Module 02

Module 2: Job-order costing

Required reading

Chapter 3, pages 69-99

Overview

This module introduces the distinctions between two methods of determining unit costs of production job-order costing and process costing and presents an overview of the design and operation of a job-ordercosting system. (Module 3 focuses on process costing.) Particular attention is given to the procedures forassigning overhead costs to units of product. The module illustrates the flow of costs through the system for atypical manufacturing company, and addresses some of the problems of overhead application.

In this module, you complete the design of a worksheet to calculate cost of goods manufactured and cost ofgoods sold using a spreadsheet program.

Assignment reminder

Assignment 1 (see Module 5) is due at the end of week 5 (see Course Schedule). It is a good idea to look at itnow in order to familairize yourself with the requirements as you work through Modules 2-4.

Topic outline and learning objectives

2.1 Job-order costing: Overview Compute predetermined overhead rates, and explainwhy estimated overhead costs (rather than actualoverhead costs) are used in the costing process.(Level 1)

2.2 Job-order costing: Flow of costs Prepare journal entries to record the flow of directmaterials cost, direct labour cost, and manufacturingoverhead cost in a job-order costing system. (Level 1)

2.3 Using pretedermined overhead rates Apply overhead cost to Work in process by use of apredetermined overhead rate. (Level 1)

2.4 Complications of overhead application Compute any balance of under- or overappliedoverhead cost for a period, and prepare the journalentry needed to close the balance into the appropriateaccounts. (Level 1)

2.5 Job-order costing in service companies Explain the role of job-order costing in servicecompanies. (Level 1)

2.6 Scrap and rework Prepare journal entries to deal with scrap and reworkof unacceptable production. (Level 1)

2.7 Computer illustration 2.7-1: Cost schedules Construct worksheet templates to calculate schedulesof cost of goods manufactured and cost of goods sold.(Level 1)

Module summary

Print this module

Course Schedule Course Modules Review and Practice Exam Preparation Resources

2.1 Job-order costing: Overview

Learning objective

Compute predetermined overhead rates, and explain why estimated overhead costs (rather thanactual overhead costs) are used in the costing process. (Level 1)

LEVEL 1

It is important that you understand the basic differences between the job-order and process costing systemsand the types of companies that would use each method. Note the following two important items from thereading for this module:

Discussion of the forms usedDistinction between direct and indirect materials

The job cost sheet (Exhibit 3-2) becomes the inventory subledger card for work in process.

Labour costs may be recorded in many different formats. Study the document used for recording direct labour(Exhibit 3-3). Consider how this recording process might be made faster, or made more accurate, if themachines used in the different tasks were connected to a computer.

Note: The explanation of overhead in the text is crucial to much of the rest of the course. You should clearlyunderstand the need for, the approach to, and the effect of using predetermined overhead rates.

To consider the question of why a predetermined overhead rate is needed, ask why smoothing is desirableeven though a study of financial accounting might suggest otherwise. Within a fiscal year, production can andoften does fluctuate. If production volume is unusually low for a given month, the unit cost of overheadassigned to inventory would tend to be very large because some overhead costs would not decrease inproportion to the decrease in production. Because assets are future benefits and because selling price, lesscosts to complete and sell (net realizable value), tends to reflect this, the future benefits can be used to justifynormalized (smoothed) overhead.

The greater unit cost resulting from the low production and the fixed overhead costs would likely mean that awrite-down of the inventory to market value (net realizable value) would be required. Smoothing by the use ofa normalized overhead would prevent such fluctuations in monthly inventory costs and incomes (due to thewrite-downs). Sufficient accuracy in estimating would be needed for costing and marketing.

Note the following equations:

Predetermined overhead rate Actual activity base = Overhead charged (or applied) to work in process.

Manufacturing overhead is charged to Work in process at a predetermined rate for the reasons mentioned onpage 78.

While the example in the textbook uses direct labour-hours as the cost driver, other appropriate cost driverscan be used to apply manufacturing overhead, such as machine-hours, beds occupied, computer time, orflight-hours.


