CHAPTER 4
JOB COSTING
4-1
Cost pool––a grouping of individual cost items.
Cost tracing––the assigning of direct costs to the chosen cost object.
Cost allocation––the assigning of indirect costs to the chosen cost object.
Cost-allocation base––a factor that links in a systematic way an indirect cost or group of
indirect costs to a cost object.
4-2
In a job-costing system, costs are assigned to a distinct unit, batch, or lot of a product or
service. In a process-costing system, the cost of a product or service is obtained by using broad
averages to assign costs to masses of identical or similar units.
4-3
An advertising campaign for Pepsi is likely to be very specific to that individual client.
Job costing enables all the specific aspects of each job to be identified. In contrast, the
processing of checking account withdrawals is similar for many customers. Here, process costing
can be used to compute the cost of each checking account withdrawal.
4-4
The seven steps in job costing are: (1) identify the job that is the chosen cost object, (2)
identify the direct costs of the job, (3) select the cost-allocation bases to use for allocating
indirect costs to the job, (4) identify the indirect costs associated with each cost-allocation base,
(5) compute the rate per unit of each cost-allocation base used to allocate indirect costs to the
job, (6) compute the indirect costs allocated to the job, and (7) compute the total cost of the job
by adding all direct and indirect costs assigned to the job.
4-5
Two major cost objects that managers focus on in companies using job costing are (1)
products or jobs, and (2) responsibility centers or departments.
4-6
Three major source documents used in job-costing systems are (1) job cost record or job
cost sheet, a document that records and accumulates all costs assigned to a specific job, starting
when work begins (2) materials requisition record, a document that contains information about
the cost of direct materials used on a specific job and in a specific department; and (3) labor-time
record, a document that contains information about the labor time used on a specific job and in a
specific department.
4-7
The main concern with the source documents of job cost records is the accuracy of the
records. Problems occurring in this area include incorrect recording of quantity or dollar
amounts, materials recorded on one job being “borrowed” and used on other jobs, and erroneous
job numbers being assigned to materials or labor inputs.
4-8
a.
b.
Two reasons for using an annual budget period are
The numerator reason––the longer the time period, the less the influence of seasonal
patterns, and
The denominator reason––the longer the time period, the less the effect of variations in
output levels on the allocation of fixed costs.
4-1
4-9
Actual costing and normal costing differ in their use of actual or budgeted indirect cost
rates:
Actual
Normal
Costing
Costing
Direct-cost rates
Actual rates
Actual rates
Indirect-cost rates
Actual rates
Budgeted rates
Each costing method uses the actual quantity of the direct-cost input and the actual quantity of
the cost-allocation base.
4-10 A house construction firm can use job cost information (a) to determine the profitability
of individual jobs, (b) to assist in bidding on future jobs, and (c) to evaluate professionals who
are in charge of managing individual jobs.
4-11 The statement is false. In a normal costing system, the Manufacturing Overhead Control
account will not, in general, equal the amounts in the Manufacturing Overhead Allocated
account. The Manufacturing Overhead Control account aggregates the actual overhead costs
incurred while Manufacturing Overhead Allocated allocates overhead costs to jobs on the basis
of a budgeted rate times the actual quantity of the cost-allocation base.
Underallocation or overallocation of indirect (overhead) costs can arise because of (a) the
Numerator reason––the actual overhead costs differ from the budgeted overhead costs, and (b)
the Denominator reason––the actual quantity used of the allocation base differs from the
budgeted quantity.
4-12 Debit entries to Work-in-Process Control represent increases in work in process.
Examples of debit entries under normal costing are (a) direct materials used (credit to Materials
Control), (b) direct manufacturing labor billed to job (credit to Wages Payable Control), and (c)
manufacturing overhead allocated to job (credit to Manufacturing Overhead Allocated).
4-13 Alternative ways to make end-of-period adjustments for underallocated or overallocated
overhead are as follows:
(i) Proration based on the total amount of indirect costs allocated (before proration) in
the ending balances of work in process, finished goods, and cost of goods sold.
(ii) Proration based on total ending balances (before proration) in work in process,
finished goods, and cost of goods sold.
(iii) Year-end write-off to Cost of Goods Sold.
(iv) Restatement of all overhead entries using actual indirect cost rates rather than
budgeted indirect cost rates.
4-14 A company might use budgeted costs rather than actual costs to compute direct labor
rates because it may be difficult to trace direct labor costs to jobs as they are completed (for
example, because bonuses are only known at the end of the year).
4-15 Modern technology such as electronic data interchange (EDI) is helpful to managers
because it provides them with quick and accurate product-cost information that facilitates the
management and control of jobs.
4-2
4-16
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
Job costing
Process costing
Job costing
Process costing
Job costing
Process costing
Job costing
Job costing (but some process costing)
Process costing
Process costing
Job costing
4-18
1.
(10 min) Job order costing, process costing.
l.
m.
n.
o.
p.
q.
r.
s.
t.
u.
Job costing
Process costing
Job costing
Job costing
Job costing
Job costing
Process costing
Job costing
Process costing
Job costing
(20 -30 min.) Job costing, normal and actual costing.
Budgeted indirectcost rate
=
Budgeted indirect costs
$8,000,000
=
Budgeted direct labor-hours 160,000 hours
= $50 per direct labor-hour
Actual indirectcost rate
=
Actual indirect costs
$6,888,000
=
Actual direct labor-hours
164,000 hours
= $42 per direct labor-hour
These rates differ because both the numerator and the denominator in the two calculations are
different—one based on budgeted numbers and the other based on actual numbers.
2a.
Normal costing
Direct costs
Direct materials
Direct labor
Indirect costs
Assembly support ($50  900; $50  1,010)
Total costs
4-3
Laguna
Model
Mission
Model
$106,450
36,276
142,726
$127,604
41,410
169,014
45,000
$187,726
50,500
$219,514
2b.
Actual costing
Direct costs
Direct materials
Direct labor
Indirect costs
Assembly support ($42  900; $42  1,010)
Total costs
$106,450
36,276
142,726
$127,604
41,410
169,014
37,800
$180,526
42,420
$211,434
3.
Normal costing enables Anderson to report a job cost as soon as the job is completed,
assuming that both the direct materials and direct labor costs are known at the time of use. Once
the 900 direct labor-hours are known for the Laguna Model (June 2007), Anderson can compute
the $187,726 cost figure using normal costing. Anderson can use this information to manage the
costs of the Laguna Model job as well as to bid on similar jobs later in the year. In contrast,
Anderson has to wait until the December 2007 year-end to compute the $180,526 cost of the
Laguna Model using actual costing.
Although not required, the following overview diagram summarizes Anderson
Construction’s job-costing system.
INDIRECT
COST
POOL

