Chapter 5 JOB ORDER COST SYSTEM-raiborn Exercises 13 . a. Th e di rect mater ia l ch arge of $6 58 ,0 00 is hi gh er th an th e estimate by $158,000. Assuming that there were no errors in the estimated and actual amounts, then either the rice aid for the material or the !uantit y of material used was substantially higher than expected. To begin the "alidation rocess, 1. detai ls of the or iginal est imate to ident if y r ice s and !uantities of materials for this #ob would need to be eamined. The starting oint to "alidate the material rices and !uantities urc has ed is to eami ne "endor in"oice s bil led to %uind o. These in"oices will alidate !aterial purchase "uantities and prices paid by %uindo. &. Addi tionally, mate rial re!u isition for ms should be ea mined to alida te the "ua nti ty o# !aterial actual ly used in production$ 3. 'et, an eamination of the material cost (material !uantity multi l ied by mat er ial ric e) on the %ob order cost sheet should reconcile to the !uantit y of mater ial shown on the material re!uisition forms. b. The dir ect labor c harge o f $6&5,000 is higher than the estimate by $&&5,000. As suming that there were no errors in th e estimated and actual amounts, then either the hourly rate aid to or the number of hours wor*ed by emloyees was substantially higher than eected. T o begin the "alidation rocess, 1. details of the original estimate to identify rates and hours for labor on this #ob would need to be eamined. The starting oint to "alidate the labor rates and hours wor*ed is to &. eamine emloyee time she ets (or ot her lab or accumul ati on documents). The time sheets will "alidate which emloyees wor*ed on the #ob and for what eriod of time. 3. A discuss ion with the ayroll manager shoul d helascer tain the actual or a"erage wage rates aid to emloyees. +. ossibly some of %uindo-s emloyees who were listed as wor*ing on the #ob should be inter"iewed to determine the accuracy of the time sheets. 1
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c. The redetermined o"erhead rate could ha"e been maniulated
to a higher rate by using a lo&er deno!inator le"el of acti"ity than was aroriate. Additionally, inaroriate costs(such as eriod costs in addition to roduct o"erhead costs)could ha"e been included in the numerator. A large estimate forsoilage and defect costs might also ha"e been included in thenumerator when, in fact, such costs rarely occur at %uindondustries.
d. The comany-s beha"ior is at best !uestionable. /i"en that thedierence between actual and estimated direct material costwas li*ely *nown at the oint of urchase, %uindo should ha"e
notied 2alem or. immediately of the ecessi"e increase incost. 2imilar notication should ha"e been ro"ided when itwas seen that direct labor and machine times were higher thaneected.
1+. a. 4aw aterial n"entory &0+,000Accounts ayable &0+,000
or* in rocess n"entory7+&63 163,800or* in rocess n"entory7+&6+ 1,890anufacturing :"erhead 1&,+60
4aw aterial n"entory 198,130
or* in rocess n"entory7+&63 5+,000or* in rocess n"entory7+&6+ 1,800 ash (3,600 $15) 55,800
c. ?ecause the comany wor*ed only on @ob +&63 until the endof Aril, all costs in beginning for other #obs are still inthat account at the end of the month.
?eginning $11,+00
ess costs associated with @ob +&63 (800)osts associated with other #obs $10,600osts for @ob +&6+ ($1,890 ; $1,800 ; $&,160) 5,830Bnding $16,+30
&&. a. =irect material $&,850=irect labor ($800 E $&0 > +0 =Fs) 800Alied o"erhead ($19 +0) 680 Total cost of @ob <&0 $+,330
b. ? of ($8,&50 ; $500 ; ($19 &5) $ <,195=irect material $&1,650=irect labor ($6,300 E $&0 > 315 =Fs) 6,300Alied o"erhead ($19 315) 5,355 33,305
$+&,+80B of (+,330)ost of goods manufactured $38,150
c. Actual o"erhead $5,05+Alied o"erhead (5,355)
:"eralied :F $ 301
&3. a. iingH $+80,000 E 60,000 > $8 er Fa"ingH $900,000 E &8,000 > $&5 er =F
b. iing (&<0 Fs $8)$ &,3&0
a"ing (3+0 =Fs $&5) 8,500 Total o"erhead alied $10,8&0
c. ($+80,000 ; $900,000) E (60,000 ; 1&,000) > $1,180,000 E
9&,000 > $16.3<
$16.3< 33+ > $5,+9+.&6 alied to @ob &&0
A lant7wide rate would not ha"e been indicati"e of the actualcost of each #ob because the iing deartment is "erymachine7intensi"e while the a"ing deartment is "ery labor7intensi"e.