2.2 Job-order costing: Flow of costs

Learning objective

Prepare journal entries to record the flow of direct materials cost, direct labour cost, andmanufacturing overhead cost in a job-order costing system. (Level 1)

LEVEL 1

The Work in process account is used to capture the costs of manufacturing the products, and includes the costof direct materials, direct labour, and manufacturing overhead. For direct materials and direct labour, actualcosts are charged to Work in process. As direct labour, direct materials, and manufacturing overhead are used,they are debited to Work in process.

However, actual overhead costs must still be accounted for in some manner. That is where the Manufacturingoverhead account comes into play. It is called a clearing account because it is cleared or emptied on a regularbasis.

The debit side of the Manufacturing overhead clearing account captures the actual cost of the various types ofmanufacturing overhead. These costs are, in turn, charged to specific jobs so the credit will clear the account,eventually bringing costs forward to Finished goods.

Activity 2.2-1 Job costing: The flow of costs

This activity introduces you to the flow of costs in a manufacturing environment. Because it is important towork through from start to finish, allow 10-15 minutes to complete the activity.


2.3 Using predetermined overhead rates

Learning objective

Apply overhead cost to Work in process by use of a predetermined overhead rate. (Level 1)

LEVEL 1

The manufacturing overhead clearing account is cleared to Work in process and charged to specific jobs basedon predetermined overhead rates.

This system of charging overhead out at a predetermined overhead rate is called a "normal costing system."

Ideally, the amount charged to specific jobs in this entry will equal the actual costs incurred. If so, the accountwill have a zero balance it will have been cleared. Topic 2.4 will describe how to clear any remaining balanceif the amount charged to specific jobs in the above entry does not equal the actual costs incurred.

Observe in Exhibit 3-11 how the Schedule of Cost of Goods Manufactured handles predetermined overhead."Actual" overhead of $95,000 is charged by first "applying" $90,000 and then adjusting for "Underappliedoverhead" of $5,000 (the difference between actual and applied overhead) to Cost of goods sold. If overheadhad been overapplied, the difference would be subtracted from Cost of goods sold.

Activity 2.3-1 Overhead application and journal entries

Work through this activity to reinforce your understanding of the cost flows for a manufacturing concern.


2.4 Complications of overhead application

Learning objective

Compute any balance of under- or overapplied overhead cost for a period, and prepare thejournal entry needed to close the balance into the appropriate accounts. (Level 1)

LEVEL 1

Determining whether a variance is underapplied or overapplied is the first difficulty in overhead application. Todetermine the answer, relate the actual overhead to the applied overhead. If actual overhead is greater thanthe applied, the variance is underapplied. Overapplied overhead is the reverse. Overapplied overhead occurswhen the amount of overhead applied to jobs exceeds the actual costs.

The closing, or disposition, of the overhead variance to Cost of goods sold is illustrated in entry (14) on page92. This is the required treatment for underapplied overhead. The CICA Handbook Accounting recentlyissued section 3031, the Canadian equivalent to International Financial Reporting Standards IAS 2. Section 3031states that for external reporting purposes, fixed overhead costs should be allocated based on normal capacity.Normal capacity is the production that is expected to be achieved on average over a number of periods orseasons under normal circumstances. This takes into account the time it takes to maintain equipment. Thismeans that the denominator used to determine the overhead application rate will always be based on thenormal capacity of the production facility. (Anticipated actual production should only be used if it"approximates" normal capacity.) Any production less than normal capacity may result in unallocated overheadat the end of the period. According to paragraph 3031.13, for external reporting purposes this overhead isexpensed to Cost of goods sold for the period. The same treatment applies to overapplied overhead. However,in periods of abnormally high production the overapplied overhead should be allocated to Work in process,Finished goods and Cost of goods sold so that inventories are not measured above cost.

For interim reports, the variance may be deferred. What if the plant is a fruit processor operating for only sixmonths of the year? Proration might be suggested except that, without inventories from production, therewould be nothing to prorate to. If you prepared interim statements, would you want a large loss from theunderapplied overhead or would you defer the overhead on the balance sheet as a deferred charge? While nodefinitive answer can be given, many managers prefer to defer the overhead variance.