COST
ALLOCATION
BASE

COST OBJECT:
RESIDENTIAL
HOME

DIRECT
COSTS

Assembly
Support
Direct
Labor-Hours
Indirect Costs
Direct Costs
Direct
Materials
4-4
Direct
Manufacturing
Labor
4-5
4-20
(20-30 min.) Job costing, accounting for manufacturing overhead, budgeted rates.
1.
An overview of the product costing system is

INDIRECT
COST
POOL

COST
ALLOCATION
BASE
Machining Department
Manufacturing Overhead
Assembly Department
Manufacturing Overhead
Machine-Hours

Indirect Costs
COST OBJECT:
PRODUCT

DIRECT
COST
Direct Manuf.
Labor Cost
Direct Costs
Direct
Materials
Direct
Manufacturing
Labor
Budgeted manufacturing overhead divided by allocation base:
Machining overhead
Assembly overhead:
2.
$1,800,000
= $36 per machine-hour
50,000
$3,600,000
= 180% of direct manuf. labor costs
$2,000,000
Machining department, 2,000 hours  $36
Assembly department, 180%  $15,000
Total manufacturing overhead allocated to Job 494
3.
Actual manufacturing overhead
Manufacturing overhead allocated,
55,000  $36
180%  $2,200,000
Underallocated (Overallocated)
4-6
$72,000
27,000
$99,000
Machining
$2,100,000
Assembly
$ 3,700,000
1,980,000
—
$ 120,000
—
3,960,000
$ (260,000)
4-22
(15–20 min.) Service industry, time period used to compute indirect cost rates.
1.
Direct labor costs
Variable overhead costs as
a percentage of direct
labor costs
Variable overhead costs
(Percentage  direct
labor costs)
Fixed overhead costs
Total overhead costs
Total overhead costs as a
percentage of direct labor
costs
Jan–March
$400,000
April–June
$280,000
90%
60%
$360,000
300,000
$660,000
60%
$168,000
300,000
$468,000
165%
Job 332
Direct materials
Direct labor costs
Overhead allocated (variable + fixed)
(165%; 180%; 170% of $6,000)
Full cost of Job 332
July–Sept
$250,000
$150,000
300,000
$450,000
167%
180%
Oct–Dec
$270,000
Total
$1,200,000
60%
$162,000
300,000
$462,000
$ 840,000
1,200,000
$2,040,000
171%
170%
Budgeted Overhead Rate Used
Jan–March
July–Sept
Average
Rate
Rate
Yearly Rate
$10,000
$10,000
$10,000
6,000
6,000
6,000
9,900
$25,900
10,800
$26,800
10,200
$26,200
(a)
The full cost of Job 332, using the budgeted overhead rate of 165% for January–March, is
$25,900.
(b)
The full cost of Job 332, using the budgeted overhead rate of 180% for July–September,
is $26,800.
(c)
The full cost of Job 332, using the annual budgeted overhead rate of 170%, is $26,200.
2.
Budgeted fixed overhead rate based on annual fixed overhead costs and annual
direct labor costs = $1,200,000  $1,200,000 = 100%
Job 332
Direct materials
Direct labor costs
Variable overhead allocated
(90%; 60%; of $6,000)
Fixed overhead allocated
(100% of $6,000)
Full cost of Job 332
Budgeted Variable Overhead Rate Used
January–March
July–Sept
rate
rate
$10,000
$10,000
6,000
6,000
4-7
5,400
3,600
6,000
$27,400
6,000
$25,600
(a)
The full cost of Job 332, using the budgeted variable overhead rate of 90% for January–
March and an annual fixed overhead rate of 100%, is $27,400.
(b)
The full cost of Job 332, using the budgeted variable overhead rate of 60% for July–
September and an annual fixed overhead rate of 100%, is $25,600.
3.
