Job-Order Costing

Types of Costing Systems Used to Determine Product Costs Job-order Costing Process Costing
Chapter 6
Widely used in services (accounting, law, medicine),as well as in manufacturing. Products or services are manufactured to order.

Cost are traced or allocated to jobs.

Cost records must be maintained for each distinct product or job.

Job-Order Cost Accounting

PearCo Job Cost Sheet
Job Number A - 143 Department B3 Item Wooden cargo crate Direct Materials Req. No. Amount Date Initiated 3-4-01 Date Completed Units Completed

Direct Labor Manufacturing Overhead Ticket Hours Amount Hours Rate Amount

Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost

Units Shipped Date Number Balance

Job-Order Cost Accounting

Job-Order Cost Accounting

Job-Order Cost Accounting

Apply manufacturing overhead to jobs using a predetermined overhead rate of $4 per direct labor hour (DLH). Lets do it

Job-Order Cost Accounting

Application of Manufacturing Overhead

The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.
POHR =
Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period

The allocation base must be traceable to the individual jobs.

Ideally, the allocation base is a cost driver that causes overhead to vary.

Application of Manufacturing Overhead

Based on estimates, and determined before the period begins.

Overhead applied = POHR Actual activity

Actual amount of the allocation base such as units produced, direct labor hours, or machine hours incurred during the period.

Overhead Application Example

POHR =
Estimated total manufacturing overhead cost for the coming period

Estimated total units in the allocation base for the coming period
$640,000

POHR =

160,000 direct labor hours (DLH)

POHR = $4.00 per DLH

For each direct labor hour worked on a job, $4.00 of factory overhead will be applied to the job.

Overhead Application Example

Overhead Application Example

Job-Order System Cost Flows

Raw Materials
Material Direct Purchases Materials Indirect Materials

Work in Process (Job Cost Sheet)

Direct Materials

Mfg. Overhead
Actual Applied Indirect Materials

Job-Order System Cost Flows

Payroll Suspense
Total Factory Payroll Direct Labor Indirect Labor

Work in Process (Job Cost Sheet)

Direct Materials Direct Labor Overhead Applied

Mfg. Overhead
Actual Applied Indirect Overhead Materials Applied to Work in Indirect Process Labor

If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.

Job-Order System Cost Flows

Work in Process (Job cost sheets) Finished Goods(Job cost sheets)

Direct Materials Direct Labor Overhead Applied

Cost of Goods Mfd.

Cost of Goods Mfd.

Cost of Goods Sold

Cost of Goods Sold (Job cost sheets)

Cost of Goods Sold

Individual job cards are subsidiary ledgers for each of these control accounts.

Plantwide Overhead Rate

Companies tend to use direct labor as the overhead allocation base.

Departmental Overhead Rates

Finishing Department

Painting Department
Shipping Department

A two-stage process is necessary because different departments may have different cost drivers.

Departmental Overhead Rates

Stage One: Costs assigned to pools

Indirect Labor

Indirect Materials

Other Overhead

Cost pools

Department 1

Department 2

Department 3

Departmental Overhead Rates

Stage One: Costs assigned to pools

Indirect Labor

Indirect Materials

Other Overhead

Cost pools
Stage Two: Costs applied to products

Department 1
Direct Labor Hours

Department 2
Machine Hours

Department 3
Raw Materials Cost

Products
Departmental Allocation Bases

Handout 5 (a):
Job Order Costing, Overhead Allocations, Journal Entries

Handout 5(a) Job order costing; overhead allocation; journal entries Deltoid Exercise Apparati, Inc. installs weight training equipment in health clubs and private homes. The firm uses job order costing, and applies overhead to specific jobs using a predetermined overhead rate (normal costing). Deltoid uses direct labor dollars as a basis for setting a predetermined overhead rate for the period. The firm has budgeted total direct labor costs of $1,200,000 and budgeted total overhead costs are $2,400,000. The firm had no beginning inventories and experienced the following transactions and events in the current period.

