chapter 3 - forsiden - universitetet i · web viewjob-order costing c. process costing d....
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Chapter 2Systems Design: Job-Order Costing
Solutions to Questions
2-1 By definition, overhead costs cannot practically be traced to products or jobs. Therefore, overhead costs must be allocated rather than traced if they are to be assigned to products or jobs.
2-2 Job-order costing is used where many different products or services are produced each period. Each product (or job) is different from all others and requires separate costing. Process costing is used where a single, homogeneous product, such as cement, bricks, or gasoline, is continuously produced for long periods.
2-3 The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials and direct labor costs traced to the job and manufacturing overhead cost applied to the job. When a job is completed, the job cost sheet is used to compute the cost per completed unit. The job cost sheet is also a control document for: (1) determining how many units have been sold and determining the cost of these units; and (2) determining how many units are still in inventory at the end of a period and determining the cost of these units on the balance sheet.
2-4 A predetermined overhead rate is used to apply overhead to jobs. It is determined before a period begins and is computed by dividing the estimated total manufacturing overhead for the period by the estimated total units in the allocation base. Thereafter, overhead is applied to jobs by multiplying the predetermined overhead rate by the actual amount of the allocation base that is incurred for each
job. The most common allocation base is direct labor hours.
2-5 A sales order is issued after a firm agreement has been reached with a customer on matters relating to quantities, prices, and shipment dates for goods. This sales order is the basis for the production department to issue a production order. The production order summarizes the specifications of the goods involved, and is the basis for the accounting department’s preparation of a job cost sheet. The job cost sheet, in turn, is used to summarize the various production costs incurred in completing the job. These costs are entered on the job cost sheet from materials requisition forms and direct labor time tickets and from allocations of overhead via the predetermined overhead rate.
2-6 Many production costs cannot be traced to a particular product or job, but rather are incurred as a result of overall production activities. Therefore, to be assigned to products, such costs must be allocated to the products. Examples of such costs would include utilities, maintenance on machines, and depreciation of the factory building. These costs are indirect production costs, as explained in Chapter 1.
2-7 A firm will not know its actual manufacturing overhead costs until after a period is over. Thus, if actual costs were used to cost products, it would be necessary to wait until the period was over to add overhead cost to jobs or to add overhead cost to jobs as the overhead cost was incurred day by day. If the
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 2 39
manager waits until after the period is over to add overhead cost to jobs, then cost data will not be available during the period. If the manager simply adds overhead cost to jobs as the overhead cost is incurred, then unit costs may fluctuate from month to month. This is because production activity often fluctuates, resulting in changes in average fixed costs, and some costs—such as heating costs—are subject to seasonal influences. For these reasons, most companies use predetermined overhead rates to apply overhead cost to jobs.
2-8 An allocation base should be the cost driver of the overhead cost; that is, the base should cause the overhead cost. If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and their costs will be distorted.
2-9 Assigning overhead costs to jobs does not ensure that there will be a profit. The units produced may not be sold and if they are sold, they may not in fact be sold at prices sufficient to cover all costs. It is a myth that assigning costs to products or jobs ensures that those costs will be recovered. Costs are recovered only by selling to customers—not by allocating costs.
2-10 The Manufacturing Overhead account is credited when overhead cost is applied to Work in Process. Generally, the amount of overhead applied will not be the same as the amount of actual cost incurred, since the predetermined overhead rate figure which is used in applying overhead is based on estimates.
2-11 Underapplied overhead occurs when the actual overhead cost exceeds the amount of overhead cost applied to Work in Process inventory during the period. Overapplied overhead occurs when the actual overhead cost is less than the amount of overhead cost applied to Work in Process inventory during the period. The simplest way to dispose of the under- or overapplied overhead is to close it out to Cost of Goods Sold. The adjustment for
underapplied overhead increases Cost of Goods Sold (and inventories) whereas the adjustment for overapplied overhead decreases Cost of Goods Sold (and inventories).
2-12 Overhead may be underapplied for a number of reasons. Poor control over overhead spending can result in actual overhead costs exceeding estimated overhead costs. Also, if some of the overhead is fixed and actual amount of the allocation base for the period is less than estimated at the beginning of the period, overhead will be underapplied.
2-13 Underapplied overhead is added to cost of goods sold since underapplied overhead implies that not enough overhead was assigned to jobs during the period and therefore cost of goods sold is understated. Likewise, overapplied overhead is deducted from cost of goods sold.
2-14 Yes, overhead should be applied so as to properly value the Work in Process inventory at year-end. Since $6,000 of overhead was applied to Job A on the basis of $8,000 of direct labor cost, the company’s predetermined overhead rate must be 75% of direct labor cost. Thus, $3,000 of overhead should be applied to Job B at year-end: $4,000 direct labor cost 75% = $3,000 overhead costs applied.
2-15Direct material............................. $10,000Direct labor.................................. 12,000Manufacturing overhead:
$12,000 × 125%....................... 15,000 Total manufacturing cost............. $37,000Unit product cost: $37,000 ÷
1,000 units................................ $37
2-16 A plantwide overhead rate is a single overhead rate used throughout all production departments. Some companies use a different overhead rate in each production department rather than a single plantwide rate. In situations where the cost driver for overhead cost differs from one department to another, the
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.40 Introduction to Managerial Accounting, 2nd Edition
allocation base should also be different. Hence, multiple overhead rates can result in more accurate product costs.
