Job Costing Chpt4

41

CHAPTER4JOBCOSTING

41 Costpoolagroupingofindividualcostitems.Costtracingtheassigningofdirectcoststothechosencostobject.Costallocationtheassigningofindirectcoststothechosencostobject.Costallocationbaseafactorthatlinksinasystematicwayanindirectcostorgroupof

indirectcoststoacostobject.

42 Inajobcostingsystem,costsareassignedtoadistinctunit,batch,orlotofaproductorservice.Inaprocesscostingsystem,thecostofaproductorserviceisobtainedbyusingbroadaveragestoassigncoststomassesofidenticalorsimilarunits.

43 Anadvertisingcampaign forPepsi is likelytobeveryspecifictothat individualclient.Job costing enables all the specific aspects of each job to be identified. In contrast, theprocessingofcheckingaccountwithdrawalsissimilarformanycustomers.Here,processcostingcanbeusedtocomputethecostofeachcheckingaccountwithdrawal.

44 Thesevenstepsinjobcostingare:(1)identifythejobthatisthechosencostobject,(2)identify the direct costs of the job, (3) select the costallocation bases to use for allocatingindirectcoststothejob,(4)identifytheindirectcostsassociatedwitheachcostallocationbase,(5)compute the rateperunitofeachcostallocation baseused toallocate indirectcosts tothejob,(6)computetheindirectcostsallocatedtothejob,and(7)computethetotalcostofthejobbyaddingalldirectandindirectcostsassignedtothejob.

45 Twomajorcostobjects thatmanagers focuson incompaniesusing jobcostingare (1)productsorjobs,and(2)responsibilitycentersordepartments.

46 Threemajorsourcedocumentsusedinjobcostingsystemsare(1)jobcostrecordorjobcostsheet,adocumentthatrecordsandaccumulatesallcostsassignedtoaspecificjob,startingwhenworkbegins(2)materialsrequisitionrecord,adocumentthatcontains informationaboutthecostofdirectmaterialsusedonaspecificjobandinaspecificdepartmentand(3)labortimerecord,adocumentthatcontainsinformationaboutthelabortimeusedonaspecificjobandinaspecificdepartment.

47 Themainconcernwiththesourcedocumentsof jobcostrecordsis theaccuracyof therecords. Problems occurring in this area include incorrect recording of quantity or dollaramounts,materialsrecordedononejobbeingborrowedandusedonotherjobs,anderroneousjobnumbersbeingassignedtomaterialsorlaborinputs.

48 Tworeasonsforusinganannualbudgetperiodarea. The numerator reasonthe longer the time period, the less the influence of seasonal

patterns,andb. Thedenominatorreasonthe longer thetimeperiod, the less theeffectofvariations in

outputlevelsontheallocationoffixedcosts.

42

49 Actualcostingandnormalcostingdiffer intheiruseofactualorbudgeted indirectcostrates:

ActualCosting

NormalCosting

DirectcostratesIndirectcostrates

ActualratesActualrates

ActualratesBudgetedrates

Eachcostingmethodusestheactualquantityof thedirectcost inputandtheactualquantityofthecostallocationbase.

410 Ahouseconstructionfirmcanusejobcostinformation(a)todeterminetheprofitabilityof individual jobs,(b)toassist inbiddingon futurejobs,and(c)toevaluateprofessionalswhoareinchargeofmanagingindividualjobs.

411 Thestatementisfalse.Inanormalcostingsystem,theManufacturingOverheadControlaccount will not, in general, equal the amounts in the Manufacturing Overhead Allocatedaccount. The Manufacturing Overhead Control account aggregates the actual overhead costsincurredwhileManufacturingOverheadAllocatedallocatesoverheadcoststojobsonthebasisofabudgetedrate timestheactualquantityofthecostallocationbase.

Underallocationoroverallocationofindirect(overhead)costscanarisebecauseof (a)theNumerator reasontheactualoverheadcostsdiffer from thebudgetedoverheadcosts, and (b)the Denominator reasonthe actual quantity used of the allocation base differs from thebudgetedquantity.

412 Debit entries to WorkinProcess Control represent increases in work in process.Examplesofdebitentriesundernormalcostingare(a)directmaterialsused(credittoMaterialsControl),(b)directmanufacturinglaborbilledtojob(credittoWagesPayableControl),and(c)manufacturingoverheadallocatedtojob(credittoManufacturingOverheadAllocated).

413 Alternativewaystomakeendofperiodadjustmentsforunderallocatedoroverallocatedoverheadareasfollows:

(i) Prorationbasedonthetotalamountof indirectcostsallocated(beforeproration) intheendingbalancesofworkinprocess,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 companymight use budgeted costs rather than actual costs to compute direct laborrates because itmay bedifficult to trace direct labor costs to jobs as they are completed (forexample,becausebonusesareonlyknownattheendoftheyear).

415 Modern technology such as electronic data interchange (EDI) is helpful to managersbecause it provides themwith quick and accurate productcost information that facilitates themanagementandcontrolofjobs.

43

416 (10min)Jobordercosting,processcosting.

a. Jobcosting l. Jobcostingb. Processcosting m. Processcostingc. Jobcosting n. Jobcostingd. Processcosting o. Jobcostinge. Jobcosting p. Jobcostingf. Processcosting q. Jobcostingg. Jobcosting r. Processcostingh. Jobcosting(butsomeprocesscosting) s. Jobcostingi. Processcosting t. Processcostingj. Processcosting u. Jobcostingk. Jobcosting

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

1.Budgetedmanufacturing

overheadrate=

costslaboringmanufacturdirectBudgeted

costsoverheadingmanufacturBudgeted

=$2,700,000$1,500,000

=1.80or185%

rateoverheadingmanufacturctualA =

costslaboringmanufacturdirectActual

costsoverheadingmanufacturActual

=$2,755,000$1,450,000

=1.9or190%

2. CostsofJob626underactualandnormalcostingfollow:

Actual NormalCosting Costing

Directmaterials $40,000 $40,000Directmanufacturinglaborcosts 30,000 30,000Manufacturingoverheadcosts$30,000 1.90$30,000 1.80 57,000 54,000

TotalmanufacturingcostsofJob626 $127,000 $124,000

44

3. Totalmanufacturingoverheadallocatedundernormalcosting=Actualmanufacturing

laborcosts Budgeted

overheadrate

= $1,450,000 1.80

= $2,610,000

Underallocatedmanufacturingoverhead

= Actualmanufacturingoverheadcosts

Manufacturingoverheadallocated

= $2,755,000 -$2,610,000=$145,000

There is no under oroverallocatedoverhead under actual costing becauseoverhead isallocated under actual costing bymultiplying actual manufacturing labor costs and the actualmanufacturingoverheadrate.This,ofcourseequalstheactualmanufacturingoverheadcosts.Allactual overhead costs are allocated to products. Hence, there is no under or overallocateadoverhead.

418 (2030min.) Jobcosting,normalandactualcosting.

1. Budgetedindirectcostrate

=Budgetedindirectcosts

Budgeteddirectlaborhours=

hours160,000$8,000,000

= $50perdirectlaborhour

Actualindirectcostrate

=Actualindirectcosts

Actualdirectlaborhours=

hours164,000$6,888,000

= $42perdirectlaborhour

These ratesdifferbecauseboth thenumeratorand thedenominator in the twocalculationsaredifferentonebasedonbudgetednumbersandtheotherbasedonactualnumbers.

