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Implementing Job Costing

1. Companies that produce unique products or provide unique services, easily distinguished fromother products or services, are likely to use a job costing system. Examples include custom homebuilders, auto mechanics, and tax accountants.

Companies that produce identical units of product in batches are likely to use a process costingsystem. Examples include producers of soft drinks, snack foods (chips, cookies, and the like),milk, and paint.

2. Generally accepted accounting principles (GAAP) requires companies to record product costs asan asset—using inventory accounts—until the products are sold. Once products are sold, productcosts must be recorded as an expense using a Cost of Goods Sold or Cost of Sales account.

Aside from GAAP requirements, managers often request product cost information to help withproduct pricing, to evaluate the profitability of jobs, and to assess the efficiency of manufacturingprocesses.

3. Manufacturing costs are all costs related to the production of goods, and are classified into threecategories—direct materials, direct labor, and manufacturing overhead. Examples include partsneeded to assemble automobiles such as wheels, engines, seats, and gauges; assembly workersand production supervisors; and factory insurance, factory utilities, and equipment depreciation.(Student examples will vary.)

Nonmanufacturing costs are all costs not related to the production of goods, and are classifiedas either selling or general and administrative. Examples include costs associated with the ac-

Chapter 2

QUESTIONS

13© Cengage Learning. All rights reserved.

as either selling or general and administrative. Examples include costs associated with the ac-counting department, the CEO’s salary, and advertising. (Student examples will vary.)

4. Raw materials used in the production process that are easily traced to the product are called directmaterials. Workers who convert materials into a finished product, and whose time iseasily tracedto the product, are classified as direct labor.

Raw materials used in the production process that are not easily traced to the product arecalled indirect materials. Production workers whose timecannot easily be traced to the productare classified as indirect labor.

5. Product costs (also called manufacturing costs) are costs associated with the production processincluding direct materials, direct labor, and manufacturing overhead. The term product is used be-cause these costs are attached to the product throughout the production process using three inven-tory asset accounts depending on the stage of completion, until the product is sold, at which pointthe costs are recorded as an expense in the Cost of Goods Sold account.

Period costs (also called nonmanufacturing costs) are costs not associated with the produc-tion process. The term period is used because these costs are recorded as an expense in the periodincurred.

6. Product costs are recorded as an expense when the products are sold. Period costs are recorded asan expense in the period incurred.

7. Items classified as direct materials are easily traced to each boat, and items classified as indirectmaterials are not easily traced to each boat. The hull, engine, transmission, carpet, and seats areclearly direct materials since these items are easily traced to each boat. Glue, paint, and screws arelikely indirect materials since these items are not easily traced to each boat.


Chapter 2 Solutions

8. Students are only required to provide two examples for each category. Examples of selling costs atPepsiCo include television advertising, promotional coupons, costs of shipping products to custom-ers, and salaries of marketing and advertising personnel. Examples of general and administrativecosts include the salaries and bonuses of top executives, and the costs of various administrative de-partments, including personnel, accounting, legal, and information technology.

9. The Raw Materials Inventory account is used to record the cost of materials not yet put into pro-duction. The Work in Process Inventory account is used to record costs associated with productsin the production process that are not yet complete. The Finished Goods Inventory account is usedto record the manufacturing costs associated with products that are complete and ready to sell.

10. The three categories are direct materials, direct labor, and manufacturing overhead. Direct ma-terials are production materials easily traced to the product. Direct labor represents those workerswhose time is easily traced to the product. All manufacturing costs other than direct materials anddirect labor are classified as manufacturing overhead.

11. The Cost of Goods Sold account is used when goods are sold. The dollar amount recorded in thisaccount comes from the production costs associated with the goods that are sold. In a job costingsystem, this amount comes from the job cost sheet.

12. The inventory cost flow equation is:Beginning balance (BB) + Transfers in (TI) − Ending balance (EB) = Transfers out (TO)

This equation is used to calculate three inventory amounts:● Raw materials transferred out (TO) and placed into production (called direct and indirect

materials)

QUESTIONS (continued)

© Cengage Learning. All rights reserved. .14

materials)

● Work in process completed and transferred out (TO) to finished goods (called cost ofgoods manufactured)

● Finished goods transferred out (TO) to the income statement as an expense (called cost ofgoods sold)

13. Merchandising company income statements differ from manufacturing company income state-ments in several areas. The schedule of raw materials placed in production and schedule of costof goods manufactured are not needed. A Merchandise Inventory account is used instead of Fin-ished Goods Inventory. Also, the schedule of cost of goods sold is often included on the incomestatement rather than presented separately.

14. The inventory accounts and related dollar amounts appearing on the balance sheet are:Raw materials: $83 millionWork in process: $545 millionFinished goods: $186 million

The product costs reported as an expense on the income statement appear in the cost of sales andtotal $2,856 million (or $2,856,000,000).

15. The materials requisition form includes the type, quantity, and cost of materials being requestedand placed into production, and the job number where the materials will be used.


Chapter 2 Solutions

16. Job cost sheets accumulate manufacturing costs incurred for each job, and serve as a subsidiaryledger to the Work in Process Inventory account. This form includes the job number, customername, and manufacturing costs incurred (direct materials, direct labor, and manufacturing over-head applied).

17. A timesheet is used by workers to track the hours spent on each job and includes the employee’sname, date, job number, and hours worked for each job.

18. A predetermined overhead rate is used to allocate manufacturing overhead costs to jobs. The termused to describe this process is overhead applied.