2-17 When direct labor is replaced by automated equipment, overhead
increases and direct labor decreases. If the predetermined overhead rate is based on direct labor, this results in an increase in the predetermined overhead rate.
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 2 41
Brief Exercise 2-1 (15 minutes)a. Job-order costingb. Job-order costingc. Process costingd. Job-order costinge. Process costing*f. Process costing*g. Job-order costingh. Job-order costingi. Job-order costingj. Job-order costingk. Process costingl. Process costing
* Some of the listed companies might use either a process costing or a job-order costing system, depending on how operations are carried out and how homogeneous the final product is. For example, a plywood manufacturer might use job-order costing if its products are constructed of different woods or come in markedly different sizes.
Brief Exercise 2-2 (15 minutes)1. These costs would have been recorded on four different
documents: the materials requisition form for Job ES34, the time ticket for Harry Kerst, the time ticket for Mary Rosas, and the job cost sheet for Job ES34.
2. The costs would have been recorded as follows:
Materials requisition form:Quantit
yUnit Cost
Total Cost
Blanks
40 $8.00 $320
Nibs 960 $0.60 576 $896
Time ticket for Harry Kerst
Started Ended
Time Complete
d Rate AmountJob
Number9:00 AM
12:15 PM
3.25 $12.00 $39.00 ES34
Time ticket for Mary Rosas
Started Ended
Time Complete
d Rate AmountJob
Number2:15 AM
4:30 PM 2.25 $14.00 $31.50 ES34
Job Cost Sheet for Job ES34Direct
materials$896.0
0
Direct labor:Harry Kerst 39.00
Mary Rosas 31.50
$966.50
Brief Exercise 2-3 (10 minutes)The predetermined overhead rate is computed as follows:
Estimated total manufacturing overhead...............................................................
$586,000
÷ Estimated total direct labor hours (DLHs)...................................................................
40,000 DLHs
= Predetermined overhead rate.............................. $14.65 per DLH
Brief Exercise 2-4 (15 minutes)a. Raw Materials.......................... 86,000
Accounts Payable.............. 86,000
b. Work in Process....................... 72,000Manufacturing Overhead......... 12,000
Raw Materials.................... 84,000
c. Work in Process....................... 105,000Manufacturing Overhead......... 3,000
Wages Payable.................. 108,000
d. Manufacturing Overhead......... 197,000Various Accounts............... 197,000
Brief Exercise 2-5 (10 minutes)Actual direct labor-hours 12,600× Predetermined overhead rate $23.1
0= Manufacturing overhead applied $291,06
0
Brief Exercise 2-6 (30 minutes)1.
Cost of Goods Manufactured
Direct materials:Raw materials inventory, beginning......................$24,00
0Add: Purchases of raw materials........................... 53,00
0Total raw materials available................................ 77,00
0Deduct: Raw materials, ending............................. 6,00
0Raw materials used in production......................... 71,00
0Less indirect materials included in
manufacturing overhead..................................... 8,00
0$ 63,00
0Direct labor.............................................................. 62,000Manufacturing overhead applied to work
in process inventory.............................................. 41,00
0Total manufacturing costs....................................... 166,00
0Add: Beginning work in process inventory............... 41,00
0 207,00
0Deduct: Ending work in process inventory............... 38,00
0Cost of goods manufactured.................................... $169,00
0
2.
Cost of Goods Sold
Finished goods inventory, beginning.......................$ 86,000
Add: Cost of goods manufactured........................... 169,00 0
Goods available for sale...........................................255,000
Deduct: Finished goods inventory, 93,00
ending...................................................................0Unadjusted cost of goods sold.................................162,00
0Add: Underapplied overhead................................... 8,00
0Adjusted cost of goods sold.....................................$170,0
00
Brief Exercise 2-7 (30 minutes)Parts 1 and 2.
Cash Raw Materials75,000(a) (a) 75,000 73,000 (b)
152,000(c)126,000(d)
Work in Process Finished Goods(b) 67,000 (f) 379,000(c) 134,000 379,000 379,000 (f)(e) 178,000
379,000 379,000(f)
Manufacturing Overhead Cost of Goods Sold(b) 6,000 178,000 (e) (f) 379,000 28,000(g)(c) 18,000 351,000(d) 126,000(g) 28,000 28,000
Brief Exercise 2-8 (15 minutes)1
.Actual direct labor-hours......................................... 8,250
× Predetermined overhead rate.............................. $21.4 0
= Manufacturing overhead applied..........................$176,550
Less: Manufacturing overhead incurred.................................................................
172,50 0
$ 4,05 0
Manufacturing overhead overapplied...........................................................
$4,050
2. Since manufacturing overhead is overapplied, the cost of goods sold would be decreased by $4,050 and the gross margin would increase by $4,050.
