Chapter 4: Product Costing Systems: General Principles and Job Costing

CHAPTER 4
PRODUCT COSTING SYSTEMS
ANSWERS TO QUESTIONS
4.1 A cost object is anything for which management decides a separate measurement is desirable. n this definition
it is important to recognise some !ey words " a cost ob#ect can be anything. $here is no e%clusi&e list of cost
ob#ects and common cost ob#ects include products' ser&ices' contracts' pro#ects and departments. $he other
important point is that management decides what it wants to !now the cost of in order to carry out its
managerial functions. (nce management has decided the cost ob#ects' management accountants are able to
measure the costs associated with the cost ob#ect )on a cost*benefit basis+ and pro&ide management with the
information. As a result of this definition and its analysis' cost ob#ects pro&ide the focus or target for the costing
system.
4.,
Purpose Current * -uture Product Costs
Short.term decisions: product mi%' pricing -uture
/onger.term strategic decisions -uture
/ong.term pricing -uture
Plan future product.related costs -uture
Control of product costs Current
0eimbursement contracts Current
1%ternal reporting )in&entory calculation+ Current
All the information cannot come from one source. $he main accounting system may accumulate current and
past costs but for much decision.ma!ing and planning' estimates of future costs will need to be generated
outside of that accounting system.
4.2
Purpose Costs ncluded
Short.term decisions . product mi%' pricing Production * downstream
/onger.term strategic decisions Production * upstream * downstream
/ong.term pricing Production * upstream * downstream
Plan future product.related costs Production' plus other rele&ant costs
across the &alue chain
Control of product costs Production' plus other rele&ant costs
across the &alue chain
0eimbursement contracts Production costs' plus other costs as
specified in the contract
1%ternal reporting )in&entory calculation+ Production costs
Con&entional costing systems typically focus on production costs. 3ut for many decisions' costs in other parts
of the &alue chain will be need to be included to help managers understand the o&erall &iability of a product or
ser&ice' and to manage costs effecti&ely.
4.4
Purpose -re4uency
Short.term decisions: product mi%' pricing Ad hoc
/onger.term strategic decisions Ad hoc
/ong.term pricing -or each new product de&elopment
Plan future product.related costs 5onthly for current products or adhoc
for each new product de&elopment
Control of product costs 5onthly' sometimes more fre4uently
0eimbursement contracts 6hene&er in&oicing is re4uired
1%ternal reporting )in&entory calculation+ Annually' and possibly monthly
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Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
A product costing system de&eloped to meet financial reporting re4uirements will pro&ide routine information
on some costs. 9owe&er' other information will be re4uired on an ad hoc basis. t may be possible to design a
product costing approach' to pro&ide at least some of this information.
4.7 $his is not entirely satisfactory. $here are a range of decisions that product costs may be useful for. 1&en though
the business is a :price.ta!er;' they may well need to consider whether they should be ma!ing all of the products
in the range' as some may be unprofitable. A wrong decision on one product may cost the firm more than it does
to !eep a costing system going. A product costing system may well help them control production costs and
recognise problems before it is too late. $he firm will need some product costs at year.end to &alue in&entory
e&en if it is minimal.
4.< 6hen direct material' direct labour and manufacturing o&erhead costs are incurred' they are applied to wor! in
process in&entory by debiting the account. 6hen goods are finished' the costs are remo&ed from the wor! in
process account with a credit' and they are transferred to finished goods in&entory by debiting that account.
Subse4uently' when the goods are sold' the finished goods in&entory is credited and the costs are added to the
cost of goods sold' with a debit.
4.7 -or e%ternal reporting purposes' only manufacturing costs are included. -actory o&erhead must be absorbed into
in&entory. -or management decision.ma!ing purposes' costs can be collected in any form' and may include
costs in any part of the &alue chain=not #ust manufacturing costs.
4.> $he three steps followed when applying manufacturing o&erhead to products are:
)a+ identifying the o&erhead cost dri&er' which is the factor that causes the o&erhead costs to be incurred?
)b+ calculating the o&erhead rate' which is usually based on the budgeted annual manufacturing o&erhead
cost' di&ided by the budgeted annual &olume of cost dri&er? and
)c+ applying manufacturing o&erhead costs to products' by multiplying the predetermined o&erhead rate by
the amount of cost dri&er consumed by the product.
4.8 (&erapplied or underapplied o&erhead is caused by errors in estimating the predetermined o&erhead rate. $hese
errors can occur in the numerator )budgeted manufacturing o&erhead+' or in the denominator )budgeted le&el of
the cost dri&er+.
4.1@ (&erapplied or underapplied o&erhead can be closed directly into cost of goods sold' or it can be prorated
among wor! in process in&entory' finished goods in&entory and cost of goods sold. f the amount of
underapplied or o&erapplied o&erhead is significant' it should be prorated.
4.11 (&erapplied or underapplied o&erhead should be closed at year end because month to month &ariations are
li!ely to a&erage out.
4.1, n 1%hibit 4.1@' underapplied o&erhead is deducted from the actual o&erheads to estimate the amount of
o&erhead applied to production during the period. As a result of this calculation the manufacturing cost reflects
the actual material and labour costs' plus applied o&erhead. $hese costs form part of the cost of goods sold. $he
cost of goods sold is then ad#usted by adding in the amount of underapplied o&erhead' to reflect the part of the
actual o&erhead that has not been recognised in manufacturing cost.
4.12 n a job costing system' costs are assigned to batches or #ob orders of production. Job costing systems are used
by firms that produce relati&ely small numbers of dissimilar products. Job costing would be used in any
situation where products are produced to customers; specification' such as tailoring or an architect.designed
home. Job costing is also appropriate in a panel.beating shop' where the damage to each &ehicle is clearly
identifiable at the outset. n a process costing system' production costs are a&eraged o&er a large number of
product units. Process costing systems are used by firms that produce large numbers of nearly identical
products' such as paint production' beer brewing or ma!ing bric!s.
$he factor which determines the choice of system is the point at which the cost ob#ect )that is' the unit being
produced+ can be identified. n #ob costing situations' the #ob can be identified as being uni4ue from the outset'
therefore direct costs can be traced to it easily and economically " thin! about the panel.beating shop. n a
process costing en&ironment' such as producing paint' each litre of paint is identical to e&ery other litre and
cannot be distinguished until the completion of the process " and e&en then' it is difficult. $his means that direct
costs cannot be traced to the unit' so must be traced to the process and then a&eraged across all units produced.
4.14 $he two main steps in process costing are:
estimating the costs of the production process?
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Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
calculating an a&erage cost per unit by di&iding the cost of the process by the number of units produced
Aote that in the ne%t chapter )see Buestion 7.<+ these steps are e%plained more comprehensi&ely where there
are four steps.
4.17 $he steps in describing the flow of costs through a single.department process costing system are as follows:
as raw material' direct labour and manufacturing o&erhead are introduced into production' their costs are
debited to the wor! in process in&entory account
as the goods are completed their costs are credited from the wor! in process in&entory account and debited
into the finished goods in&entory account
as the goods are sold their costs are credited from the finished goods in&entory account and debited into the
cost of goods sold account

n a two.stage production process' when goods are finished in production department )A+' the costs
accumulated in the wor! in process in&entory account are transferred to the wor! in process in&entory account
for production department 3.
4.1< $he type of product costing system depends on the type of product produced and the production en&ironment.
$here are some firms that produce one.off products and use a :true; #ob costing system' and others that mass.
produce one product and use a process costing system. 9owe&er' many firms need to use a hybrid costing
system because of the nature of their products.
4.1C )a+ $he #ob costing sheet is used to summarise the costs of direct material' direct labour' and manufacturing
o&erhead that relates to a particular #ob.
)b+ A material re4uisition form authorises the transfer of raw material from the warehouse to the production
department' and is used to record the cost of materials for #obs.
)c+ A labour time.sheet is used to record the amount of time spent on each #ob.
4.1> )a+ $otal manufacturing cost is the cost of materials and labour used' and the o&erhead applied for the period.
)b+ 5anufacturing costs to account for' include the cost of opening in&entory for wor! in process.
