Chap 004

Chapter 04 - Job Costing

CHAPTER 4: JOB COSTING

QUESTIONS

4-1 The purpose of any costing system is to (1) determine product and service cost, and value inventory, (2) facilitate management planning, cost control, and performance evaluation, and (3) facilitate managerial decision making.

4-2 Management can use product costs to determine the product or service pricing, to assess the financial effect of adding or deleting a product, division or subsidiary, to evaluate a make or buy decision, and to evaluate department or division product profitability performance.

4-3 Job costing is a product costing system that accumulates and assigns costs to a specific job. Process costing accumulates product or service costs by process or department and then assigns them to a large number of nearly identical products.

4-4 Companies that are likely to use a job costing system have a wide variety of products or services. These companies include printing shops, accounting firms, equipment companies, and construction companies. Companies that are likely to use a process costing system have homogeneous products or services. Such companies include automobile manufacturers, food processors, and textile companies.

4-5 Service industry companies most likely use a job costing system because each job is likely to have different quantities of materials and labor.

4-6 A job cost sheet accumulates direct materials, direct labor, and factory overhead.

4-7 The determination of a predetermined overhead rate has four steps: (1) estimate the factory overhead costs for an appropriate operating period, usually a year, (2) determine the most appropriate cost driver(s) for charging the factory overhead costs, (3) estimate the total amount or activity level of the chosen cost driver(s) for the operating period, (4) divide the estimated factory overhead costs by the estimated activity level of the chosen cost driver(s) to obtain the predetermined overhead rate(s). The predetermined factory overhead rates are applied to units instead of actual overhead costs because if the actual rate is applied to overhead costs the costs per unit for products produced in different periods will vary greatly.

4-1


4-8 A material requisition is a source document that is used to request materials from the warehouse. A time ticket shows the time worked on each job, the pay rate, and the total labor cost chargeable to each job. The bill of materials is a list of different materials needed to manufacture a product or part.

4-9 Since the overhead cost cannot be traced directly to a particular product, we

need a good costing system, which can assign overhead accurately to specific products. Generally speaking, the more expensive or extensive a costing system is, the more information it provides and the more reliable it is. It is important to balance the cost of obtaining the appropriate cost with the information obtained.

4-10 Costs originate with the purchase of materials. These costs and labor are transferred to work-in-process as work is done and eventually to finished goods. Overhead is applied to work-in-process as well. Work-in-process is forwarded to finished goods as work is completed. These costs are transferred from finished goods to cost of goods sold when the merchandise is sold.

4-11 Underapplied overhead is the amount of actual factory overhead that exceeds the factory overhead applied. Overapplied overhead is the amount of factory overhead applied that exceeds the actual factory overhead cost. Underapplied or overapplied overhead can be disposed of in two ways: adjust the cost of goods sold account or adjust the production costs of the month; that is, prorate the difference among the amounts of the current period’s applied overhead remaining in the ending balances of the work in process inventory, the finished goods inventory, and the cost of goods sold accounts.

4-12 Due to the automation trend, the proper cost driver for a manufacturing firm would probably be machine hours because the costs are predominantly related to the equipment operation.

4-13 Overhead can be overapplied if the actual overhead is less than expected or the actual level of the cost driver exceeds the estimate.

4-14 An actual costing system uses actual costs incurred for direct materials and direct labor and assigns or applies actual factory overhead to various jobs. Normal costing uses actual costs for direct materials and direct labor and applies factory overhead to various jobs using a predetermined basis.

4-15 The best choice of a cost driver is that activity or output measure that best represents what drives or causes overhead.

4-16 Cost of goods sold includes actual direct materials, actual direct labor, and applied factory overhead costs for products sold. Adjusted cost of goods sold equals normal cost of goods sold plus underapplied overhead (or less overapplied overhead).

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4-3


BRIEF EXERCISES

4-17 The application of job costing is very similar in manufacturing and service firms. Some differences are that service firms are likely to have a larger proportion of direct labor in jobs than are manufacturers.

4-18 $10 per machine hour x 16 hours = $160

4-19 The overhead rate for labor would be $80,000/4,000 labor hours = $20/labor hour and the machine-hour rate would be $80,000/8,000 machine hours = $10/machine hour. Since this is a machine shop, it might be appropriate to use a machine-hour based rate.

4-20 Applied overhead is 59,000 units x $10/unit = $590,000. There is an underapplied difference of $23,000 ($613,000 - $590,000).

4-21 Since the difference is underapplied, it must be added to the current balance of cost of goods sold: $90,000 + $10,000 = $100,000.

4-22 Job cost is $10,000 + $20,000 + ( 2 x $20,000) = $70,000.

4-23 Because of the greater variability of machine hours among jobs, job cost will be more strongly influenced by the use of machine hours. The fact that machine hours are significantly greater than labor hours suggests that workers attend to a number of different machines, and that the overall cost of the machines is somewhat greater than that of labor. In this case, a machine-based rate would be more appropriate, as the machine costs are a significant part of total overhead, and because the different jobs consume significantly different amounts of machine time.

4-24 When overhead is overapplied, this means that too much cost as been applied to WIP, finished goods, and cost of goods sold. The cost of goods sold account will be too high before adjusting for the overhead variance.

4-25 The departmental rate will likely be more accurate since it will take into account

the fact that different jobs may require different amounts of resource from each department. Product costs will be less accurate if the overhead is pooled into a single plantwide rate, which ignores these differences in use of departmental recourses by the different jobs. Chapter 5 addresses this issue in some detail.