19. Normal costing system is the term used to describe a cost system that tracksactual direct materialsand actual direct labor costs for each job, and charges manufacturing overhead to jobs using apredetermined overhead rate.

A predetermined overhead rate is used for several reasons.● Actual overhead costs can fluctuate from month to month causing high amounts of

overhead to be charged to jobs during high cost periods. Normal costing smoothes outthese fluctuations.

● Actual overhead cost data is typically only available at the end of the month, quarter,or year. Managers do not like to wait for this information to figure out the cost of jobs.

● The price charged to customers is often established based on product cost. Managerswant a way to estimate manufacturing overhead—a predetermined overhead rate pro-vides the means to do this.



vides the means to do this.

● Bookkeeping is simplified. The accountant simply uses a predetermined rate to recordmanufacturing overhead costs.

20. The two important factors to consider when selecting an allocation base are that the base musthave some link to overhead costs (that is, must drive overhead costs), and the base must be rela-tively easy to measure (for example, direct labor hours are easy to measure—simply use time-sheets to track this data).

21. Actual manufacturing overhead costs incurred are recorded as a debit to the ManufacturingOverhead account. Manufacturing overhead applied to jobs is recorded as a credit to the Manu-facturing Overhead account. The difference between the two amounts is calledoverapplied orunderapplied overhead.

22. Manufacturing overhead is underapplied when overhead applied is less than actual overhead costsincurred, resulting in a debit balance in the Manufacturing Overhead account. Manufacturingoverhead is overapplied when overhead applied is more than actual overhead costs incurred, re-sulting in a credit balance in the Manufacturing Overhead account.

23. The first option is to close the Manufacturing Overhead account to Cost of Goods Sold. This isappropriate when the balance is not significant (i.e., immaterial). The second option is to close theManufacturing Overhead account to three different accounts—Work in Process Inventory, Fin-ished Goods Inventory, and Cost of Goods Sold—in proportion to the account balances in each ofthese accounts. This is appropriate when the Manufacturing Overhead account balance is signifi-cant (i.e., material).


Chapter 2 Solutions

24. Although job costing systems in service organizations are similar to job costing systems used bymanufacturing companies, differences are as follows:● Service organizations tend to use fewer materials.

● Account names are slightly different—Raw Materials Inventory is called Parts Inventory orSupplies, Finished Goods Inventory is not applicable, Cost of Goods Sold is called Cost ofServices, and Manufacturing Overhead is simply called Overhead.

● Costs are often tracked by customer (or client) rather than by product.

25. A job costing system tracks actual direct materials, direct labor, and manufacturing overhead costsfor each job. Deducting these actual production costs from sales revenue provides a profitabilitymeasure for each job. Management often compares actual profit to estimated profit for each job toassess whether profit goals were achieved.


© Cengage Learning. All rights reserved. .16 © Cengage Learning. All rights reserved. .16

Chapter 2 Solutions

1. Product Costs at Custom Furniture CompanyDan is concerned with the lack of profits shown on last month’s income statement. The price foreach piece of furniture is based on a 70 percent markup of estimated product costs, but the incomestatement shows lower profits than expected.

Leslie proposed to compare actual costs to estimated costs for the three costliest jobs, andevaluate whether the estimates were reasonable based on this comparison.

2. Job Costing Versus Process Costing(1) Process costing (5) Job costing(2) Job costing (6) Process costing(3) Process costing (7) Process costing(4) Job costing (8) Job costing

3. Manufacturing Cost Terms(1) Manufacturing overhead (5) Direct materials(2) Direct labor (6) Manufacturing overhead(3) Manufacturing overhead (7) Manufacturing overhead(4) Manufacturing overhead

4. Manufacturing and Nonmanufacturing Cost Terms

a. (1) Period b. (1) General and administrative(2) Product (2) Manufacturing overhead(3) Period (3) Selling

BRIEF EXERCISES


(3) Period (3) Selling(4) Product (4) Direct materials(5) Period (5) General and administrative(6) Period (6) General and administrative(7) Product (7) Direct labor(8) Product (8) Manufacturing overhead

5. Manufacturing and Nonmanufacturing Cost Terms

a. (1) Product b. (1) Manufacturing overhead(2) Period (2) General and administrative(3) Product (3) Direct materials(4) Period (4) Selling(5) Product (5) Manufacturing overhead(6) Product (6) Manufacturing overhead(7) Product (7) Direct labor(8) Period (8) Selling

6. Accounts Used to Record Product CostsRaw Materials InventoryWork in Process InventoryFinished Goods InventoryCost of Goods SoldManufacturing Overhead

(2)

(3)(1)(4)(5)


Chapter 2 Solutions

7. Income Statement Terminology: Manufacturing Versus Merchandising

Manufacturing CompanyCost of goods manufacturedWork in process inventoryFinished goods inventoryCost of goods sold

8. Recording Purchase and Transfer of Raw Materials in T Accounts

a. and b.

(Oct. 8) (Oct. 8) 6,000(Oct. 10)

15,000 (Oct. 5)

9. Calculating Predetermined Overhead Rate

The predetermined overhead rate is calculated as follows:

(2)

1,00015,000

Raw Materials Inventory

Manufacturing Overhead

(Oct. 5)

Estimated overhead costs

(3)(4)

1,000

(1)

(Oct. 10)

6,000Work in Process Inventory

BRIEF EXERCISES (continued)

=

Accounts Payable


Predeterminedoverhead rate

estimated overhead costsdirect labor hours

= $50 per direct labor hour

Each job will be charged $50 in manufacturing overhead for each direct labor hour worked.

