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Problem 7 – Job Order Costing
Jessica Company started operations on January 2, 20x6. The company manufactures custom
products and uses a job order system. Overhead is allocated to jobs based on direct labour costs.
The budgeted manufacturing overhead for 20x6 was $396,900 and the direct labour costs were
budgeted at $567,000. At the end of 20x6, there were two jobs in work in process:
Direct material cost
Direct labour cost
Job A605
$20,000
12,000
Job A608
$36,000
38,000
Actual manufacturing overhead for the year amounted to $350,000 and total direct labour
charges for the year amounted to $550,000. The year-end finished good inventory balance was
$175,000 and included direct labour costs of $48,000. Cost of goods sold for the year amounted
to $1,750,000.
Required 1.
2.
3.
Prepare a schedule showing the detailed cost of the ending work-in-process, and finished
goods inventory.
Compute the over/under –applied overhead for the year.
Allocate the balance in the manufacturing overhead account using each of the 4
approaches discussed in class.
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Problem 6 – Process Costing
Deterra, Inc., uses three departments to produce a detergent. The Finishing Department is the
third and last step before the product is transferred to storage. All materials needed to give the
detergent its final composition are added at the beginning of the process in the Finishing
Department. The company uses FIFO costing. The following data for the Finishing Department
for October have been made available:
Production data:
In process, October 1 (labor and factory overhead, 75% complete)
Transferred in from preceding department
Finished and transferred to storage
In process, October 31 (labor and factory overhead, 50% complete)
10,000 litres
40,000 litres
35,000 litres
15,000 litres
Additional data:
Work-in-process inventory, October 1:
Cost from preceding department
Cost from this department:
Materials
Labor
Factory overhead
Transferred in during October
Cost added in this department:
Materials
Labor
Factory overhead
$ 38,000
21,500
39,000
42,000
$140,500
$140,000
$ 70,000
162,500
130,000
$362,500
Required:
Calculate the cost of the units transferred out to finished goods inventory and the value of the
ending WIP under both the FIFO method and the weighted average method.
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Module 3 - Management Accounting
Spoilage!
35
Spoilage Terminology!
•
spoilage - unacceptable units of production that
are discarded or sold at reduced prices!
•
reworked units - unacceptable units of
production that are subsequently repaired and
sold as acceptable finished goods!
•
scrap - material left over when making a product
that has low sales value !
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Module 3 - Management Accounting
Normal vs. Abnormal Spoilage!
•
normal spoilage - spoilage as an inherent result
of a particular production even under efficient
operating conditions -> expected spoilage!
–  treat as a component of unit cost of good units
manufactured!
•
abnormal spoilage - spoilage that should not
arise under efficient operating conditions ->
avoidable and controllable!
–  do not treat as a product cost; write off
directly to cost of goods sold!
37
Accounting for Spoilage "
Job Costing!
•
normal spoilage attributable to a specific job - job
bears the cost of the spoilage reduced by the
current net realizable value of the spoilage!
•
normal spoilage common to all jobs - treat as
manufacturing overhead!
•
abnormal spoilage - charge to an abnormal loss
account and write off directly to cost of goods
sold!
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Problem 8 – Process Costing with Spoilage
Kristina Company, which manufactures quality paint sold at premium prices, uses a single
production department. Production begins with the blending of various chemicals, which are
added at the beginning of the process, and ends with the canning of the paint. Canning occurs
when the mixture reaches the 90% stage of completion. The gallon cans are then transferred to
the Shipping Department for crating and shipment. Labor and overhead are added continuously
throughout the process.
Prior to May, when a change in the process was implemented, WIP inventories were
insignificant. The change in the process enables greater production but results in material
amounts of WIP for the first time. The company has always used the WA method to determine
equivalent production and unit costs. Now, production management is considering changing
from the WA method to the FIFO method.
Spoilage is detected when the mixture reaches the 60% stage of completion. Normal spoilage is
equal to 2% of units transferred out.
The following data relate to actual production during the month of May:
COSTS FOR MAY
Work-in-process inventory, May 1
(4,000 litres 25% complete):
Direct materials-chemicals
Direct labor
Factory overhead
May costs added:
Direct materials-chemicals
Direct materials-cans
Direct labor
Factory overhead
UNITS FOR MAY - Litres
Work-in-process inventory, May 1 (25% complete)
Sent to Shipping Department
Started in May
Work-in-process inventory, May 31 (80% complete)
$ 45,600
6,250
18,750
228,400
7,000
35,000
105,000
4,000
19,350
21,000
5,000
Required –
Calculate the cost of units transferred out and the cost of abnormal spoilage using (a) FIFO and
(b) weighted average.