2a. LagunaModel

MissionModel

NormalcostingDirectcosts

DirectmaterialsDirectlabor

IndirectcostsAssemblysupport($50 900$50 1,010)

Totalcosts

$106,45036,276142,726

45,000$187,726

$127,60441,410169,014

50,500$219,514

45

2b. ActualcostingDirectcosts

DirectmaterialsDirectlabor

IndirectcostsAssemblysupport($42 900$42 1,010)

Totalcosts

$106,45036,276142,726

37,800$180,526

$127,60441,410169,014

42,420$211,434

3. NormalcostingenablesAnderson to reporta jobcostas soonas the job iscompleted,assumingthatboththedirectmaterialsanddirectlaborcostsareknownatthetimeofuse.Oncethe900directlaborhoursareknownfortheLagunaModel(June2007),Andersoncancomputethe$187,726costfigureusingnormalcosting.Andersoncanusethisinformationtomanagethecostsof theLagunaModel job aswell as to bid on similar jobs later in the year. In contrast,Anderson has towait until theDecember 2007 yearend to compute the $180,526 costof theLagunaModelusingactualcosting.

Although not required, the following overview diagram summarizes AndersonConstructionsjobcostingsystem.

INDIRECTCOSTPOOL

COSTALLOCATION

BASE

DirectMaterials

COSTOBJECT:RESIDENTIAL

HOME

DIRECTCOSTS

}

}

} DirectManufacturingLabor

IndirectCosts

DirectCosts

AssemblySupport

DirectLaborHours

}

46

419 (10min.) Budgetedmanufacturingoverheadrate,allocatedmanufacturingoverhead.

1. Budgetedmanufacturingoverheadrate =Budgetedmanufacturingoverhead

Budgetedmachinehours

=$4,000,000

200,000machinehours= $20per machinehour

2.Manufacturingoverheadallocated=ActualmachinehoursBudgetedmanufacturingoverheadrate=195,000$20=$3,900,000

3. Sincemanufacturingoverheadallocatedisgreaterthantheactualmanufacturingoverheadcosts,Waheedoverallocatedmanufacturingoverhead:

Manufacturingoverheadallocated $3,900,000Actualmanufacturingoverheadcosts 3,860,000Overallocatedmanufacturingoverhead $40,000

47

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

1. Anoverviewoftheproductcostingsystemis

COSTOBJECT:PRODUCT

COSTALLOCATION

BASE

DIRECTCOST

}

}

MachiningDepartmentManufacturingOverhead

MachineHours

DirectMaterials

INDIRECTCOSTPOOL

}

DirectManufacturing

Labor

IndirectCosts

DirectCosts

}

AssemblyDepartmentManufacturingOverhead

DirectManuf.LaborCost

Budgetedmanufacturingoverheaddividedbyallocationbase:

Machiningoverhead000,50000,800,1$

=$36permachinehour

Assemblyoverhead:000,000,2$000,600,3$

=180%ofdirectmanuf.laborcosts

2. Machiningdepartment,2,000hours $36 $72,000Assemblydepartment,180% $15,000 27,000TotalmanufacturingoverheadallocatedtoJob494 $99,000

3. Machining AssemblyActualmanufacturingoverhead $2,100,000 $3,700,000Manufacturingoverheadallocated,55,000 $36 1,980,000 180% $2,200,000 3,960,000

Underallocated(Overallocated) $120,000 $(260,000)

48

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

1. Budgetedindirectcostrate=$13,000,000$5,000,000=260%ofprofessionallaborcosts

2. At the budgeted revenues of $20,000,000, Taylors operating income of $2,000,000equals10%ofrevenues.

Markuprate =$20,000,000$5,000,000=400%ofdirectprofessionallaborcosts

COSTALLOCATION

BASE

}

}

}

ConsultingSupport

ConsultingSupport

COSTOBJECT:JOBFOR

CONSULTINGCLIENT

DIRECTCOSTS }

IndirectCosts

DirectCosts

INDIRECTCOSTPOOL

ProfessionalLaborCosts

ProfessionalLaborCosts

ProfessionalLabor

ClientSupport

49

3. BudgetedcostsDirectcosts:

Director,$200 3 $600Partner,$100 16 1,600Associate,$50 40 2,000Assistant,$30 160 4,800 $9,000

Indirectcosts:Consultingsupport,260% $9,000 23,400

Totalcosts $32,400

Ascalculatedinrequirement2,thebidpricetoearna10%incometorevenuemarginis400%of direct professional costs. Therefore, Taylor should bid 4 $9,000 = $36,000 for the RedRoosterjob.

Bid price to earn target operating incometorevenue margin of 10% can also becalculatedasfollows:

LetR=revenuetoearntargetincomeR0.10R=$32,4000.90R=$32,400R=$32,4000.90=$36,000

or, Directcosts $ 9,000Indirectcosts 23,400Operatingincome 3,600Bidprice $36,000

410

422 (1520min.) Serviceindustry,timeperiodusedtocomputeindirectcostrates.

1.JanMarch AprilJune JulySept OctDec Total

Directlaborcosts $400,000 $280,000 $250,000 $270,000 $1,200,000Variable overhead costsas

apercentageofdirectlaborcosts 90% 60% 60% 60%

Variableoverheadcosts(Percentage directlaborcosts) $360,000 $168,000 $150,000 $162,000 $ 840,000

Fixedoverheadcosts 300,000 300,000 300,000 300,000 1,200,000Totaloverheadcosts $660,000 $468,000 $450,000 $462,000 $2,040,000Totaloverheadcostsasapercentageofdirectlaborcosts 165% 167% 180% 171% 170%

BudgetedOverheadRateUsed

Job332JanMarch

RateJulySept

RateAverage

YearlyRateDirectmaterials $10,000 $10,000 $10,000Directlaborcosts 6,000 6,000 6,000Overheadallocated(variable+fixed)(165%180%170%of$6,000) 9,900 10,800 10,200

FullcostofJob332 $25,900 $26,800 $26,200

(a) ThefullcostofJob332,usingthebudgetedoverheadrateof165%forJanuaryMarch,is$25,900.

(b) ThefullcostofJob332,usingthebudgetedoverheadrateof180%forJulySeptember,is$26,800.

(c) ThefullcostofJob332,usingtheannualbudgetedoverheadrateof170%,is$26,200.

2.Budgetedfixedoverheadratebasedonannual fixedoverheadcostsandannualdirectlaborcosts=$1,200,000 $1,200,000=100%

BudgetedVariableOverheadRateUsed

Job332JanuaryMarch

rateJulySept

rateDirectmaterials $10,000 $10,000Directlaborcosts 6,000 6,000Variableoverheadallocated(90%60%of$6,000) 5,400 3,600

Fixedoverheadallocated(100%of$6,000) 6,000 6,000

FullcostofJob332 $27,400 $25,600

411

(a) ThefullcostofJob332,usingthebudgetedvariableoverheadrateof90%forJanuaryMarch andanannual fixedoverheadrateof100%,is$27,400.