If Printers, Inc. sets prices at a markup of costs, then prices based on costs calculated as
in Requirement 2 (rather than as in Requirement 1) would be more effective in deterring clients
from sending in last-minute, congestion-causing orders in the January–March time frame. In this
calculation, more variable manufacturing overhead costs are allocated to jobs in the first quarter,
reflecting the larger costs of that quarter caused by higher overtime and facility and machine
maintenance. This method better captures the cost of congestion during the first quarter.
4-24
(3545 min.) Job costing, journal entries.
Some instructors may also want to assign Exercise 4-25. It demonstrates the relationships of the
general ledger to the underlying subsidiary ledgers and source documents.
1.
An overview of the product costing system is:
INDIRECT
COST
POOL


COST
ALLOCATION
BASE
Manufacturing Overhead
Direct Manufacturing
Labor Costs

Indirect Costs
COST OBJECT:
PRINT JOB

DIRECT
COST
Direct Costs
Direct
Materials
4-8
Direct
Manuf.
Labor
2. & 3.
This answer assumes COGS given of $4,020 does not include the writeoff of overallocated
manufacturing overhead.
2.
(1) Materials Control
Accounts Payable Control
(2) Work-in-Process Control
Materials Control
(3) Manufacturing Overhead Control
Materials Control
(4) Work-in-Process Control
Manufacturing Overhead Control
Wages Payable Control
(5) Manufacturing Overhead Control
Accumulated Depreciation––buildings and
manufacturing equipment
(6) Manufacturing Overhead Control
Miscellaneous accounts
(7) Work-in-Process Control
Manufacturing Overhead Allocated
(1.60  $1,300 = $2,080)
(8) Finished Goods Control
Work-in-Process Control
(9) Accounts Receivable Control (or Cash)
Revenues
(10) Cost of Goods Sold
Finished Goods Control
(11) Manufacturing Overhead Allocated
Manufacturing Overhead Control
Cost of Goods Sold
4-9
800
800
710
710
100
100
1,300
900
2,200
400
400
550
550
2,080
2,080
4,120
4,120
8,000
8,000
4,020
4,020
2,080
1,950
130
3.
Bal. 12/31/2008
(1) Purchases
Bal. 12/31/2009
Bal. 12/31/2008
(2) Direct materials
(4) Direct manuf. labor
(7) Manuf. overhead
allocated
Bal. 12/31/2009
Materials Control
100
(2) Issues
800
(3) Issues
90
Work-in-Process Control
60
(8)Goods completed
710
1,300
Finished Goods Control
500
(10) Goods sold
4,120
600
(10) Goods sold
Cost of Goods Sold
4,020
(11) Adjust for overallocation
Bal. 12/31/2009
3,890
Indirect materials
Indirect manuf. labor
Depreciation
Miscellaneous
(11) To close
4,120
2,080
30
Bal. 12/31/2008
(8) Goods completed
Bal. 12/31/2009
(3)
(4)
(5)
(6)
Bal.
710
100
Manufacturing Overhead Control
100
(11) To close
900
400
550
0
Manufacturing Overhead Allocated
2,080
(7) Manuf. overhead allocated
Bal.
4-10
4,020
130
1,950
2,080
0
4-11
4-26
(45 min.) Job costing, journal entries.
Some instructors may wish to assign Problem 4-24. It demonstrates the relationships of journal
entries, general ledger, subsidiary ledgers, and source documents.
1.
2.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10a)
(10b)
An overview of the product-costing system is
INDIRECT
COST
POOL