&+. a. =eartment 1 > $+65,000 E 30,000 Fs > $15.50 er F=eartment & > $380,600 E &&,000 =Fs > $19.30 er =F
b. 4aw aterial n"entory 3+6,000Accounts ayable 3+6,000
or* in rocess n"entory C @ob +6& 1<,000or* in rocess n"entory C other #obs3&1,000
or* in rocess n"entory C @ob +6& &95or* in rocess n"entory C other #obs &,860
ash (&85 $11) 3,135
or* in rocess n"entory C @ob +6& +,<60
or* in rocess n"entory C other #obs3&,&+0:"erhead ontrol (&,+00 $15.50) 39,&00
or* in rocess n"entory C @ob +6& &,8++or* in rocess n"entory C other #obs&&,8<6
ash (1,+30 $18) &5,9+0
or* in rocess n"entory C @ob +6& 3+6or* in rocess n"entory C other #obs &,968
:"erhead ontrol (180 $19.30) 3,11+
Jinished /oods n"entory C @ob +6& &9,+&5or* in rocess n"entory C @ob +6& &9,+&5
($1<,000 ; $&95 ; $+,<60 ; $&,8++ ; $3+6)
Accounts 4ecei"able C ower 3&,<102ales ($&9,+&5 1.&0) 3&,<10
ost of /oods 2old &9,+&5Jinished /oods n"entory C @ob +6& &9,+&5
c. ost er unit > $&9,+&5 E 500 > $5+.85
2elling rice er unit > $65.8&4aw material > $1<,000 E 500 > $38
d. Total 4 issued $3+0,000 Total units (500 ; &0,000) E &0,5004 cost er unit $16.5< (rounded)
Total cost er unit > $5+.85 7 $38.00 ; $16.5< > $33.++2elling rice er unit > $33.++ 1.& > $+0.13 (rounded)
2ales without error $3&,<10
2ales with error (500 $+0.13) &0,065 Total Msa"ingsN of the error $1&,8+5
&5. A standard costing system is most aroriate in roductionsettings in which acti"ities are reetiti"e. That criterion is met inthe case of atamore ndustries. =e"eloment of such standardsre!uires that reliable eectations about inut cost amounts and!uantities be determined for the more routine asects of client
ser"ices. :nce the standards are de"eloed, actual costs andinut !uantities can be comared against the standards to betterunderstand the causes of cost "ariability across the contracts.?etter identication and understanding of the causes of "ariances will allow managers to manage costs more eecti"ely
and rice comany ser"ices more aroriately.
&6. I > Actual cost for aer urchasedC 2tandard cost for aerurchased > ($0.03& <80,000) C ($0.036 <80,000) > $31,3607 $35,&80 > 7$3,<&0.2ince actual cost was less than standard, the "ariance isfa"orable.
%I > Actual cost for aer used C 2tandard cost for aer thatshould ha"e been used > ($0.036 <80,000) C ($0.036 <8+,000) > $35,&80 7 $35,+&+ > 7$1++.
2ince actual aer usage was less than the standard allowed, the"ariance is fa"orable.
&9. a. Total ayroll > <,000 K $<.65 > $86,850
b. 4I > Actual ayroll C 2tandard cost for actual hours wor*ed> $86,850 C ($<.85 <,000) > $86,850 7 $88,650 > 7$1,800.
2ince direct labor emloyees were aid less than the standardrate, the "ariance is fa"orable.
c. %I > 2tandard cost for actual hours wor*ed C 2tandard costfor standard hours allowed for roduction > $88,650 C ($<.85 8,600) > $88,650 7 $8+,910 > $3,<+0.
2ince the number of hours wor*ed was greater than thestandard hours allowed, the "ariance is unfa"orable.
d. :ne concern would be the reason the comany was aying itswor*ers less than the standard rate er hour. The otherconcern would be that the wor*ers, recogniOing that they werebeing aid less than the standard, chose to wor* more slowly
than they normally would, to comensate (relati"e to totalwages) for the reduced wage. f this situation is the case, thecomany would ha"e been better o aying the standard ratebecause the actual ayroll was ($86,850 7 $8+,910) or $&,1+0greater than the standard would ha"e been.