)c+ Cost of goods manufactured is the total manufacturing cost ad#usted for opening and closing in&entory.
4.18 n process costing' large 4uantities of identical )or nearly identical+ units are produced' therefore it is neither
possible' nor necessary' to trace costs to each indi&idual unit. nstead' production costs are traced to a process' or
department' and the a&erage unit cost is determined by di&iding the total process costs by the total number of
units produced. $he costs of producing each unit are determined by progressi&ely accumulating the costs for
each process.
4.,@ Production costs are trac!ed to each production department for two reasons:
department managers are held responsible for cost control' and so the costs for each department must be
identifiable
when there are wor! in process in&entories at the end of an accounting period' separate costs are necessary
for each department in order to calculate the &alue of wor! in process for that department
4.,1 Process costing is appropriate to industries where large 4uantities of identical units are produced. $he system of
costing used in these industries is simplified when there are no goods in process at the end of the accounting
period' and therefore' no need to &alue the closing in&entory in process. ndustries where this is applicable are
those where a batch of production is completed entirely and no part of it can be held o&er for further processing.
$his is well illustrated in the e%ample for SpritD gi&en in the chapter' because any material left in the mi%ing tan!
is discarded. (ther industries which are similar are petroleum' beer brewing and paint manufacture. n the real
world' firms sometimes close their boo!s off at the completion of the last batch for the accounting period' rather
than commence a fresh batch a few hours before the closing date' and then be confronted by the problem of
ha&ing to &alue the wor! in process. Chapter 7 e%plains how industries deal with this comple%ity where wor! in
process at the end of the accounting period is una&oidable.
4.,, Australian accounting standard' AAS3 1@18 )n&entories+ has se&eral re4uirements relating to in&entories
arising from production:
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Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
$he cost of in&entories produced are to include the costs of:
direct materials
direct labour and on.costs
sub.contracted wor!' and
a systematic allocation of production o&erheads
$he statement of financial position must disclose separately the accounting policies adopted for measuring
in&entories' including wor! in process and finished goods. 3oth of these re4uirements in&ol&e costs determined
under #ob costing systems and process costing systems' although the &aluing of wor! in process in process
costing is not dealt with until Chapter 7.
4.,2 $he only administration costs which may be included in in&entory &alues are those which relate to production'
such as wor!shop cler!s' the production manager' and time.!eeping staff. $hese costs are applied to the unit cost
through manufacturing o&erhead rate' and so are included in the unit cost.
4.,4 An ad&antage of prorating o&erapplied or underapplied o&erhead is that it results in the ad#ustment of all the
accounts affected by misestimating the o&erhead rate. $hese accounts include the wor! in process in&entory
account' the finished goods in&entory account' and the cost of goods sold account. $he resulting balances in
these accounts are more accurate when proration is used than when o&erapplied or underapplied o&erhead is
closed directly into cost of goods sold. $he primary disad&antage of prorating o&erapplied or underapplied
o&erhead is that it is more complicated and time consuming than the simpler alternati&e of closing o&erapplied
or underapplied o&erhead directly into cost of goods sold.
EXERCISES
EXERCISE 4.25 (25 minutes) Job cost seet! m"nu#"ctu$e$
1.
Job Cost Sheet
Job number $3C> Eescription teddy bears
Eate started 4*1 Eate completed 4*17
Aumber of units completed 1'@@@
Eirect 5aterial
Eate 0e4uisition Aumber Buantity Fnit Price Cost
G 1@1 4@@ H@.>@ H2,@
7*4 1@> 7@@ @ .2@ 17@
Eirect /abour
Eate $ime Sheet Aumber 9ours 0ate Cost
17*4 C, 7@@ H1, H<'@@@
5anufacturing (&erhead
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Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
Eate Cost Eri&er Buantity Application 0ate Cost
17*4 direct labour hours 7@@ H, H1'@@@
Cost Summary
Cost tem Amount
$otal Eirect 5aterial H 4C@
$otal Eirect /abour <'@@@
$otal 5anufacturing (&erhead 1'@@@
$otal Cost HC'4C@
Fnit Cost HC.4C
Eeli&ery Summary
Eate Fnits Shipped Fnits 0emaining in
n&entory
Cost 3alance
2@*4 C@@ 2@@ H,',41I
I2@@ remaining in in&entory HC.4C J H,',41
,. 5anagers might use this information to ma!e pricing decisions' assess product profitability' control product
costs' and to estimate in&entory &alues.
EXERCISE 4.2% (&' minutes) Sce(u)e o# cost o# *oo(s m"nu#"ctu$e(
1.
Lelkogs Cereal Company
Schedule of Cost of Goods Manufactured
For the Year Ended Decemer !"# $%%$
Eirect material:
0aw materials in&entory' January 1 H ,7'@@@
Add: purchases of raw material ,C,'7@@
0aw material a&ailable for use ,8C'7@@
Eeduct: raw materials in&entory' Eecember 21 ,C'7@@
0aw material used H,C@'@@@
Eirect labour 1,@'@@@
5anufacturing o&erhead ,7,'@@@I
$otal manufacturing costs <4,'@@@
Add: wor! in process in&entory' January 1 28'@@@
Subtotal <>1'@@@
Eeduct: wor! in process in&entory' Eecember 21 4,'8@@
Cost of goods manufactured <2>'1@@
I Applied manufacturing o&erhead is H,7,'@@@ )H1,@'@@@ ,1@%+. Actual manufacturing o&erhead is also H,7,'@@@ so there is no
o&erapplied or underapplied o&erhead.
,.
-inished goods in&entory' January 1 H 4,'@@@
Add: cost of goods manufactured <2>'1@@
Cost of goods a&ailable for sale <>@'1@@
Eeduct: -inished goods in&entory' Eecember 21 4<',@@
Cost of goods sold <22'8@@
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Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
EXERCISE 4.2+ (2' minutes) ,"nu#"ctu$in* cost #)o-s
1.
0aw 5aterials n&entory
,,C'@@@
1C4'@@@
72'@@@
6ages Payable
2,4'@@@
5anufacturing (&erhead
1>@'@@@
6or! in Process n&entory
1>'@@@
1C4'@@@
2,4'@@@
1>@'@@@
1,@'@@@
7C<'@@@
-inished Goods n&entory
2@'@@@
1,@'@@@
12,'@@@
1>'@@@
Sales 0e&enue
187'@@@
Accounts 0ecei&able
187'@@@
Cost of Goods Sold
12,'@@@
,.
Fred&s Sports E'u(pment )ty Ltd
)art(al Statement of f(nanc(al )os(t(on
as at Decemer !"
Current assets
Cash XXX
Accounts recei&able XXX
n&entory
0aw materials H 72'@@@
6or! in process 7C<'@@@
-inished goods 1>'@@@
Fred&s Sports E'u(pment )ty Ltd
)art(al Statement of F(nanc(al )erformance
for the year ended Decemer !"