Manufacturing
Overhead
COST
ALLOCATION
BASE

Machine-Hours
COST OBJECT
PRODUCT

DIRECT
COSTS

Indirect Costs
Direct Costs
Direct
Materials
Direct
Manuf. Labor
Amounts in millions.
Materials Control
Accounts Payable Control
Work-in-Process Control
Materials Control
Manufacturing Department Overhead Control
Materials Control
Work-in-Process Control
Wages Payable Control
Manufacturing Department Overhead Control
Wages Payable Control
Manufacturing Department Overhead Control
Accumulated Depreciation
Manufacturing Department Overhead Control
Various liabilities
Work-in-Process Control
Manufacturing Overhead Allocated
Finished Goods Control
Work-in-Process Control
Cost of Goods Sold
Finished Goods Control
Accounts Receivable Control (or Cash )
Revenues
4-12
150
150
145
145
10
10
90
90
30
30
19
19
9
9
63
63
294
294
292
292
400
400
The posting of entries to T-accounts is as follows:
Bal.
(1)
Materials Control
12 (2)
150 (3)
Bal.
(9)
Finished Goods Control
6 (10a)
294
(3)
(5)
(6)
(7)
Manufacturing Department
Overhead Control
10 (11)
30
19
9
145
10
292
150
Accumulated Depreciation
(6)
19
Work-in-Process Control
2 (9)
145
90
63
6
(10a)
(11)
Cost of Goods Sold
292
5
Accounts Receivable Control
(10b)
400
Wages Payable Control
(4)
(5)
90
30
Various Liabilities
(7)
9
Revenues
(10b)
400
The ending balance of Work-in-Process Control is $6.
3.
294
Manufacturing Overhead Allocated
(11)
63 (8)
63
68
Accounts Payable Control
(1)
Bal.
(2)
(4)
(8)
Bal.
(11) Manufacturing Overhead Allocated
Cost of Goods Sold
Manufacturing Department Overhead Control
Entry posted to T-accounts in Requirement 2.
4-13
63
5
68
4-28
1.
(2030 min.) Job costing; actual, normal, and variation from normal costing.
Actual direct cost rate for professional labor = $58 per professional labor-hour
$744,000
15,500 hours
= $48 per professional labor-hour
$960,000
Budgeted direct cost rate
=
for professional labor
16,000 hours
= $60 per professional labor-hour
$720,000
16,000 hours
= $45 per professional labor-hour
Actual indirect cost rate =
Budgeted indirect cost rate =
Direct-Cost Rate
Indirect-Cost Rate
2.
Direct Costs
Indirect Costs
Total Job Costs
(a)
(b)
Actual
Normal
Costing
Costing
$58
$58
(Actual rate)
(Actual rate)
$48
$45
(Actual rate) (Budgeted rate)
(c)
Variation of
Normal Costing
$60
(Budgeted rate)
$45
(Budgeted rate)
(a)
(b)
(c)
Actual
Normal
Variation of
Costing
Costing
Normal Costing
$58  120 = $ 6,960 $58  120 = $ 6,960 $60  120 = $ 7,200
48  120 = 5,760 45  120 = 5,400 45  120 = 5,400
$12,720
$12,360
$12,600
All three costing systems use the actual professional labor time of 120 hours. The budgeted 110
hours for the Pierre Enterprises audit job is not used in job costing. However, Chirac may have
used the 110 hour number in bidding for the audit.
The actual costing figure of $12,720 exceeds the normal costing figure of $12,360
because the actual indirect-cost rate ($48) exceeds the budgeted indirect-cost rate ($45). The
normal costing figure of $12,360 is less than the variation of normal costing (based on budgeted
rates for direct costs) figure of $12,600, because the actual direct-cost rate ($58) is less than the
budgeted direct-cost rate ($60).
4-14
Although not required, the following overview diagram summarizes Chirac’s job-costing
system.
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
Audit
Support
Professional
Labor-Hours
COST OBJECT:
JOB FOR
AUDITING
PIERRE
& CO.
Indirect Costs
Direct Costs
DIRECT
COST
Professional
Labor
4-15
4-30 (30 min.) Proration of overhead.
1. Budgeted manufacturing
overhead rate
=