Provide journal entries to reflect the following events.(Note that the predetermined overhead rate is 200% of direct labor dollars.)

(a) The firm purchased materials for $1,200,000. Of this amount, $800,000 was charged to job cards as direct materials, and $200,000 was charged as indirect materials to factory overhead.

(a) The firm purchased materials for $1,200,000. Of this amount, $800,000 was charged to job cards as direct materials, and $200,000 was charged as indirect materials to factory overhead.

Dr. Cr.

Materials inventory Accounts payable

$1,200.000 $1,200,000

Dr. Dr. Cr.

Work in process (direct materials) Overhead control Materials inventory

$800,000 $200,000 $1,000,000

(b)

Total payroll expenses for the period were $2,400,000,

comprised of $1,600,000 of direct labor charged to job cards, and $800,000 of indirect labor charged to factory overhead.

(b)

Total payroll expenses for the period were $2,400,000,

comprised of $1,600,000 of direct labor charged to job cards, and $800,000 of indirect labor charged to factory overhead.
Dr. Cr. Payroll suspense Sundry payables $2,400.000 $2,400,000

Dr. Dr. Cr.

Work in process (direct labor) Overhead control Payroll suspense

$1,600,000 $800,000 $2,400,000

Dr. Cr.

Work in process (applied overhead) Overhead control

$3,200,000 $3,200,000

(c) Additional overhead expenses totaling $1,600,000 were incurred and charged to factory overhead. Dr. Cr. Overhead control Sundry credits $1,600,000 $1,600,000

(a) Direct labor costs of $400,000 are included in the ending work-in-process inventory, and direct labor costs of $200,000 are included in the ending finished goods inventory. This information implies that the remaining direct labor costs of $1,000,000 are included in cost of goods sold. In addition, applied overhead equal to 200% of direct labor is included in each of these three accounts (ending work in process, finished goods and cost of goods sold). (b) Direct material costs of $200,000 are included in the ending work-in-process inventory, and direct material costs of $100,000 are included in the ending finished goods inventory. This information implies that $500,000 of direct materials are included in cost of goods sold.

Because there were no beginning inventories, and we know the amounts of direct materials, labor, and applied overhead during the period, as well as the ending balances in the inventories and cost of goods sold, we can determine the current manufacturing costs, cost of goods completed, over/under applied overhead, and cost of goods sold. This information is shown in T- accounts below.

Italicized numbers are contained in the journal entries provided above. Nonitalicized numbers are inferred given the journal entries and supplementary information above. Materials inventory Beg. $ -0$1,200,000 $800,000 $200,000 Work in process inventory Beg. $ -0DM $800,000 $4,200,000 DL $1,600,000 OH $3,200,000 * End. $1,400,000

End. $200,000

Finished goods inventory Beg. $ -0$4,200,000 * End. $700,000 $3,500,000

Cost of goods sold

Sales $3,000,000

* $3,500,000

Payroll $2,400,000 $1,600,000 $ 800,000

Overhead Control $ 200,000 $3,200,000 $ 800,000 $1,600,000 Bal. $600,000 (over-applied)

*Composition and amounts of ending inventories and cost of sales: Cost Work in Finished Cost of component: process, end goods, end goods sold Total Direct material $200,000 $100,000 $500,000 $800,000 Direct labor $400,000 $200,000 $1,000,000 $1,600,000 Applied OH $800,000 $400,000 $2,000,000 $3,200,000 Total * $1,400,000 * $700,000 * $3,500,000 $5,600,000

(f) Total sales for the period are $3,000,000. Dr. Accounts receivable Cr. Sales

$3,000,000 $3.000,000

(g) Goods completed are transferred to finished goods inventory: Dr. Cr. Finished goods Work in process $4,200,000 $4,200,000

(h) Cost of sales is recognized before disposition of the overhead variance: Dr. Cost of goods sold $3.500,000 Cr. Finished goods $3.500,000

Disposition of the overhead variance:

(1) Assume that overhead variances are charged (or credited) to cost of goods sold, and determine: (a) valuation of the ending inventories; (b) cost of goods sold; and (c) gross margin for the period. Provide a journal entry to close the overhead variance balance.