4-26 The information on units sold and the number of labor hours is irrelevant.First, determine the amount of overhead applied:

Applied overhead = $222,000 - $20,400 (underapplied) = $201,600

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Second, determine the overhead rate:

$210,000/50,000 units = $4.20 per unit

Third, determine the number of units produced

$201,600/$4.20 per unit = 48,000 units

4-27 The information on units sold and the number of labor hours is irrelevant.First, determine the amount of overhead applied:

Applied overhead = $360,000 + $30,000 (overapplied) = $390,000

Second, determine the overhead rate:

$350,000/700,000 units = $.50 per unit

Third, determine the number of units produced

$390,000/$.50 per unit = 780,000 unitsEXERCISES

4-28 Job Costing (30 min)

1. Total cost of Job A:Sept. Direct materials requisitioned $65,000Sept. Direct labor cost: 4,200 hours x $8.50/hour 35,700Sept. Applied overhead: 4,200 hours x $6.50/hour* 27,300Sept. 1 Work-in-process 31,200

Total cost of Job A $ 159,200

*predetermined OH rate = $617,500/95,000 direct labor hours = $6.50

2. Total overhead cost applied during September:Applied Overhead = total direct labor-hours x overhead rate= (4,200 + 3,500) x $6.50 per hour = $50,050

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3. Overapplied overhead for September:Actual Overhead = $13,500 + $6,000 + $7,000 + $7,500 + $12,000

= $46,000Overapplied Overhead = $50,050 - $46,000 = $4,050

4-29 Choice of a costing system (40 Min)

1. New Century Software, Inc @ http://www.newcenturysoftware.com/ The goal of New Century Software, Inc. is to provide products and services to help meet the facilities-based information needs of the pipeline industry through the use of Geographic Information Systems (GIS), Automated Mapping and Facilities Management (AM/FM) software.

The company's Windows-based software products provide an integrated approach to GIS implementation and augment the functionality of leading GIS packages.

Based in Fort Collins, Colorado, the company has assisted in the development of GIS for pipeline companies in the United States by providing facilities database consulting, data conversion services, and integrated software applications.

The company uses job costing.

Reasons:

The costing could be precisely calculated by the basis of the different job.

Each identifiable job has different needs from clients and is associated with different cost.

Costs can be readily identified with specific products or projects because of low volume of products or services.

2. Kinko’s @ http://www.fedex.com

Kinko's, a unit of FedEx Corporation, is a provider of a variety of office and business services such as copying and printing.


4-6

http://www.fedex.com/

http://www.newcenturysoftware.com/


Reasons:

Costs can be precisely calculated by the basis of the different jobs.

There are a wide variety of different services for individual clients.

The products and services are especially tailored to the customers’ need.

4-29 (Continued -1)

3. TXI Cement @ http://www.txi.com/ TXI Cement has a history in the cement industry of 90 years. They are one of only two companies in the USA that produces white cement. TXI Cement is constantly trying to be energy efficient, by generating electricity, and using alternate energy and raw materials sources. Distribution of products is done via two cement plants in Southern California as well as terminals in San Diego and Stockton. TXI is one of the largest bagged cement producers in the USA.

Cement is a finely ground, manufactured mineral product that when combined with water, sand, gravel and other materials forms concrete, the most widely used construction material in the world.

The company uses process costing.

Reasons:

High volume, low cost product.It is not economically feasible to keep track of the detailed cost elements applied to each unit of production (the bag of cement).

4. Paramount Pictures @ http://www.paramount.com/

Paramount pictures, the motion picture production company, is a unit of Viacom, a large company in the entertainment industry with such labels as MTV Films, Nickelodeon Movies, and DreamWorks Studios. It offers an array of choices in the form of movies, TV shows, and musical entertainment.

4-7

http://www.paramount.com/

http://www.cement.com/



Reasons:High cost, low volume projects.The company produces movies, television shows and home entertainment packages; each job goes through costing separately since every project is highly customized.4-29 (continued -2)

5. Evian @ http://www.evian.com/

Evian Natural Spring Water is bottled exclusively at its source in Evian-les-Bains located in the French Alps. Filled, sealed bottles are then shipped to over 120 countries throughout the world. Evian spring water is perfect by nature. Naturally pure and fresh, it is not artificially treated or processed in any way. Its unique source in the heart of the French Alps guarantees Evian natural spring waters remarkable purity.

The company uses process costing.

Reasons:

High volume low cost product, sold in individual bottles.It is not economically feasible to keep track of the detailed cost elements applied to each unit of production.

4-29 (continued - 3)

6. IRCON @ http://www.irconinternational.com/

4-8

http://www.irconinternational.com/

http://www.evian.com/


IRCON's diverse global capabilities are in the construction industry, such as in runways, terminal buildings, aircraft maintenance hangars & utility buildings, and commercial buildings. IRCON undertakes execution of turnkey railway electrification projects, high voltage sub-stations, transmission lines and industrial electrification works, both in India and abroad. Services offered cover the entire spectrum of activities including construction of new railway lines, rehabilitation/conversion of existing lines, station buildings and facilities, bridges, tunnels, signaling and telecommunication networks, railway electrification, setting up of production units for manufacture of rolling stock, maintenance depots/workshops concrete sleepers and track components on turn-key basis.

The company uses job costing.Reasons:

High cost, low volume orders.The company is an engineering, procurement and construction organization. Each project is fairly large in dollar value and uses large sums of material and labor. Each individual task within the project is broken into single cost entities including material, labor and overhead.

4-30 Choice of a Costing System (60 Min)

1. Zurich Financial Services Group: www.zurich.com

The Zurich Financial Services Group is a global leader in the financial services industry, providing its customers with solutions in the area of financial protection and asset accumulation. The Group concentrates its activities in five business segments: non-life and life insurance, reinsurance, Farmers Management Services, and asset management. Headquartered in Zurich, Switzerland, the Group's worldwide presence builds on strong positions in its three key markets - the United States, the United Kingdom and Switzerland.

Because Zurich FSG provides unique solutions to customers, particularly in the high net worth area, the company uses a job costing system. Each customer is handled individually and products, such as insurance, asset management services, and reinsurance, are provided as needed.

4-9

http://www.zurich.com/


2. Reichhold Chemical Company: http://www.reichhold.com/ Reichhold is a large manufacturer of chemical products including coatings (epoxy, acrylic and other resins), latex (in a joint venture with Dow Chemical Company), and composites (gelcoats and resins used in the manufacture of fiberglass products including boats, bathroom fixtures, and other applications). The chemical manufacturing industry is characterized by high volume production involving a number of manufacturing processes, so that process costing is a good choice for Reichhold.

