefirstquarter.
423 (1015min.) Accountingformanufacturingoverhead.

1.
Budgetedmanufacturingoverheadrate =
$7,500, 000
250,000
=$30permachinehour
2.
WorkinProcessControl
7,350,000
ManufacturingOverheadAllocated
7,350,000
(245,000machinehours $30permachinehour=$7,350,000)
3. $7,350,000 $7,300,000=$50,000overallocated,aninsignificantamountofactual
manufacturingoverheadcosts$50,000$7,300,000=0.66%.
7,350,000
ManufacturingDepartmentOverheadControl
CostofGoodsSold
411
7,300,000
50,000
424 (35-45min.) Jobcosting,journalentries.

SomeinstructorsmayalsowanttoassignExercise425.Itdemonstratestherelationshipsofthe
generalledgertotheunderlyingsubsidiaryledgersandsourcedocuments.
1.
Anoverviewoftheproductcostingsystemis:
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
COSTOBJECT:
PRINTJOB
DIRECT
COST
ManufacturingOverhead
DirectManufacturing
LaborCosts
IndirectCosts
DirectCosts
Direct
Materials
412
Direct
Manuf
.
Labor
2.&3.
This answer assumes COGS given of $4,020 does not include the writeoff of overallocated
manufacturingoverhead.
2.
(1) MaterialsControl
AccountsPayableControl
(2) WorkinProcessControl
MaterialsControl
(3) ManufacturingOverheadControl
MaterialsControl
ManufacturingOverheadControl
WagesPayableControl
AccumulatedDepreciationbuildingsand
manufacturingequipment
Miscellaneousaccounts
(1.60 $1,300=$2,080)
(8) FinishedGoodsControl
(9) AccountsReceivableControl(orCash)
Revenues
(10) CostofGoodsSold
FinishedGoodsControl
(11) ManufacturingOverheadAllocated
CostofGoodsSold
413
800
800
710
710
100
100
1,300
900
2,200
400
400
550
550
2,080
2,080
4,120
4,120
8,000
8,000
4,020
4,020
2,080
1,950
130
3.
Bal.12/31/2008
(1) Purchases
Bal.12/31/2009
Bal.12/31/2008
(2) Directmaterials
(4) Directmanuf.labor
(7) Manuf.overhead
allocated
Bal.12/31/2009
MaterialsControl
100 (2) Issues
800 (3) Issues
90
60 (8)Goodscompleted
710
1,300
500 (10) Goodssold
4,120
600
(10) Goodssold
CostofGoodsSold
4,020 (11) Adjustforoverallocation
Bal.12/31/2009
3,890
(11)Toclose
4,120
2,080
30
Bal.12/31/2008
(8) Goodscompleted
Bal.12/31/2009
(3) Indirectmaterials
(4) Indirectmanuf.labor
(5) Depreciation
(6) Miscellaneous
Bal.
710
100
100 (11) Toclose
900
400
550
0
2,080 (7) Manuf.overheadallocated
Bal.
414
4,020
130
1,950
2,080
0
425 (35minutes)Journalentries,Taccounts,andsourcedocuments.
1.
i.DirectMaterialsControl
124,000
124,000
SourceDocument:PurchaseInvoice,ReceivingReport
SubsidiaryLedger:DirectMaterialsRecord,AccountsPayable
ii. WorkinProcessControla
122,000
DirectMaterialsControl
122,000
SourceDocument:MaterialRequisitionRecords,JobCostRecord
SubsidiaryLedger:DirectMaterialsRecord, WorkinProcessInventory,RecordsbyJobs
iii. WorkinProcessControl
80,000
54,500
WagesPayableControl
134,500
SourceDocument:LaborTimeRecords,JobCostRecords
SubsidiaryLedger:,ManufacturingOverheadRecords,EmployeeLaborRecords,Workin
ProcessInventoryRecordsbyJobs
iv. ManufacturingOverheadControl
129,500
SalariesPayableControl
20,000
9,500
AccumulatedDepreciationControl
30,000
RentPayableControl
70,000
SourceDocument:DepreciationSchedule,RentSchedule,Maintenancewagesdue,Invoices
formiscellaneousfactoryoverheaditems
SubsidiaryLedger:ManufacturingOverheadRecords
v. WorkinProcessControl
200,000
($80,000 $2.50)
SourceDocument:LaborTimeRecords,JobCostRecord
SubsidiaryLedger:WorkinProcessInventoryRecordsbyJobs
200,000
vi. FinishedGoodsControlb
387,000
387,000
SourceDocument:JobCostRecord,CompletedJobCostRecord
SubsidiaryLedger:WorkinProcessInventoryRecordsbyJobs,FinishedGoodsInventory
RecordsbyJobs
vii. CostofGoodsSoldc
432,000
SourceDocument:SalesInvoice,CompletedJobCostRecord
SubsidiaryLedger:FinishedGoodsInventory RecordsbyJobs
viii.
CostofGoodsSold
415
432,000
200,000
184,000
16,000
SourceDocument:PriorJournalEntries
ix. AdministrativeExpenses
7,000
MarketingExpenses
120,000
SalariesPayableControl
30,000
90,000
AccumulatedDepreciation,OfficeEquipment
7,000
SourceDocument:DepreciationSchedule,MarketingPayroll Request,Invoicefor
Advertising,SalesCommissionSchedule.
SubsidiaryLedger:EmployeeSalary Records,AdministrationCostRecords,MarketingCost
Records.
aMaterialsused=Beginningdirectmaterialsinventory+Purchases - Endingdirectmaterialsinventory
=$9,000+$124,000 -$11,000=$122,000
bCostofgoodsmanufactured=Beginning WIPinventory+Manufacturingcost - EndingWIPinventory