Exercise 2-9 (30 minutes)1. Since $320,000 of studio overhead cost was applied to Work in
Process on the basis of $200,000 of direct staff costs, the apparent predetermined overhead rate is 160%:
2. The Krimmer Corporation Headquarters project is the only job remaining in Work in Process at the end of the month; therefore, the entire $40,000 balance in the Work in Process account at that point must apply to it. Recognizing that the predetermined overhead rate is 160% of direct staff costs, the following computation can be made:
Total cost added to the Krimmer Corporation Headquarters project $40,000
Less: Direct staff costs$13,50
0Studio overhead cost
($13,500 × 160%) 21,600 35,100 Costs of subcontracted work $ 4,900
With this information, we can now complete the job cost sheet for the Krimmer Corporation Headquarters project:
Costs of subcontracted work $ 4,900Direct staff costs 13,500Studio overhead 21,600
Total cost to January 31$40,00
0
Exercise 2-10 (30 minutes)1. The costing problem does, indeed, lie with manufacturing
overhead cost, as suggested. Since manufacturing overhead is mostly fixed, the cost per unit increases as the level of production decreases. The problem can be “solved” by use of predetermined overhead rates, which should be based on expected activity for the entire year. Many students will use units of product in computing the predetermined overhead rate, as follows:
The predetermined overhead rate could also be set on the basis of either direct labor cost or direct materials cost. The computations are:
Exercise 2-10 (continued)2. Using a predetermined overhead rate, the unit costs would be:
QuarterFirst Second Third Fourth
Direct materials$240,00
0$120,00
0$
60,000$180,00
0Direct labor 96,000 48,000 24,000 72,000Manufacturing
overhead:Applied at $4.20 per unit, 350% of direct labor cost, or 140% of direct materials cost
336,000 168,000 84,000 252,000
Total cost$672,00
0$336,00
0$168,00
0$504,00
0Number of units
produced 80,000 40,000 20,000 60,000Estimated unit product
cost $8.40 $8.40 $8.40 $8.40
Exercise 2-11 (30 minutes)
1. a. Raw Materials Inventory..........................................210,00
0Accounts Payable..................................................210,000
b. Work in Process.......................................................152,00
0Manufacturing Overhead.........................................38,000
Raw Materials Inventory........................................190,000c. Work in Process.......................................................49,000
Manufacturing Overhead.........................................21,000Salaries and Wages Payable.................................. 70,000
d. Manufacturing Overhead.........................................105,00
0Accumulated Depreciation....................................105,000
e. Manufacturing Overhead.........................................130,00
0Accounts Payable..................................................130,000
f. Work in Process.......................................................300,00
0Manufacturing Overhead.......................................300,000
75,000 machine-hours × $4 per machine-hour = $300,000.
g. Finished Goods........................................................510,00
0Work in Process.....................................................510,000
h. Cost of Goods Sold...................................................450,00
0Finished Goods......................................................450,000
Accounts Receivable................................................675,00
0Sales......................................................................675,000
$450,000 × 1.5 = $675,000
2. Manufacturing Overhead Work in Process(b) 38,000 300,00
0(f) Bal. 35,000 510,00
0(g)
(c) 21,000 (b) 152,00
0(d) 105,00
0(c) 49,000
(e) 130,000
(f) 300,000
6,000 Bal. 26,000(Overapplie
d overhead)
Exercise 2-12 (30 minutes)
1. Actual manufacturing overhead costs.....................$
48,000Manufacturing overhead applied:
10,000 MH × $5 per MH........................................ 50,000 Overapplied overhead cost......................................$ 2,000
2. Direct materials:Raw materials inventory, beginning......................$ 8,000Add purchases of raw materials............................ 32,000 Raw materials available for use............................40,000Deduct raw materials inventory,
ending................................................................. 7,000
Raw materials used in production.........................$
33,000Direct labor.............................................................. 40,000Manufacturing overhead cost applied to
work in process..................................................... 50,000 Total manufacturing cost.........................................123,000Add: Work in process, beginning............................. 6,000
129,000Deduct: Work in process, ending............................. 7,500
Cost of goods manufactured....................................$121,50
0
Exercise 2-13 (20 minutes)1. Predetermined overhead rates:
Company A:
Company B:
Company C:
2. Actual overhead costs incurred...............................$420,000Overhead cost applied to Work in
Process:58,000* actual hours × $7.20 per hour................. 417,600
Underapplied overhead cost....................................$ 2,400*7,000 hours + 30,000 hours + 21,000 hours = 58,000 hours
Exercise 2-14 (20 minutes)
1.Item (a):
Actual manufacturing overhead costs for the year.
Item (b):
Overhead cost applied to work in process for the year.
Item (c): Cost of goods manufactured for the year.
Item (d): Cost of goods sold for the year.
2. Manufacturing Overhead.........................................30,000
Cost of Goods Sold..............................................30,00
0
Exercise 2-15 (45 minutes)
1. a. Raw Materials315,00
0Accounts Payable 315,000
b. Work in Process216,00
0Manufacturing Overhead 54,000
Raw Materials 270,000c. Work in Process 80,000
Manufacturing Overhead110,00
0Wages and Salaries
Payable 190,000d. Manufacturing Overhead 63,000
Accumulated Depreciation63,000
e. Manufacturing Overhead 85,000Accounts Payable 85,000
f. Work in Process300,00
0Manufacturing Overhead
300,000
40,000 MHs × $7.50 per MH = $300,000.