(b) The full cost of Job 332, using the budgeted variable overhead rate of 60% for JulySeptemberandanannual fixedoverheadrateof100%,is$25,600.

3. IfPrinters,Inc.setspricesatamarkupofcosts,thenpricesbasedoncostscalculatedasinRequirement2(ratherthanasinRequirement1)wouldbemoreeffectiveindeterringclientsfromsendinginlastminute,congestioncausingordersintheJanuaryMarchtimeframe.Inthiscalculation,morevariablemanufacturingoverheadcostsareallocatedtojobsinthefirstquarter,reflecting the larger costs of that quarter caused by higher overtime and facility andmachinemaintenance.Thismethodbettercapturesthecostofcongestionduringthefirstquarter.

423 (1015min.) Accountingformanufacturingoverhead.

1. Budgetedmanufacturingoverheadrate =$7,500,000250,000

=$30permachinehour

2. WorkinProcessControl 7,350,000ManufacturingOverheadAllocated 7,350,000

(245,000machinehours $30permachinehour=$7,350,000)

3. $7,350,000 $7,300,000=$50,000overallocated,aninsignificantamountofactualmanufacturingoverheadcosts$50,000$7,300,000=0.66%.

ManufacturingOverheadAllocated 7,350,000ManufacturingDepartmentOverheadControl 7,300,000CostofGoodsSold 50,000

412

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

SomeinstructorsmayalsowanttoassignExercise425.Itdemonstratestherelationshipsofthegeneralledgertotheunderlyingsubsidiaryledgersandsourcedocuments.

1. Anoverviewoftheproductcostingsystemis:

COSTOBJECT:PRINTJOB

COSTALLOCATION

BASE

DIRECTCOST

}

}

ManufacturingOverhead

DirectManufacturingLaborCosts

DirectMaterials

INDIRECTCOSTPOOL

}

DirectManuf.Labor

IndirectCosts

DirectCosts

}

413

2.&3.This answer assumes COGS given of $4,020 does not include the writeoff of overallocatedmanufacturingoverhead.

2. (1) MaterialsControlAccountsPayableControl

800800

(2) WorkinProcessControlMaterialsControl

710710

(3) ManufacturingOverheadControlMaterialsControl

100100

(4) WorkinProcessControlManufacturingOverheadControl

WagesPayableControl

1,300900

2,200(5) ManufacturingOverheadControl

AccumulatedDepreciationbuildingsandmanufacturingequipment

400

400(6) ManufacturingOverheadControl

Miscellaneousaccounts550

550(7) WorkinProcessControl

ManufacturingOverheadAllocated(1.60 $1,300=$2,080)

2,0802,080

(8) FinishedGoodsControlWorkinProcessControl

4,1204,120

(9) AccountsReceivableControl(orCash)Revenues

8,0008,000

(10) CostofGoodsSoldFinishedGoodsControl

4,0204,020

(11) ManufacturingOverheadAllocatedManufacturingOverheadControlCostofGoodsSold

2,0801,950130

414

3.MaterialsControl

Bal.12/31/2008(1) Purchases

100800

(2) Issues(3) Issues

710100

Bal.12/31/2009 90

WorkinProcessControlBal.12/31/2008(2) Directmaterials(4) Directmanuf.labor(7) Manuf.overhead

allocated

60710

1,300

2,080

(8)Goodscompleted 4,120

Bal.12/31/2009 30

FinishedGoodsControlBal.12/31/2008(8) Goodscompleted

5004,120

(10) Goodssold 4,020

Bal.12/31/2009 600

CostofGoodsSold(10) Goodssold 4,020 (11) Adjustforoverallocation 130

Bal.12/31/2009 3,890

ManufacturingOverheadControl(3) Indirectmaterials(4) Indirectmanuf.labor(5) Depreciation(6) Miscellaneous

100900400550

(11) Toclose 1,950

Bal. 0

ManufacturingOverheadAllocated(11)Toclose 2,080 (7) Manuf.overheadallocated 2,080

Bal. 0

415

425 (35minutes)Journalentries,Taccounts,andsourcedocuments.1.

i.DirectMaterialsControl 124,000AccountsPayableControl 124,000

SourceDocument:PurchaseInvoice,ReceivingReportSubsidiaryLedger:DirectMaterialsRecord,AccountsPayable

ii. WorkinProcessControla 122,000DirectMaterialsControl 122,000

SourceDocument:MaterialRequisitionRecords,JobCostRecordSubsidiaryLedger:DirectMaterialsRecord, WorkinProcessInventory,RecordsbyJobs

iii. WorkinProcessControl 80,000ManufacturingOverheadControl 54,500

WagesPayableControl 134,500SourceDocument:LaborTimeRecords,JobCostRecordsSubsidiaryLedger:,ManufacturingOverheadRecords,EmployeeLaborRecords,WorkinProcessInventoryRecordsbyJobs

iv. ManufacturingOverheadControl 129,500SalariesPayableControl 20,000AccountsPayableControl 9,500AccumulatedDepreciationControl 30,000RentPayableControl 70,000

SourceDocument:DepreciationSchedule,RentSchedule,Maintenancewagesdue,InvoicesformiscellaneousfactoryoverheaditemsSubsidiaryLedger:ManufacturingOverheadRecords

v. WorkinProcessControl 200,000ManufacturingOverheadAllocated 200,000($80,000 $2.50)

SourceDocument:LaborTimeRecords,JobCostRecordSubsidiaryLedger:WorkinProcessInventoryRecordsbyJobs

vi. FinishedGoodsControlb 387,000WorkinProcessControl 387,000

SourceDocument:JobCostRecord,CompletedJobCostRecordSubsidiaryLedger:WorkinProcessInventoryRecordsbyJobs,FinishedGoodsInventoryRecordsbyJobs

vii. CostofGoodsSoldc 432,000FinishedGoodsControl 432,000

SourceDocument:SalesInvoice,CompletedJobCostRecordSubsidiaryLedger:FinishedGoodsInventory RecordsbyJobs

viii. ManufacturingOverheadAllocated 200,000ManufacturingOverheadControl 184,000CostofGoodsSold 16,000

416

SourceDocument:PriorJournalEntries

ix. AdministrativeExpenses 7,000MarketingExpenses 120,000

SalariesPayableControl 30,000AccountsPayableControl 90,000AccumulatedDepreciation,OfficeEquipment 7,000

SourceDocument:DepreciationSchedule,MarketingPayroll Request,InvoiceforAdvertising,SalesCommissionSchedule.

SubsidiaryLedger:EmployeeSalary Records,AdministrationCostRecords,MarketingCostRecords.

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

417

2. Taccounts

DirectMaterialsControlBal.1/1/2008(1) Purchases

9,000124,000

(2)Materialsused 122,000

Bal.12/31/2008 11,000

WorkinProcessControlBal.1/1/2008(2) Directmaterialsused(3) Directmanuf.labor(5) Manuf.overhead

allocated

6,000122,00080,000

200,000

(6)Costofgoodsmanufactured 387,000

Bal.12/31/2008 21,000

FinishedGoodsControlBal.1/1/2008(6)Costofgoodsmanuf.