3. Nestle S.A.: www.nestle.comNestle is one of the leading food companies in the world. Its product portfolio includes brands such as Nescafe, Maggi, Perrier and Buitoni. The whole food production process is a continuous high-volume one and so will have a process costing system.

4-30 (continued -1)

4. Coca-Cola: http://www.coca-cola.com/Coca-Cola is the world’s most recognized brand, with more than 400 different beverage sales brands sold in more than 200 countries. Coca-Cola was first sold in 1886, a product of the invention of Dr. John Pemberton, a local pharmacist, in Atlanta, Georgia.

The production of beverages is a process industry with a variety of raw materials being mixed, processed and then packaged into the final product. The company uses a process costing system.

4-10

http://www.coca-cola.com/

http://www.nestle.com/

http://www.reichhold.com/


4-31 Job Costing in Aircraft Manufacturing (15 min)

A key difficulty in these companies is that much of the overhead cost for the job is for capacity costs that are incurred for a multiple-year period. Thus, the determination of the overhead rate must determine an amount for each year by determining in effect what portion of the total capacity costs should be attributed to each year in which the job is being completed. In simple terms, this might mean using straight-line depreciation for plant and equipment needed for the job, or an allocation across the years based on the number of aircraft to be produced in each year and the capacity utilization expected for each year. Considerations of possible future changes in the terms of the contract for the job (to increase or decrease the number of aircraft in the order, for example), should also be considered. The determination of the budgeted overhead rates in these cases requires the careful judgment of the management accountant.

4-32 Journal Entries (20 min)

1. Predetermined Overhead Rate = $1,980,000 / 66,000 machine hours = $30 per machine-hour

2. Journal Entries: a. Materials Inventory 900,000

Accounts Payable 900,000180,000 lbs x $5 = $900,000

b. Work-in-Process Inventory 525,000($600,000 - $75,000)

Factory Overhead 75,000(15,000 lbs x $5/lb)

Materials Inventory (120,000 x$5) 600,000

c. Work-in-Process Inventory 240,000Factory Overhead 40,000

Accrued Payroll 280,000

d. Factory Overhead 75,700 Accumulated Depreciation 75,700

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e. Factory Overhead 3,500 Prepaid Insurance 3,500

f. Factory Overhead 8,500 Cash 8,500

g. Finished Goods Inventory 84,500 Work-in-Process Inventory 84,500

h. Cost of Goods Sold 77,000 Finished Goods Inventory 77,000

Accounts Receivable 103,950 Sales 103,950

$77,000 x 1.35 billing rate = $103,9504-32 (continued -1)

i. Work-in-Process Inventory 231,000 Factory Overhead 231,000

$30 per machine hour x 7,700 machine hours = $231,000

3. Actual factory overhead:$75,000 + $40,000 + $75,700 + $3,500 + $8,500 = $202,700 Overapplied overhead = $231,000 - $202,700 = $ 28,300

The journal entry to close the overhead account is as follows:Factory Overhead 28,300

Cost of Goods Sold 28,300

4-33 Working with Unknowns (20 min)

1. From Job G15: $6,050/$8,800 = 0.6875 overhead rate

2. Job A23: $24,000 x 0.6875 = $16,500 applied overhead

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Total applied overhead:A23 $16,500C76 24,750G15 6,050

$47,300

$48,600 - $47,300 = $1,300 underapplied overhead

3. For Job C76: $24,750 / .6875 = $36,000 direct labor

Therefore, $148,650 - ($36,000 + $61,000 + $24,750) – ($8,800 + $6,050)= $12,050 direct materials for Job G15

$42,000 + $61,000 + $12,050 = $115,050 cost of direct materials issued

4-34 Application of Factory Overhead (20 min)

1. Predetermined Factory Overhead Rate = $568,000 / 71,000 direct labor hours = $8 per direct labor hour

2. Applied Overhead = $8 x 71,500 = $572,000 Actual Overhead 582,250Underapplied Overhead $10,250

3. Journal entry to transfer underapplied overhead to Cost of Goods Sold

Cost of Goods Sold 10,250Factory Overhead 10,250

4-35 Service Industry; Overhead Rate, Pricing (20 min)

1. Predetermined Overhead Rate = $325,000 / 25,000 hours = $13 per professional hour

2. Total Cost = $32,000 + ($50 x 1,200) + ($13 x 1,200)

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= $32,000 + $60,000 + $15,600 = $107,600

Total Revenue = $107,600 x 150% = $161,400

4-36 Spoilage and Scrap (20 Min)

Background Information:Job X12 (specific normal spoilage for a particular job)

Cost of spoiled units $600 Disposal value of spoiled unit $300

Job Y34 (common normal spoilage, abnormal spoilage, and scrap)Cost of spoiled units

Common normal spoilage $400Abnormal spoilage $200

Sale value of scrap $ 80Sale of scrap common to all jobs $120

1. Journal entries to record spoilage costs:a. To record the normal spoilage attributable to Job X12

Materials Inventory (disposal price of the spoiled goods) 300Work-in-Process Inventory: Job X12 300

b. To record the normal and abnormal spoilages incurred in Job Y34

Factory Overhead (normal spoilage cost) 400Loss from Abnormal Spoilage 200

Work-in-Process Inventory: Job Y34 600

2. Journal entries to record scrap sold:a. To record the scrap sold attributable to a specific job

Cash 80Work-in-Process Inventory: Job Y34 80

b. To record the scrap sold common to all jobs

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Cash 120Factory Overhead 120

PROBLEMS


1. Actual Factory Overhead: $30,000 + $23,000 + $46,000 + $12,000 + $15,000 = $126,000

2. Underapplied Overhead: First, applied overhead = ($10,000 + $18,000 + $34,000 + $16,000) x 160% = $124,800Underapplied overhead = $126,000 - $124,800 = $1,200