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Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
Sales re&enue H187'@@@
/ess: Cost of goods sold 12,'@@@
Gross margin H<2'@@@
EXERCISE 4.2. (2' minutes) ,"nu#"ctu$in* cost #)o-s
1. 0aw materials:
3eginning in&entory H C1'@@@
Add: Purchases K
/ess: Eirect materials used 2,<'@@@
1nding in&entory >1'@@@
$herefore' purchases for the year were H22<'@@@
,. Eirect labour:
$otal manufacturing cost H<><'@@@
/ess: Eirect material 2,<'@@@
Eirect labour and manufacturing o&erhead H2<@'@@@
Eirect labour L manufacturing o&erhead J H2<@'@@@
Eirect labour L )<@M+ )direct labour+ J H2<@'@@@
)1<@M+ )direct labour+ J H2<@'@@@
Eirect labour J H2<@'@@@
1.<
Eirect labour J H,,7'@@@
2. Cost of goods manufactured:
6or! in process' beginning in&entory H >@'@@@
Add: $otal manufacturing costs <><'@@@
/ess: Cost of goods manufactured K
6or! in process' ending in&entory H 2@'@@@
$herefore' cost of goods manufactured was HC2<'@@@
4. Cost of goods sold:
-inished goods' beginning in&entory H 8@'@@@
Add: Cost of goods manufactured C2<'@@@
/ess: Cost of goods sold K
-inished goods' ending in&entory H11@'@@@
$herefore' cost of goods sold was HC1<'@@@
EXERCISE 4.2/ (05 minutes) O1e$"22)ie( o$ un(e$"22)ie( o1e$e"(! m"nu#"ctu$e$
". Predetermined o&erhead rate J H88C'7@@ J H12.2@ per hour
C7'@@@ hours
,. $o calculate actual manufacturing o&erhead:
Eepreciation H,4@'@@@
Property ta%es 1,'@@@
ndirect labour >,'@@@
Super&isory salaries ,@@'@@@
Ftilities 78'@@@
nsurance 2@'@@@
0ental of space 2@@'@@@
ndirect material:
3eginning in&entory' 21*1,*@@ H4>'@@@
Add: purchases 84'@@@
ndirect material a&ailable for use 14,'@@@
Eeduct: ending in&entory' 21*1,*@1 <2'@@@
ndirect material used C8'@@@
Actual manufacturing o&erhead H1'@@,'@@@
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Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
(&erapplied J actual " applied
o&erhead manufacturing manufacturing
o&erhead o&erhead
J H1'@@,'@@@ " )H12.2@ >@'@@@I+ J H<,'@@@
I Actual direct labour hours
2. 5anufacturing o&erhead <,'@@@
Cost of goods sold <,'@@@
4. $he o&erapplied o&erhead was caused by the misestimated manufacturing o&erhead rate. $he budgeted o&erhead
costs' H88C'7@@' were below the actual costs of H1'@@,'@@@. 9owe&er' the actual hours were >@'@@@ hours' 7'@@@
hours abo&e budget. $his caused o&erhead to be o&erapplied.
EXERCISE 4.&' (5 minutes) 3"sic 4ou$n") ent$ies in 4ob costin*! m"nu#"ctu$e$
6or! in process in&entory 7'4>@
0aw material in&entory 4'<@@
6ages payable <>@
5anufacturing o&erhead ,@@
-inished goods in&entory 7'4>@
6or! in process in&entory 7'4>@
EXERCISE 4.&0(2'minutes) ,"nu#"ctu$in* o1e$e"(s! #u$nitu$e m"nu#"ctu$e$
1. n each case' the predetermined manufacturing o&erhead reco&ery rate is calculated by di&iding the budgeted
o&erhead by the budgeted acti&ity dri&er.
)a+ 5achine hours HC,> @@@*,@ @@@ hours H2<.4@ per machine hour
)b+ Eirect labour hours HC,> @@@*,@ @@@ hours H1>.,@ per direct labour hour
)c+ Eirect labour cost HC,> @@@*)4@ @@@ hours N H,> per hour+ <4.>>M of direct labour cost
,. $he actual manufacturing o&erhead is H<,> @@@ and the results of using each of the three methods can be
shown below:
,eto( O1e$e"( "22)ie( O1e$5Un(e$6"22)ie(
)a+ 5achine hours ,, @@@ hrs N H2<.4@ J H>@@ >@@ H1,@ >@@ o&er
)b+ Eirect labour hours 2< @@@ hrs N H1>.,@ J H<77 ,@@ H,4 >@@ under
)c+ Eirect labour cost <4.>>M of )2< @@@ hrs N H2@+ J HC@@ C@4 H,@ C@4 o&er
2. $he most appropriate method is that based on direct cost' since the difference between actual and applied
manufacturing o&erhead is minimised. t might be useful to monitor each of the methods o&er a longer period'
and more fre4uently' before any method is decided.
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Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
4. Journal entries for each of the methods
No 7et"i) 7$ C$
)a+ 6or! in Process
5anufacturing (&erhead Control
Applying manufacturing overhead to work in process
H>>@ >@@
H>@@ >@@
)b+ 6or! in Process
5anufacturing (&erhead Control
Applying manufacturing overhead to work in process
H<77 ,@@
H<77 ,@@
)c+ 6or! in Process
5anufacturing (&erhead Control
Applying manufacturing overhead to work in process
HC@@ C@4
HC@@ C@4
EXERCISE 4.&2 (05 minutes) 8$ocess costin*9 no -o$: in 2$ocess! m"nu#"ctu$e$
1. $he cost in the mi%ing department J H44',@@ * C@'@@@ J H@.<21
$he cost in pac!ing J H11'4@@ * C@'@@@ J H@.1<2
$otal cost J H77'<@@ * C@'@@@ J H@.C84
,. Er. 6or! in process . mi%ing 44',@@
Cr. 0aw materials in&entory ,7'@@@
6ages payable 1,'@@@
5anufacturing o&erhead C',@@
Er. 6or! in process . pac!ing 44',@@
Cr. 6or! in process . mi% 44',@@
Er. 6or! in process . pac!ing 11'4@@
Cr. 0aw materials in&entory 7'@@@
6ages payable 4'@@@
5anufacturing o&erhead ,'4@@
Er. -inished goods 77'<@@
Cr. 6or! in process . pac! 77'<@@
EXERCISE 4.&& (05 minutes) 8$ocess costin*9 no -o$: in 2$ocess! b$e-e$
1. $he cost per can is calculated as follows:
5i%ing Eepartment H1@@ @@@*1@@ @@@ cans J H1.@@
3ottling Eepartment H,, @@@*1@@ @@@ cans J H@.,,
$otal H1.,,
,. Journal entries
Er. 6or! in process . mi%ing 1@@'@@@
Cr. 0aw materials in&entory C7'@@@
6ages payable 1@'@@@
5anufacturing o&erhead 17'@@@
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Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
Er. 6or! in process . bottling 1@@'@@@
Cr. 6or! in process . mi%ing 1@@'@@@
Er. 6or! in process . bottling ,,'@@@
Cr. 0aw materials in&entory 1,'@@@
6ages payable 4'@@@
5anufacturing o&erhead <'@@@
Er. -inished goods 1,,'@@@
Cr. 6or! in process . bottling 1,,'@@@
2. Process costing is the correct costing system to use where large 4uantities of identical units are produced' as
the unit cost cannot be determined before the completion of each stage of production. 6here production ta!es
place in more than one department' the costs are progressi&ely accumulated as production mo&es from one
department to the ne%t. t is normal to record the costs of each department separately as these are used for
control purposes. Aorthcorp /td is following con&entional process costing procedures.
EXERCISE 4.&4(2' minutes) 8$o$"tion o# un(e$"22)ie( o1e$e"( ("22en(i;)! m"nu#"ctu$e$
1. (&erhead has been underapplied by H1<'@@@.
,. Calculation of proration amounts:
Account Amount Percentage
Calculation of
Percentage
6or! in process H 27',7@ ,7M 27',7@ H141'@@@
-inished goods 48'27@ 27M 48'27@ H141'@@@
Cost of goods sold 7<'4@@ 4@M 7<'4@@ H141'@@@
$otal H141'@@@ 1@@M
Account
Fnderapplied
(&erhead Percentage
Amount added to
Account
6or! in process H1<'@@@I ,7M H4'@@@
-inished goods 1<'@@@ 27M 7'<@@
Cost of goods sold 1<'@@@ 4@M <'4@@
I Fnderapplied o&erhead J actual o&erhead " applied o&erhead
H1<'@@@ J H17C'@@@ " H141'@@@
Journal entry:
6or! in process in&entory 4'@@@
-inished goods in&entory 7'<@@
Cost of goods sold <'4@@
5anufacturing o&erhead 1<'@@@
2. f the underapplied o&erhead had been closed to cost of goods sold' rather than being prorated' cost of goods
sold would ha&e been increased by H1<'@@@ instead of H<'4@@. $hus' profit would ha&e been H8'<@@ lower under
this approach.
8RO3<E,S
8RO3<E, 4.&5 (4' minutes) Sce(u)e o# cost o# *oo(s m"nu#"ctu$e(
".