=$6,000+($122,000+$80,000 +$200,000) -$21,000
=387,000
cCostofGoodsSold=Beginningfin.goodsinventory+Costofgoodsmanuf. - Endingfin.goodsinventory
=$69,000+$387,0000 -$24,000 =$432,000
416
2.
Taccounts
9,000 (2)Materialsused
124,000
11,000
Bal.1/1/2008
(1) Purchases
Bal.12/31/2008
Bal.1/1/2008
(2) Directmaterialsused
(3) Directmanuf.labor
(5) Manuf.overhead
allocated
Bal.12/31/2008
6,000 (6)Costofgoodsmanufactured
122,000
80,000
Bal.1/1/2008
(6)Costofgoodsmanuf.
Bal.12/31/2008
(7) Goodssold
CostofGoodsSold
432,000 (8)Adjustforoverallocation
(8)Toclose
387,000
200,000
21,000
69,000 (7)Costofgoodssold
387,000
24,000
(3)Indirectlabor
(4) Supplies
(4) Miscellaneous
(4 Depreciation
(4)Rent
Bal.
122,000
54,500 (8) Toclose
20,000
9,500
30,000
70,000
0
200,000 (5)Manuf.overheadallocated
Bal.
417
432,000
16,000
184,000
200,000
0
426 (45min.) Jobcosting,journalentries.

SomeinstructorsmaywishtoassignProblem424.Itdemonstratestherelationshipsofjournal
entries,generalledger,subsidiaryledgers,andsourcedocuments.
1.
2.
INDIRECT
COST
POOL
Manufacturing
Overhead
COST
ALLOCATION
BASE
MachineHours
COSTOBJECT
PRODUCT
DIRECT
COSTS
IndirectCosts
DirectCosts
Direct
Materials
Direct
Manuf.Labor
Amountsinmillions.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10a)
(10b)
MaterialsControl
MaterialsControl
MaterialsControl
WagesPayableControl
WagesPayableControl
AccumulatedDepreciation
Variousliabilities
CostofGoodsSold
AccountsReceivableControl(orCash)
Revenues
418
150
150
145
145
10
10
90
90
30
30
19
19
9
9
63
63
294
294
292
292
400
400
ThepostingofentriestoTaccountsisasfollows:
Bal.
(1)
MaterialsControl
12 (2)
150 (3)
Bal.
(9)
6 (10a)
294
(3)
(5)
(6)
(7)
ManufacturingDepartment
OverheadControl
10 (11)
30
19
9
145
10
292
68
Bal.
(2)
(4)
(8)
Bal.
2 (9)
145
90
63
6
(10a)
(11)
CostofGoodsSold
292
5
(11)
63 (8)
63
(1)
150
AccumulatedDepreciation
(6)
19
AccountsReceivableControl
(10b)
400
WagesPayableControl
(4)
(5)
90
30
VariousLiabilities
(7)
Revenues
(10b)
400
TheendingbalanceofWorkinProcessControlis$6.
3.
294
(11) ManufacturingOverheadAllocated
CostofGoodsSold
EntrypostedtoTaccountsinRequirement2.
419
63
5
68
427 (15min.) Jobcosting, unitcost,endingworkinprogress.

1.
Directmanufacturinglaborrateperhour
Manufacturingoverheadcostallocated
permanufacturinglaborhour
Directmanufacturinglaborcosts
Directmanufacturinglaborhours
($275,000 $25$200,000 $25)
Manufacturingoverheadcostallocated
(11,000 $208,000 $20)
JobCostsMay2009
Directmaterials
Directmanufacturinglabor
Totalcosts
$25
$20
JobM1
$275,000
JobM2
$200,000
11,000
8,000
$220,000
$160,000
JobM1
$ 75,000
275,000
220,000
$570,000
JobM2
$ 50,000
200,000
160,000
$410,000
2.
NumberofpipesproducedforJobM1
Costperpipe($570,000 1,500)
1,500
$380
3.
570,000
570,000
4. Raymond Company began May 2009 with no workinprocess inventory. During May, it
startedandfinishedM1.ItalsostartedM2,whichisstillinworkinprocessinventoryattheend
ofMay. M2s manufacturingcostsuptothispoint,$410,000,remainasadebit balance inthe
WorkinProcessInventory accountattheendofMay2009.
420
428 (20-30min.) Jobcostingactual,normal,andvariationfrom normalcosting.

1.
Actualdirectcostrateforprofessionallabor= $58perprofessionallaborhour
Actualindirectcostrate =
$744,000
= $48perprofessionallaborhour
15,500hours
$960,000
Budgeteddirectcostrate
=
forprofessionallabor
16,000hours
Budgetedindirectcostrate =
DirectCostRate
IndirectCostRate
$720,000
16,000hours
(a)
(b)
(c)
Actual
Normal
Variationof
Costing
Costing
NormalCosting
$58
$58
$60
(Actualrate) (Actualrate)
(Budgetedrate)
$48
$45
$45
(Actualrate) (Budgetedrate) (Budgetedrate)
2.
(a)
(b)
(c)
Actual
Normal
Variationof
Costing
Costing
NormalCosting
DirectCosts
$58 120=$ 6,960 $58 120=$ 6,960 $60 120=$7,200
IndirectCosts
48 120= 5,760 45 120= 5,400 45 120= 5,400
TotalJobCosts
$12,720
$12,360
$12,600
Allthreecostingsystemsusetheactualprofessionallabortimeof120hours.Thebudgeted110
hoursforthePierreEnterprisesauditjobisnotusedinjobcosting.However,Chiracmayhave
usedthe110hournumberinbiddingfortheaudit.
The actual costing figure of $12,720 exceeds the normal costing figure of $12,360
because the actual indirectcost rate ($48) exceeds the budgeted indirectcost rate ($45). The
normalcostingfigureof$12,360islessthanthevariationofnormalcosting(basedonbudgeted
ratesfordirectcosts)figureof$12,600,becausetheactualdirectcostrate($58)islessthanthe
budgeteddirectcostrate($60).
421
Althoughnotrequired,thefollowingoverviewdiagramsummarizesChiracsjobcosting
system.
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
Audit
Support
Professional
LaborHours
COSTOBJECT:
JOBFOR
AUDITING
PIERRE
&CO.
IndirectCosts
DirectCosts
DIRECT
COST
Professional
Labor
422
429(30min.) Jobordercosting:actual,normal,andvariationfromnormalcosting.
1a.Actualcosting
Directcostrate=Actual professionallaborcostsActualprofessionallaborhours
=$1,320,00022,000 hours
=$60per professionalhour
Indirectcostrate=Actualsupportcosts Actualprofessionallaborhours
=$2,400,00022,000hours
=$109.09perprofessionalhour
1b.Normalcosting
Budgetedprofessional hours=Budgetedhoursperlawyer Numberoflawyers
=2500 8=20,000hours
Directcostrate
=Actual professionallaborcosts Actualprofessional laborhours