10. Service Organization Accounts

Manufacturing(1) Raw Materials Inventory Parts Inventory (or Supplies)(2) Work in Process Inventory Work in Process (if applicable)(3) Finished Goods Inventory Not applicable(4) Cost of Goods Sold Cost of Services (or other expense accounts)(5) Manufacturing Overhead Overhead (or Service Overhead)

11. Evaluating Profitability of JobsThe company uses a 70 percent markup on estimated product costs to establish the sales price foreach job. However, actual results on the income statement showed significantly less profit than the70 percent would provide. The accountant at Custom Furniture Company suggested comparing ac-tual costs to estimated costs to evaluate whether actual costs were in line with the initial estimates.

This analysis showed that actual direct materials costs were significantly higher than origi-nally estimated, resulting in lower profitability than expected for each job.

Service

20,000$10,00,000

=

Estimated overhead costsEstimated activity in allocation base

=


Chapter 2 Solutions

12. Schedule of Raw Materials Placed in Production and Related Journal Entries

a.

Raw materials inventory, beginning balance $1,10,000Add current period raw materials purchases 50,000

Raw materials available for production $1,60,000Less raw materials inventory, ending balance 1,35,000Raw materials placed in production $ 25,000Less indirect materials included in manufacturing overhead 8,000Direct materials placed in production $ 17,000

b. (1) Raw Materials Inventory 50,000Accounts Payable 50,000

(2) Work in Process Inventory 17,000Raw Materials Inventory 17,000

(3) Manufacturing Overhead 8,000Raw Materials Inventory 8,000

c.beg. bal. 1,10,000(1) 50,000 17,000 (2)

8,000 (3)

EXERCISES

Sedona CompanySchedule of Raw Materials Placed in Production

Month Ended September 30



8,000 (3)end. bal. 1,35,000

13. Schedule of Raw Materials Placed in Production and Related Journal Entries

a.

Raw materials inventory, beginning balance $ 45,000Add current period raw materials purchases 55,000

Raw materials available for production $1,00,000Less raw materials inventory, ending balance 38,000Raw materials placed in production $ 62,000Less indirect materials included in manufacturing overhead 14,000Direct materials placed in production $ 48,000


(2) Work in Process Inventory 48,000Raw Materials Inventory 48,000

(3) Manufacturing Overhead 14,000Raw Materials Inventory 14,000

c.beg. bal. 45,000(1) 55,000 48,000 (2)

14,000 (3)end. bal. 38,000

Schedule of Raw Materials Placed in ProductionMonth Ended April 30


Clay Company


Chapter 2 Solutions

14. Schedule of Cost of Goods Manufactured and Related Journal Entries

a.

WIP inventory, beginning balance $3,00,000Add current period manufacturing costs:

Direct materials $ 40,000Direct labor 70,000Manufacturing overhead applied 2,00,000

Total current period manufacturing costs 3,10,000

Total cost of work in process $6,10,000Less WIP inventory, ending balance 3,20,000

Cost of goods manufactured $2,90,000

b. (1) Work in Process Inventory 40,000Raw Materials Inventory 40,000

(2) Work in Process Inventory 70,000Wages Payable 70,000

(3) Work in Process Inventory 2,00,000Manufacturing Overhead 2,00,000

EXERCISES (continued)

Reid CompanySchedule of Cost of Goods Manufactured

Month Ended March 31


Manufacturing Overhead 2,00,000

(4) Finished Goods Inventory 2,90,000Work in Process Inventory 2,90,000

c.beg. bal. 3,00,000(1) 40,000 2,90,000 (4)(2) 70,000(3) 2,00,000end. bal. 3,20,000

Work in Process Inventory


Chapter 2 Solutions

15. Schedule of Cost of Goods Manufactured and Related Journal Entries

a.

WIP inventory, beginning balance $ 9,00,000Add current period manufacturing costs:

Direct materials $3,40,000Direct labor 8,10,000Manufacturing overhead applied 6,60,000

Total current period manufacturing costs 18,10,000



b. (1) Work in Process Inventory 3,40,000Raw Materials Inventory 3,40,000

(2) Work in Process Inventory 8,10,000Wages Payable 8,10,000

(3) Work in Process Inventory 6,60,000Manufacturing Overhead 6,60,000


Verdi Production Inc.Schedule of Cost of Goods Manufactured

Month Ended May 31




c.beg. bal. 9,00,000(1) 3,40,000 19,60,000 (4)(2) 8,10,000(3) 6,60,000end. bal. 7,50,000



Chapter 2 Solutions

16. Schedule of Cost of Goods Sold and Related Journal Entries

a.

Finished goods inventory, beginning balance $25,000Add cost of goods manufactured 17,000

Cost of goods available for sale $42,000Less finished goods inventory, ending balance 28,000

Cost of goods sold $14,000

b. (1) Finished Goods Inventory 17,000Work in Process Inventory 17,000

(2) Cost of Goods Sold 14,000Finished Goods Inventory 14,000

c.beg. bal. 25,000(1) 17,000 14,000 (2)end. bal. 28,000



Blue Oak Company

Finished Goods Inventory

Schedule of Cost of Goods SoldMonth Ended September 30



a.