*orton +ndustr(es
Schedule of Cost of Goods Manufactured
For the Month Ended May !" ,(n thousands-
Eirect material:
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Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
n&entory of raw material' April 2@ H ,>
Purchases of raw materials 7,7
$otal raw material a&ailable for use 772
n&entory of raw material' 5ay 21 ,2
0aw material used in production H72@
Eirect labour ,<@
5anufacturing o&erhead incurred
ndirect factory labour H 8@
Ftilities )H127 .>+ 1@>
Property ta%es <@
nsurance )H,@ .<+ 1,
Eepreciation )H,@ L H2@+ 7@
Actual manufacturing o&erhead 2,@
/ess: Fnderapplied manufacturing o&erheadI C
5anufacturing o&erhead applied to wor! in process 212
$otal manufacturing costs 1'1@2
Add: n&entory of wor! in process' April 2@ 17@
Subtotal 1',72
/ess: n&entory of wor! in process' 5ay 21 ,,@
Cost of goods manufactured H1'@22
I Actual manufacturing o&erhead H 2,@
Applied manufacturing o&erhead )C'>,7 tons at H4@ per ton+ 212
Fnderapplied manufacturing o&erhead H C
,. An alternati&e treatment for closing underapplied or o&erapplied manufacturing o&erhead is to prorate the
amount of underapplied or o&erapplied manufacturing o&erhead' o&er the accounts that contain the
manufacturing o&erhead applied to production. $hese accounts include wor! in process' finished goods' and the
cost of goods sold. $his proration should be in proportion to the unad#usted o&erhead component in each
account.
2. Closing o&erhead at the end of the month may be unhelpful as the under or o&erapplied o&erhead may be
balanced out by &ariations in the following month. t is best to close off the total &ariation at year end.
8RO3<E, 4.&% (2' minutes) 3"sic 4ob costin*! 4ou$n") ent$ies! m"nu#"ctu$e$
1. Predetermined o&erhead rate J
budgeted manufacturing overhead
budgeted direct labour hours
J
$240,000
$(2,000)(10)
J H1, per hour
,. Journal entries:
0aw material in&entory 22'@@@
Accounts payable 22'@@@
6or! in process in&entory 4<@
0aw material in&entory 4<@
5anufacturing o&erhead 1@@
5anufacturing supplies in&entory 1@@
5anufacturing o&erhead >'@@@
Accumulated depreciation: e4uipment >'@@@
5anufacturing o&erhead 4@@
Cash 4@@
<8
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
6or! in process in&entory 1<'@@@
6ages payable 1<'@@@
$o record direct labour cost.
6or! in process in&entory 8'<@@
5anufacturing o&erhead 8'<@@
$o apply manufacturing o&erhead to wor! in process )H8'<@@ J >@@ H1, per hour+.
5anufacturing o&erhead 81@
Council rates payable 81@
5anufacturing o&erhead ,'7@@
6ages payable ,'7@@
-inished goods in&entory 14'4@@
6or! in process in&entory 14'4@@
Accounts recei&able 12'7@@
Sales re&enue 12'7@@
Cost of goods sold 1@'>@@I
-inished goods in&entory 1@'>@@
I1@'>@@ J )8*1,+)H14'4@@+
8RO3<E, 4.&+(25 minutes) ,"nu#"ctu$in* cost #)o-s! "n")=sis o# )e(*e$ "ccounts
$he completed ledger accounts are shown below:
0aw 5aterials n&entory
3al. 1*1 ,1'@@@
127'@@@ 1,@'@@@
3al. 21*1, 2<'@@@
6or! in Process n&entory
3al. 1*1 1C'@@@
Eirect material
1,@'@@@
Eirect labour
17@'@@@ C1>'@@@
5fg. o&erhead
47@'@@@
3al. 21*1, 18'@@@
5anufacturing (&erhead
47,'7@@ 47@'@@@
6ages Payable
,'@@@ 3al. 1*1
14C'@@@ 17@'@@@
7'@@@ 3al. 21*1,
Accounts Payable
,'7@@ 3al. 1*1
12<'7@@ 127'@@@
1'@@@ 3al. 21*1,
C@
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
-inished Goods n&entory
3al. 1*1 1,'@@@
C1>'@@@ C1@'@@@
3al. 21*1, ,@'@@@
Cost of Goods Sold
C1@'@@@
Sales 0e&enue
>1@'@@@
Accounts 0ecei&able
3al. 1*1 11'@@@
>1@'@@@ >@<'@@@
3al. 21*1, 17'@@@
8RO3<E, 4.&. (45 minutes) Sce(u)es o# cost o# *oo(s m"nu#"ctu$e( "n( so)(9 2$o#it "n(
)oss st"tement
".
.uns .akehouse Ltd
Schedule of Cost of Goods Manufactured
For the Year Ended Decemer !"# $%%$
Eirect material:
0aw materials in&entory' 21*1,*@1 H1@'1@@
Add: Purchases of raw material 28'@@@
0aw material a&ailable for use 48'1@@
Eeduct: 0aw materials in&entory' 21*1,*@, 11'@@@
0aw material used H2>'1@@
Eirect labour C8'@@@
5anufacturing o&erhead:
ndirect material H 4'8@@
ndirect labour ,8'@@@
Eepreciation on factory building 2'>@@
Eepreciation on factory e4uipment ,'1@@
1lectricity for factory <'@@@
Property ta%es ,'4@@
nsurance 2'<@@
0ental of warehouse space 2'1@@
$otal actual manufacturing o&erhead 74'8@@
Add: (&erapplied o&erheadI 2'1@@
(&erhead applied to wor! in process 7>'@@@
$otal manufacturing costs 1C7'1@@
Add: 6or! in process in&entory' 21*1,*@1 >'1@@
Subtotal 1>2',@@
Eeduct wor! in process in&entory' 21*1,*@, >'2@@
Cost of goods manufactured H1C4'8@@
I $he schedule of Cost of Goods 5anufactured lists the manufacturing costs applied to wor! in process. $herefore' the o&erapplied
o&erhead' H2'1@@' must be added to the total actual o&erhead to arri&e at the amount of o&erhead applied to wor! in process. f there had
been underapplied o&erhead' the balance would ha&e been deducted from the actual manufacturing o&erhead. $he amount of o&erapplied
o&erhead is found by subtracting actual o&erhead' H74'8@@ )as calculated abo&e+' from o&erapplied o&erhead' H7>'@@@ )gi&en+.
,.
.uns .akehouse Ltd
Schedule of Cost of Goods Sold
C1
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
For the Year Ended Decemer !"# $%%$
-inished goods in&entory' 21*1,*@1 H 14'@@@
Add: Cost of goods manufacturedI 1C4'8@@
Cost of goods a&ailable for sale 1>>'8@@
-inished goods in&entory' 21*1,*@, 17'4@@
Cost of goods sold 1C2'7@@
/ess: (&erapplied o&erhead 2'1@@
Cost of goods sold )ad#usted for o&erapplied o&erhead+ H1C@'4@@
I $he cost of goods manufactured is obtained from the Schedule of Cost of Goods 5anufactured.
$he company closes underapplied or o&erapplied o&erhead into cost of goods sold. 9ence' the balance in o&erapplied o&erhead is deducted
from cost of goods sold for the month.
!.
.uns .akehouse Ltd
Statement of F(nanc(al )erformance
For the Year Ended Decemer !"# $%%$
Sales re&enue H,@7'>@@
/ess: Cost of goods sold 1C@'4@@
Gross margin 27'4@@
Selling and administrati&e e%penses:
Salaries H12'>@@
1lectricity for sales and admin offices ,'7@@
Eepreciation 1',@@
0ental of office space 1'C@@
(ther e%penses 4'@@@
$otal ,2',@@
Profit before ta%es 1,',@@
ncome ta% e%pense 7'1@@
Aet profit C'1@@
8RO3<E, 46&/ (45 minutes) Sce(u)es o# cost o# *oo(s m"nu#"ctu$e( "n( so)(9 2$o#it "n(
)oss st"tement
".
)ressed )arts Ltd
Schedule of Cost of Goods Manufactured
For the Year Ended Decemer !"# $%%!
