Chapter 5 Job Order Costing
197
198
Chapter 5 Job Order Costing
• Issued $120,000 of building (indirect) material for use on jobs.
15
• Accrued wages payable of $874,000, of which $794,000 could be traced directly to
particular jobs.
Job #75 was completed, accepted by the customer, and billed at a selling price of
cost plus 30 percent. Selling prices are rounded to the nearest whole dollar.
20
Paid the following monthly factory bills: utilities, $39,600; rent, $70,600; and accounts
payable (accrued in August), $196,800.
• Applied overhead to jobs on the basis of 55 percent of direct labor cost.
• Completed jobs costing $1,046,000. For these jobs, revenues of $1,342,000 were
collected.
Journalize the above transactions.
36. LO.4 (Journal entries) Polaski Inc. uses an actual cost, job order system. The following transactions are for August 2010. At the beginning of the month, Direct Material
Inventory was $2,000, Work in Process Inventory was $10,500, and Finished Goods
Inventory was $6,500.
• Direct material purchases on account totaled $90,000.
24
Purchased raw material on account, $624,000.
25
Issued $772,200 of raw material as follows: Job #78, $154,800; Job #82, $212,600; Job
#86, $349,000; and indirect material, $55,800.
30
Recorded additional factory overhead costs as follows: depreciation, $809,000;
expired prepaid insurance, $165,400; and accrued taxes and licenses, $232,400.
30
Recorded and paid the factory payroll for September 16–30 of $714,400. Analysis of
the payroll follows:
• Direct labor cost for the period totaled $75,600 for 8,000 direct labor hours; these
costs were paid in cash.
• Actual overhead costs were $82,000 and are applied to production.
• The ending inventory of Direct Material Inventory was $3,500.
• The ending inventory of Work in Process Inventory was $7,750.
• Goods costing $243,700 were sold for $350,400 cash.
a. What was the actual OH rate per direct labor hour?
b Journalize the preceding transactions.
c. Determine the ending balance in Finished Goods Inventory.
37. LO.4 (Journal entries; assigning costs to jobs; cost accumulation) Ialani Corp.
uses a job order costing system for the yachts it constructs. On September 1, 2010, the
company had the following account balances:
Raw Material Inventory
Work in Process Inventory
1,512,600
Cost of Goods Sold
4,864,000
$586,400
Job #78
266,600
Job #82
659,600
The following transactions occurred during September:
Sept. 1
Purchased $1,940,000 of raw material on account.
4
Issued $1,900,000 of raw material as follows: Job #75, $289,600; Job #78, $252,600;
Job #82, $992,200; Job #86, $312,400; and indirect material, $53,200.
15
Prepared and paid the $757,000 factory payroll for September 1–15. Analysis of this
payroll showed the following information:
228,400
Job #86
9,980 hours
243,600
65,000
a. Journalize the September transactions.
b. Use T-accounts to post the information from the journal entries in (a) to the job
cost subsidiary accounts and to general ledger accounts.
c. Reconcile the September 30 balances in the subsidiary ledger with the Work in
Process Inventory account in the general ledger.
d. Determine the amount of underapplied or overapplied overhead for September.
38. LO.4 (Journal entries; cost accumulation) Stockman Co. began 2010 with three
jobs in process:
TYPE OF COST
Direct Material
Direct Labor
Overhead
Total
$ 77,200
$ 91,400
$ 36,560
$ 205,160
251
176,600
209,800
83,920
470,320
253
145,400
169,600
67,840
382,840
Totals
$399,200
$470,800
$188,320
$1,058,320
During 2010, the following transactions occurred:
1. The firm purchased and paid for $542,000 of raw material.
2. Factory payroll records revealed the following:
• Indirect labor incurred was $54,000.
• Direct labor incurred was $602,800 and was associated with the jobs as
follows:
Job No.
247
Direct Labor Cost
$ 17,400
251
8,800
9,660 hours
$ 84,600
253
21,000
Job #78
26,320 hours
267,200
254
136,600
Job #82
20,300 hours
203,000
255
145,000
Job #86
10,280 hours
110,800
256
94,600
91,400
257
179,400
On each payroll date, Ialani Corp. applies manufacturing overhead to jobs at a rate
of $12.50 per direct labor hour.
$177,400
Applied overhead for the second half of the month to jobs.