Method for proration

In periods where production is greater than normal capacity, overhead may be overapplied. This will inflateinventory costs beyond the actual manufacturing overhead incurred. In this case, to reduce the balances inthese accounts you can use current period production costs in Cost of goods sold, Work-in-process inventory,and Finished-goods inventory as the basis for prorating the overapplied overhead.

If the accountant can determine the exact amount of "overhead applied" in each of the inventories and theCost of goods sold, it is slightly more accurate to use these amounts (in the same way as shown for total costs)in order to allocate the overhead variance. Overhead and total costs may not be present in exactly the sameproportions in inventories and in Cost of goods sold, resulting in the increase in accuracy. In practice,materiality considerations often lead to the more simplified approach shown in the textbook.

When studying the example on pages 92-93 in the textbook, note that the proration method of overhead willno longer be used for the handling of underapplied overhead, only for overapplied overhead in periods ofabnormally high production.

The equitable allocation of a single plant-wide overhead rate as compared to multiple overhead rates is aninteresting point. The method of working with one is the same as working with many. Testing the effect on avariety of products would enable an accountant to determine if multiple rates are equitable.


2.5 Job-order costing in service companies

Learning objective

Explain the role of job-order costing in service companies. (Level 1)

LEVEL 1

The principles of job-order costing apply equally in the service sector, where direct labour and overhead aretypically the dominant costs. While the textbook does not devote a separate discussion to service companies,the review material at the end of the chapter includes problems that relate specifically to service companies.

The principles of job-order costing are also applied on the international scene. However, the application of job-order costing varies from country to country depending on the needs of managers and the sophistication of themanagement process. (International job-order costing is non-examinable.)

Chapter summary

This topic marks the end of the textbook coverage of job-order costing. To ensure you understand this materialand the corresponding terminology, read the summary on page 99 and work through the review problem.


2.6 Scrap and rework

Learning objective

Prepare journal entries to deal with scrap and rework of unacceptable production. (Level 1)

LEVEL 1

A general problem in job costing is how to handle rejected units, rework labour, and scrap recovery. Notecarefully the method shown in the following example.

Example 2.6-1: Scrap and rework

1,000 units were started for Job 610.940 good units were finished for Job 610.The total cost for Job 610 was $2,400.The total cost has already been recorded in Work in process.

Situation A: Assuming no recovery on 60 bad units

Alternative approaches:

1. Charge rejects to good units. Under this approach, Work in process for Job 610 will report the fullcost of $2,400. Therefore, the actual cost of producing a good unit is $2.553, calculated as$2,400 940.

or

2. Charge rejects to all jobs. Under this approach, the cost of the defective units will be charged toManufacturing overhead and not to Job 610. The following entry will be made to remove the costof the defective units from Work in process for Job 610:

In the end, the cost of Job 610 will be reported at $2,256, that is, $2,400 $144. The unit costfor the 940 good units is $2.40.

Technically, the second approach reallocates applied overhead back to actual overhead becausethe 60 units have an applied overhead component included in their cost. This could be avoided(if significant) by removing only the material and labour costs for the rejects and charging onlythese two elements in the preceding journal entry.

Situation B: If scrap is recovered


2.7 Computer illustration 2.7-1: Cost schedules

Learning objective

Construct worksheet templates to calculate schedules of Cost of goods manufactured and Cost ofgoods sold. (Level 1)

LEVEL 1

The following illustration uses a spreadsheet program to help us prepare these schedules. The spreadsheetdemonstrates how to organize information related to Cost of goods manufactured and Cost of goods sold sothat a change can be readily incorporated without redoing the actual schedules.

Material provided

A prebuilt worksheet M2P1, which you will complete.

A completed solution worksheet M2P1S, to which you can compare your work.

Description

Chapter 3 (on pages 80-89) explains in detail the information required to prepare the schedules of Cost ofgoods manufactured and Cost of goods sold for the Rand Company.

Required

Complete the schedule of Cost of goods manufactured and Cost of goods sold using this procedure.

Procedure: Cost schedules

First familiarize yourself with the information in the textbook on Rand Company and how the various costs arecalculated and recorded. Then perform the following steps:

1. Open the Excel file MA1M2P1.xls. (Before you begin working on the data files in this course, youmust first download them and save them to your hard drive. Click the Data files link in thenavigation pane, then follow the instructions for downloading and saving the files.)