69,000387,000

(7)Costofgoodssold 432,000

Bal.12/31/2008 24,000

CostofGoodsSold(7) Goodssold 432,000 (8)Adjustforoverallocation 16,000

ManufacturingOverheadControl(3)Indirectlabor(4) Supplies(4) Miscellaneous(4 Depreciation(4)Rent

54,50020,0009,50030,00070,000

(8) Toclose 184,000

Bal. 0

ManufacturingOverheadAllocated(8)Toclose 200,000 (5)Manuf.overheadallocated 200,000

Bal. 0

418

426 (45min.) Jobcosting,journalentries.

SomeinstructorsmaywishtoassignProblem424.Itdemonstratestherelationshipsof journalentries,generalledger,subsidiaryledgers,andsourcedocuments.

1. Anoverviewoftheproductcostingsystemis

2. Amountsinmillions.

(1) MaterialsControlAccountsPayableControl

150150

(2) WorkinProcessControlMaterialsControl

145145

(3) ManufacturingDepartmentOverheadControlMaterialsControl

1010

(4) WorkinProcessControlWagesPayableControl

9090

(5) ManufacturingDepartmentOverheadControlWagesPayableControl

3030

(6) ManufacturingDepartmentOverheadControlAccumulatedDepreciation

1919

(7) ManufacturingDepartmentOverheadControlVariousliabilities

99

(8) WorkinProcessControlManufacturingOverheadAllocated

6363

(9) FinishedGoodsControlWorkinProcessControl

294294

(10a) CostofGoodsSoldFinishedGoodsControl

292292

(10b) AccountsReceivableControl(orCash)Revenues

400400


MachineHours

IndirectCostsDirectCosts

DirectMaterials

DirectManuf.Labor

INDIRECTCOSTPOOL

COSTALLOCATION

BASE

COSTOBJECTPRODUCT

DIRECTCOSTS

}

}

}

}

419

ThepostingofentriestoTaccountsisasfollows:

MaterialsControl WorkinProcessControlBal. 12(1) 150

(2) 145(3) 10

Bal. 2(2) 145(4) 90(8) 63

(9) 294

Bal. 6

FinishedGoodsControl CostofGoodsSoldBal. 6(9) 294

(10a) 292 (10a) 292(11) 5

ManufacturingDepartmentOverheadControl ManufacturingOverheadAllocated

(3) 10(5) 30(6) 19(7) 9

(11) 68 (11) 63 (8) 63

AccountsPayableControl WagesPayableControl(1) 150 (4) 90

(5) 30

AccumulatedDepreciation VariousLiabilities(6) 19 (7) 9

AccountsReceivableControl Revenues(10b) 400 (10b) 400

TheendingbalanceofWorkinProcessControlis$6.

3. (11) ManufacturingOverheadAllocated 63CostofGoodsSold 5

ManufacturingDepartmentOverheadControl 68

EntrypostedtoTaccountsinRequirement2.

420

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

1.Directmanufacturinglaborrateperhour $25Manufacturingoverheadcostallocatedpermanufacturinglaborhour $20

JobM1 JobM2Directmanufacturinglaborcosts $275,000 $200,000Directmanufacturinglaborhours($275,000$25$200,000$25) 11,000 8,000Manufacturingoverheadcostallocated(11,000 $208,000 $20) $220,000 $160,000

JobCostsMay2009 JobM1 JobM2Directmaterials $ 75,000 $ 50,000Directmanufacturinglabor 275,000 200,000Manufacturingoverheadallocated 220,000 160,000Totalcosts $570,000 $410,000

2.NumberofpipesproducedforJobM1 1,500Costperpipe($570,000 1,500) $380

3.FinishedGoodsControl 570,000

WorkinProcessControl 570,000

4. Raymond Company beganMay 2009 with no workinprocess inventory. During May, itstartedandfinishedM1.ItalsostartedM2,whichisstillinworkinprocessinventoryattheendofMay.M2smanufacturingcostsuptothispoint,$410,000,remainasadebitbalance intheWorkinProcessInventory accountattheendofMay2009.

421

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

1. Actualdirectcostrateforprofessionallabor= $58perprofessionallaborhour

Actualindirectcostrate =$744,000

15,500hours= $48perprofessionallaborhour

Budgeteddirectcostrateforprofessionallabor =

$960,00016,000hours

= $60perprofessionallaborhour

Budgetedindirectcostrate =$720,000


(a)ActualCosting

(b)NormalCosting

(c)Variationof

NormalCostingDirectCostRate $58

(Actualrate)$58

(Actualrate)$60

(Budgetedrate)IndirectCostRate $48

(Actualrate)$45

(Budgetedrate)$45

(Budgetedrate)

2. (a)ActualCosting

(b)NormalCosting

(c)Variationof

NormalCostingDirectCostsIndirectCostsTotalJobCosts

$58 120=$ 6,96048 120= 5,760

$12,720

$58 120=$ 6,96045 120= 5,400

$12,360

$60 120=$7,20045 120= 5,400

$12,600

Allthreecostingsystemsusetheactualprofessionallabortimeof120hours.Thebudgeted110hoursforthePierreEnterprisesauditjobisnotusedinjobcosting.However,Chiracmayhaveusedthe110hournumberinbiddingfortheaudit.

The actual costing figure of $12,720 exceeds the normal costing figure of $12,360because the actual indirectcost rate ($48) exceeds the budgeted indirectcost rate ($45). Thenormalcostingfigureof$12,360islessthanthevariationofnormalcosting(basedonbudgetedratesfordirectcosts)figureof$12,600,becausetheactualdirectcostrate($58)islessthanthebudgeteddirectcostrate($60).

422

Althoughnotrequired,thefollowingoverviewdiagramsummarizesChiracsjobcostingsystem.

AuditSupport

ProfessionalLaborHours

IndirectCosts

DirectCosts

INDIRECTCOSTPOOL

COSTALLOCATION

BASE

COSTOBJECT:JOBFORAUDITING

PIERRE&CO.

DIRECTCOST

ProfessionalLabor

423

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=$100perprofessionalhour

1c.Variationfromnormalcostingthatusesbudgetedratesfordirectcosts

Directcostrate Budgetedprofessionallaborcosts Budgetedprofessionallaborhours = =$1,100,00020,000hours=$55perprofessionalhour

Indirectcostrate =BudgetedsupportcostsBudgetedprofessionallaborhours=$2,000,00020,000hours=$100perprofessionalhour

2. Thecostsof Ari Apostolus will undereachmethodfollow:a. ActualCostingDirectcosts4,000hours $60perhour $240,000Indirectcosts4,000hours $109.09 perhour 436,360Totalcosts $676,360

b. Normal CostingDirectcosts4,000hours $60perhour $240,000Indirectcosts4,000hours $100perhour 400,000Totalcosts $640,000

c. VariationfromnormalcostingDirectcosts4,000hours $55perhour $220,000Indirectcosts4,000hours $100perhour 400,000Totalcosts $620,000

424

430 (30min.) Prorationofoverhead.

overheadrate1.Budgetedmanufacturing

=BudgetedmanufacturingoverheadcostBudgeteddirectmanufacturinglaborcost

$100,00050%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.