Eirect material:
0aw materials in&entory 21*1,*! H >8'@@@
Add: Purchases of raw material C21'@@@
0aw material a&ailable for use >,@'@@@
/ess: 0aw materials in&entory' 21*1,*3 78'@@@
0aw material used HC<1'@@@
Eirect labour 4C4'@@@
5anufacturing o&erhead:
ndirect material H 47'@@@
ndirect labour 17@'@@@
Eepreciation on factory building 1,7'@@@
Eepreciation on factory e4uipment <@'@@@
1lectricity for factory C@'@@@
Council rates 8@'@@@
nsurance 4@'@@@
$otal actual manufacturing o&erhead 7>@'@@@
/ess: Fnderapplied o&erheadI ,'7@@
(&erhead applied to wor! in process 7CC'7@@
$otal manufacturing costs 1'>1,'7@@
C,
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
Add: 6or! in process in&entory' 21*1,*! "@"
Subtotal 1'>1,'7@@
/ess: 6or! in process in&entory' 21*1,*3 4@'@@@
Cost of goods manufactured 1'CC,'7@@
I$he Schedule of Costs of Goods 5anufactured lists the manufacturing costs applied to wor! in process. $herefore' the underapplied
o&erhead' H,'7@@' must be deducted from total actual o&erhead to arri&e at the amount of o&erhead applied to wor! in process. f there had
been o&erapplied o&erhead' the balance would ha&e been added to total manufacturing o&erhead.
$he amount of underapplied o&erhead is found by subtracting the applied manufacturing o&erhead' H7CC'7@@' from the total actual
manufacturing o&erhead' H7>@'@@@.
$.
)ressed )arts Ltd
Schedule of Cost of Goods Sold
For the Year Ended Decemer !"# $%%!
-inished goods in&entory' 21*1,*@, H 27'@@@
Add: Cost of goods manufactured 1'CC,'7@@
Cost of goods a&ailable for sale H1'>@C'7@@
-inished goods in&entory' 21*1,*@2 4@'@@@
Cost of goods sold H1'C<C'7@@
Add: Fnderapplied o&erheadI ,'7@@
Cost of goods sold )ad#usted for underapplied o&erhead+ H1'CC@'@@@
I$he company closes underapplied or o&erapplied o&erhead into cost of goods sold. 9ence the H,'7@@ balance in underapplied o&erhead is
added to cost of goods sold for the month.
!.
)ressed )arts Ltd
Statement of F(nanc(al )erformance
For the Year Ended Decemer !"# $%%!
Sales re&enue H,'1@7'@@@
/ess: cost of goods sold 1'CC@'@@@
Gross margin 227'@@@
Selling and administrati&e e%penses ,<8'@@@
Profit before ta%es <<'@@@
ncome ta% e%pense ,7'@@@
Aet profit H 41'@@@
8RO3<E, 4.4' (05 minutes) Inte$2$etin* te sce(u)e o# cost o# *oo(s m"nu#"ctu$e(
1. H4@'@@@. Since there was no wor! in process in&entory at the beginning of ,@@2' all of the cost in the year.end
wor! in process in&entory was incurred during ,@@2.
,. $he direct material cost would ha&e been larger' probably by )roughly+ ,@ per cent' because direct material is a
&ariable cost.
2. Eepreciation is a fi%ed cost' so it would not ha&e been any larger if the firm;s &olume had increased.
4. (nly the H2@'@@@ of e4uipment depreciation would ha&e been included in manufacturing o&erhead on the
schedule of cost of goods manufactured. $he H2@'@@@ of depreciation related to selling and administrati&e
e4uipment would ha&e been treated as a period cost and e%pensed during 18%>. 9owe&er' the cost of goods
manufactured would not ha&e been affected. $his difference would ha&e been ta!en up in underapplied or
o&erapplied o&erhead.
8RO3<E, 4.40 (&' minutes) Cost o# *oo(s m"nu#"ctu$e(9 o1e$"22)ie( o$ un(e$"22)ie(
o1e$e"(
C2
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
1. Cost added to wor! in process in&entory during -ebruary:
Eirect material H,<'@@@
Eirect labour ,@'@@@
5anufacturing o&erheadI 2@'@@@
$otal costs added HC<'@@@
Add: 6or! in process in&entory 8'@@@
Subtotal >7'@@@
/ess: 6or! in process in&entory' -ebruary ,>:
Eirect material H ,'>@@
Eirect labour 1'>@@
5anufacturing o&erheadI ,'C@@
$otal C'2@@
Cost of goods manufactured HCC'C@@
I 17@M of direct labour cost.
,. Fnderapplied o&erhead J actual o&erhead " applied o&erhead
H,'@@@ J H2,'@@@ " H2@'@@@
2. Journal entries:
6or! in process in&entory ,<'@@@
0aw materials in&entory ,<'@@@
6or! in process in&entory ,@'@@@
6ages payable ,@'@@@
6or! in process in&entory 2@'@@@
5anufacturing o&erhead 2@'@@@I
I 17@M of direct labour cost.
5anufacturing o&erhead 2,'@@@
Oarious accountsP 2,'@@@
$he credits to &arious accounts related to actual manufacturing o&erhead items were H2,'@@@ in total.
-inished goods in&entory CC'C@@
6or! in process in&entoryII CC'C@@
Cost of goods sold ,'@@@
5anufacturing o&erhead ,'@@@
//
0ork (n )rocess +n1entory
!"2"2X$ 34#%%%
$5#%%% 77#7%%
$%#%%%
!%#%%%
$62$2X$ 7#!%%
8RO3<E, 4.42 (&' minutes) Cost o# *oo(s m"nu#"ctu$e(9 2$ime "n( con1e$sion costs
".
7ancol Cr(sps Ltd
Schedule of Cost of Goods Manufactured
For the Month of March
Eirect material:
0aw materials in&entory' 5arch 1 H 1C'@@@
Add: 5arch purchases of raw material 112'@@@
C4
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
0aw material a&ailable for use 12@'@@@
/ess: 0aw materials in&entory' 5arch 21 ,<'@@@
0aw materials used H1@4'@@@
Eirect labour 1<@'@@@I
5anufacturing o&erhead applied )7@M of direct labour+ >@'@@@
$otal manufacturing costs 244'@@@
Add: 6or! in process in&entory' 5arch 1 4@'@@@
Subtotal 2>4'@@@
/ess: 6or! in process in&entory'
5arch 21 )8@M H4@'@@@+ 2<'@@@
Cost of goods manufactured H24>'@@@
I 6or! upward from the bottom of the statement' using information a&ailable. Eirect labour L manufacturing o&erhead J total
manufacturing costs " direct material cost J H244'@@@ " H1@4'@@@ J H,4@'@@@. Since manufacturing o&erhead J 7@M of direct labour' then
manufacturing o&erhead J H>@'@@@ and direct labour J H1<@'@@@.
$o calculate cost of goods manufactured:
Cost of goods sold J beginning in&entory finished goods L cost of goods manufactured " ending in&entory finished goods.
247'@@@ J 1@,'@@@ L cost of goods manufactured " 1@7'@@@
cost of goods manufactured J H24>'@@@
$.
7ancol Cr(sps Ltd
Schedule of )r(me Costs
For the Month of March
0aw material:
3eginning in&entory H 1C'@@@
Add: Purchases 112'@@@
0aw materials a&ailable 12@'@@@
/ess: 1nding in&entory ,<'@@@
0aw materials used 1@4'@@@
Eirect labour 1<@'@@@
$otal prime cost ,<4'@@@
!.
7ancol Cr(sps Ltd
Schedule of Con1ers(on Costs
For the Month of March
Eirect labour H1<@'@@@
5anufacturing o&erhead applied )7@M of direct labour+ >@'@@@
$otal con&ersion cost H,4@'@@@
8RO3<E, 4.4& (4' minutes) >)o- o# m"nu#"ctu$in* costs9 incom2)ete ("t"
1. $he answers to the 4uestions are as follows:
a. H,1<'@@@ f. H<@'@@@
b. H18'@@@ g. H17@'@@@
c. HC@'@@@ h. H4@'@@@
d. H2>'@@@ i. H17'@@@
e. H>@'@@@ #. Dero
,. $he completed ledger accounts' along with supporting calculations' follow.