Budgeted manufacturing overhead cost
Budgeted direct manufacturing labor cost
$100,000
 50% of direct manufacturing labor cost
$200,000
2. Overhead allocated = 50%  Actual direct manufacturing labor cost
= 50%  $220,000 =$110,000
Overallocated plant overhead = Actual plant overhead costs – Allocated plant overhead costs
= $106,000 – $110,000 = –$4,000
Overallocated plant overhead = $4,000
3a. All overallocated plant overhead is written off to cost of goods sold.
Both work in process (WIP) and finished goods inventory remain unchanged.
Proration of $4,000
Dec. 31, 2009
Dec. 31, 2009 Balance
Overallocated
Balance
(Before Proration)
Manuf. Overhead
(After Proration)
(3) = (1) – (2)
Account
(1)
(2)
WIP
$ 50,000
$
0
$ 50,000
Finished Goods
240,000
0
240,000
Cost of Goods Sold
560,000
4,000
556,000
Total
$850,000
$4,000
$846,000
3b. Overallocated plant overhead prorated based on ending balances:
Account
WIP
Finished Goods
Cost of Goods Sold
Total
Dec. 31, 2009
Balance
(Before Proration)
(1)
$ 50,000
240,000
560,000
$850,000
Balance as a
Percent of Total
(2) = (1) ÷ $850,000
0.0588
0.2824
0.6588
1.0000
Proration of $4,000
Overallocated
Manuf. Overhead
(3) = (2)  $4,000
0.0588  $4,000 =$ 235
0.2824  $4,000 = 1,130
0.6588  $4,000 = 2,635
$4,000
Dec. 31, 2009
Balance
(After Proration)
(4) = (1) – (3)
$ 49,765
238,870
557,365
$846,000
3c. Overallocated plant overhead prorated based on 2009 overhead in ending balances:
Account
WIP
Finished Goods
Cost of Goods Sold
Total
Dec. 31, 2009
Balance
(Before
Proration)
(1)
$ 50,000
240,000
560,000
$850,000
Allocated
Manuf.
Overhead in
Dec. 31, 2009
Balance
(2)
$ 10,000a
30,000b
70,000c
$110,000
4-16
Allocated Manuf.
Overhead in Dec.
31, 2009 Balance
as a Percent of Total
(3) = (2) ÷ $110,000
0.0909
0.2727
0.6364
1.0000
Proration of $4,000
Overallocated
Manuf. Overhead
(4) = (3)  $4,000
0.0909  $4,000=$ 364
0.2727  $4,000= 1,091
0.6364  $4,000=$2,545
$4,000
Dec. 31, 2009
Balance
(After
Proration)
(5) = (1) – (4)
$ 49,636
238,909
557,455
$846,000
a,b,c
Overhead allocated = Direct manuf. labor cost  50% = $20,000; 60,000; 140,000  50%
4. Writing off all of the overallocated plant overhead to Cost of Goods Sold (CGS) is usually
warranted when CGS is large relative to Work-in-Process and Finished Goods Inventory and the
overallocated plant overhead is immaterial. Both these conditions apply in this case. ROW
should write off the $4,000 overallocated plant overhead to Cost of Goods Sold Account.
4-32
(1520 min.) Service industry, job costing, law firm.
1.
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
COST OBJECT:
JOB FOR
CLIENT
DIRECT
COST