Job #75
Indirect labor wages
15
13,650 hours
247
On September 1, the three jobs in Work in Process Inventory had the following
balances:
Job #75
8,940 hours
Job #82
Indirect labor wages
30
Job No.
$ 332,400
Job #78
3. Material requisition forms issued during the year revealed the following:
• Indirect material issued totaled $76,000.
• Direct material issued totaled $466,400 and was associated with jobs as follows:
Chapter 5 Job Order Costing
Job No.
Direct Material Cost
247
$ 12,400
199
200
Chapter 5 Job Order Costing
Determine the following balances on November 5:
251
6,200
a. the three raw material accounts
b. Work in Process Inventory
253
16,800
c. Cost of Goods Sold
254
105,200
255
119,800
256
72,800
257
133,200
4. Overhead is applied to jobs on the basis of direct labor cost. Management budgeted
overhead of $240,000 and total direct labor cost of $600,000 for 2010. Actual total
factory overhead costs (including indirect labor and indirect material) for the year
totaled $244,400.
5. Jobs #247 through #255 were completed and delivered to customers, who paid for
the goods in cash. The revenue on these jobs was $2,264,774.
a. Journalize all preceding events.
b. Determine the ending balances for the jobs still in process.
c. Determine the cost of jobs sold, adjusted for underapplied or overapplied
overhead.
39. LO.4 (Simple inventory calculation) Production data for the first week in November
2010 for Florida Fabricators were as follows:
WORK IN PROCESS INVENTORY
Date
Job No.
Material
Labor
Nov. 1
411
$1,900
36 hours
Machine Time (Overhead)
50 hours
1
412
1,240
10 hours
30 hours
7
417
620
8 hours
16 hours
Finished Goods Inventory, Nov. 1: $23,800
Finished Goods Inventory, Nov. 5: $0
MATERIAL RECORDS
Type
Inv. 11/1
Purchases
Issuances
Inv. 11/5
Aluminum
$ 8,300
$98,300
$58,700
$?
Steel
12,800
26,500
34,200
$?
Other
5,800
23,550
25,900
$?
Direct labor hours worked in the first week of November were 680 at a cost of $15
per direct labor hour. Machine hours worked that week were 1,200. Overhead for first
week in November was as follows:
Depreciation
$ 9,000
Supervisor salaries
14,400
Indirect labor
8,350
Insurance
2,800
Utilities
2,250
Total
$36,800
Overhead is applied to production at a rate of $30 per machine hour. Underapplied or
overapplied overhead is treated as an adjustment to Cost of Goods Sold at year-end.
All company jobs are consecutively numbered, and all work not in ending Finished
Goods Inventory has been completed and sold. The only job in progress on November
5 was #417.
40. LO.4 (Job cost sheet analysis) You have applied for a cost accounting position with
Chelsea Containers. The company controller has asked all candidates to take a quiz to
demonstrate their knowledge of job order costing. Chelsea’s job order costing system is
based on normal costs, and overhead is applied based on direct labor cost. The following information pertaining to May has been provided to you:
Job No.
Direct
Material
Direct Labor
Applied
Overhead
Total Cost
67
$ 35,406
$13,840
$15,916
$ 65,162
69
109,872
14,480
16,652
141,004
70
2,436
4,000
4,600
11,036
71
308,430
57,000
?
?
72
57,690
4,400
5,060
67,150
You are informed that Job #68 had been completed in April. You are also told that Job
#67 was the only job in process at the beginning of May. At that time, the job had been
assigned $25,800 for direct material and $7,200 for direct labor. At the end of May,
Job #71 had not been completed; all others were complete. Answers to the following
questions are required:
a. What is Chelsea Containers’ predetermined overhead rate?
b. What was the total cost of beginning Work in Process Inventory?
c. What were total direct manufacturing costs incurred for May?
d. What was cost of goods manufactured for May?
41. LO.4 (Departmental rates) All jobs at Frankfurt Inc., which uses a job order costing
system, go through two departments (Fabrication and Assembly). Overhead is applied
to jobs based on machine hours in Fabrication and on labor hours in Assembly. In
December 2009, corporate management estimated the following production data for
2010 in setting its predetermined OH rates:
Fabrication
Assembly
Machine hours
104,000
44,000
Direct labor hours
50,400
320,000
$1,560,000
$1,760,000
Departmental overhead
Two jobs completed during 2010 were #2296 and #2297. The job order cost sheets
showed the following information about these jobs:
Job #2296
Job #2297
$118,500
$147,200
Direct labor hours—Fabrication
900
460
Machine hours—Fabrication
1,800
900
Direct labor hours—Assembly
850
400
Machine hours—Assembly
108
46
Direct material cost
Direct labor workers are paid $12 per hour in the Fabrication Department and $10 per
hour in the Assembly Department.
a. Compute the predetermined OH rates used in Fabrication and Assembly for 2010.
b. Compute the direct labor cost associated with each job for both departments.