Disposition of the overhead variance:

(1) Assume that overhead variances are charged (or credited) to cost of goods sold, and determine: (a) valuation of the ending inventories; (b) cost of goods sold; and (c) gross margin for the period. Provide a journal entry to close the overhead variance balance. If the entire overhead variance is credited to cost of goods sold, the ending inventory valuations are as shown above (in the T-accounts), and the cost of sales is reduced from $3,500,000 to $2,900,000. Gross margin is $100,000 (sales of $3,000,000 less cost of sales of $2,900,000).The journal entry is as follows: Dr. Cr. Overhead control Cost of goods sold $600,000 $600,000

Re-do the calculations required in part (2) above assuming that Deltoids overhead variances are pro-rated to inventories and cost of sales based upon the amounts of applied overhead in the ending balances in these accounts (before the variances and the revenue and expense accounts are closed).

(2) Re-do the calculations required in part (2) above assuming that Deltoids overhead variances are pro-rated to inventories and cost of sales based upon the amounts of applied overhead in the ending balances in these accounts (before the variances and the revenue and expense accounts are closed). Applied Account overhead in Ending balance Work in process inventory Finished goods inventory Cost of goods sold Total Dr. Cr. Cr. Cr. $400,000 $2,000,000 $3,200,000 Overhead control Cost of goods sold Work in process Finished goods 12.5% 62.5% 100.0% $600,000 $375,000 $150,000 $75,000 $ 75,000 $375,000 $600,000 $800,000 25.0% $150,000 Percent of total applied overhead Times over-applied overhead of $600,000

If the overhead variance is apportioned among cost of goods sold and the ending inventories, the cost of sales is reduced from $3,500,000 to $3,125,000. Gross margin is a negative $125,000 (sales of $3,000,000 less cost of sales of $3,125,000).

Handout 5 (b):
Job Order Costing, Plant-wide and Departmental Overhead Rates

This exercise demonstrates overhead applications using (a) a single plant-wide rate, (b) separate plant-wide rates for variable and fixed overheads, (c) departmental rates for variable and fixed overheads. The following budgeted and actual overhead data for the year 2008 has been prepared for Departments A and B, and in total for the entire manufacturing plant: Dept. A Dept. B Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 200,000 $ 600,000 Direct labor hours 160,000DLH 40,000DLH Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 300,000 $ 600,000 Direct labor hours 190,000DLH 30,000DLH Plant-wide $ 600,000 $ 800,000 200,000DLH $ 600,000 $ 900,000 220,000DLH

Dept. A Dept. B Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 200,000 $ 600,000 Direct labor hours 160,000DLH 40,000DLH Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 300,000 $ 600,000 Direct labor hours 190,000DLH 30,000DLH

Plant-wide $ 600,000 $ 800,000 200,000DLH $ 600,000 $ 900,000 220,000DLH

1. Assume that the company develops a single, plant-wide combined (fixed and variable) overhead rate for the period. Determine the plant-wide overhead rate, the applied overhead, and the amount of over-/under-applied overhead for the period.

Dept. A Dept. B Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 200,000 $ 600,000 Direct labor hours 160,000DLH 40,000DLH Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 300,000 $ 600,000 Direct labor hours 190,000DLH 30,000DLH

Plant-wide $ 600,000 $ 800,000 200,000DLH $ 600,000 $ 900,000 220,000DLH

1. Assume that the company develops a single, plant-wide combined (fixed and variable) overhead rate for the period. Determine the plant-wide overhead rate, the applied overhead, and the amount of over-/under-applied overhead for the period.