&8. a. urrently, ?oni"o has no data on the actual cost of buildingany of the comuters being congured. onse!uently, the
comany is unable to determine the actual rot (loss)generated on any sales transaction. The #ob order costsystem would allow ?oni"o to better understand what factorsdri"e costs in the rm, measure the rot on salestransactions, and identify ways to better manage costs and
re"enues.
b. A ricing olicy that ignores the costs of direct labor ando"erhead (in addition to mar*eting and administrati"e costs)is Pawed. :nly if = and :F are strictly roortional to directmaterial could their costs not be considered in determiningthe rice and rot of each comuter. Fowe"er, in this case,these costs are li*ely a ma#or ortion of the cost of building amade7to7order comuter.
&<. a. 2ecretary ($+,800 E 160 hrs. 35 hrs.) $ 1,050
oies (1,+50 ages $0.06 er age) 89hone calls 1+5:"erhead ($<,600 E 160 hrs. 35 hrs.) &,100AttorneyQs time ($1<0 <5 hrs.) 18,050 Total charges $&1,+3&
This means onroe would be charging $&1,+3& E <5 >$&&5.60 or $&30 er hour (rounded).
Total bill to :li"gra > <5 hours $&30 > $&1,850
b. =irect costs ($89 ; $1+5 ; $18,050) $18,&8&Allocated secretarial costs 1,050Allocated o"erhead &,100argin R($18,050 ; $&,100) K 0.+0S 8,060 Total billing $&<,+<&
c. A Pat charge er hour would be more li*ely to be accetable
to clients because such a charge is more understandable thanbeing charged an hourly rate lus a charge for the time that isnot really being sent on their cases.
30. Bach student will ha"e a dierent answer, but the memo shouldaddress the following issueH
?udgeted cost is far below each #ob-s actual cost, which indicatesthat the comany is not using ast #ob information as a basis foreither controlling costs or increasing future bid rices. ?y not usinga"ailable historical information to ad#ust oerations, the comany
is acceting marginal #obs. Although each #ob generated a ositi"egross margin, the actual gross margin is only a small fraction of thebudgeted gross margin. t is imortant that a comany learn fromast mista*es.
31. a. 2ome of the comanies that ha"e been found to engage inthis ractice are Jamily =ollar, e ?oys, Taco ?ell, Toys747Ds,and al7art.
b. t is easier to doctor the records now than in the ast becauserecords are comuteriOed and managers generally ha"e accessto the les. re"iously, managers would ha"e had to consirewith ayroll cler*s or accountants to change aer or unch7card records.
c. Bach student will ha"e a dierent answer. Fowe"er, most
students will robably indicate that store managers ma*ingsuch changes would be red (short7run). Jor the long7run,ethics training would robably be recommended and ossiblya change in the way store managers- bonuses are comuted.
3&. a. anufacturing :"erhead 1,1504aw aterial n"entory &50ages ayable <00
b. 7 @ob ?A+68 1,150
4aw aterial n"entory &50ages ayable <00
/i"en that the rewor* costs were not necessary to thecomletion of the #ob, 2an Angelo or. should robably notcharge its mar*u ercentage on the $1,150 of rewor* costsunless the customer had already been informed that suchcharges might be charged and the customer had agreed tosuch charges.
c. oss on Abnormal 4ewor* 1,150
4aw aterial n"entory &50ages ayable <00
33. a. redetermined :F rate > $1,+&1,000 E 1+5,000 > $<.80 erF
=irect material $+9,500=irect labor &1,800:"erhead (3&5 $<.80) 3,185
b. The $950 rewor* cost is included in anufacturing :"erheadontrol.
c. Total original cost $9&,+85ost of new 30 units 1,3<0ess sale of defecti"e units (&+0) Total cost of @ob 896 $93,635
3+. a. The estimated cost of the soilage should be included incalculating the redetermined o"erhead rate. This aroachsreads the cost of soilage across all good units roduced.
b. The cost of this soilage should be charged to the secic #ob.2ince there is no sal"age "alue for the soilage, no #ournalentry would be necessary as the cost of the soiled units
would be included in the rior charges to the #ob for directmaterials, direct labor and manufacturing o"erhead.
c. n this case, the soilage is uneected and the net costshould be recorded as a loss of the eriod in which it occurred.Any sal"age "alue associated with the soilage will reduce theamount of the loss. To record the transaction, wor* inrocess (and the secic #ob-s #ob order cost sheet) should becredited for the cost of the soilage and the eected, netsal"age of the soilage should be debited (=isosal "alue of defecti"e wor*). A loss account (e.g., oss from abnormalsoilage) should be debited to balance the transaction.