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Problem 9 – Job Order Costing and Spoilage
The Dangelo Company manufactures products that often require specification changes or
modifications to meet its customers' needs. Still, Dangelo has been able to establish a normal
spoilage rate of 2.5% of normal input. Normal spoilage is recognized during the budgeting
process and classified as a component of manufacturing overhead when determining the
overhead rate.
One of Dangelo's inspection managers, obtains the following information for Job No. A604 that
was recently completed. A total of 122,000 units were started, and 5,000 units were rejected at
final inspection yielding 117,000 good units. Nine hundred of the first units produced were
rejected because of a design defect that was considered very unusual; this defect was corrected
immediately, and no further units were rejected for this reason. These units were disposed of
after incurring an additional cost of $1,200. The inspection department was unable to identify a
rejection pattern for the remaining 4,100 rejected units. These units can be sold at $7 per unit.
The total costs for all 122,000 units of Job No. A604 are presented here. The job has been
completed, but the costs have yet to be transferred to finished goods.
Direct materials
Direct manufacturing labour
Manufacturing overhead
Total manufacturing costs
$2,196,000
1,830,000
2,928,000
$6,954,000
Required 1.
2.
Calculate the unit quantities of normal and abnormal spoilage.
Prepare the appropriate journal entry (or entries) to properly account for job No. A604
including spoilage, disposal, and transfer of costs to finished goods control.
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Module 3 - Management Accounting
Cost Estimation!
39
Steps in Estimating a Cost Function!
•
choose the dependent variable -y!
–  ideally, all the individual items in the
dependent variable will have a similar
relationship with the cost driver(s), chosen in
the next step!
–  example: cost driver to predict the total cost of
health benefits could be the number of
employees!
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Module 3 - Management Accounting
Steps in Estimating a Cost Function cont d!
•
choose the cost driver(s) - x , x , …, x
1
2
n!
–  the chosen driver should be economically
plausible and accurately measurable!
–  there should be a cause and effect relationship
between the cost driver and the resulting costs!
41
Steps in Estimating a Cost Function cont d!
•
collect data on the dependent variable and on the
cost driver(s) - y, x !
i
–  the ideal database would contain numerous
observations in periods not subject to major
technological change!
–  the time period used to measure the
dependent variable and the cost driver(s)
should be identical!
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Module 3 - Management Accounting
Steps in Estimating a Cost Function cont d!
•
plot the data - a plot will reveal whether the cost relation is
indeed linear, and whether there are any outliers!
•
high-low method: makes use of the costs and activity levels
for the high and low activity levels in a set of data!
–  variable cost = ∆ in cost / ∆ in activity level between the
highest and lowest points of activity!
–  relies only on two data points!
•
visual fit (scattergraph) method: visually fit a straight line
in a scatter plot of data!
•
regression analysis: most reliable, as it uses all data points
in calculating the best fitting line!
43
Cost Estimation - Example!
Month
MH
Material $
Overhead $
1
175
$4,750
$4,500
2
170
4,600
4,225
3
160
4,200
3,780
4
190
5,900
5,250
5
175
4,600
4,800
6
200
5,250
5,100
7
160
4,350
4,450
8
150
4,350
4,200
9
210
6,000
5,475
10
180
4,950
4,760
11
170
4,450
4,325
12
145
3,800
3,975
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Module 3 - Management Accounting
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Module 3 - Management Accounting
Cost Driver = Machine Hours!
49
Cost Driver = Material $!
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Module 3 - Management Accounting
Cost Driver = MH + Material $!
51
Regression Analysis!
•
criterion 1: Economic Plausibility!
–  the basis relationship between the dependent
variable and the independent variable should
make economic sense and be intuitive to both
the operating manager and the management
accountant!
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Module 3 - Management Accounting
Regression Analysis - cont d!
•
criterion 2: Goodness of Fit!
–  does the independent variable explain a
substantial percentage of the variation in the
dependent variable?!
–  the coefficient of determination, r is used to
measure the goodness of fit!