2. Study the layout of the worksheet. Observe that cells A6 to D27 form the data table. Nextexamine the schedule of cost of goods manufactured, starting with row 28. Cells D51 to D55 arecurrently empty.

3. Study the formulas in the worksheet (for example, refer to the formula in cell C33). Pay particularattention to how the formulas in the schedule of Cost of goods manufactured reference the cellsin the data table (for example, refer to the reference in cell C31).

4. Enter the missing formulas in cells D51 to D55. Do not enter numeric values in these cells. Youmust enter formulas that will result in the values shown in Exhibit 3-11 (page 89) of the text.

5. Enter formulas in cells D63 to D67 to complete the schedule of Cost of goods sold, which startsin row 59.

6. Save your completed worksheet.

7. Print a copy of your worksheet and compare it with the solution worksheet by clicking on thesheet tab M2P1S. If you do not obtain the same results, proceed to step 9; otherwise, go to step


10.

8. Print a copy of the formulas and compare them with the formulas of the solution worksheetM2P1S. Correct any errors.

9. Assume management decided that two changes were necessary in the data table:

Direct labour from $60,000 to $70,000

Depreciation from $18,000 to $15,000

Click the M2P1S sheet tab for the solution. Change the values in cells C15 and C22 to the newvalues. The Cost of goods manufactured (cell D55) should now show $168,000 instead of$158,000, and the adjusted Cost of goods sold (cell D67) should show $130,500 instead of$123,500.

Note: According to IAS 16 paragraph 6, the systematic expensing of the original cost of physical assets overtime is called depreciation.

Module 2 summary

Job-order costing is used in organizations that offer a great variety of different products or services.

One of the major issues is how to apply overhead to each order. Topic 2.1 addresses the issue by introducingthe rationale of the predetermined overhead rate which is based on estimates.

Topic 2.2 tracks the three basic cost components for each job.

Topic 2.3 shows how to apply overhead cost to Work in process.

Since the actual cost incurred during a period may differ from the overhead applied, a difference usually occurs.Topic 2.4 deals with the under or over application of overhead including how to dispose of these differences.

The job-order costing method is versatile, and Topic 2.5 introduces its use in service companies.

Topic 2.6 deals with how to handle flawed units in job-order systems.

Topic 2.7 consists of a computer exercise that summarizes the flow of costs in a job-order system andprepares the schedules of Cost of goods manufactured and Cost of goods sold essential components of theincome statement.


Module 2 self-test

Question 1

Computer question

Before you attempt this question, you should work through Computer illustration 2.7-1.

Description

The Atlantic Manufacturing Company operates a job-order cost system and applies overhead cost to jobs onthe basis of direct labour cost. In computing an overhead rate for the year, the company's estimates were:manufacturing overhead cost, $480,000; and direct labour cost, $640,000. The company's inventory accountsat the beginning and end of the year were as follows:

January 1 December 31 (beginning of year) (end of year)Raw materials $34,000 $26,000Work in process 84,000 78,000Finished goods 152,000 144,000 The following actual costs were incurred during the year: Purchase of raw materials (all direct) $540,000Direct labour cost 680,000Manufacturing overhead costs: Insurance, factory 35,000Depreciation of equipment 65,000Indirect labour 160,000Property taxes 42,000Maintenance 50,000Rent, building 160,000

Required

Answer requirements 1, 4, and 5 manually. Use the following procedure to answer requirements 2 and 3.

1. a. Compute the predetermined overhead rate for the year. b. Compute the amount of under- or overapplied overhead for the year. 2. Prepare a schedule of cost of goods manufactured for the year. 3. Compute the cost of goods sold for the year. (Do not include any under- or overapplied overhead in your

cost of goods sold figure.) What options are available for disposing of under- or overapplied overhead? If you choose to adjust Cost of goods sold, what would be your adjusted figure?

4. Job 189 was started and completed during the year. What price would have been charged to the

customer if the job required $4,300 in materials and $6,600 in direct labour cost, and the companypriced its jobs at 40% above cost to manufacture?