C7
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
0aw 5aterials n&entory
3al. 21*1@ 17'@@@
C@'@@@ 4@'@@@
3al. 2@*11 47'@@@
6or! in Process n&entory
3al. 21*11 >'@@@
Eirect
material 4@'@@@
17@'@@@
Eirect labour
>@'@@@
(&erhead <@'@@@
3al. 2@*11 2>'@@@
5anufacturing (&erhead
<@'@@@ <@'@@@
6ages Payable
1'@@@ 3al. 21*1@
C8'7@@ >@'@@@
1'@@@ 3al. 2@*11
Accounts Payable
1,'@@@ 3al. 21*1@
>1'@@@ C@'@@@
1'7@@ 3al. 2@*11
-inished Goods n&entory
3al. 21*1@ 27'@@@
17@'@@@ 1>@'@@@
3al. 2@*11 7'@@@
Cost of Goods Sold
1>@'@@@
Sales 0e&enue
,1<'@@@
Account 0ecei&able
3al. 21*1@ >'@@@
,1<'@@@ ,@7'@@@
3al. 2@*11 18'@@@
Supporting calculations:
1. Sales re&enue J cost of goods sold 1,@M
J H1>@'@@@ 1,@M
J H,1<'@@@
,. 1nding balance in accounts recei&able J beginning balance L sales re&enue " collections
C<
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
J H>'@@@ L H,1<'@@@ " H,@7'@@@
J H18'@@@
2. Purchases of raw material J addition to accounts payable
Addition to accounts payable J ending balance L payments " beginning balance
J H1'@@@ L H>1'@@@ " H1,'@@@
J HC@'@@@
4.
November 30 balance in
work in process inventory
J
direct
material
L
direct
labour
L
manufacturing
overhead
J H,@'7@@ L )7@@+)H,@+ L )7@@+)H17I+
J H2>'@@@
I predetermined o&erhead rate J
budgeted overhead
budgeted direct labour hours

J
$720,000
48,000
J H17 per direct labour hour
budgeted direct labour hours J
budgeted direct labour cost
direct labour rate
=
$960,000
$20
8.
Addition to work in process
for direct labour
9
November credit to
wages payable
November credit to
wages payable
9 ending balance L payments " beginning balance
9 H1'7@@ L HC8'7@@ " H1'@@@ J H>@'@@@
<. Ao&ember applied o&erhead J direct labour hours predetermined o&erhead rate
9 4#%%%/ 3"8
9 35%#%%%
Eirect labour hours 9
addition to work in process for direct labour
direct labour rate
9
$80,000
$20
9 4'@@@ hours
7.
Cost of goods completed
during November
9
beginning
balance in
work in process
:
additions
during
November
;
ending
balance in
work in process
J H>'@@@ L )H4@'@@@ L H>@'@@@ L H<@'@@@+ " H2>'@@@
J H17@'@@@
CC
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
6.
Raw material used
in November
9
November credit to
raw materials inventory
9 34%#%%% ,g(1en-
4.
October 31 balance in
raw materials inventory
9
November 30 balance
in raw materials
inventory
:
direct
material
used
;
purchases
9 H47'@@@ L H4@'@@@ " HC@'@@@
J H17'@@@
1@. (&erapplied or J actual o&erhead " applied o&erhead
underapplied o&erhead J H<@'@@@ " H<@'@@@ J @
8RO3<E, 4.44 (2' minutes) Etic") issues9 un(e$"22)ic"tion o# m"nu#"ctu$in* o1e$e"(!
m"nu#"ctu$e$
1. n accordance with the CPA Australia;s "ode of Professional "onduct' the appropriateness of $om Sa&inQs three
alternati&e courses of action is described as follows:
-ollow 3rownQs directi&e and do nothing further: $his action is inappropriate as Sa&in has ethical
responsibilities to ta!e further action in accordance with the following standards of ethical conduct.
#ntegrity: 5embers must be straightforward' honest and sincere in their approach to professional wor!.
"ompetence and $ue "are: 5embers must perform professional ser&ices with due care' competence and
diligence.
%he #mage of the Profession: 5embers must refrain from any conduct or action that may tarnish the
image of the accounting profession' or un#ustifiably detract from the good name of their professional
body.
&thical behaviour: 5embers must conduct themsel&es in a manner consistent with the good reputation
of their profession and refrain from any conduct that might bring discredit to their profession.
Attempt to con&ince 3rown to ma!e the proper ad#ustments' and to ad&ise the e%ternal auditors of her
actions: $his action is appropriate as Sa&in has ta!en the ethical conflict to his immediate superior for
resolution. Fnless Sa&in suspects that his superior is in&ol&ed' this alternati&e is the first step for the
resolution of an ethical conflict.
$ell the Audit Committee of the 3oard of Eirectors: $his action is not appropriate as a first step' because
Sa&in should approach his immediate superior first.
,. Sa&in should inform 3rown that he is planning to discuss the conflict with 3rownQs superior. 9e should pursue
discussions with successi&ely higher le&els of management=including the Audit Committee and the 3oard of
Eirectors=until the matter is satisfactorily resol&ed. At the same time' he should see! confidential ad&ice from
an ob#ecti&e ad&iser to clarify the rele&ant concepts and obtain an understanding of possible courses of action. f
the ethical conduct still e%ists after e%hausting all le&els of internal re&iew' Sa&in may ha&e no alternati&e other
than to resign from the business.
C>
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
8RO3<E, 4.45 (&' minutes) 8$ocess costin*! m"nu#"ctu$e$
1' , R 2
,i;in* 3ott)in* 8"c:"*in*
Eepartmental costs HC8 2@@ H,4 8@@ H1@ ,@@
(utput 7 @@@ litres ,@ @@@ filled bottles ,@ @@@ pac!ed bottles
Cost per unit H17.>< per litre )or H2.8<7
per ,7@ mls+
H1.,47 per bottle L H2.8<7
for mi%ture J H7.,1 per
filled bottle
H@.71 per pac!age L
H7.,1 per filled bottle J
H7.C, per pac!aged'
filled bottle
4. $he method described in the chapter )page 147+ shows that the cost per unit )H@.17+ is calculated by di&iding the
total costs )H< @@@+ by the total output )4@ @@@ microchips+. $his aggregates the production cost for the entire
company' whereas' in many process costing businesses' such as 6eedeater /td.' products undergo a number of
separate processes in different departments. n this 4uestion' the total cost per unit can be separated into the
costs for the mi%ture' the bottling acti&ity and the pac!aging.
8. Journal entries
7"te 7et"i)s 7$ C$
April 2@ 6or! in Process " 5i%ing
0aw 5aterials n&entory
Eirect /abour
5anufacturing (&erhead Control
HC8'2@@
H42'@@@
1<'>@@
18'7@@
April 2@ 6or! in Process " 3ottling
6or! in Process " 5i%ing
%ransfer of April production costs from Mi'ing
$epartment to (ottling $epartment
C8 2@@
C8 2@@
April 2@ 6or! in Process " 3ottling
0aw 5aterials n&entory
Eirect /abour
5anufacturing (&erhead Control
,4'8@@
17'@@@
C'8@@
,'@@@
April 2@ 6or! in Process " Pac!aging
6or! in Process " 3ottling
%ransfer of April production costs from (ottling
$epartment to Packaging $epartment
1@4 ,@@
1@4 ,@@
April 2@ 6or! in Process " Pac!ing
0aw 5aterials n&entory
Eirect /abour
5anufacturing (&erhead Control
1@',@@
7'@@@
4'2@@
8@@
April 2@ -inished Goods n&entory
6or! in Process " Pac!aging
%ransfer of April production costs from Packaging
$epartment to )inished *oods #nventory
114 4@@
114 4@@
C8
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
<. $he approach of !eeping separate wor! in process accounts for each department is preferable to aggregating
production costs for all processes*departments in one wor! in process account as it gi&es each departmental
production manager more scope for controlling costs.