b. =irect material $ 6&0=irect labor (8 $15) 1&0:"erhead (16 $30) +80 Total $1,&&0
c. C beginningW $ 6,&30=irect material (total issuances) 118,800=irect labor (680 K $15) 10,&00:"erhead (1,&00 K $30) 36,000 Total manufacturing costs $191,&30 7 ending (1,&&0)ost of goods manufactured $190,010J/ 7 beginning &3,800ost of goods a"ailable for sale $1<3,810J/ 7 ending (0)
ost of goods sold $1<3,810
W @ob aterial abor :F Total +11 $1,<00 $ 5+0 $1,500 $3,<+0 +1& 1,&+0 150 <00 &,&<0
$3,1+0 $ 6<0 $&,+00 $6,&30
+0. a. Dsing any of the #obs, one can determine that the relationshibetween direct labor and alied o"erhead is that o"erhead is115G of direct labor cost. Jor eamle, using #ob 69H$15,<16 E $13,8+0 > 1.15.
b. =irect material $&5,800=irect labor 9,&00Alied o"erhead 8,&80 Total $+1,&80
ncome using a cost7lus basis is substantially higher thanthat which is obtained using a Pat rate selling rice. =umasanufacturing will be more leased with the systemU ratherthan aying a rate of $8,600 er ad, =umas would be aying
$9,&0&. :n the other hand, 4eliant-s and :maha-s costs erad would increase from $8,600 er ad to $8,<15 and $13,96&,resecti"ely.
Ads shouldnQt be billed at a Pat rate because some may ta*emuch longer to de"elo than others. The 8 ads for :mahatoo* 630 hours to de"elo or about 9< hours each. n contrast,the 3 ads were de"eloed for 4eliant in 1&+ hours (+1 hours
d. incoln onstruction omany does not seem to ha"e a goodestimation system in lace for its bid rocess, esecially in its
recast =eartment. The comany may be losing a signicantnumber of bids because of inPated cost estimates.
+6. a. A #ob order cost system is aroriate in any en"ironment inwhich costs can be readily identied with secic roducts,batches, contracts, or ro#ects. Jor adoting this system thereshould be a #ustication on a cost7benet basis to trace coststo those secic roducts, batches, contracts, or ro#ects.
b. The only #ob remaining in at 531 is =4211+H=4211+ balance, +30 $1,590,000
ay additionsH4aw material $1&+,000urchased arts 89,000=irect labor &00,500:"erhead (1<,500 hrs. X $9.50W) 1+6,&50 559,950
balance, 531 $&,1&9,950
W:F rate > $+,500,000 E 600,000 hrs. > $9.50 er hour
c. J/ in"entory of layens, +30 1<,+00Dnits comleted in ay 15,000Dnits a"ailable 3+,+00Dnits shied in ay (&1,000)
J/ in"entory, 531 13,+002ince i 2!uea*s uses the JJ: in"entory method, all unitsremaining in J/ in"entory were comleted in ay.
or* in rocess in"entory, +30 $+&0,000ay additionsH 4aw material $ 3,000 urchased arts 10,800 =irect labor +3,&00 :"erhead (+,+00 Z $9.50) 33,000 <0,000 Total cost $510,000
Dnit cost > $510,000 E 15,000 units comleted > $3+ er unitJ/ in"entory > $3+ Z 13,+00 > $+55,600
d. f the amount of o"eralied or underalied :F is notmaterial or the result of an error in the :F alication rate,the amount is normally charged directly to /2. f the amountis signicant, the amount should be rorated o"er therele"ant accounts (i.e., , J/, and /2).
(Aadated)
+9. a., b. Alied :F rate > $30&,+00 E 100,800 > $3 er =Fost of goods manufactured $ <6,000Add ending wor* in rocessH
Two #obs oen ha"e = of $ +,800 Two #obs oen ha"e = of <,000 Two #obs oen ha"e alied :F of ($3 K &,1++) 6,+3&
&0,&3& Total costs accounted for $116,&3&ess beginning wor* in rocess (15,+00)ost of roduction inuts $100,83&
essH =irect labor $36,+00Alied :F ($3.00 K 8,800) &6,+00
(6&,800)ost of direct material used $ 38,03&ost of indirect material issued 11,600
b. @ob <18 = cost ($18 1,&00) $&1,600 = cost ($+ 1,&00) +,800 Total standard direct cost $&6,+00
@ob &00&= cost ($18 &,000) $ 36,000= cost ($+ &,000) 8,000 Total standard direct cost $++,000
c. @ob <18 2tandard Actual Iariance = $ &1,600 $&3,5&5 $1,<&5 D = +,800 +,8+0 +0 D Total $&6,+00 $&8,365 $1,<65 D
@ob &00&
= $36,000 $39,++0 $1,++0 D = 8,000 9,850 150 J Total $++,000 $+5,&<0 $1,&<0 D
d. ?y comuting "ariances for each #ob, managers becomeaware of any trends in costs. f costs are aggregated across #obs, any trends may be obscured.