Account

Dec.31,2009Balance(BeforeProration)

(1)

Prorationof$4,000Overallocated

Manuf. Overhead(2)

Dec.31,2009Balance

(AfterProration)(3)=(1) (2)

WIP $ 50,000 $ 0 $ 50,000FinishedGoods 240,000 0 240,000CostofGoodsSold 560,000 4,000 556,000Total $850,000 $4,000 $846,000

3b.Overallocatedplantoverheadproratedbasedon endingbalances:

Account

Dec.31,2009Balance

(BeforeProration)(1)

BalanceasaPercentofTotal

(2)=(1)$850,000


Manuf.Overhead(3)=(2)$4,000

Dec.31,2009Balance

(AfterProration)(4)=(1) (3)

WIP $50,000 0.0588 0.0588$4,000 =$ 235 $49,765FinishedGoods 240,000 0.2824 0.2824$4,000 = 1,130 238,870CostofGoodsSold 560,000 0.6588 0.6588$4,000 = 2,635 557,365Total $850,000 1.0000 $4,000 $846,000

3c.Overallocatedplantoverheadproratedbasedon 2009overheadinendingbalances:

Account

Dec.31,2009Balance(Before

Proration)(1)

AllocatedManuf.

OverheadinDec.31,2009

Balance(2)

Allocated Manuf.OverheadinDec.31,2009Balance

asaPercentofTotal(3) =(2)$110,000


Manuf.Overhead(4)=(3)$4,000

Dec.31,2009Balance(After

Proration)(5)=(1) (4)

WIP $50,000 $ 10,000a 0.0909 0.0909$4,000=$ 364 $ 49,636FinishedGoods 240,000 30,000b 0.2727 0.2727$4,000= 1,091 238,909CostofGoodsSold 560,000 70,000c 0.6364 0.6364$4,000=$2,545 557,455Total $850,000 $110,000 1.0000 $4,000 $846,000

425

a,b,cOverheadallocated=Directmanuf.laborcost50%=$20,00060,000140,00050%

4.Writingoff alloftheoverallocatedplantoverheadtoCostofGoodsSold(CGS)isusuallywarrantedwhenCGSislargerelativetoWorkinProcessandFinishedGoods Inventoryandtheoverallocatedplantoverheadisimmaterial.Boththeseconditionsapplyinthiscase.ROWshouldwriteoffthe$4,000overallocatedplantoverheadtoCostofGoodsSoldAccount.

431 (20-30min) Jobcosting,accountingformanufacturingoverhead,budgetedrates.

1. Anoverviewofthejobcostingsystemis:

COSTOBJECT:PRODUCT

COSTALLOCATION

BASE

DIRECTCOST

}

}

MachiningDepartmentManufacturingOverhead

MachineHoursinMachiningDept.

DirectMaterials

INDIRECTCOSTPOOL

}

DirectManufacturing

Labor

IndirectCosts

DirectCosts

}

FinishingDepartmentManufacturingOverhead


inFinishingDept.

2. Budgetedmanufacturingoverheaddividedbyallocationbase:

a. MachiningDepartment:

$10,000,000200,000

= $50permachinehour

b. FinishingDepartment:

$8,000,000$4,000,000

= 200%ofdirectmanufacturinglaborcosts

COSTOBJECT:JOB

426

3. MachiningDepartmentoverhead,$50 130hours $6,500FinishingDepartmentoverhead,200%of$1,250 2,500Totalmanufacturingoverheadallocated $9,000

4. Total costsofJob431:Directcosts:

DirectmaterialsMachiningDepartment $14,000FinishingDepartment 3,000

DirectmanufacturinglaborMachiningDepartment 600FinishingDepartment 1,250 $18,850

Indirectcosts:MachiningDepartmentoverhead,$50 130 $6,500FinishingDepartmentoverhead,200%of$1,250 2,500 9,000

Totalcosts $27,850

TheperunitproductcostofJob431is$27,850200units=$139.25perunit

The point of this part is (a) to get the definitions straight and (b) to underscore thatoverhead isallocatedbymultiplying theactualamountof the allocation base by the budgetedrate.

5.

Machining FinishingManufacturingoverheadincurred(actual) $11,200,000 $7,900,000Manufacturingoverheadallocated

220,000hours $50 11,000,000200%of$4,100,000 8,200,000

Underallocatedmanufacturingoverhead $200,000Overallocatedmanufacturingoverhead $300,000Totaloverallocatedoverhead=$300,000$200,000=$100,000

6. Ahomogeneouscostpool isonewhereall costshavethesameora similar causeandeffect or benefitsreceived relationship with the costallocation base. Solomon likely assumesthat all itsmanufacturing overhead cost items are not homogeneous. Specifically, those in theMachiningDepartmenthaveacauseandeffectrelationshipwithmachinehours,whilethoseintheFinishingDepartmenthaveacauseandeffect relationshipwithdirectmanufacturing laborcosts.Solomonbelieves that thebenefitsofusingtwocostpools (moreaccurateproductcostsandbetterabilitytomanagecosts)exceedsthecostsofimplementingamorecomplexsystem.

427

432 (15-20min.)Serviceindustry,jobcosting,lawfirm.

1.


LegalSupport

COSTOBJECT:JOBFORCLIENT

INDIRECTCOSTPOOL

COSTALLOCATION

BASE }

}

}

}

DIRECTCOST

IndirectCosts

DirectCosts

ProfessionalLabor

2. Budgetedprofessionallaborhourdirectcostrate

=Budgeteddirectlaborcompensationperprofessional

Budgeteddirectlaborhoursperprofessional

=$104,000


Notethatthebudgetedprofessional laborhourdirectcostratecanalsobecalculatedbydividingtotalbudgetedprofessional laborcostsof$2,600,000($104,000perprofessional 25professionals)bytotalbudgetedprofessionallaborhoursof40,000(1,600hoursperprofessional 25professionals),$2,600,000 40,000=$65perprofessionallaborhour.

Budgetedindirectcostrate

=BudgetedtotalcostsinindirectcostpoolBudgetedtotalprofessionallaborhours

=25hours1,600

$2,200,000

=$2,200,00040,000hours

= $55perprofessionallaborhour

4. Richardson PunchDirectcosts:

Professionallabor,$65 100$65 150Indirectcosts:

Legalsupport,$55 100$55 150

$6,500

5,500$12,000

$9,750

8,250$18,000

3.

428

433 (2530min.) Serviceindustry,jobcosting,twodirectandindirectcostcategories,lawfirm(continuationof432).

Althoughnotrequired, the followingoverviewdiagram ishelpful tounderstandKeatings jobcostingsystem.