Legal
Support

Professional
Labor-Hours

Indirect Costs
Direct Costs
}
Professional
Labor
2.
Budgeted professional = Budgeted direct labor compensation per professional
labor-hour direct cost rate
Budgeted direct labor-hours per professional
$104,000
=
1,600 hours
= $65 per professional labor-hour
Note that the budgeted professional labor-hour direct-cost rate can also be calculated by
dividing total budgeted professional labor costs of $2,600,000 ($104,000 per professional  25
professionals) by total budgeted professional labor-hours of 40,000 (1,600 hours per professional
 25 professionals), $2,600,000  40,000 = $65 per professional labor-hour.
3.
Budgeted total costs in indirect cost pool
Budgeted total professional labor-hours
$2,200,000
=
1,600 hours  25
$2,200,000
=
40,000 hours
= $55 per professional labor-hour
Budgeted indirect =
cost rate
4-17
4.
Direct costs:
Professional labor, $65  100; $65  150
Indirect costs:
Legal support, $55  100; $55  150
4-18
Richardson
Punch
$ 6,500
$ 9,750
5,500
$12,000
8,250
$18,000
4-19
4-34
(2025 min.) Proration of overhead.
1. Budgeted manufacturing overhead rate is $4,800,000 ÷ 80,000 hours = $60 per machine-hour.
2.
Manufacturing overhead = Manufacturing overhead – Manufacturing overhead
underallocated
incurred
allocated
= $4,900,000 – $4,500,000*
= $400,000
*$60  75,000 actual machine-hours = $4,500,000
a.
Write-off to Cost of Goods Sold
Account
(1)
Work in Process
Finished Goods
Cost of Goods Sold
Total
Write-off
of $400,000
Underallocated
Manufacturing
Overhead
(3)
Account
Balance
(Before Proration)
(2)
$
750,000
1,250,000
8,000,000
$10,000,000
Account
Balance
(After Proration)
(4) = (2) + (3)
$
0
0
400,000
$400,000
$
750,000
1,250,000
8,400,000
$10,400,000
b.
Proration based on ending balances (before proration) in Work in Process, Finished
Goods and Cost of Goods Sold.
Account
(1)
Work in Process
Finished Goods
Cost of Goods Sold
Total
Proration of $400,000
Underallocated
Manufacturing
Overhead
(3)
Account Balance
(Before Proration)
(2)
$ 750,000 ( 7.5%) 0.075  $400,000 = $ 30,000
1,250,000 (12.5%) 0.125  $400,000 = 50,000
8,000,000 (80.0%) 0.800  $400,000 = 320,000
$10,000,000 100.0%
$400,000
Account
Balance
(After Proration)
(4) = (2) + (3)
$ 780,000
1,300,000
8,320,000
$10,400,000
c.
Proration based on the allocated overhead amount (before proration) in the ending
balances of Work in Process, Finished Goods, and Cost of Goods Sold.
Account
Allocated Overhead
Account
Balance
Included in
Proration of $400,000
Balance
(Before
the Account Balance
Underallocated
(After
Account
Proration) (Before Proration) Manufacturing Overhead
Proration)
(1)
(2)
(3)
(4)
(5)
(6) = (2) + (5)
a
Work in Process
$ 750,000 $ 240,000 ( 5.33%) 0.0533  $400,000 = $ 21,320
$ 771,320
Finished Goods
Cost of Goods Sold
Total
a
1,250,000
b
(14.67%) 0.1467  $400,000 =
58,680
1,308,680
c
(80.00%) 0.8000  $400,000 = 320,000
8,320,000
660,000
8,000,000 3,600,000
$10,000,000 $4,500,000
100.00%
b
c
$60  4,000 machine-hours; $60  11,000 machine-hours; $60  60,000 machine-hours
4-20
$400,000
$10,400,000
3.
Alternative (c) is theoretically preferred over (a) and (b). Alternative (c) yields the same
ending balances in work in process, finished goods, and cost of goods sold that would have been
reported had actual indirect cost rates been used.
Chapter 4 also discusses an adjusted allocation rate approach that results in the same
ending balances as does alternative (c). This approach operates via a restatement of the indirect
costs allocated to all the individual jobs worked on during the year using the actual indirect cost
rate.
4-21
4-36 (40 min.) Proration of overhead with two indirect cost pools.
1.a. C & A department:
Overhead allocated = $40  4,000 Machine hours = $160,000
Underallocated overhead = Actual overhead costs – Overhead allocated
= $163,000 – 160,000 = $3,000 underallocated
1.b. Finishing department:
Overhead allocated = $50 per direct labor-hour  2,000 direct labor-hours = $100,000
Overallocated overhead = Actual overhead costs – Overhead allocated
= $87,000 – 100,000 = $13,000 overallocated
2a. All overallocated overhead is written off to cost of goods sold.
Both Work in Process and Finished goods inventory remain unchanged.
Account
WIP
Finished Goods
Cost of Goods Sold
Total
Dec. 31, 2008 Balance
(Before Proration)
(1)
$ 150,000