3. Cost of Goods Sold for Job No. 125: $77,500 + $1,000 + $10,000 + ($10,000 x 160%) = $104,500 4. Work-in-Process Ending Inventory (Jobs 128, 129, and 130): [$26,000 + $18,000 + ($18,000 x 160%)] + [$12,000 + $34,000 + ($34,000 x 160%)] + [$4,000 + $16,000 + ($16,000 x 160%)] =

$218,800

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Valport CompanyStatement of Cost of Goods ManufacturedFor the Year Ended November 30, 2010

($000s omitted)

Materials inventory 12/1/09 $ 105Materials purchases ($965+98) 1,063Less: Indirect materials ($125+9) 134Materials inventory 11/30/2010 85 Direct Materials Used 949

Direct Labor ($845+80) 925Manufacturing Overhead Applied Indirect materials ($125 +9) $134 Indirect Labor ($345+30) 375 Utilities ($245+22) 267 Depreciation (385+35) 420 1,196Total Manufacturing Costs $3,070

Add: Work-In-Process 12/1/09 60Less: Work-In-Process 11/30/2010 150 Cost of Goods Manufactured $2,980

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2.

Finished Goods Inventory 12/1/09 $ 125Plus: Cost of Goods Manufactured 2,980Less: Finished Goods Inventory 11/30/2010 225 Cost of Goods Sold $2,880

4-39 Job Costing (30 min)1. Overapplied OH= $7,700, a decrease in COGS2. Total Mfg cost for X= $83,800; Y= $75,400

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4-40 Job Costing (alternative to 4-39) (30 min)1. Underapplied OH = $31,3502. Total Mfg cost for Job 1467= $357,913; for Job 1469 = $330,363

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4-41 Journal Entries and Accounting for Overhead (35 min)

1. Predetermined Overhead Rate = $ 120,000 / 8,000 = $15 per DL hour

2. Journal Entries

a. Materials Inventory 90,000Accounts Payable 90,000

b. Work-in-Process Inventory- Job S10 23,000 Work-in-process Inventory - Job C20 42,000 Work-in-Process Inventory - Job M54 22,000 Factory Overhead 4,000

Materials Inventory 91,000

c. Work-in-Process Inventory- Job S10 6,110 Work-in-Process Inventory- Job C20 4,030 Work-in-Process Inventory- Job M54 1,820 Factory Overhead 2,500 Salary Expense (S & A) 6,000

Accrued Payroll 20,460

d. Factory Overhead 2,200 Depreciation Expense (S & A) 1,700

Accumulated Depreciation 3,900

e. Advertising Expense (S & A) 6,000Cash 6,000

f. Factory Overhead 1,300Accounts Payable (or Cash) 1,300

g. Factory Overhead 1,600Accounts Payable (or Cash) 1,600

h. Work-in-Process Inventory 13,800Factory overhead 13,800

Applied Overhead = $15 x 920 hours = $13,800

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4-41 (continued -1) i. Finished Goods Inventory-Job S10 46,660

Work-in-Process Inventory- Job S10 46,660 $6,110 / $13 = 470 direct labor-hours $10,500 + $23,000 + $6,110 + ($15 x 470) = $46,660 j. Accounts Receivable 59,000

Sales 59,000 Cost of Goods Sold 54,000

Finished Goods Inventory - Job J21 54,000

k. Cash 25,000Accounts Receivable 25,000

3. Ending balance of the Materials Inventory = Beginning balance + Purchases - Uses = $27,000 + $90,000 - $91,000 = $26,000

4. Ending balance of the Work-in-Process Inventory = Job C20 Cost + Job M54 Cost = (Direct Materials + Direct Labor + Applied Overhead) of 2 jobs = ($42,000 + $22,000) + ($4,030 + $1,820) + [$15 x (310 + 140)] = $64,000 + $5,850 + $6,750 = $76,600where direct labor-hours for Job C20 = $4,030 / $13 = 310 hours

for Job M54 = $1,820 / $13 = 140 hours

Alternative approach:Ending WIP = Beginning WIP + DM + DL + Applied OH - FG= $10,500 + ($23,000 + $42,000 + $22,000) + ($6,110 + $4,030 + $1,820) + $13,800 - $46,660 = $76,600

5. Actual Overhead = $4,000 + $2,500 + $2,200 + $1,300 + $1,600 = $11,600$11,600 (Actual) - $13,800 (Applied) = $2,200 Overapplied Overhead

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4-42 Journal Entries, Schedule of Cost of Goods Manufactured (50-60 min) 1. Predetermined Overhead Rate = $1,235,475 / 86,700 = $14.25 per direct labor-hour

2. a. Direct Materials Inventory 125,000Accounts Payable 125,000

$25 x 5,000 = $125,000

b. Materials Inventory 1,800Accounts Payable 1,800

$36 x 50 = $1,800

c. Work-in-Process Inventory 87,500 Factory Overhead 1,098 Direct Materials Inventory 87,500 Supplies Inventory 1,098 $25 x 3,500 = $87,500 $36 x 30.5 = $1,098

d. Work-in-Process Inventory 141,900 Factory Overhead 46,000

Cash 187,900 $187,900 - $46,000 = $141,900 Direct labor-hours used = $141,900 / $22 = 6,450 hours

e. Factory Overhead 15,230 Cash 15,230

f. Factory Overhead 3,500 Prepaid Insurance 3,500

g. Factory Overhead 8,200 Accumulated Depreciation 8,200 (Factory Asset)

h. Selling & Administrative Expense 2,400 Accumulated Depreciation 2,400

4-21


4-42 (Continued -1)

i. Selling & Administrative Expense 5,500 Cash 5,500

j. Factory Overhead 13,500 Cash 13,500

k. Selling & Administrative Expense 13,250 Cash 13,250

l. Applied Overhead = $14.25 x 6,450 DL hour = $91,912.50 Work-in-Process Inventory 91,912.50

Factory overhead 91,912.50

m. Finished Goods Inventory 146,000 Work-in-Process Inventory 146,000

n. Accounts Receivable 132,000 Sales Revenue 132,000

Cost of Goods Sold 112,000 Finished Goods Inventory 112,000

3. Actual Overhead = $1,098 + $46,000 + $15,230 + $3,500 + $8,200 + $13,500 = $87,528

Overapplied Overhead = $91,912.50 - $87,528 = $4,384.50

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4-42 (Continued -2)