Chapter 5 Job Order Costing
201
202
Chapter 5 Job Order Costing
c. Compute the amount of overhead assigned to each job in each department.
DEPARTMENT
d. Determine the total cost of Jobs #2296 and #2297.
e. Actual data for 2010 for each department are as follows:
Machine hours
Fabricating
Assembly
103,200
43,200
Direct labor hours
Departmental overhead
47,800
324,000
$1,528,000
$1,790,000
Job #2019
What is the amount of underapplied or overapplied overhead for each department for
the year ended December 31, 2010?
42. LO.4 (Comprehensive) Birmingham Contractors uses a job order costing system. In
May 2010, the company made a $3,300,000 bid to build a pedestrian overpass over the
beach highway at Gulf Shores, Alabama. Birmingham Contractors won the bid and
assigned #515 to the project. Its completion date was set at December 15, 2010. The
following costs were estimated for completion of the overpass: $1,240,000 for direct
material, $670,000 for direct labor, and $402,000 for overhead.
During July, work began on job #515; direct material cost assigned to Job #515
was $121,800, and direct labor cost associated with it was $175,040. The firm uses a
predetermined OH rate of 60 percent of direct labor cost. Birmingham Contractors
also worked on several other jobs during July and incurred the following costs:
Direct material (including Job #515) issued
$579,300
Direct labor (including Job #515) accrued
584,000
Indirect labor accrued
55,800
Administrative salaries and wages accrued
39,600
Depreciation on construction equipment
26,400
Depreciation on office equipment
7,800
Client entertainment (on accounts payable)
11,100
Advertising for firm (paid in cash)
6,600
Indirect material (from supplies inventory)
18,600
Miscellaneous expenses (design-related; to be paid in the following month)
10,200
Accrued utilities (for office, $1,800; for construction, $5,400)
7,200
During July, Birmingham Contractors completed several jobs that had been in process
before the beginning of the month. These completed jobs sold for $1,224,000 and
payment will be made to the company in August. The related job cost sheets showed
costs associated with those jobs of $829,000. At the beginning of July, Birmingham
Contractors had Work in Process Inventory of $871,800.
a. Prepare a job order cost sheet for Job #515, including all job details, and post the
appropriate cost information for July.
b. Prepare journal entries for the preceding information.
c. Prepare a Cost of Goods Manufactured Schedule for July for Birmingham
Contractors.
d. Assuming that the company pays income tax at a 40 percent rate, prepare an income
statement for Birmingham Contractors.
43. LO.4 (Comprehensive) Edward Nabors owns Enclose, which designs and manufactures perimeter fencing for large retail and commercial buildings. Each job goes
through three stages: design, production, and installation. Three jobs were started and
completed during the first week of May 2010. No jobs were in process at the end of
April 2010. Information for the three departments for the first week in May follows.
Excel
Design
Production
Direct labor hours
800
NA
Installation
Machine hours
NA
720
NA
Direct labor cost
$81,600
$34,000
$10,080
760
Direct material
$9,600
$116,400
$10,400
Job #2020
Design
Production
Installation
Direct labor hours
680
NA
Machine hours
NA
2,400
640
NA
Direct labor cost
$69,360
$59,600
$11,520
Direct material
$8,200
$268,800
$36,800
Job #2021
Design
Production
Installation
Direct labor hours
720
NA
Machine hours
NA
960
3,280
NA
Direct labor cost
$73,440
$21,600
$15,200
Direct material
$17,600
$232,000
$10,400
Overhead is applied using departmental rates. Design and Installation use direct labor
cost as the base, with rates of 30 and 90 percent, respectively. Production uses machine
hours as the base, with a rate of $15 per hour. Actual overhead for the month was
$105,600 in Design, $60,000 in Production, and $31,200 in Installation.
a. Determine the overhead to be applied to each job. By how much is the overhead
underapplied or overapplied in each department? For the company?
b. Assume that no journal entries have been made to Work in Process Inventory.