5. Direct labour made up $29,640 of the $78,000 ending Work in process inventory balance. Supply the

information missing below:

Direct materials $ ?


Direct labour 29,640 Manufacturing overhead ? Work in process $ 78,000

Procedure

1. Open the Excel file MA1M2Q1.

2. Examine the layout of the worksheet. Rows 6 to 24 form the data table and contain the datafrom the problem. Rows 26 to 48 contain a schedule of cost of goods manufactured and rows 52to 60 contain a schedule of cost of goods sold.

To complete requirement 2

3. Enter in cell C23 the overhead rate and in cell C24 the amount of overapplied or underappliedoverhead for the year as calculated in requirement 1.

4. Enter in cells C29 to C32, D33, D34, C36 to C43, and D44 to D48 the appropriate formulas tocomplete the schedule of cost of goods manufactured.

To complete requirement 3

5. Enter the formulas in column D of rows 54 to 60 to complete the schedule of cost of goods sold,and save your completed worksheet.

6. Answer the rest of requirement 3.

Source: Ray H. Garrison, Eric W. Noreen, G.R. Chesley, and Raymond F. Carroll, Managerial Accounting, SixthCanadian Edition, Problem 3-19, page 129. Copyright 2004, by McGraw-Hill Ryerson Limited. Adapted withpermission.

Solution

Question 2

Multiple choice

a. The predetermined overhead rate is $12.20 per direct-labor hour. Job 360 required 415 direct-labour hours, of which 300 were incurred during October. How much overhead should be appliedto Job 360 during October?

1. $1,4032. $3,6603. $4,3924. $5,063

b. Production reports for the second quarter show the following data:

Month Direct machine- hours Direct labour- hours Labour cost Materials costJanuary 18,000 24,000 $120,000 $64,000

February 24,000 20,000 100,000 57,000March 20,000 18,000 88,000 90,000

Actual overhead for January, February, and March was $45,020, $60,000, and $50,100respectively. Which variable above would be the most likely basis for allocating overhead?

1. Direct labour-hours2. Labour cost3. Direct machine-hours

4. Materials cost

c. A job has been completed and has incurred $10,000 of direct material costs and $16,000 ofdirect labour. The customer wants to take delivery of the completed job but actual factoryoverhead costs will not be known until the end of the month. Which of the following should thecompany do?

1. Charge the customer $26,000 plus a mark-up on direct materials and direct labour.2. Withhold the product until actual overhead costs are known.3. Allocate overhead to job using a predetermined overhead rate.4. Send an adjusted invoice to the customer when actual overhead costs are known.

d. The following information is available for April:

Job A Job B Job C

Direct costs balance, April 1 $4,000 $6,400 April manufacturing costs 8,000 $3,600

Jobs A and B were finished and delivered to the clients. Job C was not completed at April 30.What was April's Cost of goods sold?

1. $3,6002. $11,6003. $14,4004. $18,400

e. Job 621 is the only job remaining in Work in process at the end of June. The June 30 balance inWork in process is $24,000 of which $6,000 is direct material. Manufacturing overhead isallocated at the rate of $1.50 per $1.00 of direct labour. What is the amount of direct labourcharged to Job 621?

1. $7,2002. $10,8003. $12,0004. $18,000

f. When overhead is underapplied, the correct adjusting entry is which of the following?

1. Dr. Work in process and Cr. Cost of goods sold2. Dr. Cost of goods sold and Cr. Manufacturing overhead3. Dr. Manufacturing overhead and Cr. Cost of goods sold4. Dr. Cost of goods sold and Cr. Work in process

g. Direct labour was $90,000 and factory overhead applied on the basis of direct labour cost was$63,000. What was the predetermined overhead rate?

1. 30%2. 43%3. 70%4. 143%

Use the following information to answer h) and i).

The following is an excerpt from DellCo's accounting information system:

Indirect factory materials $ 48,000

Direct manufacturing materials 114,000Indirect office wages 14,000Manufacturing overhead applied 182,000

Factory depreciation 86,000

Office depreciation 14,000

Direct office wages 32,000Factory supervisors, salaries 36,000Supplies, factory 7,000

h. Based on the information above, what value will be debited to the Manufacturing overheadaccount?