Finished goods inventory, beginning balance $ 6,50,000Add cost of goods manufactured 4,45,000

Cost of goods available for sale $10,95,000Less finished goods inventory, ending balance 6,25,000

Cost of goods sold $ 4,70,000

b. (1) Finished Goods Inventory 4,45,000Work in Process Inventory 4,45,000

(2) Cost of Goods Sold 4,70,000Finished Goods Inventory 4,70,000

c.beg. bal. 6,50,000(1) 4,45,000 4,70,000 (2)end. bal. 6,25,000


Posada CompanySchedule of Cost of Goods Sold

Month Ended March 31


Chapter 2 Solutions

18. Income Statement (without cost of goods sold adjustment)

Sales $11,00,000Cost of goods sold 4,75,000

Gross profit $ 6,25,000Less operating (nonmanufacturing) expenses:

Selling 3,00,000General and administrative 2,30,000

Operating profit $ 95,000

19. Income Statement (with cost of goods sold adjustment)

Sales $20,50,000Cost of goods sold before adjustment for underapplied overhead $7,00,000Adjustment for underapplied overhead* 23,000

Cost of goods sold 7,23,000

Year Ended December 31Income StatementRambler Company


Auto Products Inc.

Month Ended October 31Income Statement


Cost of goods sold 7,23,000

Gross profit $13,27,000Less operating (nonmanufacturing) expenses:


Operating profit $ 4,22,000

* This represents the amount of overhead underapplied to jobs and closed out to Cost of Goods Soldat the end of the year.


Chapter 2 Solutions

20. Manufacturing Overhead Allocation Base and Calculating the Cost of Jobs

a. The predetermined overhead rate is calculated as follows:

Predeterminedoverhead rate

Using Direct Labor Hours:


Using Direct Labor Costs:

= $5 per direct labor dollar cost(or 500% of direct labor cost)

Using Machine Hours:estimated overhead costsmachine hours

= per machine hour

direct labor costs

=

=

=

$37.50

$6,00,000

$30,00,00080,000


estimated overhead costsdirect labor hours

estimated overhead costs

$30,00,00040,000

$30,00,000

Estimated overhead costsEstimated activity in allocation base

=


b. The goal is to allocate overhead using an allocation base that drives (or causes) overheadcosts. If Pyramid’s production process is highly mechanized, overhead costs are likely drivenby machine use. The more machine hours used, the higher the overhead costs incurred. Thus,there is a link between machine hours and overhead costs and using machine hours as an allo-cation base is preferable. Machine hours are also easily tracked, making implementation rela-tively simple.

c. Three different cost calculations are required:

Direct DirectLabor Labor MachineHours Cost Hours

Direct materials $ 6,000 $ 6,000 $ 6,000

Direct labor 4,000 4,000 4,000

Manufacturing overhead 22,500 20,000 26,250

Total cost of Job 128 $32,500 $30,000 $36,250

* $22,500 = $75 rate × 300 direct labor hours** $20,000 = $5 rate (or 500 percent) × $4,000 direct labor cost

† $26,250 = $37.50 rate × 700 machine hours

†***


Chapter 2 Solutions

21. Manufacturing Overhead Allocation Base and Calculating the Cost of Jobs

a. The predetermined overhead rate is calculated as follows:

overhead rate

Using Direct Labor Hours:estimated overhead costsdirect labor hours


Using Direct Labor Costs:estimated overhead costsdirect labor costs

= $4 per direct labor dollar cost(or 400% of direct labor cost)

Using Machine Hours:estimated overhead costsmachine hours

= per machine hour

b. The goal is to allocate overhead using an allocation base that drives (or causes) overhead

=

=

$8,00,000

$8,00,000

$8,00,000

$200

$2,00,000

10,000

4,000


=Estimated overhead costs

Estimated activity in allocation basePredetermined

=

******


b. The goal is to allocate overhead using an allocation base that drives (or causes) overheadcosts. If Elko’s production process involves more direct labor than automated processes, over-head costs are likely driven by direct labor. The more direct labor hours used, the higher theoverhead costs incurred. Thus, there is a link between direct labor hours (or direct labor costs)and overhead costs, and using direct labor as an allocation base is preferable. Direct laborhours and costs are also easily tracked, making implementation relatively simple.

c. Three different cost calculations are required:

Direct DirectLabor Labor MachineHours Cost Hours

Direct materials $1,750 $1,750 $1,750Direct labor 860 860 860Manufacturing overhead 6,400 3,440 4,000

Total cost of Job 15B $9,010 $6,050 $6,610

* $6,400 = $80 rate × 80 direct labor hours** $3,440 = $4 rate (or 400 percent) × $860 direct labor cost† $4,000 = $200 rate × 20 machine hours

†***


Chapter 2 Solutions

22. Income Statement and Supporting Schedules

a.

Raw materials inventory, beginning balance $ 30,000Add current period raw materials purchases 3,00,000

Raw materials available for production $3,30,000Less raw materials inventory, ending balance 24,000Raw materials placed in production $3,06,000Less indirect materials included in manufacturing overhead 36,000

Direct materials placed in production $2,70,000

b.

WIP inventory, beginning balance $16,50,000Add current period manufacturing costs:

Direct materials $ 2,70,000Direct labor 3,75,000Manufacturing overhead applied 18,90,000

Total current period manufacturing costs 25,35,000Total cost of work in process $41,85,000

PROBLEMS

Industrial CompanySchedule of Raw Materials Placed in Production

Year Ended December 31, 2009

Industrial CompanySchedule of Cost of Goods Manufactured





c.