8RO3<E, 4.4% (&' minutes) 8$o$"tion o# o1e$"22)ie( o$ un(e$"22)ie( o1e$e"( ("22en(i;)!
m"nu#"ctu$e$
1. Predetermined o&erhead rate J
budgeted manufacturing overhead
budgeted machine hours
J
$235,000
$47,000
J H7 per machine hour
,. Applied manufacturing o&erhead J
machine
hours
used

predetermined
overhead
rate

J 4'@@@ hrs H7 per hour

J H,@'@@@
2. Fnderapplied o&erhead J actual o&erhead " applied o&erhead
H<'@@@ J H,<'@@@ " H,@'@@@
4. Cost of goods sold <'@@@
5anufacturing o&erhead <'@@@
7. )a+ Calculation of proration amounts:
Account 1%planation AmountI Percentage Calculation of Percentage
6or! in Process Job P>, only H ,'7@@ 1,.7M ,'7@@ ,@'@@@
-inished Goods Job A@> only 1,'7@@ <,.7M 1,'7@@ ,@'@@@
Cost of Goods Sold Job AC8 only 7'@@@ ,7.@M 7'@@@ ,@'@@@
$otal H,@'@@@ 1@@.@M
I 5achine hours used on #ob predetermined o&erhead rate
Account Fnderapplied (&erhead Percentage Amount Added to Account
6or! in Process H<'@@@ 1,.7M H C7@
-inished Goods <'@@@ <,.7M 2'C7@
Cost of Goods Sold <'@@@ ,7.@M 1'7@@
$otal <'@@@
)b+ Journal entry:
6or! in process in&entory C7@
-inished goods in&entory 2'C7@
Cost of goods sold 1'7@@
5anufacturing o&erhead <'@@@
CASES
CASE 4.4+ (+5 minutes) Com2$eensi1e 4ob costin* 2$ob)em! m"nu#"ctu$e$
1. Predetermined o&erhead rate J
budgeted manufacturing overhead
budgeted direct labour hours
>@
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
J
$411,600
19,600
J H,1 per direct labour hour
,.
Job Cost Sheet
Job number $>1 Eescription $rombones
Eate started 5arch Eate completed 5arch
Aumber of units completed C<
Eirect 5aterial
Eate 0e4uisition Aumber Buantity Fnit Price Cost
7*2 11, ,7@ H7.@@ H1',7@
Eirect /abour
Eate $ime Sheet Aumber 9ours 0ate Cost
>*2 to 1,*2 2@>.21, >@@ H,@ H1<'@@@
5anufacturing (&erhead
Eate Cost Eri&er Buantity Application 0ate Cost
>*2 to 1,*2 direct labour hours >@@ H,1 H1<'>@@
Cost Summary
Cost tem Amount
$otal Eirect 5aterial
$otal Eirect /abour
$otal 5anufacturing (&erhead
H 1',7@
1<'@@@
1<'>@@
$otal Cost H24'@7@
Fnit Cost H44>.@2I
Eeli&ery Summary
Eate Fnits Shipped Fnits 0emaining in
n&entory
Cost 3alance
5arch 2> 2> H1C'@,7
Irounded
H1C'@,7 J H24'@7@ ,
2. Journal entries:
)a+ 0aw material in&entory 7'@@@
Accounts payable 7'@@@
)b+ 0aw materials in&entory 4'@@@
>1
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
Accounts payable 4'@@@
)c+ 6or! in process in&entory 11',7@I
0aw materials in&entory 11',7@
I ),7@ s4 metres H7 per s4 metre+ L )1'@@@ !gs H1@ per !g+
5anufacturing o&erheadII 1@@
5anufacturing supplies in&entory 1@@
II Oal&e lubricant is an indirect material' so it is considered an o&erhead cost.
)d+ 6or! in process in&entory 24'@@@
5anufacturing o&erhead 12'@@@
6ages payable 4C'@@@
6or! in process in&entory 27'C@@I
5anufacturing o&erhead 27'C@@
I Applied manufacturing o&erhead J 1'C@@ direct labour hours H,1 per hour
)e+ 5anufacturing o&erhead 1,'@@@
Accumulated Eepreciation: 3uildings and
14uipment 1,'@@@
)f+ 5anufacturing o&erhead 1',@@
Cash 1',@@
)g+ 5anufacturing o&erhead ,'1@@
Accounts payable ,'1@@
)h+ 5anufacturing o&erhead ,'4@@
Cash ,'4@@
)i+ 5anufacturing o&erhead 2'1@@
Prepaid insurance 2'1@@
)#+ Selling and administrati&e e%penses >'@@@
Cash >'@@@
)!+ Selling and administrati&e e%penses 4'@@@
Accumulated depreciation: (ffice
14uipment 4'@@@
)l+ Selling and administrati&e e%penses 1'@@@
Cash 1'@@@
)m+ -inished goods in&entory 24'@7@I
6or! in process in&entory 24'@7@
I Cost of Job $>1:
Eirect material ),7@ H7+ H 1',7@
Eirect labour )>@@ H,@+ 1<'@@@
5anufacturing o&erhead )>@@ H,1+ 1<'>@@
$otal cost 24'@7@
)n+ Accounts recei&able ,<'<@@I
Sales re&enue ,<'<@@
I)C< ,+ HC@@ per trombone
Cost of goods sold 1C'@,7II
-inished goods in&entory 1C'@,7
II1C'@,7 J H24'@7@ ,
4. /edger accounts and posting of #ournal entries:
>,
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
Cash
3al 1@'@@@
1',@@ )f+
,'4@@ )h+
>'@@@ )#+
1'@@@ )l+
Accounts 0ecei&able
3al ,1'@@@
)n+ ,<'<@@
Prepaid nsurance
3al 7'@@@
2'1@@ )i+
5anufacturing Supplies n&entory
3al 7@@
1@@ )c+
Accounts Payable
12'@@@ 3al
7'@@@ )a+
4'@@@ )b+
,'1@@ )g+
6ages Payable
>'@@@ 3al
4C'@@@ )d+
Accumulated Eepreciation:
3uildings and 14uipment
1@,'@@@ 3al
1,'@@@ )e+
4'@@@ )!+
5anufacturing (&erhead
)c+ 1@@ 27'C@@ )d+
)d+ 12'@@@
)e+ 1,'@@@
)f+ 1',@@
)g+ ,'1@@
)h+ ,'4@@
)i+ 2'1@@
0aw 5aterials n&entory
3al 148'@@@
)a+ 7'@@@ 11',7@ )c+
)b+ 4'@@@
>2
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
6or! n Process n&entory
3al 81'@@@
)c+ 11',7@ 24'@7@ )m+
)d+ 24'@@@
)d+ 27'C@@
-inished Goods n&entory
3al ,,@'@@@
)m+ 24'@7@ 1C'@,7 )n+
Cost of Goods Sold
)n+ 1C'@,7
Selling and Administrati&e 1%penses
)#+ >'@@@
)!+ 4'@@@
)l+ 1'@@@
Sales 0e&enue
,<'<@@ )n+
7. )a+ Calculation actual o&erhead:
ndirect material )&al&e lubricant+ H 1@@
ndirect labour 12'@@@
Eepreciation: factory building and e4uipment 1,'@@@
0ent: warehouse 1',@@
Ftilities ,'1@@
Council rates and property ta%es ,'4@@
nsurance 2'1@@
$otal actual o&erhead H22'8@@
)b+ (&erapplied o&erhead J
actual
manufacturing
overhead
"
applied
manufacturing
overhead
J H22'8@@ " H27'C@@I
J H1'>@@ o&erapplied
I H27'C@@ J 1'C@@ direct labour hours H,1 per hour
)c+ 5anufacturing o&erhead 1'>@@
Cost of goods sold 1'>@@
<.