Journalize all necessary entries to both the subsidiary ledger and general ledger
accounts. Accrue direct labor costs.
c. Calculate the total cost for each job.
44. LO.4 (Cost accumulation; assigning costs to jobs) Gigi LeBlanc is an advertising consultant who tracks costs for her jobs using a job order costing system. During
September, LeBlanc and her staff worked on and completed jobs for the following
companies:
Reliant
Company
Dumas
Manufacturing
Omaha Inc.
Direct material cost
$7,800
$14,200
$19,800
Direct labor cost
$5,580
$18,000
$28,350
3
10
8
Number of promotions designed
Direct material can be traced to each job because these costs are typically associated
with specific advertising campaigns. Based on historical data, LeBlanc has calculated an
overhead charge of $58 per direct labor hour. The normal labor cost per hour is $45.
a. Determine the total cost for each of the advertising accounts for the month.
b. Determine the cost per promotion developed for each client. (Round to the nearest
dollar.)
c. LeBlanc charges $8,600 per promotion. What was her net income for the month,
assuming actual overhead for the month was $50,000? Adjust for under- or overapplied overhead.
d. You suggest to LeBlanc that she bill ads on a cost-plus basis and suggest a markup of
30 percent on cost. How would her income have compared to her income computed
in (c) if she had used this method? How would her clients feel about such a method?
Chapter 5 Job Order Costing
45. LO.4 (Comprehensive; job cost sheet) Lincoln Construction Company builds
bridges. In October and November 2010, the firm worked exclusively on a bridge
spanning the Calamus River in northern Nebraska. Lincoln Construction’s
Precast Department builds structural elements of the bridges in temporary plants
located near the construction sites. The Construction Department operates at the
bridge site and assembles the precast structural elements. Estimated costs for the
Calamus River bridge for the Precast Department were $1,550,000 for direct material, $220,000 for direct labor, and $275,000 for overhead. For the Construction
Department, estimated costs for the Calamus River bridge were $350,000 for
direct material, $130,000 for direct labor, and $214,500 for overhead. Overhead is
applied on the last day of each month. Overhead application rates for the Precast
and Construction departments are $25 per machine hour and 165 percent of direct
labor cost, respectively.
TRANSACTIONS FOR OCTOBER
203
204
Chapter 5 Job Order Costing
30
Applied overhead in each department. The Precast Department recorded 3,950 machine
hours in November.
30
Billed the state of Nebraska for the completed bridge at the contract price of
$3,450,000.
a. Journalize the entries for the preceding transactions. For purposes of this problem,
it is not necessary to transfer direct material and direct labor from one department
to the other.
b. Post all entries to T-accounts.
c. Prepare a job order cost sheet, which includes estimated costs, for the construction
of the bridge.
d. Discuss Lincoln Construction Company’s estimates relative to its actual costs.
46. LO.1 & LO.4 (Comprehensive) Pip Squeaks Inc. is a manufacturer of furnishings for
infants and children. The company uses a job order cost system. Pip Squeaks’ Work
in Process Inventory on April 30, 2010, consisted of the following jobs:
1
Purchased $1,150,000 of material (on account) for the Precast Department to begin
building structural elements. All of the material was issued to production; of the issuances, $650,000 was considered direct.
Job No.
Items
Units
Accumulated Cost
5
Installed utilities at the bridge site at a total cost of $25,000. This amount will be paid at a
later date.
CBS102
Cribs
20,000
$ 900,000
PLP086
Playpens
15,000
420,000
8
Paid rent for the temporary construction site housing the Precast Department, $5,000.
DRS114
Dressers
25,000
1,570,000
15
Completed bridge support pillars by the Precast Department and transferred to the
construction site.
20
Paid machine rental expense of $60,000 incurred by the Construction Department for
clearing the bridge site and digging foundations for bridge supports.
24
Purchased additional material costing $1,485,000 on account.
31
Paid the following bills for the Precast Department: utilities, $7,000; direct labor, $45,000;
insurance, $6,220; and supervision and other indirect labor costs, $7,900. Departmental
depreciation was recorded, $15,200. The company also paid bills for the Construction
Department: utilities, $2,300; direct labor, $16,300; indirect labor, $5,700; and insurance,
$1,900. Departmental depreciation was recorded on equipment, $8,750.