=$1,320,00022,000hours
=$60perprofessionalhour
Indirectcostrate =Budgetedsupportcosts Budgetedprofessionallaborhours

=$2,000,00020,000hours
1c.Variationfromnormalcostingthatusesbudgetedratesfordirectcosts
Directcostrate = Budgetedprofessionallaborcosts Budgetedprofessionallaborhours
=$1,100,00020,000hours
Indirectcostrate =BudgetedsupportcostsBudgetedprofessionallaborhours
=$2,000,00020,000hours
2. Thecostsof Ari Apostolus will undereachmethodfollow:
a. ActualCosting
Directcosts4,000hours $60perhour
$240,000
Indirectcosts4,000hours $109.09 perhour
436,360
Totalcosts
$676,360
b. Normal Costing
Indirectcosts4,000hours $100perhour
Totalcosts
$240,000
400,000
$640,000
c. Variationfromnormalcosting
Indirectcosts4,000hours $100perhour
Totalcosts
$220,000
400,000
$620,000
423
430 (30min.) Prorationofoverhead.

1.Budgetedmanufacturing
overheadrate
Budgetedmanufacturingoverheadcost
Budgeteddirectmanufacturinglaborcost
$100,000
= 50%ofdirectmanufacturinglaborcost
$200,000
2.Overheadallocated=50% Actualdirectmanufacturinglaborcost
=50% $220,000=$110,000
Overallocatedplantoverhead=Actualplantoverheadcosts Allocatedplantoverheadcosts
=$106,000 $110,000=$4,000
Overallocatedplantoverhead=$4,000
3a.Alloverallocatedplantoverheadiswrittenofftocostofgoodssold.
Both workinprocess(WIP)andfinishedgoodsinventoryremainunchanged.
Prorationof$4,000
Dec.31,2009
Dec.31,2009Balance
Overallocated
Balance
(BeforeProration)
Manuf. Overhead
(AfterProration)
Account
(1)
(3)=(1) (2)
(2)
WIP
$ 50,000
$
0
$ 50,000
FinishedGoods
240,000
0
240,000
CostofGoodsSold
560,000
4,000
556,000
Total
$850,000
$4,000
$846,000
3b.Overallocatedplantoverheadproratedbasedon endingbalances:
Account
WIP
FinishedGoods
CostofGoodsSold
Total
Dec.31,2009
Balance
(BeforeProration)
(1)
$50,000
240,000
560,000
$850,000
Balanceasa
PercentofTotal
(2)=(1)$850,000
0.0588
0.2824
0.6588
1.0000
Prorationof$4,000
Overallocated
Manuf.Overhead
(3)=(2) $4,000
0.0588 $4,000 =$ 235
0.2824 $4,000 = 1,130
0.6588 $4,000 = 2,635
$4,000
Dec.31,2009
Balance
(AfterProration)
(4)=(1) (3)
$49,765
238,870
557,365
$846,000
3c.Overallocatedplantoverheadproratedbasedon 2009overheadinendingbalances:
Account
WIP
FinishedGoods
CostofGoodsSold
Total
Dec.31,2009
Balance
(Before
Proration)
(1)
$50,000
240,000
560,000
$850,000
Allocated
Manuf.
Overheadin
Dec.31,2009
Balance
(2)
$ 10,000a
30,000b
70,000c
$110,000
424
Allocated Manuf.
OverheadinDec.
Prorationof$4,000
31,2009Balance
Overallocated
asaPercentofTotal
Manuf.Overhead
(3) =(2)$110,000
(4)=(3) $4,000
0.0909
0.0909 $4,000=$ 364
0.2727
0.2727 $4,000= 1,091
0.6364
0.6364 $4,000=$2,545
1.0000
$4,000
Dec.31,2009
Balance
(After
Proration)
(5)=(1) (4)
$ 49,636
238,909
557,455
$846,000
a,b,c
Overheadallocated=Directmanuf.laborcost 50%=$20,00060,000140,000 50%
4.Writingoff alloftheoverallocatedplantoverheadtoCostofGoodsSold(CGS)isusually
warrantedwhenCGSislargerelativetoWorkinProcessandFinishedGoods Inventoryandthe
overallocatedplantoverheadisimmaterial.Boththeseconditionsapplyinthiscase.ROW
shouldwriteoffthe$4,000overallocatedplantoverheadtoCostofGoodsSoldAccount.
431 (20-30min)
1.
Jobcosting,accountingformanufacturingoverhead,budgetedrates.
Anoverviewofthejobcostingsystemis:
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
MachiningDepartment
FinishingDepartment
MachineHours
inMachiningDept.
DirectManufacturing
LaborCosts
inFinishingDept.
IndirectCosts
COSTOBJECT:
COSTOBJECT:
PRODUCT
JOB
DIRECT
COST
2.
DirectCosts
Direct
Materials
Direct
Manufacturing
Labor
Budgetedmanufacturingoverheaddividedbyallocationbase:
a. MachiningDepartment:
$10,000,000
= $50permachinehour
200,000
b. FinishingDepartment:
$8,000,000
$4,000,000
= 200%ofdirectmanufacturinglaborcosts
425
3.
MachiningDepartmentoverhead,$50 130hours
FinishingDepartmentoverhead,200%of$1,250
Totalmanufacturingoverheadallocated
4.
Total costsofJob431:
Directcosts:
DirectmaterialsMachiningDepartment
FinishingDepartment
Directmanufacturinglabor MachiningDepartment
FinishingDepartment
Indirectcosts:
MachiningDepartmentoverhead,$50 130
FinishingDepartmentoverhead,200%of$1,250
Totalcosts
$6,500
2,500
$9,000
$14,000
3,000
600
1,250
$6,500
2,500
$18,850
9,000
$27,850
TheperunitproductcostofJob431is$27,850200units=$139.25perunit
The point of this part is (a) to get the definitions straight and (b) to underscore that
overhead is allocated by multiplying the actual amount of the allocation base by the budgeted
rate.
5.
Machining
Manufacturingoverheadincurred(actual)
$11,200,000
220,000hours $50
11,000,000
200%of$4,100,000
Underallocatedmanufacturingoverhead
$200,000
Overallocatedmanufacturingoverhead
Totaloverallocatedoverhead=$300,000$200,000=$100,000
Finishing
$7,900,000
8,200,000
$300,000
6.
A homogeneouscostpool isonewhereall costshavethe sameora similar causeand
effect or benefitsreceived relationship with the costallocation base. Solomon likely assumes
that all its manufacturing overhead cost items are not homogeneous. Specifically, those in the
MachiningDepartmenthaveacauseandeffectrelationshipwithmachinehours,whilethosein
the Finishing Department have a causeandeffect relationship with direct manufacturing labor
costs. Solomon believes thatthe benefits of usingtwo cost pools (more accurate product costs
andbetterabilitytomanagecosts)exceedsthecostsofimplementingamorecomplexsystem.
426
432 (15-20min.)Serviceindustry,jobcosting,lawfirm.
1.
INDIRECT
COST
POOL
Legal
Support
COST
ALLOCATION
BASE
Professional
LaborHours
COSTOBJECT:
JOBFOR
CLIENT
DIRECT
COST
IndirectCosts
DirectCosts
}
Professional
Labor
2.
Budgetedprofessional = Budgeteddirectlaborcompensationperprofessional
laborhourdirectcostrate
Budgeteddirectlaborhoursperprofessional
$104,000
1,600hours
=
Notethatthebudgetedprofessionallaborhourdirectcostratecanalsobecalculatedby
dividingtotal budgetedprofessional laborcostsof$2,600,000($104,000perprofessional 25
professionals)bytotalbudgetedprofessionallaborhoursof40,000(1,600hoursperprofessional
25professionals),$2,600,000 40,000=$65perprofessionallaborhour.
3.
Budgetedindirect = Budgetedtotalcostsinindirectcostpool
costrate
Budgetedtotalprofessionallaborhours
$2,200,000
=
1,600hours25
$2,200,000
=
40,000hours
4.
Directcosts:
Professionallabor,$65 100$65 150
Indirectcosts:
Legalsupport,$55 100$55 150
427
Richardson
Punch
$6,500
$9,750
5,500
$12,000
8,250
$18,000
433 (2530min.) Serviceindustry,jobcosting,twodirectandindirectcostcategories,