4. Apex Corporation Schedule of Cost of Goods Manufactured and Sold For the month ended August 31, 2010 __________________________________________________Direct materials: Beginning materials inventory $ 0 Purchases 125,000 Total materials available 125,000 Deduct: ending materials inventory (37,500 ) $ 87,500.00Direct labor 141,900.00Factory overhead applied 91,912.50Total manufacturing costs 321,312.50Add: beginning work-in-process inventory 0.00Deduct: ending work-in-process inventory ( 175,312 .50) Cost of goods manufactured 146,000.00Add: beginning finished goods inventory 0.00Deduct: ending finished goods inventory (34,000 .00 )Normal cost of goods sold 112,000.00Deduct: overapplied overhead ( 4,384.50)Cost of goods sold $107,615 .50

5. Apex Corporation Income Statement For the month ended August 31, 2010 __________________________________________________

Sales $132,000.00Cost of Goods Sold ( 107,615.50)Gross Margin 24,384.50Selling & Administrative Expense* 21,150.00Net Income $ 3,234.50

* S & A Expense = $2,400 + $5,500 + $13,250 = $21,150

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4-43 Journal Entries (alternative to 4-42) (40 min)

1. Predetermined Overhead Rate = $527,805 / 31,700 = $16.65 per direct labor-hour

2. a. Factory Overhead 1,495 Prepaid Insurance 1,495

b. Finished Goods Inventory 62,390 Work-in-Process Inventory 62,390

c. Selling & Administrative Expense 1,025 Accumulated Depreciation 1,025

d. Materials Inventory 315Accounts Payable 315

$15 x 21 = $315

e. Factory Overhead 6,510 Cash 6,510

f. Work-in-Process Inventory 60,700 Factory Overhead 19,600

Cash 80,300 $80,300 - $19,600 = $60,700 Direct labor-hours used = $60,700 / $20 = 3,035 hours

g. Factory Overhead 5,770 Cash 5,770

h. Direct Materials Inventory 23,100Accounts Payable 23,100

$11 x 2,100 = $23,100

i. Accounts Receivable 56,410 Sales Revenue 56,410

Cost of Goods Sold 47,860 Finished Goods Inventory 47,860

4-24


4-43 (continued -1)

j. Work-in-Process Inventory 16,445 Factory Overhead 195 Direct Materials Inventory 16,445 Supplies Inventory 195 $11 x 1,495 = $16,445 $15 x 13 = $195

k. Selling & Administrative Expense 5,660 Cash 5,660

l. Factory Overhead 3,505 Accumulated Depreciation 3,505 (Factory Asset)

m. Selling & Administrative Expense 2,350 Cash 2,350

n. Applied Overhead = $16.65 x 3,035 DL hours = $50,532.75 Work-in-Process Inventory 50,532.75

Factory Overhead 50,532.75

3. Actual Overhead = $1,495 + $6,510 + $19,600 + $5,770 + $195 + $3,505 = $37,075

Overapplied Overhead = $50,532.75 - $37,075 = $13,457.75

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4-43 (continued -2)

4. Accuzeit Corporation Schedule of Cost of Goods Manufactured and Sold For the month ended April 30, 2010 __________________________________________________

Direct materials: Beginning materials inventory $ 0.00 Purchase 23,100 .00 Total materials available 23,100.00 Deduct: ending materials inventory (6,655 .00) $ 16,445.00Direct labor 60,700.00Factory overhead applied 50,532.75Total manufacturing costs 127,677.75Add: beginning work-in-process inventory 0.00Deduct: ending work-in-process inventory (65,287 .75) Cost of goods manufactured 62,390.00Add: beginning finished goods inventory 0.00Deduct: ending finished goods inventory (14,530 .00 )Normal cost of goods sold 47,860.00Deduct: overapplied overhead (13,457.75)Cost of goods sold $ 34,402 .25

5. Accuzeit Corporation Income Statement For the month ended April 30, 2010 __________________________________________________

Sales $ 56,410.00Cost of Goods Sold ( 34,402.25)Gross Margin 22,007.75Selling & Administrative Expense* 9,035.00Net Income $ 12,972.75

* S & A Expense = $1,025 + $5,660 + $2,350 = $9,035

4-26


4-44 Service Industry Job Costing (15 min)

1. $225,000 / $180,000 = 125% of professional labor cost This is used to allocate the budgeted overhead for the period to each specific account based on the direct professional labor that has occurred for each account.

2. Amount of overhead charged to: Barry Account: 125% x $2,200 = $2,750 Miles Account: 125% x $8,400 = $10,500

3. Computation of the total contract cost: Cost Barry Account Miles Account Direct labor 2,200 8,400 Overhead 2,750 10,500 Total $ 4,950 $18,900

4-27


4-45 Job Cost Sheets; Departmental Rates (40 min)1.

4-28


4-45 (Continued -2)2. The solution for requirement two is shown below

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4-45 (continued -3)3. Using Pivot Tables in Excel provides the flexibility to easily manipulate the data to find summary information from the data. The solution for Part 3, identical to that in Part 1, but using Pivot Tables (see tutorial for Pivot Tables at the end of the solution for 4-45):

4-45 (continued -4)

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4. Using Pivot Tables in Excel provides the flexibility to easily manipulate the data to find summary information from the data. The solution for Part 4, identical to that in Part 2, but using Pivot Tables:

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4-45 (continued -4)

Tutorial and Illustration:Creating and Using Pivot Tables—the following steps can be used to create a pivot table that in turn, can be used to evaluate various data sets with ease. By exploring the pivot tables within Excel you can use this feature to perform many different summations and calculations. This tutorial will only show you a simple version of a pivot table. The data for the tutorial is taken from the self study problem at the end of the chapter, the Watkins Machinery Company.

1. Enter the data for the problem into a spreadsheet, as follows:

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2. Go to the Insert tab on the ribbon, and select the PivotTable button.