2
–  the r test is a measure of the extent to which
the independent variable explains or accounts
for the variability of the dependent variable!
2
53
Regression Analysis - cont d!
•
criterion 3: Significance of Independent Variable
(s)!
–  the coefficient of the chosen independent
variable(s) should be significantly different
from zero, implying an important relationship
exists between independent and dependent
variables - measured by the t-value of the
coefficient of the independent variable(s)!
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Problem 10 – Cost Estimation
The following selected data were taken from the accounting records of Daviault Manufacturing
Company. The company uses direct-labor hours as its cost driver for overhead costs.
Month
January
February
March
April
May
June
Direct-Labor
Hours
26,000
25,000
28,000
23,000
30,000
34,000
Manufacturing
Overhead
$749,250
720,000
772,500
681,000
775,500
879,000
June's cost consisted of machine supplies ($153,000), depreciation ($22,500), and plant
maintenance ($703,500). These costs exhibit the following respective behavior: variable, fixed,
and semivariable (mixed).
The manufacturing overhead figures presented in the preceding table do not include supervisory
labor cost, which is step-fixed in nature. For volume levels of less than 15,000 hours, supervisory
labor amounts to $67,500. The cost is $135,000 from 15,000-29,999 hours and $202,500 when
activity reaches 30,000 hours or more.
Required:
1.
2.
3.
Determine the machine supplies cost and depreciation for April.
Using the high-low method, analyze Daviault Manufacturing Company's plant
maintenance cost and calculate the monthly fixed portion and the variable cost per directlabor hour.
Assume that present cost behavior patterns continue into the latter half of the year.
Estimate the total amount of manufacturing overhead the company can expect in October
if 29,500 direct-labor hours are worked.
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Module 3 - Management Accounting
Activity Based Costing!
55
Activity Based Costing!
•
why traditional cost systems fail?!
–  overhead is typically allocated to products using unit-based
measures such as direct labor, materials purchases, processing
time or units produced!
–  the product costs produced by such allocations are distorted
because products do not consume most support resources in
proportion to their production volumes!
•
distortions are most severe in organizations producing a diverse
product mix!
•
products that differ in volume, complexity, and age consume
support resources in significantly different amounts!
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Module 3 - Management Accounting
Activity Based Costing - Structural
Overview!
COSTING
SYSTEM
Resource
Categories
Resource
Drivers
Activity
Analysis
Activities
Activity
Drivers
Direct
Costs
Perf Eval
for ABM
COST
MANAGEMENT
Cost
Objects
57
The Structure of ABCS!
•
first stage assigns the expenses of support
resources to the activities performed by these
resources!
–  assumption is that activities causes costs!
•
in the second stage, activity costs are assigned to
products based on individual products'
consumption or demand for each activity!
–  assumption is that products create the
demand for activities!
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Module 3 - Management Accounting
Classes of costs: Unit and Batch!
•
unit cost: costs that vary proportionally with the number of
units produced!
–  examples: direct material, direct labor, machine hours!
–  these costs are proportional to short-run production
decisions!
•
batch related costs are incurred each time a batch of goods
is processed!
–  examples: setups, material movements, purchase
orders, inspection!
–  the demand for setup resources are independent of the
number of units produced after completing the setup!
!
59
Classes of costs: Product and Facility!
•
product related costs: incurred to enable individual
products to be produced and sold!
–  the expenses of these activities can be traced to the
individual products, but the resources consumed by the
activities are independent of how many units or batches
of the products are produced!
–  examples: process engineering, product specifications,
product enhancements!
•
facility related costs: costs incurred to create productive
capacity for all products!
–  examples: factory administration, maintenance, heating
and lighting!
!
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Module 3 - Management Accounting
When to Implement Activity Based
Costing!
•
ABCS are likely to report significantly more accurate
product costs when...!
–  the organization uses large amounts of indirect
resources in its production processes, and/or!
–  the organization has significant diversity in products,
production processes, and customers, and/or!
–  the company faces significant competition, especially
from more focused competitors!
!
61
Benefits of Activity Based Costing!
•
improved decisions: w.r.t introduction, pricing and
discontinuance of products; ABCS eliminates cross-product
subsidies!
•
continuous improvement activities to reduce overhead
costs: managers will now know what activities causes costs
and can reduce or eliminate those activities that add little
or no value to products or services!