lawfirm(continuationof432).
Although notrequired,the followingoverviewdiagram is helpfultounderstandKeatings job
costingsystem.
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
COSTOBJECT:
JOBFOR
CLIENT
DIRECT
COST
}
}
General
Support
Secretarial
Support
Professional
LaborHours
Partner
LaborHours
IndirectCosts
DirectCosts
}
Professional
AssociateLabor
Professional
PartnerLabor
1.
Budgetedcompensationperprofessional
Dividedbybudgetedhoursofbillable
timeperprofessional
Budgeteddirectcostrate
Canalsobecalculatedas
1,600
$125perhour*
1,600
$50perhour
Totalbudgetedpartnerlaborcosts
$200,000 5 $1,000,000
=
=
Totalbudgetedpartnerlabor hours
1,600 5
8,000
= $125
Totalbudgetedassociatelabor costs
$80,000 20 $1,600,000
=
=
Totalbudgetedassociatelabor hours
1,600 20
32,000
=$50
*Canalsobecalculatedas
Professional
Professional
PartnerLabor AssociateLabor
$200,000
$80,000
2.
General
Secretarial
Support
Support
Budgetedtotalcosts
$1,800,000
$400,000
Dividedbybudgetedquantityofallocationbase 40,000hours 8,000hours
Budgetedindirectcostrate
$45perhour $50perhour
428
3.
Richardson
Punch
Directcosts:
Professionalpartners,$125 60$125 30
Professionalassociates,$50 40$50 120
Directcosts
Indirectcosts:
Generalsupport,$45 100$45 150
Secretarialsupport,$50 60$50 30
Indirectcosts
Totalcosts
4.
SingledirectSingleindirect
(fromProblem 432)
Multipledirect Multipleindirect
(fromrequirement3ofProblem 433)
Difference
$7,500
2,000
$3,750
6,000
$9,500
4,500
3,000
$9,750
6,750
1,500
7,500
$17,000
8,250
$18,000
Richardson
Punch
$12,000
$18,000
17,000
18,000
$ 5,000
undercosted
$0
nochange
TheRichardsonandPunchjobsdifferintheiruseofresources.TheRichardsonjobhasa
mix of 60% partners and 40% associates, while Punch has a mix of 20% partners and 80%
associates.Thus,theRichardson job isarelatively highuserofthe morecostlypartnerrelated
resources(bothdirectpartnercostsandindirectpartnersecretarialsupport).Therefinedcosting
system inProblem432 increasesthereportedcostinProblem432 fortheRichardson job by
41.7%(from$12,000to$17,000).
429
434 (20-25min.) Prorationofoverhead.