31
Issued a check to pay for the material purchased on October 1 and October 24.
31
Applied overhead to production in each department; 6,000 machine hours were worked
in the Precast Department in October.
TRANSACTIONS FOR NOVEMBER
1
Transferred additional structural elements from the Precast Department to the construction site. The Construction Department incurred a cash cost of $5,000 to rent a crane.
4
Issued $1,000,000 of material to the Precast Department. Of this amount, $825,000 was
considered direct.
8
Paid rent of $5,000 in cash for the temporary site occupied by the Precast Department.
15
Issued $425,000 of material to the Construction Department. Of this amount, $200,000
was considered direct.
18
Transferred additional structural elements from the Precast Department to the construction site.
The company’s Finished Goods Inventory, carried on a FIFO (first-in, first-out) basis,
consists of five items:
Item
Quantity and Unit Cost
Total Cost
Cribs
7,500 units ⫻ $64
$ 480,000
Strollers
13,000 units ⫻ $23
299,000
Carriages
11,200 units ⫻ $102
1,142,400
Dressers
21,000 units ⫻ $55
1,155,000
Playpens
19,400 units ⫻ $35
679,000
Total
$3,755,400
Pip Squeaks applies factory overhead on the basis of direct labor hours. The
company’s factory overhead budget for the fiscal year ending May 31, 2010, totaled
$4,500,000, and the company planned to work 600,000 direct labor hours during this
year. Through the first 11 months of the year, a total of 555,000 direct labor hours were
worked, and total factory overhead amounted to $4,273,500.
At the end of April, the balance in Pip Squeaks’ Raw Material Inventory
account, which includes both raw material and purchased parts, was $668,000.
Additions to and requisitions from the material inventory during May included
the following:
Additions
Raw Material
Parts Purchased
$242,000
$396,000
24
Transferred the final batch of structural elements from the Precast Department to the
construction site.
29
Completed the bridge.
Job #CBS102
51,000
104,000
30
Paid final bills for the month in the Precast Department: utilities, $15,000; direct labor,
$115,000; insurance, $9,350; and supervision and other indirect labor costs, $14,500.
Depreciation was recorded, $15,200. The company also paid bills for the Construction
Department: utilities, $4,900; direct labor, $134,300; indirect labor, $15,200; and insurance,
$5,400. Depreciation was recorded on equipment, $18,350.
Job #PLP086
3,000
10,800
Job #DRS114
124,000
87,000
Job #STR077 (10,000 strollers)
62,000
81,000
Job #CRG098 (5,000 carriages)
65,000
187,000
Requisitions:
Chapter 5 Job Order Costing
205
During May, Pip Squeaks’ factory payroll consisted of the following:
Job No.
Hours
Cost
CBS102
12,000
$122,400
PLP086
4,400
43,200
DRS114
19,500
200,500
STR077
3,500
30,000
CRG098
14,000
138,000
Indirect
3,000
57,600
Total
$621,100
Chapter 5 Job Order Costing
Payroll records, kept at an across-town service center that processes the company’s
payroll, showed that April’s direct labor amounted to $36,400 and represented 8,800
labor hours. Indirect factory labor amounted to $10,800 in April.
The president’s office had a file copy of the production budget for the current year.
It revealed that the predetermined overhead application rate is based on planned annual direct labor hours of 100,800 and expected factory overhead of $302,400.
Discussion with the factory superintendent indicated that only two jobs remained
unfinished on April 30. Fortunately, the superintendent also had copies of the job cost
sheets that showed a combined total of $4,800 of direct material and $9,000 of direct
labor. The direct labor hours on these jobs totaled 2,144. Both of these jobs had been
started during April.
A badly faded copy of April’s Cost of Goods Manufactured and Sold Schedule
showed cost of goods manufactured was $96,000, and the April 1 Finished Goods
Inventory was $16,800.
29,400
Supervision
206
The jobs that were completed in May and the unit sales for May are as follows:
Job No.
Items
Quantity Completed
CBS102
Cribs
20,000
PLP086
Playpens
15,000
STR077
Strollers
10,000
CRG098
Carriages
5,000
Items
Quantity Shipped
Cribs
17,500
Playpens
21,000
Strollers
14,000
Dressers
18,000
Carriages
6,000
The treasurer’s office files copies of paid invoices chronologically. All invoices are
for raw material purchased on account. Examination of these files revealed that unpaid
invoices on April 1 amounted to $12,200; $56,000 of purchases had been made during
April; and $36,000 of unpaid invoices existed on April 30.
a. Calculate the cost of direct material used in April.
b. Calculate the cost of raw material issued in April.
c. Calculate the April 30 balance of Raw Material Inventory.
d. Determine the amount of underapplied or overapplied overhead for April.
e. What is the Cost of Goods Sold for April?