2. Manufacturing Overhead Work in Process(b) 54,000 300,00
0(f) (b) 216,00
0(c) 110,00
0(c) 80,000
(d) 63,000 (f) 300,000
(e) 85,000
Exercise 2-15 (continued)3. The cost of the completed job would be $596,000 as shown in
the Work in Process T-account above. The entry for item (g) would be:
Finished Goods 596,000Work in Process 596,000
The unit product cost on the job cost sheet would be:$596,000 ÷ 8,000 units = $74.50 per unit.
Problem 2-16 (30 minutes)1. Cutting Department:
Finishing Department:
2.Overhead Applied
Cutting Department: 110 MHs × $4.00 per MH.........................................................................$440
Finishing Department: $450 × 120%....................... 540 Total overhead cost applied.....................................$980
3. Yes; if some jobs required a large amount of machine time and little labor cost, they would be charged substantially less overhead cost if a plantwide rate based on direct labor cost were being used. It appears, for example, that this would be true of job AF-45 which required considerable machine time to complete, but required only a small amount of labor cost.
Problem 2-17 (45 minutes)
2. The amount of overhead cost applied to Work in Process for the year would be: 56,000 machine-hours × $4.00 per machine-hour = $224,000. This amount is shown in entry (a) below:
Manufacturing Overhead
(Maintenance) 21,500 224,000 (a)(Indirect
materials) 15,000(Indirect labor) 76,000(Utilities) 45,000(Insurance) 12,000(Depreciation) 68,000Balance 13,500
Work in Process(Direct
materials) 650,000(Direct labor) 67,000(Overhead) (a) 224,000
3. Overhead is underapplied by $13,500 for the year, as shown in the Manufacturing Overhead account above. The entry to close out this balance to Cost of Goods Sold would be:
Cost of Goods Sold...................................................13,500Manufacturing Overhead....................................13,500
Problem 2-17 (continued)4. When overhead is applied using a predetermined rate based on
machine-hours, it is assumed that overhead cost is proportional to machine-hours. So when the actual machine-hours turn out to be 56,000, the costing system assumes that the overhead will be 56,000 machine-hours × $4.00, or $224,000. This is a decrease of $24,000 from the initial estimated manufacturing overhead cost of $248,000. However, the actual manufacturing overhead did not decrease by this much. The actual manufacturing overhead was $237,500—a decrease of $10,500 from the estimate. The manufacturing overhead did not decline by the full $24,000 because of the existence of fixed costs and/or because overhead spending was not under control. These issues will be covered in more detail in later chapters.
Problem 2-18 (45 minutes)1.
Alpha BetaGamm
aDesigner-hours 30 55 15Predetermined overhead rate ×$74 ×$74 ×$74Manufacturing overhead
applied $2,220 $4,070 $1,110
2. Alpha BetaDirect materials $ 3,300 $ 5,400Direct labor 5,100 7,000Overhead applied 2,220 4,070 Total cost $10,620 $16,470
Completed Projects* 27,090Work in Process 27,090
* $10,620 + $16,470 = $27,090
3. The balance in the Work in Process account will consist entirely of the costs associated with the Gamma project:Direct materials $ 600Direct labor 1,500Overhead applied 1,110 Total cost in work in
process $3,210
4. The balance in the Overhead account can be determined as follows:
OverheadActual overhead costs
7,900 7,400 Applied overhead costs
Underapplied overhead
500
As indicated above, the debit balance in the Overhead account is called underapplied overhead.
Problem 2-19 (75 minutes)1. a. Raw Materials..........................................................400,000
Cash....................................................................400,000b. Work in Process.......................................................350,000
Manufacturing Overhead.........................................79,000Raw Materials.....................................................429,000
c. Work in Process.......................................................375,000Manufacturing Overhead.........................................110,000Sales Commissions Expense....................................95,000Salaries Expense......................................................80,000
Cash....................................................................660,000d. Manufacturing Overhead.........................................35,000
Rent Expense...........................................................17,000Cash....................................................................52,000
e. Manufacturing Overhead.........................................98,000Cash....................................................................98,000
f. Advertising Expense................................................150,000Cash....................................................................150,000
g. Manufacturing Overhead.........................................183,000Depreciation Expense..............................................20,000
Accumulated Depreciation..................................203,000h. Work in Process.......................................................487,500
Manufacturing Overhead....................................487,500
$375,000 actual direct labor cost × 130% = $487,500.
Problem 2-19 (continued) i. Finished Goods........................................................1,230,000
Work in Process..................................................1,230,000j. Cash.........................................................................1,850,000
Sales...................................................................1,850,000Cost of Goods Sold...................................................1,250,000
Finished Goods....................................................1,250,000
2.Raw Materials Work in Process
Bal. 35,000 429,000
(b) Bal. 25,000
1,230,000
(i)
(a) 400,000 (b) 350,000Bal. 6,000
(c)375,000
(h) 487,500Bal. 7,500
Finished Goods Manufacturing OverheadBal.
65,000 1,250,000
(j) (b) 79,000 487,500 (h)
(i) 1,230,000
(c) 110,000
Bal.