1.Budgetedmanufacturingoverheadrateis$4,800,00080,000hours=$60per machinehour.
2.
Manufacturingoverhead = Manufacturingoverhead Manufacturingoverhead

underallocated
incurred
allocated
= $4,900,000 $4,500,000*
= $400,000
*$60 75,000actualmachinehours=$4,500,000
a.
WriteofftoCostofGoodsSold
Account
(1)
WorkinProcess
FinishedGoods
CostofGoodsSold
Total
Writeoff
of$400,000
Underallocated
Manufacturing
Overhead
(3)
Account
Balance
(BeforeProration)
(2)
$750,000
1,250,000
8,000,000
$10,000,000
Account
Balance
(AfterProration)
(4)=(2)+(3)
$0
0
400,000
$400,000
$750,000
1,250,000
8,400,000
$10,400,000
b.
Prorationbasedonendingbalances(beforeproration)inWorkinProcess,Finished
GoodsandCostofGoodsSold.
Account
(1)
WorkinProcess
FinishedGoods
CostofGoodsSold
Total
Prorationof$400,000
Underallocated
Manufacturing
Overhead
(3)
Account
AccountBalance
Balance
(BeforeProration)
(AfterProration)
(2)
(4)=(2)+(3)
$750,000 (7.5%) 0.075 $400,000= $ 30,000
$780,000
1,250,000 (12.5%) 0.125 $400,000= 50,000
1,300,000
8,000,000 (80.0%) 0.800 $400,000= 320,000
8,320,000
$10,000,000 100.0%
$10,400,000
$400,000
c.
Prorationbasedontheallocatedoverheadamount(beforeproration)intheending
balancesofWorkinProcess,FinishedGoods,andCostofGoodsSold.
Account AllocatedOverhead
Account
Balance
Includedin
Prorationof$400,000
Balance
Underallocated
(Before theAccountBalance
(After
Account
Proration) (BeforeProration) ManufacturingOverhead Proration)
(5)
(1)
(2)
(3)(4)
(6)=(2)+(5)
a
WorkinProcess
$750,000$240,000 (5.33%) 0.0533 $400,000=$21,320
$ 771,320
FinishedGoods
CostofGoodsSold
Total
a
1,250,000
660,000
8,000,000 3,600,000
(14.67%) 0.1467 $400,000= 58,680
1,308,680
(80.00%) 0.8000 $400,000= 320,000
8,320,000
$10,000,000$4,500,000 100.00%
b
$60 4,000machinehours $60 11,000machinehours $60 60,000machinehours
430
$400,000
$10,400,000
3.
Alternative(c)istheoreticallypreferredover(a)and(b).Alternative(c)yieldsthesame
endingbalancesinworkinprocess,finishedgoods,andcostofgoodssoldthatwouldhavebeen
reportedhadactualindirectcostratesbeenused.
Chapter 4 also discusses an adjusted allocation rate approach that results in the same
endingbalancesasdoesalternative(c).Thisapproachoperatesviaarestatementoftheindirect
costsallocatedtoalltheindividualjobsworkedonduringtheyearusingtheactualindirectcost
rate.
435 (15min.) Normalcosting,overheadallocation,workingbackward.
1a.
Manufacturingoverheadallocated =200%Directmanufacturinglaborcost
$3,600,000 =2Directmanufacturinglaborcost
Directmanufacturinglaborcost =
b.
$3,600,000
=$1,800,000
2
Totalmanufacturing = Directmaterial + Directmanufacturing + Manufacturing

cost
used
laborcost
overheadallocated
$8,000,000 =Directmaterialused+$1,800,000+$3,600,000
Directmaterialused =$2,600,000
2.
WorkinProcess+Totalmanufacturingcost= Costofgoodsmanufactured+WorkinProcess
12/31/2009
1/1/2009
DenoteWorkinprocesson12/31/2009byX
$320,000+$8,000,000=$7,920,000+X
X=$400,000
Workinprocessinventory,12/31/09=$400,000.
431
436 (40min.) Prorationofoverheadwithtwoindirectcostpools.

1.a.C&Adepartment:
Overheadallocated=$40 4,000Machinehours=$160,000
Underallocatedoverhead=Actualoverheadcosts Overheadallocated
=$163,000 160,000=$3,000underallocated
1.b.Finishingdepartment:
Overheadallocated=$50perdirectlaborhour 2,000directlaborhours=$100,000
Overallocatedoverhead=Actualoverheadcosts Overheadallocated
=$87,000 100,000=$13,000overallocated
2a.Alloverallocated overheadiswrittenofftocostofgoodssold.
BothWorkinProcessandFinishedgoodsinventoryremainunchanged.
Account
WIP
FinishedGoods
CostofGoodsSold
Total
Dec.31,2008 Balance
(BeforeProration)
(1)
$ 150,000
250,000
1,600,000
$2,000,000
Prorationof $10,000
Overallocated
Overhead
(2)
0
0
+$3,000$13,000
$
10,000
Dec.31,2008
Balance
(AfterProration)
(3)=(1)+ (2)
$ 150,000
250,000
1,590,000
$1,990,000
2b.Overallocatedoverheadproratedbasedonendingbalances
Dec.31,2008Balance
(BeforeProration)
Account
(1)
WIP
$150,000
FinishedGoods
250,000
CostofGoodsSold
1,600,000
Total
$2,000,000
Balanceasa
PercentofTotal
(2)=(1)$2,000,000
0.075
0.125
0.800
1.000
Prorationof$10,000
Dec.31,2008Balance
OverallocatedOverhead
(AfterProration)
(3)=(2) 10,000
(4)=(1) (3)
0.075 $10,000 =$ 750
$ 149,250
0.125 $10,000 = 1,250
248,750
0.800 $10,000 = 8,000
1,592,000
$10,000
$1,990,000
2c.Overallocatedoverheadproratedbasedonoverheadinendingbalances.(Note:overhead
mustbeallocatedseparatelyfromeachdepartment.Thiscanbedoneusingthenumberof
machinehours/directlaborhoursasasurrogate foroverheadinendingbalances.)
432
ForC&Adepartment:
Account
WIP
FinishedGoods
CostofGoodsSold
Total
AllocatedOverheadin
Dec.31,2008 Balance
(1)
200 $40=$ 8,000
600 $40= 24,000
3,200 $40= 128,000
$160,000
AllocatedOverheadin
Dec.31,2008Balance
asaPercentofTotal
(2)=(1)$160,000
0.05
0.15
0.80
1.00
Prorationof$3,000
Underallocated
Overhead
(3)=(2) $3000
0.05 $3,000=$ 150
0.15 $3,000=
450
0.80 $3,000= 2,400
$3,000
Forfinishingdepartment:
Account
WIP
FinishedGoods
CostofGoodsSold
Total
Account
WIP
FinishedGoods
CostofGoodsSold
Total
AllocatedOverheadinDec.
31,2008Balance
(4)
100 $50=$ 5,000
400 $50= 20,000
1,500 $50= 75,000
$100,000
Dec.31,2008Balance
(BeforeProration)
(7)
$150,000
250,000
1,600,000
$2,000,000
AllocatedOverhead
in Dec.31,2008
Balance
asaPercentofTotal
(5)=(4)$100,000
0.05
0.20
0.75
1.00
Prorationof$13,000
UnderallocatedOverhead
(6)=(5) $13,000
0.05 $13,000=$650
0.20 $13,000 =2,600
0.75 $13,000= 9,750
$13,000
Underallocated/
Overallocated
Overhead
(8)=(3) (6)
$150 $650 = $ (500)
$450 $2,600= (2,150)
$2,400 $9,750= (7,350)
$(10,000)
Dec.31,2009Balance
(AfterProration)
(9)=(7)+(8)
$149,500
247,850
1,592,650
$1,990,000
3. The first method is simple and Cost of Goods Sold accounts for 80% of the three account
amounts. The amount of overallocated and underallocated overhead is also immaterial.
Allocationtotheothertwoaccountsisminimal.Therefore,writeofftocostofgoodssoldisthe
mostcosteffectivealternative.
433
437 (35min.) Generalledgerrelationships,underandoverallocation.