POHR = Budgeted total overhead / Budgeted DLH = $1,400,000 / 200,000DLH = $7.00 Applied OH = POHR x Actual DLH = $7.00 x 220,000DLH = $1,540,000 Under/over applied overhead = Actual OH Applied OH = $1,500,000 - $1,540,000 = $40,000 over-applied

Dept. A Dept. B Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 200,000 $ 600,000 Direct labor hours 160,000DLH 40,000DLH Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 300,000 $ 600,000 Direct labor hours 190,000DLH 30,000DLH

Plant-wide $ 600,000 $ 800,000 200,000DLH $ 600,000 $ 900,000 220,000DLH

2. Assume that the company develops separate plant-wide overhead rates for variable and fixed overheads. Determine the predetermined rates, the applied overheads, and the amounts of over-/under-applied overhead for both variable and fixed overhead.

Dept. A Dept. B Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 200,000 $ 600,000 Direct labor hours 160,000DLH 40,000DLH Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 300,000 $ 600,000 Direct labor hours 190,000DLH 30,000DLH

Plant-wide $ 600,000 $ 800,000 200,000DLH $ 600,000 $ 900,000 220,000DLH

2. Assume that the company develops separate plant-wide overhead rates for variable and fixed overheads. Determine the predetermined rates, the applied overheads, and the amounts of over-/under-applied overhead for both variable and fixed overhead.
Variable overhead: PVOHR = Budgeted variable overhead / Budgeted DLH = $800,000 / 200,000DLH = $4.00 Applied VOH = PVOHR x Actual DLH = $4.00 x 220,000DLH = $880,000 Under/over applied variable overhead = Actual VOH Applied VOH = $900,000 - $880,000 = $20,000 under-applied

Dept. A Dept. B Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 200,000 $ 600,000 Direct labor hours 160,000DLH 40,000DLH Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 300,000 $ 600,000 Direct labor hours 190,000DLH 30,000DLH

Plant-wide $ 600,000 $ 800,000 200,000DLH $ 600,000 $ 900,000 220,000DLH

2. Assume that the company develops separate plant-wide overhead rates for variable and fixed overheads. Determine the predetermined rates, the applied overheads, and the amounts of over-/under-applied overhead for both variable and fixed overhead.
Variable overhead: PVOHR = Budgeted variable overhead / Budgeted DLH = $800,000 / 200,000DLH = $4.00 Applied VOH = PVOHR x Actual DLH = $4.00 x 220,000DLH = $880,000 Under/over applied variable overhead = Actual VOH Applied VOH = $900,000 - $880,000 = $20,000 under-applied

Fixed overhead: PFOHR = Budgeted fixed overhead / Budgeted DLH = $600,000 / 200,000DLH = $3.00 Applied FOH = PFOHR x Actual DLH = $3.00 x 220,000DLH = $660,000 Under/over applied fixed overhead = Actual FOH Applied FOH = $600,000 - $660,000 = $60,000 over-applied Note: The under-applied variable overhead of $20,000 plus the over-applied fixed overhead of $60,000 add up to the total over-applied overhead of $40,000 determined using the combined rate in part 1, above.

Dept. A Dept. B Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 200,000 $ 600,000 Direct labor hours 160,000DLH 40,000DLH Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 300,000 $ 600,000 Direct labor hours 190,000DLH 30,000DLH

Plant-wide $ 600,000 $ 800,000 200,000DLH $ 600,000 $ 900,000 220,000DLH

3. Assume that the company develops combined (fixed and variable) predetermined overhead rates separately for each of the two departments. Determine the departmental overhead rates, the applied overhead, and the amount of over-/under-applied overhead in each department for the period.