50. a. rot on the ed7rice contracts is constrained by thecontract rice. rot can only be increased if ways are foundto reduce costs. :ne way that costs can be reduced is to shiftthem to other contracts. This is a articularly eecti"estrategy if the costs that are shifted to another contract canbe recoued under the terms of that other contract. ?yshifting some costs of the ed7rice contracts to the cost7lus contracts, the rot on the ed7rice contracts rises and
the shifted costs can be reco"ered under the terms of thecost7lus contracts. Jurther, this strategy may ha"e the eectof increasing costs under the cost7lus contracts if thosecontracts determine rot as a ercentage of total costs.
b. This tye of cost shifting is dishonest and unethical. t has theeect of increasing the total rices of cost7lus contracts, and,if those contracts are go"ernment related, those rices are
tyically borne by taayers. n a sense it is a way for thestoc*holders and managers of the defense contractors tosteal from the taayers. t is diYcult to imagine a setting inwhich this rocess could be labeled ethical.
51. a. Bach student will ha"e a dierent answer.
b. The comany is utiliOing the benets of automation to reducethe costs of handling so many arts. ?y standardiOingrocesses, the comany can assemble a messenger bag witha di"erse set of arts in an amount of time that is similar tothat re!uired for mass7roduced ones. Accordingly, althoughthe comany is robably aying, on a"erage, more for artson custom messenger bags than mass7roduced onesU it isholding the line on direct labor and roduction o"erhead. ?yholding costs down for labor and o"erhead, the total cost of
the custom roduced messenger bags is not signicantlyhigher than that of the mass roduced messenger bags.
c. %uality as "iewed from the ersecti"e of the consumershould be much higher with the custom7made messengerbags because customers are able to secify the "arious artsthey want included. ?y getting the eact combination of artsthe customers desire, they will ercei"e the !uality of theroduct to be "ery high relati"e to the remium in rice theyay o"er the mass7roduced messenger bags.
d. The answer is mostly re"ealed in art (c). ?y containing coststo le"els close to those of mass7roduced messenger bags,but allowing the customer to choose the arts they desire, asubstantial gross rot can be achie"ed. The higher grossrot rePects the customersQ willingness to ay a remium forthe eact combination of arts desired, e"en though thecomanyQs costs are not signicantly greater than thoseincurred to mass roduce messenger bags.
5&. a. t is li*ely that the least oular thoughts and oinions wouldnot be heard on camus. 2tudents would naturally suortthose ideas and ositions that were consistent with their own
ethics, hilosohies, and self interests. As a conse!uence, theo"erall di"ersity of ideas would robably decline.
b. Assuming di"ersity of oinions ultimately benets allstudents, the Dni"ersity of isconsin is ossibly suortingdi"ersity with the only means a"ailable[student dollars.Fowe"er, this aroach may not be ethical because it forcesstudents to suort oinions, beliefs, and ideas that may
"iolate their ersonal ethics. Although the 2ureme ourt of the Dnited 2tates will ultimately determine whether this is alegal ractice, each indi"idual student can reach hisher ownconclusion as to whether the ractice is ethical.
53. a. :"erhead other than soilage $600,000Bstimated soilage cost $50,000ess sal"age "alue &0,000 30,000Ad#usted estimated o"erhead cost $630,000
:4 > $630,000 E +0,000 > $15.95 er =F
b. =isosal "alue of chemical +<6anufacturing :"erhead 1,&3+
or* in rocess[@ob 988 1,930
5+. a. redetermined rate > $<&5,000 E 100,000 > $<.&5 er F
b. Total cost of direct material $689,100 Total cost of direct labor 159,950Alied :F (3,080 $<.&5) &8,+<0 Total cost of @ob ?316 $893,3+0
c. The rewor* cost is debited to the manufacturing o"erheadaccount since the comany uses a redetermined rate thatincludes rewor* costs to aly o"erhead.