•
ease of determining relevant costs: product cost data in
traditional systems often needs to be analyzed in order to
obtain information relevant to a special decision; under
ABCS, the data is readily available!
!
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Problem 11 – Activity Based Costing
Mona Loa, Inc. (MLI), is a distributor and processor of a variety of different brands of coffee.
The company buys coffee beans from around the world and roasts, blends, and packages them
for resale. MLI currently has 10 different coffees that it offers to gourmet
shops in one kilogram bags. The major cost is direct materials, however, there is a substantial
amount of factory overhead in the predominantly automated roasting and packing process. The
company uses relatively little direct labor.
Some of the coffees are very popular and sell in large volumes, while a few of the newer brands
have very low volumes. MLI prices its coffee at full product cost, including allocated overhead,
plus a markup of 25 percent. If prices for certain coffees are significantly higher than the market,
the prices are lowered. The company competes primarily on the quality of its products, but
customers are price conscious as well.
Data for the 20x8 budget include factory overhead of $3,500,000, which has been allocated in its
current costing system on the basis of each product's direct labor cost. The budgeted direct labor
cost for 20x8 totals $700,000. Budgeted purchases and use of direct materials (mostly coffee
beans) will total $6,000,000.
Budgeted direct costs for one kg. bags of two of the company's products are as follows:
Direct materials
Direct labor
Italian
Roast
$3.20
0.30
French
Roast
$2.80
0.30
MLI's controller believes the current traditional product costing system may be providing
misleading cost information. He has developed this analysis of the 20x8 budgeted factory
overhead costs:
Activity
Purchasing
Material handling
Quality control
Roasting
Blending
Packaging
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Cost Driver
Purchase order
Setups
Batches
Roasting-hours
Blending-hours
Packaging-hours
Budgeted
Activity
1,150
1,750
500
100,000
23,125
30,000
Budgeted
Cost
$575,000
612,500
150,000
950,000
462,500
750,000
$3,500,000
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Data regarding the 20x8 production of Italian Roast and French Roast coffee follow. Assume no
beginning or ending direct materials inventory for either of these coffees.
Budgeted sales
Batch size
Setups
Purchase order size
Roasting time
Blending time
Packaging time
Italian Roast
100,000 kg.
10,000 kg.
3 per batch
25,000 kg.
1 hour per 100 kg.
.5 hours per 100 kg.
.1 hours per 100 kg.
French Roast
2,000 kg.
500 kg.
3 per batch
500 kg.
1 hour per 100 kg.
.5 hours per 100 kg.
.1 hours per 100 kg.
Required –
1) Using MLI’s current traditional product costing system:
a) Determine the company’s predetermined overhead rate using direct labour cost as the
single cost driver.
b) Determine the full product costs and selling prices for one kg. of Italian Roast and French
Roast coffee.
2) Develop a new product cost, using an activity-based costing approach, for one kg. of Italian
Roast and French Roast coffee. Compare the results with those in requirement 1.
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Problem 4 – Job Order Costing
Avid Assemblers uses job-order costing to assign costs to products. The company assembles and
packages 20 different products to customer specifications. Products are worked on in batches of
30 to 50 units. Each batch is assigned a job number.
On October 1, the company had the following balances recorded.
Direct Materials
Work in process
Finished goods
$ 7,800
45,726
23,520
Work in process consisted of the following jobs:
Job 202
Job 204
Job 205
Direct materials
Direct labour
Applied overhead
$ 4,200
8,500
5,100
$ 3,190
7,210
4,326
$ 2,800
6,500
3,900
Total
$17,800
$14,726
$13,200
30
50
35
Job 208
$1,200
2,910
40
Total
$ 8,980
20,450
Number of units
Finished goods consisted of job 203, with the following costs:
Direct materials
Direct labour
Applied overhead
$ 7,200
10,200
6,120
Total
$23,520
Number of units
50
Shown below are the direct cost data related to jobs started in October:
Direct materials
Direct labour
Number of units
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Job 206
$4,180
9,200
40
Job 207
$3,600
8,340
50
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Other information:
1.
Direct materials and direct labour added to beginning work in process in October
were as follows:
Direct materials
Direct labour
Job 202
$ 950
2,000
Job 204
$ 410
3,500
Job 205
$1,200
4,500
Total
$ 2,560
10,000
2.
Overhead is applied at a predetermined rate on the basis of direct labour cost.