250,000
1,600,000
$2,000,000
Proration of $10,000
Overallocated
Overhead
(2)
0
0
+$3,000 –$13,000
$
10,000
Dec. 31, 2008
Balance
(After Proration)
(3) = (1) + (2)
$ 150,000
250,000
1,590,000
$1,990,000
2b. Overallocated overhead prorated based on ending balances
Account
WIP
Finished Goods
Cost of Goods Sold
Total
Dec. 31, 2008 Balance
(Before Proration)
(1)
$ 150,000
250,000
1,600,000
$2,000,000
Balance as a
Percent of Total
(2) = (1) ÷ $2,000,000
0.075
0.125
0.800
1.000
Proration of $10,000
Overallocated Overhead
(3) = (2)  10,000
0.075 × $10,000 = $ 750
0.125 × $10,000 = 1,250
0.800 × $10,000 = 8,000
$10,000
Dec. 31, 2008 Balance
(After Proration)
(4) = (1) – (3)
$ 149,250
248,750
1,592,000
$1,990,000
2c. Overallocated overhead prorated based on overhead in ending balances. (Note: overhead
must be allocated separately from each department. This can be done using the number of
machine hours/direct labor hours as a surrogate for overhead in ending balances.)
4-22
For C & A department:
Account
WIP
Finished Goods
Cost of Goods Sold
Total
Allocated Overhead in
Dec. 31, 2008 Balance
(1)
200  $40 = $ 8,000
600  $40 = 24,000
3,200  $40 = 128,000
$160,000
Allocated Overhead in
Dec. 31, 2008 Balance
as a Percent of Total
(2) = (1) ÷ $160,000
0.05
0.15
0.80
1.00
Proration of $3,000
Underallocated
Overhead
(3) = (2)  $3000
0.05  $3,000 = $ 150
0.15  $3,000 =
450
0.80  $3,000 =
2,400
$3,000
For finishing department:
Account
WIP
Finished Goods
Cost of Goods Sold
Total
Account
WIP
Finished Goods
Cost of Goods Sold
Total
Allocated Overhead in Dec.
31, 2008 Balance
(4)
100  $50 = $ 5,000
400  $50 = 20,000
1,500  $50 = 75,000
$100,000
Dec. 31, 2008 Balance
(Before Proration)
(7)
$ 150,000
250,000
1,600,000
$2,000,000
Allocated Overhead
in Dec. 31, 2008
Balance
as a Percent of Total
(5) = (4) ÷ $100,000
0.05
0.20
0.75
1.00
Proration of $13,000
Underallocated Overhead
(6) = (5)  $13,000
0.05  $13,000 = $ 650
0.20  $13,000 = 2,600
0.75  $13,000 = 9,750
$13,000
Underallocated/
Overallocated
Overhead
(8) = (3) – (6)
$150 – $650 = $ (500)
$450 – $2,600 = (2,150)
$2,400 – $9,750 = (7,350)
$(10,000)
Dec. 31, 2009 Balance
(After Proration)
(9) = (7) + (8)
$ 149,500
247,850
1,592,650
$1,990,000
3. The first method is simple and Cost of Goods Sold accounts for 80% of the three account
amounts. The amount of overallocated and underallocated overhead is also immaterial.
Allocation to the other two accounts is minimal. Therefore, write-off to cost of goods sold is the
most cost effective alternative.
4-23
4-38
(4055 min.) Overview of general ledger relationships.
1. & 3. An effective approach to this problem is to draw T-accounts and insert all the known
figures. Then, working with T-account relationships, solve for the unknown figures (here coded
by the letter X for beginning inventory figures and Y for ending inventory figures).
Materials Control
15,000
(1)
85,000
100,000
30,000
X
Purchases
Y
X
(1) DM
(2) DL
(3) Overhead
(a)
(c)
Y
Work-in-Process Control
10,000
(4)
70,000
150,000
90,000
310,000
320,000
5,000
3,000
23,000
Y
(5)
Cost of Goods Sold
300,000
(d)
(a)
(b)
Manufacturing Department Overhead Control
85,000
(d)
1,000
1,000
(d)
70,000
305,000
305,000
Finished Goods Control
20,000
(5)
305,000
325,000
25,000
X
(4)
70,000
Manufacturing Overhead Allocated
93,000
(3)
(c)
300,000
300,000
6,000
87,000
90,000
3,000
Manufacturing overhead cost rate = $90,000 ÷ $150,000 = 60%
Wages Payable Control
(a)
6,000
Various Accounts
(b)
1,000
4-24
2.
Adjusting and closing entries:
(a) Work-in-Process Control
Manufacturing Department Overhead Control
Wages Payable Control
To recognize payroll costs
5,000
1,000
(b) Manufacturing Department Overhead Control
Various accounts
To recognize miscellaneous manufacturing overhead
1,000
(c) Work-in-Process Control
Manufacturing Overhead Allocated
To allocate manufacturing overhead
3,000
6,000
1,000
3,000
Note: Students tend to forget entry (c) entirely. Stress that a budgeted overhead allocation
rate is used consistently throughout the year. This point is a major feature of this
problem.
(d) Manufacturing Overhead Allocated
93,000
Manufacturing Department Overhead Control
87,000
Cost of Goods Sold
6,000
To close manufacturing overhead accounts and overallocated overhead to cost of
goods sold
An overview of the product-costing system is
INDIRECT
COST
POOL