Finished goods inventory, beginning balance $12,30,000Add cost of goods manufactured 23,85,000


Cost of goods sold $25,65,000

d.

Sales $37,95,000Cost of goods sold 25,65,000Gross profit $12,30,000Less operating (nonmanufacturing) expenses:



Industrial Company


Schedule of Cost of Goods SoldYear Ended December 31, 2009

Industrial CompanyIncome Statement


Chapter 2 Solutions

22. Income Statement and Supporting Schedules (continued)

e. The three product costs included in cost of goods sold on the income statement are:Direct materials: materials used in the production process that are easily

traced to the product.Direct labor: production labor hours used in the production process

that are easily traced to the product.Manufacturing overhead: all costs associated with the production

process other than direct materials and direct labor.

PROBLEMS

27© Cengage Learning. All rights reserved. 27© Cengage Learning. All rights reserved.

Chapter 2 Solutions

23. Income Statement and Supporting Schedules

a.

Raw materials inventory, beginning balance $ 15,000Add current period raw materials purchases 1,50,000

Raw materials available for production $1,65,000Less raw materials inventory, ending balance 12,000Raw materials placed in production $1,53,000Less indirect materials included in manufacturing overhead 18,000

Direct materials placed in production $1,35,000

b.

WIP inventory, beginning balance $ 8,25,000Add current period manufacturing costs:

Direct materials $1,35,000Direct labor 1,87,500Manufacturing overhead applied 9,45,000

Total current period manufacturing costs 12,67,500Total cost of work in process $20,92,500

Ciena Inc.

PROBLEMS (continued)

Ciena Inc.Schedule of Raw Materials Placed in Production


Schedule of Cost of Goods ManufacturedYear Ended December 31, 2010




c.

Finished goods inventory, beginning balance $ 6,15,000Add cost of goods manufactured 11,92,500


Cost of goods sold $12,82,500

d.

Sales $18,97,500Cost of goods sold ($1,282,500 + $25,000*) 13,07,500Gross profit $ 5,90,000Less operating (nonmanufacturing) expenses:



* $25,000 is added to cost of goods sold to reflect the adjustment necessary at year end to closeout the Manufacturing Overhead account to Cost of Goods Sold.


Ciena Inc.Income Statement


Ciena Inc.Schedule of Cost of Goods Sold


Chapter 2 Solutions

23. Income Statement and Supporting Schedules (continued)

e. Companies with overapplied or underapplied overhead use a normal costing system of allo-cating overhead costs to products. Normal costing uses a predetermined overhead rate ratherthan actual costs to apply overhead costs to products. The phrase “underapplied overhead”means overhead costs applied to products during the period were less than actual overheadcosts incurred during the period. That is, the company did not apply enough overhead costs toits products during the year. To make up for this lack of overhead costs being recorded, theamount of underapplied overhead is added to cost of goods sold on the income statement.

24. Actual and Applied Manufacturing Overhead

a. Manufacturing Overhead 47,500Raw Materials Inventory 20,000Wages Payable 18,000Prepaid Rent 3,000Accumulated Depreciation, Equipment 6,500

b. Work in Process Inventory 61,200Manufacturing Overhead 61,200

c.(a) 47,500 61,200 (b)



*


13,700 end. bal.

d. Manufacturing Overhead has a credit balance of $13,700, as shown in part c, and thus isoverapplied. The entry to close Manufacturing Overhead is:

Manufacturing Overhead 13,700Cost of Goods Sold 13,700

* $61,200 = $12 × 5,100 machine hours

*


Chapter 2 Solutions

25. Actual and Applied Manufacturing Overhead

a. Manufacturing Overhead 6,37,500Raw Materials Inventory 3,35,000Wages Payable 2,75,000Accumulated Depreciation, Factory 18,000Utilities Payable (or Accounts Payable) 9,500

b. Work in Process Inventory 6,00,000Manufacturing Overhead 6,00,000

c.(a) 6,00,000 (b)

end. bal. 37,500

d. Manufacturing Overhead has a debit balance of $37,500, as shown in part c, and thus isunderapplied. The entry to close Manufacturing Overhead is:

Cost of Goods Sold 37,500Manufacturing Overhead 37,500

* $600,000 = $2 (or 200%) × $300,000 direct labor cost


Manufacturing Overhead6,37,500

*

*


Chapter 2 Solutions

26. Calculating the Cost of Jobs, Making Journal Entries, and Preparing an Income Statement

a. Job 1 Job 2 Job 3 Job 4 TotalDirect materials $2,800 $1,250 $1,550 $ 780 $ 6,380

Direct labor 500 430 465 210 1,605

Manufacturing overhead

($30 × direct labor hrs) 900 750 840 450 2,940

Total cost $4,200 $2,430 $2,855 $1,440 $10,925


(2) Work in Process Inventory 6,380Manufacturing Overhead 1,075

Raw Materials Inventory 7,455

(3) Work in Process Inventory 1,605Manufacturing Overhead 985

Wages Payable 2,590


(5) Finished Goods Inventory 9,485Work in Process Inventory 9,485



Work in Process Inventory 9,485($9,485 = $4,200 Job 1 + $2,430 Job 2 + $2,855 Job 3)

(6) Cost of Goods Sold 6,630Finished Goods Inventory 6,630($6,630 = $4,200 Job 1 + $2,430 Job 2)

Accounts Receivable 9,500Sales 9,500($9,500 = $6,000 Job 1 + $3,500 Job 2)

c. Racing Bikes Inc. made $1,070 in gross profit from the sale of Job 2 ($1,070 = $3,500 revenue− $2,430 cost). Note that the gross profit is the profit earned before covering selling, generaland administrative costs.

d.