3. Once you click on the PivotTable button a new screen will pop-up. Select your data on the sheet, and check that you would like the pivot table to be created in a new sheet as seen below

4. Now you can click OK.5. As you can see, your pivot table is shown within a new sheet, and

now a new box has opened on the left side of your screen. This box allows you to modify the data within Excel. The lists shown in the Fields box are the headers of your data columns in the “Data” sheet. You should now select the field names, and drag them into the boxes below. For a detailed example see the screen captures below:

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6. When you look at the pivot table you can see that it has summed up left-to-right, and top-to-bottom. This data is the same as the information given in parts a and b of the self-study problem.

7. The drop-down boxes within the pivot table allow you to modify what data will be shown within the pivot table. Select the drop-down box for Purchased Products and select only “Material X.” As you can see below, this changed your pivot table to only show data relevant to “Material X.”

4-34


8. To change the format of the data within the pivot table is the same as changing the data of a normal cell. You can select from the formatting shortcut box, or you can right click on each, or all by selecting all the cells, and selecting Format cells… Format your numbers into this format 2,222.

9. Your final result should look like the pivot table below:


1. Total labor cost (2,800+3,800+1,700 direct labor factory hours used) x $30/DLH = $249,000Applied Overhead $896,400 OH application rate = $896,400/$249,000 = 360% direct labor cost

2. Beginning Materials Inventory = $ 42,500+Total materials purchased in July 45,000

- Materials used in July ($21,340+26,000+16,000) = 63,340 = Ending balance in Materials Inventory $24,160

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3. Actual factory overhead cost incurred during the month of July:

Indirect labor (6,900hours x $30/hr) $207,000 Rent 129,500 Utility 188,600 Repairs and maintenance 194,600 Depreciation 127,100 Other 176,600 Actual factory overhead cost in July $1,023,400

4. Ending balance of work in process inventory account

Job C46 Job M24DM $26,000 $16,000 DL 114,000 51,000 Applied OH 410,400 183,600

$550,400 $250,600 $801,000

4-46 (continued -1)

5. Cisneros Company

Schedule of Cost of Goods ManufacturedFor the month ended July 31

Direct materials $ 63,340Direct labor 249,000Factory overhead applied 896,400Total current manufacturing costs 1,208,740Add: beginning work-in-process inventory 54,000Total manufacturing cost to account for 1,262,740Deduct: ending work-in-process inventory (801,000)Cost of goods manufactured $461,740

6. Over- or under-applied overhead:Actual factory overhead cost incurred in July $ 1,023,400 Total factory overhead applied in July 896,400 Under-applied overhead $ 127,000

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7. Cost per unit in Job A12 (100 units):

Cost of goods manufactured (A12) $461,740 Number of units 100 Cost per unit $4,617.40

8. Cisneros Company

Statement of Cost of Goods SoldFor the month ended July 31

Finished goods beginning balance $ 75,000Cost of goods manufactured 461,740 Cost of goods available for sale 536,740Less: Finished goods ending balance 196,080 Cost of goods sold 340,660 +Underapplied overhead 127,000Adjusted cost of goods sold $ 467,660

4-47 Assigning Overhead to Jobs; Ethics (20 min)

The management accountant should keep the professional ethics code in mind. First, he or she should try to persuade other pilot project members and the company controller to strongly recommend the top management to adopt the more accurate departmental overhead rate method. If the company top management still would not listen, the management accountant should report the situation to the company’s audit committee.

4-48 Operation Costing (30 Min)

1. Cost per pound:

Raw Sweet Corn: $5,200 / 800 lbs = $6.50/lbRaw Regular Corn: $2,450 / 700 lbs = $3.50/lbTotal pounds for separating and cleaning depts. 800 + 700 = 1,500Total pounds for Creaming Department 700Separating Department: $1,500 / 1,500 lbs = $1.00/lbCleaning Department: $900 / 1,500 lbs = $0.60/lb

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Creaming Department: $210 / 700 lbs = $0.30/lb

Total product cost per pound:Sweet Corn = $6.50 + $1.00 + $0.60 = $8.10Regular Corn = $3.50 + $1.00 + $0.60 + $0.30 = $5.40

2. Journal Entries:

a. To record the requisition of the raw corn for both types less the cream cost:

WIP Inventory: Separation Department.......7,350Direct Materials Inventory....………….......7,350

$5,200 + $2,450 - $300 = $7,350

b. To apply conversion costs to the Separation Department:

WIP Inventory: Separation Department .......1,500Conversion Costs Applied ……...…………1,500

$1/lb x 1,500 lbs = $1,500

c. To transfer both types of corn to the Cleaning Department:

WIP Inventory: Cleaning Department.....…...8,850WIP Inventory: Separation Department.....8,850

$7,350 + $1,500 = $8,8504-48 (continued -1)

d. To apply conversion cost to the Cleaning Department: WIP Inventory: Cleaning Department......…….900

Conversion Costs Applied..………….…..…. 900$.60/lb x 1,500 lbs = $900

e. To transfer the Regular Corn to the Creaming Department and the Sweet Corn to Finished Goods Inventory:

WIP Inventory: Creaming Department........3,270 Finished Goods Inventory……………..…....6,480

WIP Inventory: Cleaning Department......9,750

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$2,450 - $300 + ($1 x 700) + ($0.60 x 700) = $3,270$5,200 + ($1 x 800) + ($0.60 x 800) = $6,480$8,850 + $900 = $9,750

f. To transfer cream costs and conversion cost to the Creaming Department:

WIP Inventory: Creaming Department….......510Direct Materials Inventory.……….………..300Conversion Costs Applied ……………......210

$.30/lb x 700 lbs = $210

g. To transfer the Creamed Corn to Finished Goods:

Finished Goods Inventory……………........3,780WIP Inventory: Creaming Department...3,780

$3,270 + $510 = $3,780

4-49 Spoilage, Rework and Scrap (30 Min)

1. Normal spoilage is the occurrence of unacceptable units arising under efficient operating conditions. Normal spoilage is an inherent result of the particular process or operation and is uncontrollable in the short run. The costs associated with normal spoilage are typically viewed as part of the cost of the good units produced.