Thesolutionassumesallmaterialsusedaredirectmaterials.AsummaryoftheTaccountsfor
NeedhamCompanybeforeadjustingforunderoroverallocationofoverheadfollows:
112008
30,000 Materialusedfor
112008
20,000 Transferredto
Purchases
400,000 manufacturing 380,000 Directmaterials 380,000 finishedgoods 940,000
12312008 50,000
Directmanuf.
Labor
360,000
Manuf.overhead
allocated
480,000
12312008
300,000
CostofGoodsSold
112008
10,000 Costofgoods
Finishedgoods
Transferredin
sold
900,000 sold
900,000
fromWIP 940,000
12312008 50,000
Manufacturing
overhead
costs
540,000
Manufacturing
overhead
allocatedto
workin
process
480,000
1.
FromDirectMaterialsControlTaccount,
Directmaterialsissuedtoproduction=$380,000thatappearsasacredit.
2.
Directmanufacturinglaborhours
Manufacturingoverhead
allocated
Directmanufacturing laborcosts
Directmanufacturingwagerateperhour
$360,000
=
=24,000hours
$15perhour
Manufacturing
= Directmanufacturing overheadrate
laborhours
= 24,000hours $20perhour =$480,000
=
3.
FromthedebitentrytoFinishedGoodsTaccount,
CostofjobscompletedandtransferredfromWIP=$940,000
4.
FromWorkinProcessTaccount,
Workinprocessinventory
=$20,000+$380,000+$360,000+$480,000 $940,000
on12/31/2008
=$300,000
5. FromthecreditentrytoFinishedGoodsControlTaccount, Costofgoodssold(before
proration)=$900,000
434
6.
Manufacturingoverhead
underallocated
7.
a.
b.
DebitstoManufacturing CredittoManufacturing
OverheadAllocated
OverheadControl
= $540,000 $480,000
= $60,000underallocated
=
WriteofftoCostofGoodsSoldwillincrease(debit)CostofGoodsSoldby$60,000.
Hence,CostofGoodsSold=$900,000+$60,000=$960,000.
Prorationbasedonendingbalances(beforeproration)inWorkinProcess,Finished
Goods,andCostofGoodsSold.
Accountbalancesineachaccountafterprorationfollows:
Account
(1)
WorkinProcess
FinishedGoods
CostofGoodsSold
Prorationof$60,000
AccountBalance
Underallocated
(BeforeProration)
(2)
(3)
$300,000 (24%) 0.24 $60,000=$14,400
50,000 (4%) 0.04 $60,000=2,400
900,000 (72%) 0.72 $60,000= 43,200
$1,250,000 100%
$60,000
AccountBalance
(AfterProration)
(4)=(2)+(3)
$314,400
52,400
943,200
$1,310,000
8. NeedhamsoperatingincomeusingwriteofftoCostofGoodsSoldandProrationbasedon
endingbalances(beforeproration)follows:
Revenues
Costofgoodssold
Grossmargin
Marketinganddistributioncosts
Operatingincome/(loss)
Writeoffto
CostofGoods
Sold
ProrationBased
onEnding
Balances
$1,090,000
960,000
130,000
140,000
$(10,000)
$1,090,000
943,200
146,800
140,000
$6,800
9. Ifthepurpose istoreportthe mostaccurateinventoryandcostofgoodssold figures,the

preferredmethodistoproratebasedonthemanufacturingoverheadallocatedcomponentinthe
inventoryandcostofgoodssoldaccounts.ProrationbasedonthebalancesinWorkinProcess,
Finished Goods, and Cost of Goods Sold will equal the proration based on the manufacturing
overheadallocatedcomponentiftheproportionsofdirectcoststomanufacturingoverheadcosts
areconstantintheWorkinProcess,FinishedGoodsandCostofGoodsSoldaccounts.Evenif
thisisnotthecase,theprorationsbasedonWorkinProcess,FinishedGoods,andCostofGoods
Soldwillbetterapproximatetheresultsifactualcostrateshadbeenusedratherthanthewriteoff
toCostofGoodsSoldmethod.
Another consideration in Needhams decision about how to dispose of underallocated
manufacturingoverheadistheeffectsonoperatingincome.ThewriteofftoCostofGoodsSold
will lead to an operating loss. Proration based on the balances in Work in Process, Finished
Goods,andCostofGoodsSoldwillhelpNeedhamavoidthelossandshowanoperatingincome.
ThemainmeritofthewriteofftoCostofGoodsSoldmethodisitssimplicity.However,
accuracy and the effect on operating income favor the preferred and recommended proration
approach.
435
438 (40-55min.) Overviewofgeneralledgerrelationships.