Dept. A Dept. B Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 200,000 $ 600,000 Direct labor hours 160,000DLH 40,000DLH Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 300,000 $ 600,000 Direct labor hours 190,000DLH 30,000DLH

Plant-wide $ 600,000 $ 800,000 200,000DLH $ 600,000 $ 900,000 220,000DLH

3. Assume that the company develops combined (fixed and variable) predetermined overhead rates separately for each of the two departments. Determine the departmental overhead rates, the applied overhead, and the amount of over-/under-applied overhead in each Department A: for the period. department
POHR = Budgeted total overhead / Budgeted DLH = $400,000 / 160,000DLH = $2.50 Applied OH = POHR x Actual DLH = $2.50 x 190,000DLH = $475,000 Under/over applied overhead = Actual OH Applied OH = $500,000 - $475,000 = $25,000 under-applied

Dept. A Dept. B Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 200,000 $ 600,000 Direct labor hours 160,000DLH 40,000DLH Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 300,000 $ 600,000 Direct labor hours 190,000DLH 30,000DLH

Plant-wide $ 600,000 $ 800,000 200,000DLH $ 600,000 $ 900,000 220,000DLH

3. Assume that the company develops combined (fixed and variable) predetermined overhead rates separately for each of the two departments. Determine the departmental overhead rates, the applied overhead, and the amount of over-/under-applied overhead in each Department A: department for the period.
POHR = Budgeted total overhead / Budgeted DLH = $400,000 / 160,000DLH = $2.50 Applied OH = POHR x Actual DLH = $2.50 x 190,000DLH = $475,000 Under/over applied overhead = Actual OH Applied OH = $500,000 - $475,000 = $25,000 under-applied Department B: POHR = Budgeted total overhead / Budgeted DLH = $1,000,000 / 40,000DLH = $25.00 Applied OH = POHR x Actual DLH = $25.00 x 30,000DLH = $750,000 Under/over applied overhead = Actual OH Applied OH = $1,000,000 - $750,000 = $250,000 under-applied

Dept. A Dept. B Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 200,000 $ 600,000 Direct labor hours 160,000DLH 40,000DLH Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 300,000 $ 600,000 Direct labor hours 190,000DLH 30,000DLH

Plant-wide $ 600,000 $ 800,000 200,000DLH $ 600,000 $ 900,000 220,000DLH

4. Contrast the total amounts of applied overheads and over-/under absorbed overheads that you determined in answering the questions above. Which amounts provide more useful information to managers? Note that the actual total overhead for the two departments combined is $1,500,000, and the total applied overhead is $1,225,000. The total under-applied overhead is therefore $275,000. This reveals a significantly more negative variance than was apparent using a single plant-wide rate to absorb overhead. The underlying reason for the disparate measurements is because the overhead rates differ substantially between the departments, and the department with the higher rate had lower production (fewer labor hours) than were budgeted. Consequently, that higherrate department should have had a large reduction in variable overhead spending, but that reduction apparently was not realized.

5. Assume that the company is developing a bid price for a special customer order. The project is estimated to require 20,000 direct labor hours. Determine the total variable overhead that would be estimated for the project based on plant-wide and departmental overhead rates, under each of the following assumptions: (a) The 20,000 required direct labor hours would consist of 16,000 hours in Department A and 4,000 hours in Department B. Explain any difference between the overhead assignments using plant-wide vs. departmental rates.

5. Assume that the company is developing a bid price for a special customer order. The project is estimated to require 20,000 direct labor hours. Determine the total variable overhead that would be estimated for the project based on plant-wide and departmental overhead rates, under each of the following assumptions: (a) The 20,000 required direct labor hours would consist of 16,000 hours in Department A and 4,000 hours in Department B. Explain any difference between the overhead assignments using plant-wide vs. departmental rates.

First, we determine that the departmental variable overhead rate is $1.25 in Department A ($200,000 / 160,000DLH), and is $15.00 in Department B ($600,000 / 40,000DLH).