Sales $9,500Cost of goods sold 6,630

Gross profit $2,870Deduct operating (nonmanufacturing) expenses:

Selling 1,000General and administrative 2,200

Operating loss ($ 330)

Racing Bikes Inc.Income Statement

Month Ended July 31


Chapter 2 Solutions

27. Calculating the Cost of Jobs, Making Journal Entries, and Preparing an Income Statement

a. Job 1 Job 2 Job 3 TotalDirect materials $38,800 $19,300 $22,500 $ 80,600Direct labor 7,400 5,900 3,250 16,550Manufacturing overhead

(160% × direct labor costs) 11,840 9,440 5,200 26,480

Total cost $58,040 $34,640 $30,950 ########

b. (1) Raw Materials Inventory #######Accounts Payable #######


Raw Materials Inventory #######


Wages Payable 21,400


(5) Finished Goods Inventory 58,040Work in Process Inventory 58,040



Work in Process Inventory 58,040

(6) Cost of Goods Sold 58,040Finished Goods Inventory 58,040

Accounts Receivable 70,000Sales 70,000

c. Classic Boats made $11,960 in gross profit from the sale of Job 1 ($11,960 = $70,000 reve-nue − $58,040 cost). Note that the gross profit is the profit earned before covering selling,general and administrative costs.

d.

Sales $70,000Cost of goods sold 58,040Gross profit $11,960Less operating (nonmanufacturing) expenses:

Selling 2,000General and administrative 5,500


Classic Boats Inc.Income Statement

Month Ended April 30


Chapter 2 Solutions

28. Calculating the Cost of Jobs and Making Journal Entries for a Service Company

a. Job 1 Job 2 Job 3 TotalDirect labor $1,500 $1,700 $400 $3,600

Service overhead

($10 per direct labor hour) 500 600 100 1,200

Total cost $2,000 $2,300 $500 $4,800

b. (1) Supplies 1,500Accounts Payable 1,500

(2) Service Overhead 800Supplies 800

(3) Work in Process 3,600Service Overhead 900

Wages Payable 4,500

(4) Work in Process 1,200Service Overhead 1,200

(5) Cost of Services 2,000Work in Process 2,000

Accounts Receivable 3,000Sales Revenue 3,000



Sales Revenue 3,000

c. Sampson & Associates made $1,000 in gross profit for Job 1 ($1,000 = $3,000 revenue −$2,000 cost). Note that the gross profit is the profit earned before covering selling, general andadministrative costs.


Chapter 2 Solutions

29. Calculating the Cost of Jobs and Making Journal Entries for a Service Company

a. Job 1 Job 2 Job 3 Job 4 TotalDirect labor $ 6,000 $ 6,800 $2,200 $350 $15,350Service overhead

(120% of direct labor cost) 7,200 8,160 2,640 420 18,420

Total cost $13,200 $14,960 $4,840 $770 $33,770

b. (1) Supplies 6,000Accounts Payable 6,000

(2) Service Overhead 3,200Supplies 3,200


Wages Payable 18,950


(5) Cost of Services 28,160Work in Process 28,160($28,160 = $13,200 + $14,960)

Accounts Receivable 41,000



Accounts Receivable 41,000Revenue 41,000($41,000 = $20,000 + $21,000)

c. Management Consulting made $6,800 in gross profit for Job 1 ($6,800 = $20,000 revenue− $13,200 cost), and $6,040 in gross profit for Job 2 ($6,040 = $21,000 revenue − $14,960cost). Note that the gross profit is the profit earned before covering selling, general and admin-istrative costs.

d. Jobs 3 and 4 are still in process at the end of the first half of September. The cost for each ofthese jobs is $4,840 and $770, respectively. Thus, total Work in Process is $5,610.


Chapter 2 Solutions

30. Closing Manufacturing Overhead: Two Approaches

a. The Manufacturing Overhead account has a debit balance of $60,000. Thus, overhead isunderapplied—not enough overhead has been applied to jobs.

b. When the balance in the Manufacturing Overhead account is immaterial, the account istypically closed to Cost of Goods Sold. Since overhead is underapplied, Cost of GoodsSold is increased. The entry is:

Cost of Goods Sold 60,000Manufacturing Overhead 60,000

c. When the balance in the Manufacturing Overhead account is material, it should be closedto three different accounts—WIP Inventory, Finished Goods Inventory, and Cost ofGoods Sold—in proportion to the account balances in these three accounts. Again, sinceoverhead is underapplied, these three accounts are increased. The entry is:

Work in Process Inventory* 6,000Finished Goods Inventory* 12,000Cost of Goods Sold* 42,000

Manufacturing Overhead 60,000

* Amounts are calculated as follows:Account Percent


Allocation Amount(% × $60,000)Account


Account PercentBalance of Total

WIP Inventory $ 2,00,000 10%

Finished Goods Inventory 4,00,000 20%

Cost of Goods Sold 14,00,000 70%

Total $20,00,000 100% $60,000

$ 6,000

12,00042,000

Allocation Amount(% × $60,000)Account


Chapter 2 Solutions

31. Closing Manufacturing Overhead: Two Approaches

a. The Manufacturing Overhead account has a credit balance of $90,000. Thus, overhead isoverapplied—too much overhead has been applied to jobs.