Abnormal spoilage is spoilage that is not expected to arise under efficient operating conditions and is not an inherent part of the production process. Accordingly, abnormal spoilage is usually considered controllable and is not included as a portion of the cost of good units produced but as an expense of the period.

2. a. Spoiled units are unacceptable units of production that are either discarded or sold for disposal value.

b. Rework units are unacceptable units or production that are subsequently reconditioned into good units which can be sold as acceptable finished goods.

4-39


c. Scrap represents inputs that do not become part of the output and have minor economic value when compared to the sales value of the completed product.

3. a. An analysis of the 5,000 units rejected by Richport Company for Job No. N1192-122 yields the following breakdown between normal and abnormal spoilage. Units

Normal spoilage (see below)* 3,000Abnormal spoilage:

Design defect (given) 900Other [5,000 – (3,000 + 900)]1,100 2,000

Total units rejected 5,000

*Normal spoilage = .025 of units of good production (where good production = production before any spoilage)Good Production for 117,000 units = 117,000 / (1-.025)= 120,000 units; if we produced 120,000 units, we would expect a normal spoilage of 2.5% for a net of 117,000 units; so Normal spoilage = 120,000 x .025 = 3,000 units, or 120,000 – 117,000 = 3,000

4-49 (continued -1)

b. The journal entries required to properly account for Job No. N1192-122 is presented below and uses an average cost per unit of $57 ($6,954,000 / 122,000).

Debit CreditSpoiled Inventory (4,100 x $7) $ 28,700Loss from Abnormal Spoilage (b) 106,300

WIP Inventory (a) $135,000

Supporting Calculations:a)

900 abnormal spoiled units @ $57 $ 51,3001,100 other abnormal rejected units @ $57 62,7003,000 normal spoiled units @ $7 21,000

$135,000

4-40


b) $135,000 - $28,700 = $106,300

4-41


4-50 Job Cost Sheets (40 min)1. Solution using Pivot Tables: (See Note at end of Solution)

4-42


4-50 (continued -1)2. Solution using Pivot Tables in Excel:4-50 (continued -2)

4-43


Note: There is a tutorial explaining the use of Pivot tables in Excel at the end of the solution for problem 4-45.

Note, also: The solution can be arrived at without using pivot tables. A convenient alternative would be to use the Data Sort and the Data Subtotals commands. For example, the following sequence would provide the needed job totals for materials and labor hours for each department for each job.

a. Mark the data on materials requisitions and time tickets, and sort this by job numberb. For the same range of data, use Data Subtotals by Job for Materials cost (see example screen shot below) to find the materials cost for each job

c. Return to Data Subtotals for the same range of data and select to remove subtotalsd. Use Data Subtotals by Department for labor hours to find the labor hours for each department for each job.

4-44


4-51 Job Costing; Quarterly and Annual Rates1,2,3

4-45


Problem 4-51 (continued -1)

4. The analyses in parts 1-3 show:a) An annual pricing rate under the annual approach would be $141.98,

while the quarterly approach would produce prices ranging from a low of $121.50 in the third quarter to high a of $202.50 in the second quarter. Note that the quarterly rates determined above are based on the assumption, stated in the case, that the rate for any quarter is based on the actual results of the prior quarter.

b) The result of the quarterly policy as implemented is to have overhead rates and pricing rates relatively high in the high volume quarters, the quarters in which per-hour overhead rates are the lowest. This arises because the high and low quarters alternate, and the rates are calculated for one quarter to apply to the next. It appears that George and Steve may be unaware of the fact that volume differences between quarters affect their overhead rates and prices from quarter to quarter. Strategically, this means they are unable to compete effectively in price setting, given their cost information.

c) The effect of using the quarterly rates, relative to the annual rates, is that prices and revenues are higher for the high volume months under the quarterly method. The result is higher variability of prices and profits, from quarter to quarter, using the quarterly rates. The annual rate approach reduces this variability among quarters. This could be used as a strong argument that the annual rate should be used, as the text argues. Note from examining the solution above that this is true whether we use the contribution income statement or the conventional full cost income statement. The higher variability of revenues and profits could cause strategic problems, such as creating problems in cash flow management, as cash flows fluctuate significantly from season to season.

Total annual profit is greater under the quarterly rate approach ($2,320,625 relative to $1,615,625 for the annual rates) because the quarterly approach has higher rates in the high volume quarters. Total costs are the same in both approaches but revenues are higher for the quarterly approach. The fact that Mansfield is charging somewhat higher rates during the high volume months is probably what has caused some customers to say that some of Mansfield’s competitors have better prices. By using annual rates, Mansfield is likely to address this pricing problem and also to reduce the

4-46


4-51 (continued -2)

variability in profits among quarters. Of course, it also appears that going to the annual rate could also reduce profits. The demand figures used in the analysis are the actual figures for the prior year, so using an annual rate would have produced lower profits in the prior year if demand were the same.

d) If the use of annual rates would significantly increase demand, then George and Steve should consider the change, as it would increase profits and reduce variability in pricing and profits across quarters. However, there is a significant difference in annual profit figures for the two methods ( $2,320,625 - $1,615,625 = $705,000, or 30% of current profit). This suggests that demand would have to increase significantly. There are two issues that now arise: can Mansfield achieve the significant increase in demand with

annual rates? if the increased demand comes in the two busiest quarters (as is

likely to happen), will Mansfield have the capacity to meet the increase? Note that the firm’s capacity per quarter is approximately 27 machines x 150 hours x 3 months = 12,150 machine hours. Right now the busiest quarter has 12,500 machine hours of demand, indicating that these machines are already used beyond planned capacity levels in this quarter, and thus, any increase in capacity means a need for more machines, an investment that should be carefully considered.

e) Given the seasonality of the business, George and Steve may want to consider monthly profit reports, irrespective of the overhead rate and pricing method chosen.

f) A good additional question for class discussion would be the following: What would be the effect of the choice of a quarterly or annual rate on the quarterly income statements if Mansfield were to close the overhead account quarterly and close the underapplied or overapplied overhead to cost of goods sold? The solution shown for parts 1,2 and 3 above assumes that underapplied or overapplied overhead is charged to cost of goods sold quarterly. The solution for overhead closed at year end for both the quarterly rate and the annual rate is shown below. The year end closing of the overhead variance tends to reduce the variability in profit across the quarters –

4-47


4-51 (continued -3)

g) the high volume quarters are in effect charged a higher amount of overhead. Note that the overhead variances for the annual rate net to zero over the four quarters.