Dept. A Dept. B Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 200,000 $ 600,000 Direct labor hours 160,000DLH 40,000DLH Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 300,000 $ 600,000 Direct labor hours 190,000DLH 30,000DLH

Plant-wide $ 600,000 $ 800,000 200,000DLH $ 600,000 $ 900,000 220,000DLH

5. Assume that the company is developing a bid price for a special customer order. The project is estimated to require 20,000 direct labor hours. Determine the total variable overhead that would be estimated for the project based on plant-wide and departmental overhead rates, under each of the following assumptions: (a) The 20,000 required direct labor hours would consist of 16,000 hours in Department A and 4,000 hours in Department B. Explain any difference between the overhead assignments using plant-wide vs. departmental rates.

First, we determine that the departmental variable overhead rate is $1.25 in Department A ($200,000 / 160,000DLH), and is $15.00 in Department B ($600,000 / 40,000DLH).
Plant-wide rate: 20,000DLH x $4.00 = $80,000

Departmental rates: A: 16,000DLH x $1.25 = $20,000 B: 4,000DLH x $15.00 = $60,000 TOTAL = $80,000 There is no difference in the two estimates of variable overhead because the required labor hours are distributed across the two departments in the same proportions as are the plant-wide labor hours. Note that 80% (20%) of the plant-wide total labor hours are budgeted for Department A (B). The special customer order also requires 80% (20%) of its labor hours in Department A (B).

(b) The 20,000 required direct labor hours would consist of 10,000 hours in Department A and 10,000 hours in Department B. Explain any difference between the overhead assignments using plant-wide vs. departmental rates.

Plant-wide rate:

20,000DLH x $4.00 = $80,000

Departmental rates: A: 10,000DLH x $1.25 = $ 12,500 B: 10,000DLH x $15.00 = $150,000 TOTAL = $162,500 In this case, the required labor hours are disproportionately incurred in the higher-cost department. Because of this feature, the use of departmental rates will provide a substantially higher estimate of variable overhead. Use of a plantwide overhead rate would result in an under-estimate of variable overhead in the amount of $82,500 ($162,500 - $80,000).

6. Assume that the company has entered a cost plus contract with the U.S. government that provides re-imbursement of full (i.e., fixed plus variable) costs plus a mark-on of 25% above cost. The contract is expected to require 40,000 direct labor hours. Determine the total overhead reimbursement that would be received for this contract based on plant-wide and departmental overhead rates, under each of the following assumptions: (a) The 40,000 required direct labor hours would consist of 32,000 hours in Department A and 8,000 hours in Department B. Explain any difference between the overhead assignments using plant-wide vs. departmental rates.

Dept. A Dept. B Budgeted amounts at the start of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 200,000 $ 600,000 Direct labor hours 160,000DLH 40,000DLH Actual amounts determined at the end of the year: Fixed overhead $ 200,000 $ 400,000 Variable overhead $ 300,000 $ 600,000 Direct labor hours 190,000DLH 30,000DLH

Plant-wide $ 600,000 $ 800,000 200,000DLH $ 600,000 $ 900,000 220,000DLH

6. Assume that the company has entered a cost plus contract with the U.S. government that provides re-imbursement of full (i.e., fixed plus variable) costs plus a mark-on of 25% above cost. The contract is expected to require 40,000 direct labor hours. Determine the total overhead reimbursement that would be received for this contract based on plant-wide and departmental overhead rates, under each of the following assumptions:
(a) The 40,000 required labor hours would consist of 32,000 hours Department A in (a) The 40,000 required direct direct labor hours would consist ofin32,000 hoursand 8,000 hours in Department B. Explain any difference between the overhead assignments Department A and 8,000 hours in Department B. Explain any difference using plant-wide vs. departmental rates. between the overhead assignments using plant-wide vs. departmental rates. Plant-wide rate: 40,000DLH x $7.00 = $280,000 Departmental rates: A: 32,000DLH x $2.50 = $80,000 B: 8,000DLH x $25.00 = $200,000 TOTAL = $280,000 There is no difference in the two estimates of overhead because the required labor hours are distributed across the two departments in the same proportions as are the plant-wide labor hours. Note that 80% (20%) of the plant-wide total labor hours are budgeted for Department A (B). The government contract also requires 80% (20%) of its labor hours in Department A (B).