45,000 (d) 35,000
(e) 98,000(g) 183,000Bal. 17,500
Cost of Goods Sold(j) 1,250,00
0
3. Manufacturing overhead is underapplied by $17,500 for the year. The entry to close this balance to Cost of Goods Sold would be:
Cost of Goods Sold...................................................17,500
Manufacturing Overhead....................................17,50
0
Problem 2-19 (continued) 4.
Productos Elina S.A.Income Statement
Sales $1,850,000Less cost of goods sold
($1,250,000 + $17,500) 1,267,500 Gross margin 582,500Less selling and administrative expenses:
Sales commissions $ 95,000Administrative salaries 80,000Rent expense 17,000Advertising expense 150,000Depreciation expense 20,000 362,000
Net operating income $ 220,500
Problem 2-20 (75 minutes)1. The cost of raw materials put into production would be:
Raw materials inventory, 1/1...................................$ 50,000Debits (purchases of materials)............................... 350,000 Materials available for use.......................................400,000Raw materials inventory, 12/31............................... 40,000 Materials requisitioned for production.....................$360,000
2. Of the $360,000 in materials requisitioned for production, $310,000 was taken into Work in Process as direct materials. Therefore, the difference of $50,000 would have been debited to Manufacturing Overhead as indirect materials.
3. Total factory wages accrued during the year (credits to the Factory Wages Payable account)................................................................$520,000
Less direct labor cost (from Work in Process).......... 500,000 Indirect labor cost....................................................$ 20,000
4. The cost of goods manufactured would have been $1,600,000—the credits to the Work in Process account.
5. The Cost of Goods Sold for the year would have been:
Finished goods inventory, 1/1$ 100,00
0Add: Cost of goods
manufactured (from Work in Process) 1,600,000
Goods available for sale 1,700,000Finished goods inventory, 12/31 200,000
Cost of goods sold$1,500,00
0
6. The predetermined overhead rate would have been:
Problem 2-20 (continued)7. Manufacturing overhead would have been underapplied by
$15,000, computed as follows:Actual manufacturing overhead cost for the
year (debits)..........................................................$765,000Applied manufacturing overhead cost (from
Work in Process—this would have been the credits to the Manufacturing Overhead account)................................................................ 750,000
Underapplied overhead...........................................$ 15,000
8. The ending balance in Work in Process is $60,000. Direct materials make up $10,000 of this balance, and manufacturing overhead makes up $30,000. The computations are:Balance, Work in Process, 12/31..............................$60,000Less: Direct labor cost (given)................................. 20,000
Manufacturing overhead cost ($20,000 × 150%)............................................................ 30,000
Direct materials cost (remainder)............................$10,000
Problem 2-21 (75 minutes)
1. a.
b. Before the under- or overapplied overhead can be computed, we must determine the amount of direct materials used in production for the year.Raw materials inventory, beginning........................$ 4,000Add, Purchases of raw materials.............................. 450,000 Raw materials available...........................................454,000Deduct: Raw materials inventory,
ending................................................................... 39,000 Raw materials used in production............................$415,000Since no indirect materials are identified in the problem, these would all be direct materials. With this figure, we can proceed as follows:Actual manufacturing overhead costs:
Indirect labor.........................................................$145,000 Property taxes.......................................................10,000 Depreciation of equipment....................................190,000 Maintenance..........................................................60,000 Insurance...............................................................4,250 Rent, building........................................................ 94,000
Total actual costs.....................................................503,250 Applied manufacturing overhead costs:
$415,000 × 125%................................................. 518,750
Overapplied Overhead.............................................$ (15,500
)
Problem 2-21 (continued)2.
Timeless ProductsSchedule of Cost of Goods Manufactured
Direct materials:Raw materials inventory, beginning......................$ 4,000Add purchases of raw materials............................ 450,000 Total raw materials available................................454,000Deduct raw materials inventory,
ending................................................................. 39,000 Raw materials used in production............................$ 415,000Direct labor.............................................................. 65,000Manufacturing overhead applied to
work in process..................................................... 518,750 Total manufacturing costs....................................... 998,750Add: Work in process, beginning............................. 100,000
1,098,750Deduct: Work in process, ending............................. 45,000 Cost of goods manufactured....................................$1,053,750
3. Cost of goods sold:Finished goods inventory, beginning.....................$ 300,000Add cost of goods manufactured........................... 1,053,750 Goods available for sale........................................1,353,750Deduct finished goods inventory,
ending................................................................. 280,000
Cost of goods sold.................................................$1,073,75
0
4. Direct materials.......................................................$ 4,000Direct labor..............................................................1,500Overhead applied ($4,000 × 125%)........................ 5,000 Total job cost...........................................................$10,500$10,500 × 112% = $11,760 price to the customer.