b. When the balance in the Manufacturing Overhead account is immaterial, the account istypically closed to Cost of Goods Sold. Since overhead is overrapplied, Cost of GoodsSold is decreased. The entry is:

Manufacturing Overhead 90,000Cost of Goods Sold 90,000

c. When the balance in the Manufacturing Overhead account is material, it should be closedto three different accounts—WIP Inventory, Finished Goods Inventory, and Cost ofGoods Sold—in proportion to the account balances in these three accounts. Again, sinceoverhead is overapplied, these three accounts are decreased. The entry is:

Manufacturing Overhead 90,000Work in Process Inventory* 9,000Finished Goods Inventory* 27,000Cost of Goods Sold* 54,000

* Amounts are calculated as follows:Account Percent Allocation Amount


Account (% × $90,000)


Account PercentBalance of Total

WIP Inventory $ 1,00,000 10%

Finished Goods Inventory 3,00,000 30%

Cost of Goods Sold 6,00,000 60%

Total $10,00,000 100%

54,000

$90,000

Allocation AmountAccount (% × $90,000)

$ 9,000

27,000


Chapter 2 Solutions

32. Inventory Accounts for Manufacturing Company

Answers will vary. Inventory information may come from the notes to the financial statementsif not presented in detail on the balance sheet.

33. Ethics and Job Costing

a. The fee arrangement for the Maxum job provides for revenues to equal cost plus 50 percent.Because Shawney Accountancy is under budget on this job, there is an incentive to chargemore time to it and collect additional fees. Since the Bantem job revenue is simply $25,000regardless of actual cost, there is an incentive to keep costs to a minimum—even if hours mustbe charged to the wrong job.

b. Charging time worked on the Bantem job to the Maxum job is not ethical. It would create prob-lems for management within Shawney Accountancy who prepare bids for new jobs based onhistorical information, and who rely on cost information to make future decisions. In addition,if cost information is falsified as Kelly is proposing, Maxum Company would pay more thanits fair share for the work being performed.

Ron should first look to the company’s established policies for ethical conflict resolu-tion. If Shawney Accountancy Corporation does not have policies in place or if following theorganization’s policies does not resolve the conflict, the next step is to discuss the conflictwith Ron’s immediate superior. However, Ron’s immediate supervisor (Kelly) is involved inthe conflict, so approaching someone who supervises her would be best. If Kelly’s superior isnot receptive to Ron’s concerns, the next step is to approach top management, or the board of

SKILL-BUILDING CASES


not receptive to Ron’s concerns, the next step is to approach top management, or the board ofdirectors of the company.

As stated in the IMA’s statement, if the ethical conflict still exists after exhausting alllevels of internal review, two additional options exist: (1) “Clarify relevant ethical issues byinitiating a confidential discussion with an IMA Ethics Counselor or other impartial advisor toobtain a better understanding of possible courses of action” or (2) “Consult your own attorneyas to legal obligations and rights concerning the ethical conflict.”

34. Automation and Overhead Allocation

When direct labor is the most significant product cost, it is reasonable to assume that manufacturingoverhead costs are driven by labor—the more labor being utilized, the higher the cost of overhead.As production processes shift toward automation, labor costs become a smaller part of total produc-tion costs, and overhead increases (resulting from increased machine maintenance, utilities, depreci-ation costs, and the like). Thus, using direct labor hours or direct labor costs as an allocation base isno longer reasonable. Some other allocation base such as machine hours would be better.


Chapter 2 Solutions

35. Labor Costs at General Motors and Toyota

a. Answers will vary. Several possibilities are as follows:(1) GM is unionized and likely pays its workers a higher rate. According to the article, hourly

wages for Toyota’s workers average $35 (including benefits). Hourly wages for GMworkers average $81 (including benefits).

(2) Toyota’s workers may be more efficient than GM’s workers.(3) Toyota may have more automation and fewer assembly workers than GM.(4) Toyota’s new factory includes state-of-the-art production equipment, while GM’s factory

is 50 years old and is more difficult to upgrade.

b. Assembly line labor is only one component of production. Other production costs to considerinclude costs for direct materials and manufacturing overhead items (for example, salaried su-pervisors, equipment depreciation, and maintenance). As production facilities become increas-ingly automated, direct labor costs decrease in proportion to total production costs. This makesthe evaluation of direct materials and manufacturing overhead costs even more important.

SKILL-BUILDING CASES (continued)


Chapter 2 Solutions

36. Journal Entries, Closing Manufacturing Overhead, and Preparing an Income Statementa. and b.

beg. bal. 5,00,000(1) purchase 3,00,000 4,20,000 to production (2)

end. bal. 3,80,000

beg. bal. 7,00,000(2) direct materials 3,60,000 20,30,000 completed goods (11)(4) direct labor 8,00,000(8) overhead applied 18,00,000

end. bal. 16,30,000

beg. bal. 18,00,000(11) completed goods 20,30,000 25,70,000 goods sold (12)end. bal. 12,60,000