48. LO.5 (Standard costing) Modern Convenience specializes in making robotic conveyor
systems to move materials within a factory. Model #89 accounts for approximately 60
percent of the company’s annual sales. Because the company has produced and expects
to continue to produce a significant quantity of this model, Modern Convenience uses
the following standard costs to account for Model #89 production costs:
a. Describe when it is appropriate for a company to use a job order costing system.
b. Calculate the dollar balance in Pip Squeaks’ Work in Process Inventory account as
of May 31, 2010.
c. Calculate the dollar amount related to the playpens in Pip Squeaks’ Finished Goods
Inventory as of May 31, 2010.
d. Explain the treatment of underapplied or overapplied overhead when using a job
order costing system.
47. LO.4 (Missing amounts) Riveredge Manufacturing Company realized too late that
it had made a mistake locating its controller’s office and its electronic data processing
system in the basement. Because of the spring thaw, the Mississippi River overflowed
its banks on May 2 and flooded the company’s basement. Electronic data storage was
destroyed, and the company had not provided off-site storage of data. Some of the
paper printouts were located but were badly faded and only partially legible. On May 3,
when the flooding subsided, company accountants were able to assemble the following
factory-related data from the debris and from discussions with various knowledgeable
personnel. Data about the following accounts were found:
• Raw Material (includes indirect material) Inventory: Balance April 1 was $9,600.
• Work in Process Inventory: Balance April 1 was $15,400.
• Finished Goods Inventory: Balance April 30 was $13,200.
• Total company payroll cost for April was $58,400.
• Accounts payable balance April 30 was $36,000.
• Indirect material used in April cost $11,600.
• Other nonmaterial and nonlabor overhead items for April totaled $5,000.
Direct material (28,000 pounds)
Direct labor (1,720 hours at $20 per hour)
Overhead
Total standard cost
$ 56,000
34,400
76,000
$166,400
For the 200 units of Model #89 produced in 2010, the actual costs were
Excel
Direct material (6,000,000 pounds)
$11,600,000
Direct labor (178,400 hours)
6,957,600
Overhead
14,800,000
Total actual cost
$33,357,600
a. Compute a separate variance between actual and standard cost for direct material, direct labor, and manufacturing overhead for the Model #89 units produced in
2010.
b. Is the direct material variance found in (a) driven primarily by the price per pound
difference between standard and actual or the quantity difference between standard
and actual? Explain.
49. LO.5 (Standard costing) During July 2010, Pull-Along worked on two production
runs ( Jobs #918 and #2002) of the same product, a trailer hitch component. Job #918
consisted of 1,200 units of the product, and Job #2002 contained 2,000 units. The hitch
components are made from 1/2⬙ sheet metal. Because this component is routinely produced for one of Pull-Along’s long-term customers, standard costs have been developed
Chapter 5 Job Order Costing
207
for its production. The standard cost of material for each unit is $18; each unit contains
6 pounds of material. The standard direct labor time per unit is 12 minutes for workers
earning a rate of $20 per hour. The actual costs recorded for each job were as follows:
Direct Material
Direct Labor
Job #918
(7,300 pounds) $23,525
(230 hours) $4,840
Job #2002
(11,900 pounds) 37,440
(405 hours) 7,850
208
Chapter 5 Job Order Costing
a recent case heard by the U.S. Supreme Court. The case involves the University of
Wisconsin, which charges all students a user fee and then redistributes these fees to
student organizations.
The purpose of collecting the fee is to ensure that money is available to support
diversity of thought and speech in student organizations. The user fee supports even
unpopular causes so that the students hear a variety of voices. In total, the fee subsidized
about 125 student groups. However, a group of students filed suit, claiming that students
should not be required to fund causes that are inconsistent with their personal beliefs.
a. What is the standard direct cost of each trailer hitch component?
b. What was the total standard direct cost assigned to each of the jobs?
a. In your opinion, how would diversity of thought be affected if a student were
allowed to select the organizations that would receive the student’s user fee (e.g., as
with dues)?
b. Is the University of Wisconsin treating its students ethically by charging them to
support student organizations for causes that conflict with their personal beliefs?
c. Compute the variances for direct material and for direct labor for each job.
d. Why should variances be computed separately for each job rather than for the
aggregate annual trailer hitch component production?