1. ProfessionalPartnerLabor

ProfessionalAssociateLabor

BudgetedcompensationperprofessionalDividedbybudgetedhoursofbillable

timeperprofessionalBudgeteddirectcostrate

$200,000

1,600$125perhour*

$80,000

1,600$50perhour

*Canalsobecalculatedas TotalbudgetedpartnerlaborcostsTotalbudgetedpartnerlabor hours

=$200,000 5

1,600 5

=

000,8

$1,000,000= $125

CanalsobecalculatedasTotalbudgetedassociatelabor costs

Totalbudgetedassociatelabor hours=

$80,000 20

1,600 20

=

$1,600,000

32 000,=$50

2. GeneralSupport

SecretarialSupport

BudgetedtotalcostsDividedbybudgetedquantityofallocationbaseBudgetedindirectcostrate

$1,800,00040,000hours$45perhour

$400,0008,000hours$50perhour


GeneralSupport

COSTOBJECT:JOBFORCLIENT

INDIRECTCOSTPOOL

COSTALLOCATION

BASE }

}

}

}

DIRECTCOST

IndirectCosts

DirectCosts

PartnerLaborHours

SecretarialSupport

ProfessionalAssociateLabor

ProfessionalPartnerLabor

429

3. Richardson PunchDirectcosts:

Professionalpartners,$125 60$125 30Professionalassociates,$50 40$50 120

DirectcostsIndirectcosts:

Generalsupport,$45 100$45 150Secretarialsupport,$50 60$50 30

IndirectcostsTotalcosts

$7,5002,000

$9,500

4,5003,000

7,500$17,000

$3,7506,000

$9,750

6,7501,500

8,250$18,000

4. Richardson PunchSingledirectSingleindirect(fromProblem 432)

Multipledirect Multipleindirect(fromrequirement3ofProblem 433)

Difference

$12,000

17,000

$ 5,000undercosted

$18,000

18,000

$0nochange

TheRichardsonandPunchjobsdiffer intheiruseofresources.TheRichardsonjobhasamix of 60% partners and 40% associates, while Punch has a mix of 20% partners and 80%associates.Thus, theRichardson job isarelativelyhighuserof themorecostlypartnerrelatedresources(bothdirectpartnercostsandindirectpartnersecretarialsupport).Therefinedcostingsystem inProblem432 increasesthereportedcost inProblem432 for theRichardson jobby41.7%(from$12,000to$17,000).

430

434 (20-25min.) Prorationofoverhead.

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

2. Manufacturingoverheadunderallocated

= Manufacturingoverheadincurred

Manufacturingoverheadallocated

= $4,900,000 $4,500,000*= $400,000

*$60 75,000actualmachinehours=$4,500,000

a. WriteofftoCostofGoodsSold

Account(1)

AccountBalance


Writeoffof$400,000

UnderallocatedManufacturing

Overhead(3)

AccountBalance

(AfterProration)(4)=(2)+(3)

WorkinProcessFinishedGoodsCostofGoodsSoldTotal

$750,0001,250,0008,000,000

$10,000,000

$00

400,000$400,000

$750,0001,250,0008,400,000

$10,400,000

b. Prorationbasedonendingbalances(beforeproration)inWorkinProcess,FinishedGoodsandCostofGoodsSold.

Account(1)

AccountBalance(BeforeProration)

(2)

Prorationof$400,000UnderallocatedManufacturing

Overhead(3)

AccountBalance


WorkinProcessFinishedGoodsCostofGoodsSoldTotal

$750,0001,250,0008,000,000

$10,000,000

(7.5%)(12.5%)(80.0%)100.0%

0.075 $400,000= $ 30,0000.125 $400,000= 50,0000.800 $400,000= 320,000

$400,000

$780,0001,300,0008,320,000

$10,400,000

c. Prorationbasedontheallocatedoverheadamount(beforeproration)intheendingbalancesofWorkinProcess,FinishedGoods,andCostofGoodsSold.

Account(1)

AccountBalance(Before

Proration)(2)

AllocatedOverheadIncludedin

theAccountBalance(BeforeProration)(3)(4)

Prorationof$400,000Underallocated

ManufacturingOverhead(5)

AccountBalance(After

Proration)(6)=(2)+(5)

WorkinProcess $750,000$240,000a

(5.33%) 0.0533 $400,000=$21,320 $ 771,320FinishedGoods 1,250,000 660,000

b(14.67%) 0.1467 $400,000= 58,680 1,308,680

CostofGoodsSold 8,000,000 3,600,000c

(80.00%) 0.8000 $400,000= 320,000 8,320,000Total $10,000,000$4,500,000 100.00% $400,000 $10,400,000

a$60 4,000machinehours

b$60 11,000machinehours

c$60 60,000machinehours

431

3. Alternative(c)istheoreticallypreferredover(a)and(b).Alternative(c)yieldsthesameendingbalancesinworkinprocess,finishedgoods,andcostofgoodssoldthatwouldhavebeenreportedhadactualindirectcostratesbeenused.

Chapter 4 also discusses an adjusted allocation rate approach that results in the sameendingbalancesasdoesalternative(c).Thisapproachoperatesviaarestatementoftheindirectcostsallocatedtoalltheindividualjobsworkedonduringtheyearusingtheactualindirectcostrate.

435 (15min.) Normalcosting,overheadallocation,workingbackward.

1a. Manufacturingoverheadallocated =200%Directmanufacturinglaborcost

$3,600,000 =2Directmanufacturinglaborcost

Directmanufacturinglaborcost =2

$3,600,000=$1,800,000

b. Totalmanufacturingcost

=Directmaterialused

+Directmanufacturinglaborcost

+ Manufacturingoverheadallocated

$8,000,000 =Directmaterialused+$1,800,000+$3,600,000

Directmaterialused =$2,600,000

2. WorkinProcess1/1/2009

+Totalmanufacturingcost= Costofgoodsmanufactured+WorkinProcess12/31/2009

DenoteWorkinprocesson12/31/2009byX

$320,000+$8,000,000=$7,920,000+X

X=$400,000

Workinprocessinventory,12/31/09=$400,000.

432

436 (40min.) Prorationofoverheadwithtwoindirectcostpools.

1.a.C&Adepartment:

Overheadallocated=$404,000Machinehours=$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

Dec.31,2008 Balance(BeforeProration)

(1)

Prorationof $10,000OverallocatedOverhead

(2)

Dec.31,2008Balance

(AfterProration)(3)=(1)+ (2)

WIP $ 150,000 0 $ 150,000FinishedGoods 250,000 0 250,000CostofGoodsSold 1,600,000 +$3,000$13,000 1,590,000Total $2,000,000 $ 10,000 $1,990,000

2b.Overallocatedoverheadproratedbasedonendingbalances

Account


(1)

BalanceasaPercentofTotal

(2)=(1)$2,000,000

Prorationof$10,000OverallocatedOverhead

(3)=(2)10,000

Dec.31,2008Balance(AfterProration)(4)=(1) (3)

WIP $150,000 0.075 0.075 $10,000 =$ 750 $ 149,250FinishedGoods 250,000 0.125 0.125 $10,000 = 1,250 248,750CostofGoodsSold 1,600,000 0.800 0.800 $10,000 = 8,000 1,592,000Total $2,000,000 1.000 $10,000 $1,990,000

2c.Overallocatedoverheadproratedbasedonoverheadinendingbalances.(Note:overheadmustbeallocatedseparatelyfromeachdepartment.Thiscanbedoneusingthenumberofmachinehours/directlaborhoursasasurrogate foroverheadinendingbalances.)