1. $177,0002. $182,0003. $191,0004. $205,000

i. Based on the information above, what value will be debited to the Work in process accountregarding manufacturing overhead?

1. $177,0002. $182,0003. $191,0004. $205,000

j. The following data is available for the month of January:

JanuaryLabour cost $232,500

Actual Manufacturing overhead $273,060

If Manufacturing overhead is applied at the rate of 120% of direct manufacturing labour costs,what would be the under- or overapplied overhead?

1. $5,940 overapplied2. $40,560 overapplied3. $54,612 underapplied4. $95,172 overapplied

k. The overapplied balance of manufacturing overhead is $720,000, a significant amount. Theending balances of wWork in process, Finished goods, and Cost of goods sold are $232,000,$162,400, and $185,600, respectively. Assuming that $720,000 is to be allocated to each of theseaccounts based on ending balances, which of the following is correct?

1. Work in process will be debited for $232,000.2. Finished goods will be credited for $201,600.3. Finished goods will be credited for $162,400.4. Cost of goods sold will be credited for $185,600.

l. A $516,000 credit balance in Manufacturing overhead at the end of the period means which ofthe following?

1. Manufacturing overhead is $516,000 overapplied.2. Manufacturing overhead applied is $516,000.3. Manufacturing overhead is $516,000 underapplied.4. Actual overhead is $516,000.

Solution

Question 3

Textbook, Exercise 3-15, pages 110-111.

Solution

Question 4

Textbook, Problem 3-30, pages 122-123.

Solution

Question 5


Solution

Question 6


Solution

Question 7

Textbook, Question 3-2, page 104.

Solution

Question 8

Textbook, Question 3-18, page 105.

Solution

Self-test 2

Solution 1

Computer solution

Requirement 1

a. Estimated overhead cost Estimated direct labour cost = $480,000 $640,000 = 75%

Actual manufacturing overhead costs:

Indirect labour $160,000

Property taxes 42,000

Depreciation of equipment 65,000

Maintenance 50,000

Insurance 35,000

Rent, building 160,000

Total actual costs $512,000

Applied manufacturing overhead costs:

$680,000 * 75% 510,000

Underapplied overhead (DR) ($2,000)

Requirement 2 and Solution printout

MA1: MODULE 2: QUESTION 1: requirements 2 and 3CGA-CANADA


Requirement 3 and Formula printout

The manufacturing overhead variance is closed to the Cost of goods sold account if the overhead isunderapplied for the period. In periods of abnormally high production the overapplied overhead should beallocated to Work in process, Finished goods, and Cost of goods sold so that inventories are not measuredabove cost. Under- or overapplied overhead can be deferred to the Balance Sheet when interim financialstatements are produced during the year or where large seasonal variations occur in output, but relatively

constant overhead costs exist and predetermined overhead amounts are used to smooth out fluctuations inoverhead costs. Resulting significant debits or credits can be carried forward to year-end, and a finaldisposition of these amounts can be made using either of the other two methods discussed above.

If the choice were made to adjust Cost of goods sold, the adjusted figure would be $1,754,000

Requirement 4

Direct materials $ 4,300Direct labour 6,600Overhead applied ($6,600 75%) 4,950Cost to manufacture $ 15,850

$15,850 140% = $22,190 price to the customer

Requirement 5

The amount of overhead cost in ending Work in process would be:

$29,640 direct labour cost 75% = $22,230

The amount of direct material cost in ending Work in process would be:

Total ending Work in process $ 78,000Deduct: Direct labour $(29,640) Manufacturing overhead 22,230 51,870 $ 26,130

The completed schedule of costs in ending Work in process would be:

Direct materials $ 26,130Direct labour 29,640Manufacturing overhead 22,230Total Work in process $ 78,000

Source: Ray H. Garrison, Eric W. Noreen, G.R. Chesley, and Raymond F. Carroll, Solutions Manual toaccompany Managerial Accounting, Sixth Canadian Edition. Copyright 2004, by McGraw-Hill Ryerson Limited.Adapted with permission.