(2) indirect materials 60,000 18,00,000 overhead applied (8)(5) indirect labor 5,40,000(7) factory costs 13,20,000

bal. before adj. 1,20,000

COMPREHENSIVE CASES





Cost of Goods Sold


(12) goods sold 25,70,000


b. (1) Raw Materials InventoryAccounts Payable 3,00,000

(2) Work in Process InventoryManufacturing Overhead

Raw Materials Inventory 4,20,000

(3) Accounts PayableCash 3,00,000

(4) Work in Process InventoryWages Payable 8,00,000

(5) Manufacturing OverheadWages Payable 5,40,000

(6) Wages PayableCash 12,00,000

(7) Manufacturing OverheadAccumulated Depreciation, Building 5,80,000Prepaid Insurance 2,20,000Cash ($80,000 + $440,000) 5,20,000

13,20,000

12,00,000

5,40,000

3,00,000

8,00,000

3,00,000

3,60,00060,000

Cost of Goods Sold


Chapter 2 Solutions

36. Journal Entries, Closing Manufacturing Overhead, and Preparing an Income Statementb. (continued)

(8) Work in Process Inventory 18,00,000Manufacturing Overhead 18,00,000($20 × 90,000 machine hours)

(9) Selling Expenses 4,30,000Cash 4,30,000

(10) G&A Expenses 2,65,000Cash 2,65,000


(12) Accounts Receivable 38,00,000Sales 38,00,000


(14) Cash 33,00,000Accounts Receivable 33,00,000

c. (15) Cost of Goods Sold 1,20,000Manufacturing Overhead 1,20,000

COMPREHENSIVE CASES (continued)



d.

Sales $38,00,000

Cost of goods sold ($2,570,000 + $120,000*) 26,90,000

Gross profit $11,10,000

Less operating (nonmanufacturing) expenses:

Selling 4,30,000

General and administrative 2,65,000


* $120,000 is added to cost of goods sold to reflect the adjustment necessary at year end to closeout the Manufacturing Overhead account to Cost of Goods Sold. See entry (15).

e. Companies with overapplied or underapplied overhead use a normal costing system of allocat-ing overhead costs to products. Normal costing uses a predetermined overhead rate rather thanactual costs to apply overhead costs to products.

At Benning Inc., overhead was underapplied for the period, which means overhead costsapplied to products during the period were less than actual overhead costs incurred during theperiod. That is, the company did not apply enough overhead costs to its products during theyear. To make up for this lack of overhead costs being recorded, the amount of underappliedoverhead is added to cost of goods sold on the income statement.

Benning Inc.Income Statement



Chapter 2 Solutions

37. Journal Entries, Closing Manufacturing Overhead, and Preparing an Income Statementa. and b.

beg. bal. 50,000(1) purchase 30,000 41,000 to production (2)

end. bal. 39,000

beg. bal. 60,000(2) direct materials 36,000 4,78,000 completed goods (11)(4) direct labor 1,40,000(8) overhead applied 2,70,000

end. bal. 28,000

beg. bal. 90,000(11) completed goods 4,78,000 4,15,000 goods sold (12)end. bal. 1,53,000

(2) indirect materials 5,000 2,70,000 overhead applied (8)(5) indirect labor 1,34,000(7) factory costs 1,10,000

21,000 bal. before adj.


Cost of Goods Sold


COMPREHENSIVE CASES




(12) goods sold 4,15,000


b. (1) Raw Materials InventoryAccounts Payable 30,000

(2) Work in Process InventoryManufacturing Overhead

Raw Materials Inventory 41,000

(3) Accounts PayableCash 30,000

(4) Work in Process InventoryWages Payable 1,40,000

(5) Manufacturing OverheadWages Payable 1,34,000

(6) Wages PayableCash 1,80,000

(7) Manufacturing OverheadAccumulated Depreciation, Equipment 22,000Prepaid Rent 36,000Cash ($33,000 + $19,000) 52,000

5,000

1,10,000

1,80,000

Cost of Goods Sold

30,000

36,000

1,34,000

30,000

1,40,000


Chapter 2 Solutions

37. Journal Entries, Closing Manufacturing Overhead, and Preparing an Income Statementb. (continued)

(8) Work in Process Inventory 2,70,000Manufacturing Overhead 2,70,000($30 × 9,000 direct labor hours)

(9) Selling Expenses 63,000Cash 63,000

(10) G&A Expenses 18,000Cash 18,000


(12) Accounts Receivable 7,80,000Sales 7,80,000


(14) Cash 3,80,000Accounts Receivable 3,80,000

c. (15) Manufacturing Overhead 21,000Cost of Goods Sold 21,000

COMPREHENSIVE CASES (continued)


Cost of Goods Sold 21,000

d.

Sales $7,80,000

Cost of goods sold ($415,000 − $21,000*) 3,94,000

Gross profit $3,86,000

Less operating (nonmanufacturing) expenses:

Selling 63,000

General and administrative 18,000

Operating profit $3,05,000

* $21,000 is deducted from cost of goods sold to reflect the adjustment necessary at year end toclose out the Manufacturing Overhead account to Cost of Goods Sold. See entry (15).

e. Companies with overapplied or underapplied overhead use a normal costing system of allocat-ing overhead costs to products. Normal costing uses a predetermined overhead rate rather thanactual costs to apply overhead costs to products.

At Sierra Nursery Company, overhead was overapplied for the period, which meansoverhead costs applied to products during the period were more than actual overhead costs in-curred during the period. That is, the company applied too much in overhead costs to its prod-ucts during the year. To make up for this excess of overhead costs being recorded, the amountof overapplied overhead is deducted from cost of goods sold on the income statement.


Sierra Nursery CompanyIncome Statement


implementing job costing - test bank, manual solution,...

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