433

ForC&Adepartment:

Account

AllocatedOverheadinDec.31,2008 Balance

(1)

AllocatedOverheadinDec.31,2008BalanceasaPercentofTotal(2)=(1)$160,000


Overhead(3)=(2)$3000

WIP 200$40=$ 8,000 0.05 0.05$3,000=$ 150FinishedGoods 600$40= 24,000 0.15 0.15$3,000= 450CostofGoodsSold 3,200$40= 128,000 0.80 0.80$3,000= 2,400Total $160,000 1.00 $3,000

Forfinishingdepartment:

Account

AllocatedOverheadinDec.31,2008Balance

(4)

AllocatedOverheadin Dec.31,2008

BalanceasaPercentofTotal(5)=(4)$100,000

Prorationof$13,000UnderallocatedOverhead

(6)=(5)$13,000WIP 100$50=$ 5,000 0.05 0.05$13,000=$650FinishedGoods 400$50= 20,000 0.20 0.20$13,000 =2,600CostofGoodsSold 1,500$50= 75,000 0.75 0.75$13,000= 9,750Total $100,000 1.00 $13,000

Account


(7)

Underallocated/OverallocatedOverhead

(8)=(3) (6)

Dec.31,2009Balance(AfterProration)(9)=(7)+(8)

WIP $150,000 $150 $650 = $ (500) $149,500FinishedGoods 250,000 $450 $2,600= (2,150) 247,850CostofGoodsSold 1,600,000 $2,400 $9,750= (7,350) 1,592,650Total $2,000,000 $(10,000) $1,990,000

3. The first method is simple andCost ofGoods Sold accounts for 80%of the three accountamounts. The amount of overallocated and underallocated overhead is also immaterial.Allocationtotheothertwoaccountsisminimal.Therefore,writeofftocostofgoodssoldisthemostcosteffectivealternative.

434

437 (35min.) Generalledgerrelationships,underandoverallocation.

Thesolutionassumesallmaterialsusedaredirectmaterials.AsummaryoftheTaccountsforNeedhamCompanybeforeadjustingforunderoroverallocationofoverheadfollows:

DirectMaterialsControl WorkinProcessControl112008 30,000Purchases 400,000

Materialusedformanufacturing 380,000

112008 20,000Directmaterials 380,000

Transferredtofinishedgoods 940,000

12312008 50,000 Directmanuf.Labor 360,000

Manuf.overheadallocated 480,000

12312008 300,000

FinishedGoodsControl CostofGoodsSold112008 10,000TransferredinfromWIP 940,000

Costofgoodssold 900,000

Finishedgoodssold 900,000

12312008 50,000

ManufacturingOverheadControl ManufacturingOverheadAllocatedManufacturingoverheadcosts 540,000

Manufacturingoverheadallocatedtoworkinprocess 480,000

1. FromDirectMaterialsControlTaccount,Directmaterialsissuedtoproduction=$380,000thatappearsasacredit.

2. Directmanufacturinglaborhours =Directmanufacturing laborcosts

Directmanufacturingwagerateperhour

=$360,

$15perho000

ur=24,000hours

Manufacturingoverheadallocated =

Directmanufacturinglaborhours

Manufacturingoverheadrate

= 24,000hours $20perhour =$480,000

3. FromthedebitentrytoFinishedGoodsTaccount,CostofjobscompletedandtransferredfromWIP=$940,000

4. FromWorkinProcessTaccount,Workinprocessinventory

on12/31/2008=$20,000+$380,000+$360,000+$480,000 $940,000

=$300,000

5. FromthecreditentrytoFinishedGoodsControlTaccount, Costofgoodssold(beforeproration)=$900,000

435

6.Manufacturingoverhead

underallocated =DebitstoManufacturing

OverheadControl CredittoManufacturingOverheadAllocated

= $540,000 $480,000= $60,000underallocated

7. a. WriteofftoCostofGoodsSoldwillincrease(debit)CostofGoodsSoldby$60,000.Hence,CostofGoodsSold=$900,000+$60,000=$960,000.

b. Prorationbasedonendingbalances(beforeproration)inWorkinProcess,FinishedGoods,andCostofGoodsSold.

Accountbalancesineachaccountafterprorationfollows:

Account(1)

AccountBalance(BeforeProration)

(2)


ManufacturingOverhead(3)

AccountBalance(AfterProration)

(4)=(2)+(3)WorkinProcess $300,000 (24%) 0.24 $60,000=$14,400 $314,400FinishedGoods 50,000 (4%) 0.04 $60,000=2,400 52,400CostofGoodsSold 900,000 (72%) 0.72 $60,000= 43,200 943,200

$1,250,000 100% $60,000 $1,310,000

8. NeedhamsoperatingincomeusingwriteofftoCostofGoodsSoldandProrationbasedonendingbalances(beforeproration)follows:

Writeoffto ProrationBasedCostofGoods onEnding

Sold Balances

Revenues $1,090,000 $1,090,000Costofgoodssold 960,000 943,200Grossmargin 130,000 146,800Marketinganddistributioncosts 140,000 140,000Operatingincome/(loss) $(10,000) $6,800

9. If thepurpose is toreportthemostaccurateinventoryandcostofgoodssold figures, thepreferredmethodistoproratebasedonthemanufacturingoverheadallocatedcomponentintheinventoryandcostofgoodssoldaccounts.ProrationbasedonthebalancesinWorkinProcess,FinishedGoods, andCostofGoodsSoldwill equal the proration basedon themanufacturingoverheadallocatedcomponentiftheproportionsofdirectcoststomanufacturingoverheadcostsareconstantintheWorkinProcess,FinishedGoodsandCostofGoodsSoldaccounts.Evenifthisisnotthecase,theprorationsbasedonWorkinProcess,FinishedGoods,andCostofGoodsSoldwillbetterapproximatetheresultsifactualcostrateshadbeenusedratherthanthewriteofftoCostofGoodsSoldmethod.

Another consideration in Needhams decision about how to dispose of underallocatedmanufacturingoverheadistheeffectsonoperatingincome.ThewriteofftoCostofGoodsSoldwill lead to an operating loss. Proration based on the balances inWork in Process, FinishedGoods,andCostofGoodsSoldwillhelpNeedhamavoidthelossandshowanoperatingincome.

ThemainmeritofthewriteofftoCostofGoodsSoldmethodis itssimplicity.However,accuracy and the effect on operating income favor the preferred and recommended prorationapproach.

436

438 (40-55min.) Overviewofgeneralledgerrelationships.

1.&3. Aneffectiveapproach tothisproblem is todrawTaccountsand insert all theknownfigures.Then,workingwithTaccountrelationships,solvefortheunknownfigures(herecodedbytheletterXforbeginninginventoryfiguresandYforendinginventoryfigures).