Manufacturing Overhead

Direct Manufacturing
Labor Costs

Indirect Costs
Direct Costs
COST
ALLOCATION
BASE
COST OBJECT:
JOB

DIRECT
COST
3.
Direct
Materials
See the answer to 1.
4-25
Direct
Manufacturing
Labor
4-40
1.
(20 min.) Job costing, contracting, ethics.
Direct manufacturing costs:
Direct materials
Direct manufacturing labor
Indirect manufacturing costs,
150%  $6,000
Total manufacturing costs
$25,000
6,000
$31,000
9,000
$40,000
Aerospace bills the Navy $52,000 ($40,000  130%) for 100 X7 seats or $520 ($52,000 
100) per X7 seat.
2.
a
Direct manufacturing costs:
Direct materials
Direct manufacturing labora
Indirect manufacturing costs,
150%  $5,000
Total manufacturing costs
$25,000
5,000
$30,000
7,500
$37,500
$6,000 – $400 ($25  16) setup – $600 ($50  12) design
Aerospace should have billed the Navy $48,750 ($37,500  130%) for 100 X7 seats or $487.50
($48,750  100) per X7 seat.
3.
The problems the letter highlights (assuming it is correct) include the following:
a. Costs included that should be excluded (design costs)
b. Costs double-counted (setup included as both a direct cost and in an indirect cost
pool)
c. Possible conflict of interest in Aerospace Comfort purchasing materials from a
family-related company
Steps the Navy could undertake include the following:
(i) Use only contractors with a reputation for ethical behavior as well as quality products
or services.
(ii) Issue guidelines detailing acceptable and unacceptable billing practices by
contractors. For example, prohibiting the use of double-counting cost allocation
methods by contractors.
(iii)Issue guidelines detailing acceptable and unacceptable procurement practices by
contractors. For example, if a contractor purchases from a family-related company,
require that the contractor obtain quotes from at least two other bidders.
(iv) Employ auditors who aggressively monitor the bills submitted by contractors.
(v) Ask contractors for details regarding determination of costs.
4-26
4-27