(b) The 40,000 required direct labor hours would consist of 15,000 hours in Department A and 25,000 hours in Department B. Explain any difference between the overhead assignments using plant-wide vs. departmental rates. Plant-wide rate: 40,000DLH x $7.00 = $280,000 Departmental rates: A: 15,000DLH x $2.50 = $37,500 B: 25,000DLH x $25.00 = $625,000 TOTAL = $662,500 In this case, the required labor hours are disproportionately incurred in the highercost department. Because of this feature, the use of departmental rates will provide a substantially higher application of overhead to the government contract. Use of a plant-wide overhead rate would result in a lower application of overhead in the amount of $382,500 ($662,500 - $280,000). Because costs are reimbursed at a 25% mark-up, the company would receive a lower reimbursement in the amount of $478,125 ($382,500 x 125%) if the plant-wide overhead rate were used to cost the contract.

Handout 5(c)

Multiple choice items

1. Avery Co. uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. For the month of October, Avery's estimated manufacturing overhead cost was $300,000 based on an estimated activity level of 100,000 direct labor-hours. Actual overhead amounted to $325,000 with actual direct labor-hours totaling 110,000 for the month. How much was the overapplied or underapplied overhead? A. $25,000 overapplied B. $25,000 underapplied C. $5,000 overapplied D. $5,000 underapplied

1. Avery Co. uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. For the month of October, Avery's estimated manufacturing overhead cost was $300,000 based on an estimated activity level of 100,000 direct labor-hours. Actual overhead amounted to $325,000 with actual direct labor-hours totaling 110,000 for the month. How much was the overapplied or underapplied overhead? A. $25,000 overapplied B. $25,000 underapplied The POHR is $3.00 ($300,000 / 100,000dlh). C. $5,000 overapplied Applied OH = $330,000 ($3 x 110,000dlh). D. $5,000 underapplied
Overapplied OH = $5,000 ($325,000 - $330,000)

2. Woodman Company uses a predetermined overhead rate based on direct laborhours to apply manufacturing overhead to jobs. Estimated and actual data for direct labor and manufacturing overhead for last year are as follows:

The manufacturing overhead for Woodman Company for last year was: A. overapplied by $20,000 B. overapplied by $40,000 C. underapplied by $20,000 D. underapplied by $40,000

2. Woodman Company uses a predetermined overhead rate based on direct laborhours to apply manufacturing overhead to jobs. Estimated and actual data for direct labor and manufacturing overhead for last year are as follows:

The manufacturing overhead for Woodman Company for last year was: A. overapplied by $20,000 B. overapplied by $40,000 C. underapplied by $20,000 POHR = $1.20 ($720,000 / 600,000dlh). D. underapplied by $40,000

Applied OH = $660,000 ($1.20 x 550,000).

Under-applied OH = $20,000 ($680,000 $660,000).

3. Darrow Company uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. Last year, the company worked 10,000 direct labor-hours and incurred $80,000 of actual manufacturing overhead cost. If overhead was underapplied by $2,000, the predetermined overhead rate for the company for the year must have been: A. $7.80 B. $8.00 C. $8.20 D. $8.40

3. Darrow Company uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. Last year, the company worked 10,000 direct labor-hours and incurred $80,000 of actual manufacturing overhead cost. If overhead was underapplied by $2,000, the predetermined overhead rate for the company for the year must have been: A. $7.80 Actual overhead of $80,000 is underapplied by B. $8.00 $2,000 so applied overhead is $78,000. The C. $8.20 activity is 10,000dlh, implying a POHR of $7.80 D. $8.40 ($78,000 / 10,000).