Problem 2-21 (continued)5. The amount of overhead cost in Work in Process would be:
$18,000 direct materials cost × 125% = $22,500.The amount of direct labor cost in Work in Process would be:
Total ending work in process$45,00
0
Deduct: Direct materials$18,00
0 Manufacturing
overhead 22,500 40,500 Direct labor cost $ 4,500
The completed schedule of costs in Work in Process would be:Direct materials $18,000Direct labor 4,500Manufacturing overhead 22,500 Total work in process $45,000
Problem 2-22 (45 minutes)1. Molding Department predetermined overhead rate:
Painting Department predetermined overhead rate:
2. Molding Department overhead applied:250 machine-hours × $5.40 per machine-
hour....................................................................$1,350Painting Department overhead applied:
$1,840 direct labor cost × 160%........................... 2,944 Total overhead cost.................................................$4,294
3. Total cost of job 435:Department
Molding Painting TotalDirect materials $ 700 $ 105 $ 805Direct labor 150 1,840 1,990Manufacturing overhead
applied 1,350 2,944 4,294 Total cost $2,200 $4,889 $7,089Cost per unit for job 435:
4. DepartmentMolding Painting
Manufacturing overhead incurred............................$320,000 $970,000Manufacturing overhead applied:
62,000 machine-hours × $5.40 per machine-hour...............................................334,800
$602,000 direct labor cost × 160%....................... 963,200 Underapplied (or overapplied)
overhead...............................................................$(14,800) $ 6,800
Problem 2-23 (75 minutes)1. and 2.
Cash Accounts ReceivableBal.
5,280 182,000 (m) Bal.
13,000190,000
(l)
(l) 190,000 (k) 195,000Bal.
13,280 Bal.
18,000
Raw Materials Prepaid InsuranceBal.
7,000 29,600 (b) Bal.
3,120 2,300 (g)
(a) 31,000 Bal. 820
Bal.
8,400
Work in Process Finished GoodsBal.
15,600104,000
(j) Bal. 25,000 101,400
(k)
(b) 23,680 (j) 104,000(f) 35,100 Bal
. 27,600(i) 46,400Bal.
16,780
Plant and Equipment Accumulated DepreciationBal. 163,000 41,000
Bal.
28,000 (d)69,000 Bal
.
Manufacturing Overhead Depreciation Expense(b) 5,920 46,400 * (i) (d) 4,200(c) 15,000(d) 23,800
(f) 7,800(g) 1,725 Insurance ExpenseBal.
7,845 7,845 (n) (g) 575
*5,800 MH × $8 per MH = $46,400.
Advertising Expense Miscellaneous Expense(e) 37,000 (h) 7,500
Problem 2-23 (continued)Administrative Salaries
ExpenseSales
(f) 23,400 195,000 (k)
Cost of Goods Sold Accounts Payable(k)
101,400(m) 117,000 29,000 Bal
.(n) 7,845 31,000 (a)Bal. 109,245
15,000 (c)
37,000 (e)7,500 (h)2,500 Bal
.
Salaries & Wages Payable(m) 65,000 66,300 (f)
1,300 Bal.
Capital Stock Retained Earnings
124,000Bal.
38,000Bal
.
3. Overhead is underapplied. Entry (n) above records the closing of this underapplied overhead balance to Cost of Goods Sold.
4. Kleinman CompanyIncome Statement
For the Year Ended June 30Sales........................................................................$195,000Less cost of goods sold ($101,400 +
$7,845).................................................................. 109,245 Gross margin........................................................... 85,755Less selling and administrative
expenses:
Depreciation expense............................................$
4,200Advertising expense..............................................37,000
Administrative salaries expense............................23,400Insurance expense................................................575Miscellaneous expense.......................................... 7,500 72,675
Net operating income.............................................. $ 13,080
Problem 2-24 (90 minutes)1. a. Raw Materials 273,000
Accounts Payable 273,000b. Work in Process 240,000
Manufacturing Overhead 80,000Raw Materials 320,000
c. Work in Process 370,000Manufacturing Overhead 100,000Salaries Expense 85,000
Salaries and Wages Payable 555,000
d. Manufacturing Overhead 107,000Accounts Payable 107,000
e. Advertising Expense 168,000Accounts Payable 168,000
f. Manufacturing Overhead 40,850Insurance Expense 2,150
Prepaid Insurance 43,000g. Manufacturing Overhead 224,000
Depreciation Expense 56,000Accumulated Depreciation
280,000h. Work in Process 555,000
Manufacturing Overhead555,000
$370,000 actual direct labor cost × 150% = $555,000 overhead applied.
i. Finished Goods1,170,00
0
Work in Process1,170,00
0
j. Accounts Receivable1,560,00
0
Sales1,560,00
0
Cost of Goods Sold1,190,00
0
Finished Goods1,190,00
0
Problem 2-24 (continued)2. Raw Materials Finished Goods
Bal. 53,000 320,000 (b) Bal. 81,0001,190,00
0 (j)
(a) 273,000 (i)1,170,00
0Bal. 6,000 Bal. 61,000
Work in ProcessManufacturing
Overhead
Bal. 33,4001,170,00
0 (i) (b) 80,000 555,000 (h)(b) 240,000 (c) 100,000(c) 370,000 (d) 107,000(h) 555,000 (f) 40,850Bal. 28,400 (g) 224,000
3,150Bal
.
Cost of Goods Sold
(j)1,190,00
0
3. Overhead overapplied by $3,150 for the year. The entry to close this balance to Cost of Goods Sold would be:Manufacturing Overhead 3,150
Cost of Goods Sold 3,150
4. Basin ProductsIncome Statement
For the Year Ended December 31
Sales........................................................................$1,560,00
0Less Cost of Goods Sold ($1,190,000 –
$3,150).................................................................. 1,186,850 Gross margin........................................................... 373,150Less selling and administrative expenses:
Salaries expense...................................................$ 85,00
0Advertising expense..............................................168,000Insurance expense................................................2,150Depreciation expense............................................ 56,000 311,150
Net operating income.............................................. $ 62,000
Problem 2-25 (90 minutes)1. and 2.