MaterialsControlXPurchases

15,00085,000

(1) 70,000

100,000 70,000Y 30,000

WorkinProcessControlX(1) DM 70,000(2) DL 150,000(3) Overhead 90,000

10,000

310,000

(4) 305,000

(a)(c)

320,0005,0003,000

305,000

Y 23,000

FinishedGoodsControlX(4)

20,000305,000

(5) 300,000

325,000 300,000Y 25,000

CostofGoodsSold(5) 300,000 (d) 6,000

ManufacturingDepartmentOverheadControl

(a)(b)

85,0001,0001,000

(d) 87,000

ManufacturingOverheadAllocated(d) 93,000 (3)

(c)90,0003,000

Manufacturingoverheadcostrate=$90,000$150,000=60%

WagesPayableControl(a) 6,000

VariousAccounts(b) 1,000

437

2. Adjustingandclosingentries:

(a)WorkinProcessControl 5,000ManufacturingDepartmentOverheadControl 1,000

WagesPayableControl 6,000Torecognizepayrollcosts

(b)ManufacturingDepartmentOverheadControl 1,000Variousaccounts 1,000

Torecognizemiscellaneousmanufacturingoverhead

(c)WorkinProcessControl 3,000ManufacturingOverheadAllocated 3,000

Toallocatemanufacturingoverhead

Note:Studentstendtoforgetentry(c)entirely.Stressthatabudgetedoverheadallocationrate is used consistently throughout the year. This point is a major feature of thisproblem.

(d)ManufacturingOverheadAllocated 93,000ManufacturingDepartmentOverheadControl 87,000CostofGoodsSold 6,000

Toclosemanufacturingoverheadaccountsandoverallocatedoverheadtocostofgoodssold

Anoverviewoftheproductcostingsystemis

COSTOBJECT:JOB

COSTALLOCATION

BASE

DIRECTCOST

}

}



DirectMaterials

INDIRECTCOSTPOOL

}

DirectManufacturing

Labor

IndirectCosts

DirectCosts

}3. Seetheanswerto1.

438

439 (30min.) Allocationandprorationofoverhead.

1. Budgetedoverheadrate=BudgetedoverheadcostsBudgetedlaborcosts=1,5002,000=75%oflaborcost

2.Endingworkinprocess

Job1 Job2 TotalDirectmaterial costs 25 15 40Directlaborcosts 20 32 52Overhead(0.75Directlaborcosts) 15 24 39Total costs 60 71 131

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.

Account(1)

Dec.31,1762AccountBalance(BeforeProration)

(2)

Writeoffof 100Overallocated

overhead(3)

Dec.31,1762AccountBalance(AfterProration)(4)=(2)+(3)

WorkinProcess 131 0 131Costofgoodssold 3,919 (100) 3,819

4,050 (100) 3,950

4b. Overallocatedoverheadproratedbasedonendingbalances

Account(1)

Dec.31, 1762Balance


BalanceasaPercentofTotal(3)=(2) 4,050

Prorationof100OverallocatedOverhead

(4)=(3)100

Dec.31,1762Balance


WorkinProcess 131 0.03 (3) 128CostofGoodsSold 3,919 0.97 (97) 3,822

4,050 1.00 (100) 3,950

5. WritingoffalloftheoverallocatedoverheadtoCostofGoodsSold(CGS)iswarrantedwhenCGSislargerelativetoWorkinProcessInventoryandFinishedGoodsInventoryandtheoverallocatedoverheadisimmaterial.Boththeseconditionsapplyinthiscase.Franklin&SonPrintingshouldwriteoffthe100overallocatedoverheadtoCostofGoodsSoldaccount.

439

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

1. Directmanufacturingcosts:DirectmaterialsDirectmanufacturinglabor

Indirectmanufacturingcosts,150% $6,000

Totalmanufacturingcosts

$25,0006,000 $31,000

9,000$40,000

AerospacebillstheNavy$52,000($40,000 130%)for100X7seatsor$520($52,000 100)perX7seat.

2. Directmanufacturingcosts:DirectmaterialsDirectmanufacturinglabor

a

Indirectmanufacturingcosts,150% $5,000

Totalmanufacturingcosts

$25,0005,000 $30,000

7,500$37,500

a$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) Useonlycontractorswithareputationforethicalbehavioraswellasqualityproductsorservices.

(ii)Issue guidelines detailing acceptable and unacceptable billing practices bycontractors. For example, prohibiting the use of doublecounting cost allocationmethodsby contractors.

(iii)Issue guidelines detailing acceptable and unacceptable procurement practices bycontractors. For example, if a contractor purchases froma familyrelated company,requirethatthecontractorobtainquotesfromatleasttwootherbidders.

(iv)Employauditorswhoaggressivelymonitorthebillssubmittedbycontractors.(v)Askcontractorsfordetailsregardingdeterminationofcosts.

440

441 (35min.) Jobcostingserviceindustry.

1. ToursinProcess(TIP)June30,2009

2.

Costof CompletedTours(CCT)inJune2009

BandMaterials

(1)Labor(2)

Overhead(3)=150%(2)

Total(4)

GrungeExpress $ 400 $ 700 $1,050 $2,150DifferentStrokes 475 700 1,050 2,225MaybeTomorrow 275 400 600 1,275Total $1,150 $1,800 $2,700 $5,650

3. Overheadallocated=1.50 1,400a=$2,100Underallocatedoverhead =ActualoverheadAllocated overhead

=$2,500 2,100=$400underallocated

aTotallaborinJune=$100+$300+$400+$200+$400=$1,400

4a.UnderallocatedoverheadiswrittenofftoCCT

CIPinventoryremainsunchanged.

Account

June30,2009Balance


Prorationof$400

UnderallocatedOverhead

(2)

June30,2009Balance(After

Proration)(3)=(1) + (2)

CIP $2,100 $ 0 $2,100CCT 5,650 400 6,050

$7,750 $400 $8,150

4b. Underallocatedoverheadproratedbasedonendingbalances

Account

June30,2009Balance


BalanceasaPercentofTotal(2)=(1)$7,750

Prorationof$400Underallocated

Overhead(3)=(2)$400

June30,2009Balance

(AfterProration)(4)=(1) + (3)

TIP $2,100 0.271 0.271$400 =$108 $2,208CCT 5,650 0.729 0.729$400 = 292 5,942

$7,750 1.000 $400 $8,150

BandMaterials

(1)Labor(2)

Overhead(3)=150%(2)

Total(4)

AsILayDieing $250 $400 $600 $1,250AskMeLater 350 200 300 850Total $600 $600 $900 $2,100

441

4c. UnderallocatedoverheadproratedbasedonJuneoverheadinendingbalances

Account

June30,2009Balance


OverheadallocatedinJuneIncludedin

June30,2009Balance

(2)

OverheadallocatedinJuneIncludedinJune30,2009 asaPercentofTotal(3)=(2)$2,100

Prorationof$400Underallocated

Overhead(4)=(3)$400

June30,2009Balance(After

Proration)(5)=(1) + (4)

TIP $2,100 $ 900a 0.43 0.43$400=$172 $2,272CCT 5,650 1,200b 0.57 0.57$400= 228 5,878

$7,750 $2,100 1.00 $400 $8,150

aJunelaborforAsILayDieingandAskMeLater150%=($400+$200)150%=$600150%=$900

bJunelaborforGrungeExpress,DifferentStrokesandMaybeTomorrow150%=($100+$300+$400)150%=$800$150=$1,200

5. Iwouldchoosethemethodin4cbecausethismethodresultsinaccountbalancesbasedonactual overhead allocation rates. The account balances before proration in TIP and CCT aresignificantandunderallocatedoverheadismaterial.Furthermore,theratioofendingbalancesinTIPandCCTisdifferentfromtheratioofoverheadallocatedtoeachoftheseaccountsinJune.

Job Costing Chpt4

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