1.&3. An effective approach tothis problem is to draw Taccounts and insert all the known
figures.Then,workingwithTaccountrelationships,solvefortheunknownfigures(herecoded
bytheletterXforbeginninginventoryfiguresandYforendinginventoryfigures).
MaterialsControl
15,000 (1)
85,000
100,000
30,000
X
Purchases
Y
X
(1) DM
(2) DL
(3) Overhead
(a)
(c)
Y
10,000 (4)
70,000
150,000
90,000
310,000
320,000
5,000
3,000
23,000
Y
(5)
CostofGoodsSold
300,000 (d)
(a)
(b)
85,000 (d)
1,000
1,000
(d)
70,000
305,000
305,000
20,000 (5)
305,000
325,000
25,000
X
(4)
70,000
93,000 (3)
(c)
300,000
300,000
6,000
87,000
90,000
3,000
Manufacturingoverheadcostrate=$90,000$150,000=60%
WagesPayableControl
(a)
6,000
VariousAccounts
(b)
1,000
436
2.
Adjustingandclosingentries:
(a) WorkinProcessControl
WagesPayableControl
Torecognizepayrollcosts
5,000
1,000
(b)ManufacturingDepartmentOverheadControl
Variousaccounts
Torecognizemiscellaneousmanufacturingoverhead
1,000
(c) WorkinProcessControl
Toallocatemanufacturingoverhead
3,000
6,000
1,000
3,000
Note:Studentstendtoforgetentry(c)entirely.Stressthatabudgetedoverheadallocation
rate is used consistently throughout the year. This point is a major feature of this
problem.
(d)ManufacturingOverheadAllocated
93,000
87,000
CostofGoodsSold
6,000
Toclosemanufacturingoverheadaccountsandoverallocatedoverheadtocostof
goodssold
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
DirectManufacturing
LaborCosts
IndirectCosts
COSTOBJECT:
JOB
DIRECT
COST
3.
DirectCosts
Direct
Materials
Seetheanswerto1.
437
Direct
Manufacturing
Labor
439 (30min.) Allocationandprorationofoverhead.

1. Budgetedoverheadrate=BudgetedoverheadcostsBudgetedlaborcosts
=1,5002,000=75%oflaborcost
2.Endingworkinprocess
Directmaterial costs
Directlaborcosts
Overhead
(0.75Directlaborcosts)
Total costs
Job1
25
20
15
60
Job2
15
32
Total
40
52
24
71
39
131
Costofgoodssold=BeginningWIP+Manufacturingcosts EndingWIP
= 0+(900+1,800+ 1,800 0.75) 131=3,919
3.Overheadallocated=0.75 1,800= 1,350
Overallocatedoverhead=ActualoverheadAllocated overhead
=1,250 1,350=100 overallocated
4.a.Alloverallocatedoverheadiswrittenofftocostofgoodssold.
WIPinventoryremainsunchanged.
Dec.31,1762
AccountBalance
Account
(BeforeProration)
(1)
(2)
WorkinProcess
131
Costofgoodssold
3,919
4,050
4b.
Writeoffof 100
Overallocated
overhead
(3)
0
(100)
(100)
Dec.31,1762
AccountBalance
(AfterProration)
(4)=(2)+(3)
131
3,819
3,950
Overallocatedoverheadproratedbasedonendingbalances
Account
(1)
WorkinProcess
CostofGoodsSold
Dec.31, 1762
Balance
(BeforeProration)
(2)
131
3,919
4,050
Balanceasa
PercentofTotal
(3)=(2) 4,050
0.03
0.97
1.00
Prorationof100
Overallocated
Overhead
(4)=(3) 100
(3)
(97)
(100)
Dec.31,1762
Balance
(AfterProration)
(5)=(2)+(4)
128
3,822
3,950
5.
WritingoffalloftheoverallocatedoverheadtoCostofGoodsSold(CGS)iswarranted
whenCGSislargerelativetoWorkinProcessInventoryandFinishedGoodsInventoryandthe
overallocatedoverheadisimmaterial.Boththeseconditionsapplyinthiscase.Franklin&Son
Printingshouldwriteoffthe100overallocatedoverheadtoCostofGoodsSoldaccount.
438
440 (20min.) Jobcosting,contracting,ethics.

1.
Directmanufacturingcosts:
Directmaterials
Indirectmanufacturingcosts,
150% $6,000
Totalmanufacturingcosts
$25,000
6,000
$31,000
9,000
$40,000
AerospacebillstheNavy$52,000($40,000 130%)for100X7seatsor$520($52,000
100)perX7seat.
2.
Directmanufacturingcosts:
Directmaterials
a
Indirectmanufacturingcosts,
150% $5,000
Totalmanufacturingcosts
$25,000
5,000
$30,000
7,500
$37,500
$6,000 $400($25 16)setup $600($50 12)design
AerospaceshouldhavebilledtheNavy$48,750($37,500 130%)for100X7seatsor$487.50
($48,750 100)perX7seat.
3.
Theproblemstheletterhighlights(assumingitiscorrect)includethefollowing:
a. Costsincludedthatshouldbeexcluded(designcosts)
b. Costs doublecounted (setup included as both a direct cost and in an indirect cost
pool)
c. Possible conflict of interest in Aerospace Comfort purchasing materials from a
familyrelatedcompany
StepstheNavycouldundertakeincludethefollowing:
(i) Useonlycontractorswithareputationforethicalbehavioraswellasqualityproducts
orservices.
(ii)Issue guidelines detailing acceptable and unacceptable billing practices by
contractors. For example, prohibiting the use of doublecounting cost allocation
methodsby contractors.
(iii)Issue guidelines detailing acceptable and unacceptable procurement practices by
contractors. For example, if a contractor purchases from a familyrelated company,
requirethatthecontractorobtainquotesfromatleasttwootherbidders.
(iv)Employauditorswhoaggressivelymonitorthebillssubmittedbycontractors.
(v)Askcontractorsfordetailsregardingdeterminationofcosts.
439
441 (35min.) Jobcostingserviceindustry.