Cash Accounts ReceivableBal.
22,000 274,500
(m) Bal.
35,700290,000
(l)
(l) 290,000 (k) 323,000Bal.
37,500 Bal.
68,700
Raw Materials Prepaid InsuranceBal.
10,500 50,000 (b) Bal.
3,100 2,500 (g)
(a) 64,700 Bal. 600
Bal.
25,200
Videos in Process Finished GoodsBal.
17,200 174,000
(j) Bal. 40,000 210,000
(k)
(b) 40,000 (j) 174,000(f) 28,700 Bal
. 4,000(i) 91,440Bal.
3,340
Studio and Equipment Accumulated DepreciationBal. 256,000 73,500
Bal.
30,000 (d)103,500 Bal
.
Studio Overhead Depreciation Expense(b) 10,000 91,440 * (i) (d) 4,500(c) 16,000(d) 25,500
(f) 37,000(g) 1,750 Insurance Expense(n) 1,190 1,190 Bal. (g) 750
* $90,000 ÷ 2,500 hours = $36 per hour;2,540 hrs. × $36 per hr. = $91,440.
Advertising Expense Miscellaneous Expense(e) 45,000 (h) 2,900
Problem 2-25 (continued)Administrative Salaries
ExpenseSales
(f) 35,000 323,000 (k)
Cost of Goods Sold Accounts Payable(k)
210,000 1,190(n) (m) 175,000 56,000 Bal
.64,700 (a)
Bal. 208,810
16,000 (c)
45,000 (e)2,900 (h)9,600 Bal
.
Salaries & Wages Payable(m)
99,500100,70
0(f)
1,200 Bal.
Capital Stock Retained Earnings160,50
0Bal.
94,500Bal
.
3. Overhead is overapplied for the year. Entry (n) above records the closing of this overapplied overhead balance to Cost of Goods Sold.
4. Videoland Corp.Income Statement
For the Year Ended June 30Sales of videos.........................................................$323,000Less cost of goods sold ($210,000 –
$1,190).................................................................. 208,810 Gross margin........................................................... 114,190Less selling and administrative
expenses:
Depreciation expense............................................$ 4,500Advertising expense..............................................45,000Administrative salaries..........................................35,000Insurance expense................................................750Miscellaneous expense.......................................... 2,900 88,150
Net operating income..............................................$ 26,040
Analytical Thinking (75 minutes)1. The revised predetermined overhead rate is determined as
follows:
Original estimated total manufacturing overhead...............................................................
$2,475,000
Plus: Lease cost of the new machine.......................300,000
Plus: Cost of new technician/programmer............... 45,00
0
Estimated total manufacturing overhead................$2,820,00
0
Original estimated total direct labor-hours..............52,000Less: Estimated reduction in direct labor-
hours..................................................................... 6,000 Estimated total direct labor-hours...........................46,000
The revised predetermined overhead rate is higher than the original rate because the automated milling machine will increase the overhead for the year (the numerator in the rate) and will decrease the direct labor-hours (the denominator in the rate). This double-whammy effect increases the predetermined overhead rate.
2. Acquisition of the automated milling machine will increase the apparent costs of all jobs—not just those that use the new facility. This is because the company uses a plantwide overhead rate. If there were a different overhead rate for each department, this would not happen.
3. The predetermined overhead rate is now considerably higher than it was. This will penalize products that continue to use the same amount of direct labor-hours. Such products will now
appear to be less profitable and the managers of these products will appear to be doing a poorer job. There may be pressure to increase the prices of these products even though there has in fact been no increase in their real costs.
Analytical Thinking (continued)4. While it may have been a good idea to acquire the new
equipment because of its greater capabilities, the calculations of the cost savings were in error. The original calculations implicitly assumed that overhead would decrease because of the reduction in direct labor-hours. In reality, the overhead increased because of the additional costs of the new equipment. A differential cost analysis would reveal that the automated equipment would increase total cost by about $285,000 a year if the labor reduction is only 2,000 hours.Cost consequences of leasing the automated equipment:
Increase in manufacturing overhead cost:
Lease cost of the new machine...........................$300,00
0Cost of new technician/programmer................... 45,000
345,000Less: labor cost savings (2,000 hours × $30 per
hour)................................................................... 60,000
Net increase in annual costs.................................$285,00
0Even if the entire 6,000-hour reduction in direct labor-hours occurred, that would have added only $120,000 (4,000 hours × $30 per hour) in cost savings. The net increase in annual costs would have been $165,000 and the machine would still be an unattractive proposal. The entire 6,000-hour reduction may ultimately be realized as workers retire or quit. However, this is by no means automatic.There are two morals to this tale. First, predetermined overhead rates should not be misinterpreted as variable costs. They are not. Second, a reduction in direct labor requirements does not necessarily lead to a reduction in direct labor hours paid. It is often very difficult to actually reduce the direct labor force and may be virtually impossible in some companies except through natural attrition.