4-52 Overhead Rates Used for Each Machine in a Printing Plant(Note: See also the Comments on Cost Management in Action at the end of the chapter regarding a similar costing situation)

This short case is intended as a basis for class discussion that could initiate the following topics and questions: application of job costing in the printing industry; what are the factors driving the accuracy of product costing; how does the choice of job costing method affect pricing; what is the effect of cost allocation methods on management behavior, performance evaluation, and how does a chosen cost method advance or hinder the firm’s progress to its strategic goals? Some observations that I would bring out in this discussion include:

4-48


EFS uses a job costing system in which materials and direct labor are traced to the job, and overhead is traced to each machine and then applied to the jobs based on machine usage

A strength would be that EFS has put a lot of effort into tracing the printing costs accurately and using an overhead allocation approach that attempts to trace the costs of the machinery to the jobs that used that machinery

I would begin a discussion of the EFS approach to allocating other overhead costs – insurance, supervision, and office salaries – to the jobs based on the capacity of the machines. That is, machines with more printing capacity (where capacity is the number of feet of forms produced per minute of machine time) will receive a larger portion of this portion of overhead. This is very much like a volume based rate, which is OK, but does not reflect the actual behavior of these costs. Suppose the total of other overhead is significant. Then small jobs on high capacity (fast) machines will be charged a relatively high rate. Conversely, large jobs on low-capacity machines will be charged a relatively low rate. How this would affect pricing and the allocation of jobs to machines is not easy to predict.

The strategic issue is (as in Problem 4-51above) the (unknown) impact of cost calculations on competitive pricing, and therefore on the company’s competitiveness. The success of the company depends on its ability to set a competitive price, recognizing that the company has unused capacity (in a seasonal business) in some periods of the year. Source: Jacci L. Rodgers, S. Mark Comstock and Karl Pritz, “Customize Your Costing System,” Management Accounting, May 1993, pp. 31-32. See also, Lisa Cross, “Benefiting from Costing and Pricing Tools,” Graphic Arts Monthly, July 2004, pp 32-34.

4-53 Plantwide vs. Departmental Overhead Rate (30 Min)

1. Empco Inc. is currently using a plantwide overhead rate that is applied on the basis of direct labor dollars. In general, a plantwide factory overhead rate is acceptable only if a similar relationship between overhead and direct labor exists in all departments, or the company manufactures products, which receive proportional services from each department.

4-49


In most cases, departmental overhead rates are preferable to plantwide overhead rates because plantwide overhead rates do not provide:

a framework for reviewing overhead costs on a departmental basis, identifying departmental cost overruns, or taking corrective action to improve departmental cost control.

sufficient information about product profitability, thus, increasing the difficulties associated with management decision-making.

2. Because Empco uses a plantwide overhead rate applied on the basis of direct labor dollars, the elimination of direct labor in the Drilling Department through the introduction of robots may appear to reduce the overhead cost of the Drilling Department to zero. However, this change will not reduce fixed factory overhead expenses such as depreciation, plant supervision, etc. In reality, the use of robots is likely to increase fixed expenses because of increased depreciation expense. Under Empco's current method of allocating overhead costs, the remaining departments will merely absorb these costs.

4-53 (continued -1)

3. In order to improve the allocation of overhead costs , Empco should: establish separate overhead accounts (pools) and rates

for the Drilling Department. identify, if possible, fixed and variable overhead costs and

establish fixed and variable overhead rates. apply overhead costs to the Drilling Department on the

basis of robot or machine hours.

4-50


4-54 Plantwide vs. Departmental Overhead Rate (30 min)

1. Budgeted Overhead = ($146,000 + $94,000) + ($77,000 + $163,000) = $480,000Budgeted Direct Labor-hours = 1,000 units x (12 + 8) hours = 20,000 hours Predetermined Overhead Rate = $480,000 / 20,000 = $24 per direct labor-hour2. Budgeted Machine-hours = 1,000 units x (5 + 15) hours = 20,000 hours Predetermined Overhead Rate = $480,000 / 20,000 = $24 per machine-hour3. Using Direct Labor-hours:

Department A Department B TotalDL-hours 1,000 x 12 1,000 x 8

= 12,000 hours = 8,000 hours 20,000 hoursOverhead applied 12,000 x $24 8,000 x $24

= $288,000 = $192,000 $480,000Using Machine-hours:

Department A Department B TotalMachine-hours 1,000 x 5 1,000 x 15

= 5,000 hours = 15,000 hours 20,000 hoursOverhead applied 5,000 x $24 15,000 x $24

= $120,000 = $360,000 $480,000

4. If direct labor-hours are used to apply factory overhead, Department A is overcharged and Department B is undercharged. If machine hours are used, Department A is undercharged and Department B is overcharged. The reason is that each department has a different cost driver. Department A is labor intensive and Department B is machine intensive. Therefore, using one single plantwide overhead rate is not appropriate.5. Using direct labor-hours for Department A:Predetermined Overhead Rate = $240,000 / 12,000 = $20 per direct labor-hourApplied Overhead = 1,000 units x 12 hours x $20 = $240,000Using machine-hour for Department B:Predetermined Overhead Rate = $240,000 / 15,000 = $16 per machine-hour Applied Overhead = 1,000 units x 15 hours x $16 = $240,000

4-51

Chap 004

Documents

conventional

efficient

high volume

administrative

chosen cost

direct labor

total mfg

factory overhead