.and<ay Ltd
Schedule of Cost of Goods Manufactured
For the month of March
Eirect material:
0aw materials in&entory' 5arch 1 H148'@@@
Add: 5arch purchases of raw material 8'@@@
0aw material a&ailable for use 17>'@@@
Eeduct: 0aw materials in&entory' 5arch 21 14<'C7@
>4
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
0aw material used H 11',7@
Eirect labour 24'@@@
5anufacturing o&erhead:
ndirect material H 1@@
ndirect labour 12'@@@
Eepreciation on factory building and e4uipment 1,'@@@
0ent: warehouse 1',@@
Ftilities ,'1@@
Council rates and property ta%es ,'4@@
nsurance 2'1@@
$otal actual manufacturing o&erhead 22'8@@
Add: o&erapplied o&erhead 1'>@@ I
(&erhead applied to wor! in process 27'C@@
$otal manufacturing costs >@'87@
Add: wor! in process in&entory' 5arch 1 81'@@@
Subtotal 1C1'87@
Eeduct: wor! in process in&entory' 5arch 21 12C'8@@
Cost of goods manufactured H 24'@7@
I $he schedule of Cost of Goods 5anufactured lists the manufacturing costs applied to wor! in process. $herefore the o&erapplied
o&erhead' H1'>@@ must be added to the actual o&erhead to arri&e at the amount of o&erhead applied to wor! in process during 5arch.
Cost of Job$>1' which was completed during 5arch.
C.
.and<ay Ltd
Schedule of Cost of Goods Sold
For the month of March
-inished goods in&entory' 5arch 1 H,,@'@@@
Add: Cost of goods manufactured 24'@7@
Cost of goods a&ailable for sale ,74'@7@
-inished goods in&entory' 5arch 21 ,2C'@,7
Cost of goods sold 1C'@,7
/ess: o&erapplied o&erheadI 1'>@@
Cost of goods sold )ad#usted for o&erapplied o&erhead+ H 17',,7
I $he company closes underapplied or o&erapplied o&erhead into cost of goods sold. 9ence the balance in o&erapplied o&erhead is deducted
from the cost of goods sold for this month.
>.
.and<ay Ltd
Statement of F(nanc(al )erformance
For the month of March
Sales re&enue ,<'<@@
/ess: Cost of goods sold 17',,7
Gross margin 11'2C7
Selling and administrati&e e%penses 12'@@@
Profit )loss+ H )1'<,7+
CASE 4.4. (45 minutes) Inte$2$etin* in#o$m"tion #$om " 4ob costin* s=stem! m"nu#"ctu$e$
1. A #ob costing system is appropriate in any en&ironment where each product or batch of products is uni4ue and
costs can be readily identified with specific products' batches' contracts or pro#ects.
,. $he only #ob remaining in Constructo;s wor! in process in&entory on Eecember 21is E0S114. $he dollar &alue
of E0S114 is calculated as follows:
>7
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
E0S114 balance Ao&ember2@ H,7@'@@@
Eecember additions:
0aw material H1,4'@@@
Purchased parts >C'@@@
Eirect labour ,@@'7@@
5anufacturing o&erhead )18'7@@ HC.7@I+ 14<',7@ 77C'C7@
6or! in process in&entory Eecember 21 H>@C'C7@
I5anufacturing o&erhead rate J H4'7@@'@@@
<@@'@@@ hours
J HC.7@ per hour
2. $he dollar &alue of the playpens remaining in Construco;s finished goods in&entory on Eecember 21' is
H477'<@@' calculated as follows:
Playpen Fnits
-inished goods in&entory Ao&ember 2@ 18'4@@
Fnits completed in Eecember 17'@@@
Fnits a&ailable for sale 24'4@@
Fnits shipped in Eecember ,1'@@@
-inished goods in&entory Eecember 21 12'4@@
Assuming that the units produced first are sold first' all units remaining in finished goods in&entory were
completed in Eecember.
Fnit costs of playpens completed in Eecember:
6or! in process in&entory Ao&ember 2@ H4,@'@@@
Eecember additions:
0aw material H 2'@@@
Purchased parts 1@'>@@
Eirect labour 42',@@
5anufacturing o&erhead )4'4@@ hours HC.7@+ 22'@@@ 8@'@@@
$otal cost H71@'@@@
Fnit cost J
total cost
units completed
H24 per unit
Oalue of finished goods in&entory on Eecember 21 J Fnit cost 4uantity
J H24 12'4@@
J H477'<@@
CASE 4.4/ (5' minutes) Cost #)o-s in " 4ob costin* s=stem9 sce(u)e o# cost o# *oo(s
m"nu#"ctu$e(9 "utom"tion! m"nu#"ctu$e$
1. 5anufacturers use predetermined o&erhead rates to allocate to production #obs the production costs that are not
directly traceable to specific #obs. As a result' management will ha&e timely' accurate #ob cost information.
Predetermined o&erhead rates are easy to apply and a&oid fluctuations in #ob costs caused by changes in
production &olume or o&erhead costs throughout the year.
,. $he manufacturing o&erhead applied to Ao&ember 2@is calculated as follows:
5achine hours predetermined o&erhead rate J o&erhead applied
C2'@@@ H17 J H1'@87'@@@
><
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
2. $he manufacturing o&erhead applied in Eecember is calculated as follows:
5achine hours predetermined o&erhead rate J o&erhead applied
<'@@@ H17 J H8@'@@@
4. Fnderapplied manufacturing o&erhead to Eecember 21is calculated as follows:
Actual o&erhead )H1'1@@'@@@ L H8<'@@@+ H1'18<'@@@
Applied o&erhead )H1'@87'@@@ L H8@'@@@+ )1'1>7'@@@ +
Fnderapplied o&erhead H 11'@@@
7. $he balance in Oalport;s finished goods in&entory account on Eecember 21is comprised only of #ob number
A11.@12 and is calculated as follows:
Ao&ember 2@ balance for Job Ao. A11.@12 H77'@@@
Eecember direct material 4'@@@
Eecember direct labour 1,'@@@
Eecember o&erhead )1'@@@ H17+ 17'@@@
$otal finished goods in&entory H><'@@@
<. Oalport;s Schedule of Cost of Goods 5anufactured for the year is constructed as follows:
7alport Ltd
Schedule of Cost of Goods Manufactured
For the Year Ended Decemer !"
0aw materials in&entory January 1 H 1@7'@@@
0aw material purchases )H8<7'@@@ L H8>'@@@+ 1'@<2'@@@
0aw material a&ailable for use 1'1<>'@@@
/ess: ndirect material used )H1,7'@@@ L H8'@@@+ H124'@@@
0aw materials in&entory Eecember 21 >7'@@@ ,18'@@@
0aw material used 848'@@@
Eirect labour )H>47'@@@ L H>@'@@@+ 8,7'@@@
5anufacturing o&erhead:
ndirect material )H1,7'@@@ L H8'@@@+ H124'@@@
ndirect labour )H247'@@@ L H2@'@@@+ 2C7'@@@
Ftilities )H,47'@@@ L H,,'@@@+ ,<C'@@@
Eepreciation )H2>7'@@@ L H27'@@@+ 4,@'@@@
$otal actual manufacturing o&erhead 1'18<'@@@
Eeduct: underapplied o&erhead 11'@@@
(&erhead applied to wor! in process 1'1>7'@@@
$otal manufacturing costs 2'@78'@@@
Add: 6or! in process in&entory' January 1 <@'@@@
Subtotal 2'118'@@@
/ess: wor! in process in&entory Eecember 21I 17@'@@@
Cost o# *oo(s m"nu#"ctu$e( ?2@/%.@.''
ISupporting calculations for wor! in process at Eecember 21:
E1,.@@, E1,.@@2 $otal
Eirect material H2C'8@@ H,<'@@@ H <2'8@@
Eirect labour ,@'@@@ 1<'>@@ 2<'>@@
Applied o&erhead:
,'7@@ hrs H17 2C'7@@ 2C'7@@
>@@ hrs H17 SSSSSS 1,'@@@ 1,'@@@
>C
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton
Chapter 4: Product Costing Systems: General Principles and Job Costing
$otal H87'4@@ H74'>@@ H17@',@@
>>
Solutions 5anual t*a Management Accounting: An Australian Perspective 3/e by /angfield.Smith' $horne and 9ilton