Communicating in Practice
Date: Current dateTo: InstructorFrom: Student’s NameSubject: Talk with a ControllerThe student’s memorandum should address the following: The name, title and job affiliation of the individual interviewed.
(Note: Not specifically required in problem but essential and, as such, a good topic for class discussion, if appropriate.)
A list of the company’s main products. Identification of the type of costing system in use (job order,
process or other). Brief description of how overhead is assigned to products
(including basis for allocation and whether more than one overhead rate is in use).
Indication as to whether any changes have been made to or are being considered in relation to the company’s costing system, and, if applicable, a brief description of the changes.
Ethics Challenge (60 minutes)1. Shaving 5% off the estimated direct labor-hours in the
predetermined overhead rate will result in an artificially high overhead rate. The artificially high predetermined overhead rate is likely to result in overapplied overhead for the year. The cumulative effect of overapplying the overhead throughout the year is all recognized in December when the balance in the Manufacturing Overhead account is closed out to Cost of Goods Sold. If the balance were closed out every month or every quarter, this effect would be dissipated over the course of the year.
2. This question may generate lively debate. Where should Cristin Madsen’s loyalties lie? Is she working for the general manager of the division or for the corporate controller? Is there anything wrong with the “Christmas bonus”? How far should Cristin go in bucking her boss on a new job?While individuals can certainly disagree about what Cristin should do, some of the facts are indisputable. First, the practice of understating direct labor-hours results in artificially inflating the overhead rate. This has the effect of inflating the cost of goods sold figures in all months prior to December and overstating the costs of inventories. In December, the adjustment for overapplied overhead provides a big boost to net operating income. Therefore, the practice results in distortions in the pattern of net income over the year. In addition, since all of the adjustment is taken to Cost of Goods Sold, inventories are still overstated at year-end. This means that retained earnings is also overstated.While Cristin is in an extremely difficult position, her responsibilities under the IMA’s Standards of Ethical Conduct for Management Accountants seem to be clear. The Objectivity Standard states that “management accountants have a responsibility to disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and recommendations presented.” Cristin should discuss this situation with her immediate supervisor in the controller’s
office at corporate headquarters. This step may bring her into direct conflict with the general manager of the division, so it would be a very difficult decision for her to make.
Ethics Challenge (continued)In the actual situation that this case is based on, the corporate controller’s staff were aware of the general manager’s accounting tricks, but top management of the company supported the general manager because “he comes through with the results” and could be relied on to hit the annual profit targets for his division. Personally, we would be very uncomfortable supporting a manager who will resort to deliberate distortions to achieve “results.” If the manager will pull tricks in this area, what else might he be doing that is questionable or even perhaps illegal?
Teamwork In Action
1. The types of transactions that are posted to the accounts may be summarized in T-account form as follows:
Raw MaterialsBeginning balancePurchases Direct materials used (to
Work in Process)
Accounts PayableBeginning balance
Payments to suppliers Purchases of raw materials
Work in ProcessBeginning balanceDirect materials used (from Raw Materials)
Cost of goods manufactured (to Finished Goods)
Direct laborManufacturing overhead applied
Manufacturing OverheadActual manufacturing costs Manufacturing overhead
appliedOverhead overapplied (to COGS)
Overhead underapplied (to COGS)
Finished GoodsBeginning balanceCost of goods manufactured (from WIP)
Cost of goods sold
Cost of Goods SoldCost of goods soldOverhead underapplied (from Manufacturing Overhead)
Overhead overapplied (from Manufacturing Overhead)
Teamwork In Action (continued)2. The predetermined overhead rate and overhead applied
amounts are:Predetermined overhead rate:
$180,000 ÷ 60,000 DLHs = $3 per DLH.Overhead applied:
5,200 DLHs × $3 per DLH = $15,600
3. The balance in the work in process account is determined as follows:Direct materials (given)...........................................$2,60
0Direct labor (300 DLHs × $6 per DLH).....................1,800Overhead applied (300 DLHs × $3 per
DLH)...................................................................... 90
0Total.........................................................................$5,30
0
4. The completed T-accounts follow:Accounts Payable
(c) Payments 40,000
6,000 Balance 4/1 (c)
42,000
Purchases (plug)
8,000 Balance 4/30 (given)
Work in Process(given) Balance 4/1 4,500 89,00
0Cost of goods manufactured
(f)
(b,d) Direct labor* 31,200
(above)
Overhead applied
15,600
(plug) Direct materials
43,000
(above)
Balance 4/30 5,300
* 5,200 DLHs × $6 per DLH = $31,200
Raw Materials(given) Balance 4/1 12,00
043,00
0Direct materials
(above)
(above)
Purchases 42,000
Balance 4/30 11,000
Teamwork In Action (continued)Manufacturing Overhead
(given)
Actual costs for April
14,800
15,600
Overhead applied
(above)
To cost of goods sold
800 800 Overapplied overhead
Finished Goods(e) Balance 4/1 11,00
084,00
0Cost of goods sold
(plug)
(f) Cost of goods manufactured
89,000
(given) Balance 4/30 16,000
Cost of Goods Sold(above)
Cost of goods sold
84,000
800 Overapplied overhead
(above)
83,200