Self-test 2

Solution 2

Multiple choice

a. 2)

$12.20 300 = $3,660

b. 3)

Calculating an overhead rate based on machine-hours is the most constant (about $2.50), whichindicates a strong cause and effect relationship between the two costs.

c. 3)

Using a predetermined overhead rate provides a mechanism for assigning overhead costs to jobsas they are completed.

d. 4)

$4,000 + $6,400 + $8,000 = $18,400 cost of goods sold for April.

e. 1)

$18,000 = 1.5x + x$18,000 = 2.5xx = $7,200 direct labour

f. 2)

When overhead is underapplied, actual overhead incurred is greater than what has been applied.Therefore, the underapplied amount, equal to the difference between actual and applied, isadded or debited to Cost of goods sold and credited to the Manufacturing overhead account.

g. 3)

$63,000 $90,000 = .70 or 70% predetermined overhead rate.

h. 1)

The Manufacturing overhead account is debited for actual overhead costs, which include thefollowing: Indirect factory materials $48,000 + Factory depreciation $86,000 + Factorysupervisors' salaries $36,000 + Supplies, factory $7,000 = $177,000 debited to Manufacturingoverhead.

i. 2)

The Work in process account is debited for applied overhead of $182,000.

j. 1)

$232,500 1.2 = $279,000 applied; $279,000 $273,060 = $5,940 overapplied.

k. 2)


Work in process will be credited for a 40% share ($232,000 $580,000 = 40%) of the $720,000= $288,000; Finished goods will be credited for a 28% share ($162,400 $580,000 = 28%) ofthe $720,000 = $201,600; and Cost of goods sold will be credited for a 32% share ($185,600 $580,000 = 32%) of the $720,000 = $230,400.

l. 1)

The balance in Manufacturing overhead at the end of the period reflects under- or overappliedoverhead. A credit balance of $516,000 indicates that overhead applied was greater than actualmanufacturing overhead by $516,000 (in other words, $516,000 overapplied).

Self-test 2

Solution 3

Exercise 3-15

Requirement 1

Milling Department:

Assembly Department:

Requirement 2

Overhead appliedMilling Department: 90 MHs $8.50 per MH $765Assembly Department: $160 125% 200Total overhead cost applied $965

Requirement 3

Yes; if some jobs required a large amount of machine time and little labour cost, they would be chargedsubstantially less overhead cost if a plantwide rate based on direct labour cost were being used. It appears, forexample, that this would be true of job 407 which required considerable machine time to complete, butrequired only a small amount of labour cost.

Source: Ray H. Garrison, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to accompany ManagerialAccounting, Eight Canadian Edition. Copyright 2010, by McGraw-Hill Ryerson Limited. Reproduced withpermission.


Self-test 2

Solution 4

Problem 3-30

Requirement 1

1.

$150,000 direct materials cost 160% = $240,000 applied.


2.

3.

Southworth Company

Schedule of Cost of Goods Manufactured

Direct materials:

Raw materials inventory, beginning............................................... $ 18,000

Purchases of raw materials.......................................................... 142,000

Materials available for use............................................................ 160,000

Raw materials inventory, ending................................................... 10,000

Materials used in production......................................................... $150,000

Direct labour............................................................................... 216,000

Manufacturing overhead applied to work in process...................................................................................... 240,000

Total manufacturing cost.............................................................. 606,000

Add: Work in process, beginning................................................... 24,000

630,000

Deduct: Work in process, ending................................................... 40,000

Cost of goods manufactured......................................................... $590,000

4.

Cost of Goods Sold................................................................ 3,000

Manufacturing Overhead......................................................... 3,000

Schedule of cost of goods sold:

Finished goods inventory, beginning........................................ $ 35,000

Add: Cost of goods manufactured........................................... 590,000

Goods available for sale......................................................... 625,000

Finished goods inventory, ending............................................ 25,000

Unadjusted cost of goods sold................................................ 600,000

Add underapplied overhead.................................................... 3,000

Adjusted cost of goods sold.................................................... $603,000

5.