1.
ToursinProcess(TIP)June30,2009
2.
Band
AsILayDieing
AskMeLater
Total
Materials
(1)
$250
350
$600
Labor
(2)
$400
200
$600
Overhead
Total
(3)=150%(2)
(4)
$600
$1,250
300
850
$900
$2,100
Costof CompletedTours(CCT)inJune2009
Band
GrungeExpress
DifferentStrokes
MaybeTomorrow
Total
Materials
Labor
(1)
(2)
$ 400
$ 700
475
700
275
400
$1,150
$1,800
Overhead
(3)=150%(2)
$1,050
1,050
600
$2,700
Total
(4)
$2,150
2,225
1,275
$5,650
3.
Overheadallocated=1.50 1,400a =$2,100
Underallocatedoverhead =ActualoverheadAllocated overhead
=$2,500 2,100=$400underallocated
a
TotallaborinJune=$100+$300+$400+$200+$400=$1,400
4a.UnderallocatedoverheadiswrittenofftoCCT
CIPinventoryremainsunchanged.
Account
CIP
CCT
4b.
June30,2009
Balance
(After
Proration)
(3)=(1) + (2)
$2,100
6,050
$8,150
Underallocatedoverheadproratedbasedonendingbalances
Account
TIP
CCT
June30,2009
Balance
(BeforeProration)
(1)
$2,100
5,650
$7,750
Prorationof
$400
Underallocated
Overhead
(2)
$ 0
400
$400
June30,2009
Balance
(BeforeProration)
(1)
$2,100
5,650
$7,750
Balanceasa
PercentofTotal
(2)=(1)$7,750
0.271
0.729
1.000
440
Prorationof$400
Underallocated
Overhead
(3)=(2) $400
0.271 $400 =$108
0.729 $400 = 292
$400
June30,2009
Balance
(AfterProration)
(4)=(1) + (3)
$2,208
5,942
$8,150
4c.
UnderallocatedoverheadproratedbasedonJuneoverheadinendingbalances
Account
TIP
CCT
Overheadallocated
June30,2009
inJuneIncludedin
Balance
June30,2009
(BeforeProration)
Balance
(1)
(2)
$2,100
$ 900a
5,650
1,200b
$7,750
$2,100
Overheadallocated
inJuneIncludedin
June30,2009 asa
PercentofTotal
(3)=(2)$2,100
0.43
0.57
1.00
Prorationof$400
Underallocated
Overhead
(4)=(3) $400
0.43 $400=$172
0.57 $400= 228
$400
June30,2009
Balance
(After
Proration)
(5)=(1) + (4)
$2,272
5,878
$8,150
JunelaborforAsILayDieingandAskMeLater150%
=($400+$200)150%=$600150%=$900
JunelaborforGrungeExpress,DifferentStrokesandMaybeTomorrow150%
=($100+$300+$400)150%=$800$150=$1,200
5.
Iwouldchoosethemethodin4cbecausethismethodresultsinaccountbalancesbasedon
actual overhead allocation rates. The account balances before proration in TIP and CCT are
significantandunderallocatedoverheadismaterial.Furthermore,theratioofendingbalancesin
TIPandCCTisdifferentfromtheratioofoverheadallocatedtoeachoftheseaccountsinJune.
441

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Job Costing Chpt4

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CHAPTER4

49 Actualcostingand normalcostingdiffer intheir useofactualorbudgeted indirectcost

417 (20min.) Actualcosting,normalcosting,accountingformanufacturingoverhead.

$2, 700, 000

$2, 755, 000

418 (2030min.) Jobcosting,normalandactualcosting.

419 (10min.) Budgetedmanufacturingoverheadrate,allocatedmanufacturingoverhead.

420 (2030min.) Jobcosting,accountingformanufacturingoverhead,budgetedrates.

421 (20-25min.) Jobcosting,consultingfirm.

At the budgeted revenues of $20,000,000, Taylors operating income of $2,000,000

422 (1520min.) Serviceindustry,timeperiodusedtocomputeindirectcostrates.

423 (1015min.) Accountingformanufacturingoverhead.

424 (35-45min.) Jobcosting,journalentries.

bCostofgoodsmanufactured=Beginning WIPinventory+Manufacturingcost - EndingWIPinventory

426 (45min.) Jobcosting,journalentries.

427 (15min.) Jobcosting, unitcost,endingworkinprogress.

428 (20-30min.) Jobcostingactual,normal,andvariationfrom normalcosting.

=Actual professionallaborcosts Actualprofessional laborhours

Indirectcostrate =Budgetedsupportcosts Budgetedprofessionallaborhours

430 (30min.) Prorationofoverhead.

Overheadallocated=Directmanuf.laborcost 50%=$20,00060,000140,000 50%

433 (2530min.) Serviceindustry,jobcosting,twodirectandindirectcostcategories,

434 (20-25min.) Prorationofoverhead.

Manufacturingoverhead = Manufacturingoverhead Manufacturingoverhead

(14.67%) 0.1467 $400,000= 58,680

(80.00%) 0.8000 $400,000= 320,000

$60 4,000machinehours $60 11,000machinehours $60 60,000machinehours

Totalmanufacturing = Directmaterial + Directmanufacturing + Manufacturing

436 (40min.) Prorationofoverheadwithtwoindirectcostpools.

437 (35min.) Generalledgerrelationships,underandoverallocation.

9. Ifthepurpose istoreportthe mostaccurateinventoryandcostofgoodssold figures,the

438 (40-55min.) Overviewofgeneralledgerrelationships.

439 (30min.) Allocationandprorationofoverhead.

440 (20min.) Jobcosting,contracting,ethics.

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

441 (35min.) Jobcostingserviceindustry.

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