50. LO.6 (Ethics; writing) Two types of contracts are commonly used when private firms
contract to provide services to governmental agencies: cost-plus and fixed-price contracts. The cost-plus contract allows the contracting firm to recover the costs associated
with providing the product or service plus a reasonable profit. The fixed-price contract
provides for a fixed payment to the contractor. When a fixed-price contract is used,
the contractor’s profits are based on its ability to control costs relative to the price
received.
In recent years, a number of contractors have either been accused, or found guilty,
of improper accounting or fraud in accounting for contracts with the government. One
deceptive accounting technique that is sometimes the subject of audit investigations
involves cases in which a contractor is suspected of shifting costs from fixed-priced
contracts to cost-plus contracts. In shifting costs from the fixed-priced contract, the
contractor not only influences costs assigned to that contract but also receives a reimbursement plus an additional amount on the costs shifted to the cost-plus contract.
a. Why would a company that conducts work under both cost-plus and fixed-price
contracts have an incentive to shift costs from the fixed-price to the cost-plus
contracts?
b. From an ethical perspective, do you believe such cost shifting is ever justified?
Explain.
Ethics
51. LO.6 (Research; quality; writing) Timbuk2 is a San Francisco company that makes a
variety of messenger, cyclist, and laptop bags. The company’s Web site (Timbuk2.com)
allows customers to design their own size, color, and fabric bags with specific features
and accessories; then the company sews the bags to the customers’ specifications.
a. Visit the company’s Web site and custom-design a bag. Compare the quoted price
with a bag of similar quality and features at a local store. Explain whether you think
the Timbuk2 bag is a good value.
b. Why would Timbuk2 be able to produce custom-made messenger bags for almost
the same cost as mass-produced ones?
c. Would you expect the quality of the custom-produced messenger bags to be higher
or lower than the mass-produced ones? Discuss the rationale for your answer.
d. Why would the custom-made messenger bags show a high profit margin?
Internet
52. LO.6 (Ethics; writing) One of the main rationales for using a job order costing system
is to achieve profitability by charging a price for each job that is proportionate to the
related costs. The fundamental underlying concept is that the buyer of the product
should be charged a price that exceeds all costs related to the job contract; thus, the
price reflects the cost.
However, there are settings in which the price charged to the consumer does not
reflect the costs incurred by the vendor to serve that customer. This is the situation in
Ethics
53. LO.7 (Defective units and rework) Prudoe Compounds produces a variety of chemicals that are used by auto manufacturers in their painting processes. With each batch
of chemicals produced, some spoilage naturally occurs. Prudoe Compounds includes
normal spoilage cost in its predetermined OH rate. For 2010, Prudoe Compounds
estimated the following:
Overhead costs, other than spoilage
Estimated spoilage cost
$600,000
50,000
Estimated sales value of spoiled materials
20,000
Estimated direct labor hours
40,000
a. Prudoe Compounds applies overhead based on direct labor hours. Calculate the
predetermined OH rate for 2010.
b. For a batch of chemicals mixed in May 2010, the firm experienced normal spoilage
on Job #788. The cost of the spoiled material amounted to $1,730 and the company
estimated the salvage value of those materials to be $496. Journalize the entry for
the spoilage.
54. LO.7 (Defective units and rework) PlastiCo produces plastic pipe to customer specifications. Losses of less than 5 percent are considered normal because they are inherent
in the production process. The company applies overhead to products using machine
hours. PlastiCo used the following information in setting its predetermined OH rate
for 2010:
Expected overhead other than rework
Expected rework costs
Total expected overhead
Expected machine hours for 2010
$850,000
75,000
$925,000
100,000
During 2010, the following production and cost data were accumulated:
Total good production completed
Total defects
Ending inventory
2,000,000 feet of pipe
40,000 feet of pipe
75,000 feet of pipe
Total cost of direct material for Job #B316
$687,100
Total cost of direct labor for Job #B316
$157,750
Total machine hours for Job #B316
3,080
Cost of reworking defects during 2010
$75,500
Total actual overhead cost for 2010
$862,000