Southworth CompanyIncome Statement

Sales............................................................................... $1,000,000

Cost of goods sold............................................................ 603,000

Gross margin.................................................................... 397,000

Selling and administrative expenses:

Salaries expense.............................................................. $145,000

Advertising expense.......................................................... 130,000

Depreciation expense........................................................ 5,000

Rent expense................................................................... 18,000

Miscellaneous expense...................................................... 17,000 315,000

Operating income.............................................................. $ 82,000

6.

Direct materials......................................................................................... $ 3,600

Direct labour (400 hours $11 per hour).................................................... 4,400

Manufacturing overhead cost applied (160% $3,600)................................. 5,760

Total manufacturing cost............................................................................ 13,760

Add markup (75% $13,760).................................................................... 10,320

Total billed price of Job 218........................................................................ $24,080

$24,080 500 units = $48.16 per unit.

Source: Ray H. Garrison, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to accompanyManagerial Accounting, Eighth Canadian Edition. Copyright 2010, by McGraw-Hill RyersonLimited. Reproduced with permission.

Self-test 2

Solution 5

Problem 3-21

1. and 2.

3. Manufacturing overhead was overapplied by $3,000 for the year. This balance would be allocated


between Work in Process, Finished Goods, and Cost of Goods Sold in proportion to the currentperiod costs in these accounts. The allocation would be:

Work in process, 12/31.................................... $ 21,000 5.6 %

Finished goods, 12/31...................................... 55,000 14.6

Cost of goods sold, 12/31................................. 300,000 79.8

$376,000 100.0 %

Manufacturing overhead....................................................... 3,000

Work in process (5.6% $3,000).................................. $ 168

Finished goods (14.6% $3,000)................................... $ 438

Cost of goods sold (79.8% $3,000).............................. $2,394

4.

Fantastic Props, Inc.Income Statement

For the year ended December 31

Sales..................................................................................... $450,000

Cost of goods sold ($300,000 $2,394).................................... 297,606

Gross margin......................................................................... 152,394

Selling and administrative expenses:

Salaries expense................................................................. $75,000

Depreciation expense.......................................................... 5,000

Insurance expense.............................................................. 800

Shipping expense................................................................ 40,000 120,800

Operating income................................................................... $ 31,594

Source: Ray H. Garrison, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to accompany ManagerialAccounting, Eighth Canadian Edition. Copyright 2010, by McGraw-Hill Ryerson Limited. Reproduced withpermission.

Self-test 2

Solution 6

1. Preparation Department predetermined overhead rate:

2. Fabrication Department predetermined overhead rate:

3. Preparation Department overhead applied: 350 machine-hours $5.20 per machine-hour.................................. $1,820Fabrication Department overhead applied: $1,200 direct materials cost 180%................................................ 2,160Total overhead cost........................................................................... $3,980

Total cost of Job 127:

Preparation Fabrication TotalDirect materials............................. $ 940 $1,200 $2,140Direct labour................................. 710 980 1,690Manufacturing overhead................. 1,820 2,160 3,980Total cost..................................... $3,470 $4,340 $7,810

Unit product cost for Job 127:

4. Preparation FabricationManufacturing overhead cost incurred............................. $390,000 $740,000Manufacturing overhead cost applied: 73,000 machine-hours $5.20 per machine-hour......... 379,600 $420,000 direct materials cost 180%........................ 756,000Underapplied (or overapplied) overhead......................... $ 10,400 $(16,000)



Self-test 2

Solution 7

Question 3-2

Job-order costing is used in situations where many different products or services that require separate costingare produced each period. Process costing is used in situations where a single, homogeneous product, such ascement, bricks, or gasoline, is produced for long periods.



Self-test 2

Solution 8

Question 3-18

Yes, predetermined overhead rates in general smooth product costs when costs change during a year or whereproduction volume varies. The predetermined overhead rate is computed by using the yearly estimated totaloverhead divided by the estimated base for the year. This rate is used to calculate the product cost for eachperiod. The product cost becomes an average cost rather than an actual cost which would include thefluctuations.



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Module 02

Documents

process costing

costing process

joborder costing system

thanactual overhead

explanation of overhead

role of job

manufacturingoverhead

cost ofgoods