3.
Actual expenses for October were as follows:
Supervisory salaries
Factory rent
Amortization (machines)
Indirect labour
Supplies (factory)
Selling expenses
CPP, El, and other benefits*
$4,000
2,000
3,000
5,000
1,100
8,500
3,200
*80 percent of employer contributions and benefits relates to factory personnel.
4.
Purchases of direct materials during October amounted to $8,500
5.
Only Jobs 207 and 208 are still in process at closing on October 31. Finished
goods consisted only of Job 205 at month end.
6.
Avid writes off any over- or underapplied overhead to Cost of Goods Sold in the
month it is incurred.
Required:
1.
2.
3.
4.
5.
What is the predetermined overhead rate used by Avid to apply overhead to jobs?
What is the unit cost of Job 204 ?
What are the October 31 balances for the following inventory accounts?
a.
Direct Materials
b.
Work in Process
c.
Finished Goods
What is the cost of goods manufactured in October? (You do not have to prepare
a statement as part of this Requirement.)
Determine the over- or underapplied overhead for October.
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Problem 14 - Service Department Allocations
Jamieson Steel has two profit centres: Ingots and Stainless Steel. These profit centres rely
on services provided by two service departments, electricity and water. Ingots’ and
Stainless’ consumption of the service departments’ output (in millions) is given in the
following table:
Service Departments
Service
Departments
Electricity
Water
Electricity
2,500 kwh
1,000 gal
Water
2,500 kwh
800 gal
Profit Centres
Stainless
Ingots
Steel
2,500 kwh
2,500 kwh
1,600 gal
1,400 gal
Total
10,000 kwh
4,800 gal
The total operating costs of the two service departments are:
Electricity
Water
$80 million
60 million
$140 million
Required Allocate the service department costs to the profit centres using…
(a)
the direct method
(b)
the step method (water first)
(c)
the step method (electricity first)
(d)
the reciprocal method
Calculate the unit cost per kwh and gallon for each of the 4 methods.
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Accelerated Program
Week 15
Suggested study plan for this week:
Primary List
Secondary List
1.
Review what we did in class on Saturday.
2.
Spoilage (ch 4)
MCQ 7-8, Q9, Q10,
Q5, Q6, Q7, Q8
Cost Behaviour (ch 5)
MCQ, Q2, Q3, Q4
Q1, Q5, Q6
Activity Based Costing (ch 6)
MCQ, Q2, Q3, Q5,
Q4, Q1
3.
4.
5.
Prepare in-class problems 12 and 13. These will
be taken up in class on Saturday.
6.
Prepare the Week 15 Quiz
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Problem 12 – Process Costing
For each of the following independent cases, determine the information requested.
a.
Beginning inventory amounted to 500 units. This period 2,250 units were started and
completed. At the end of the period, the 1,500 units in inventory were 30 percent complete.
Using FIFO costing, the equivalent production for the period was 2,800 units. What was the
percentage of completion of the beginning inventory?
b.
The ending inventory included $8,700 for conversion costs. During the period, 4,200
equivalent units were required to complete the beginning inventory, and 6,000 units were
started and completed. The ending inventory represented 1,000 equivalent units of work
this period. FIFO costing is used. What were the total conversion costs incurred this
period?
c.
In the beginning inventory, 1,000 units were 40 percent complete with respect to materials.
During the period, 8,000 units were transferred out. Ending inventory consisted of 1,400
units that were 70 percent complete with respect to materials. How many units were started
and completed during the period? Assume FIFO costing.
d.
At the start of the period, 8,000 units were in the work in process inventory and 6,000 units
were in the ending inventory. During the period, 19,000 units were transferred out to the
next department. Materials and conversion costs are added evenly throughout the
production process. FIFO costing is used. How many units were started this period?
e.
In the beginning inventory 4,100 units were 40 percent complete with respect to conversion
costs. During the period, 3,500 units were started. In the ending inventory, 3,250 units were
20 percent complete with respect to conversion costs. How many units were transferred
out? Weighted average costing is used.
f.
The beginning inventory consisted of 4,000 units with a direct materials cost of $14,200.
The equivalent work represented by all of the direct materials costs in the WIP Inventory
account amounted to 18,000 units. There were 6,000 units in ending inventory that were 20
percent complete with respect to materials. The ending inventory had a direct materials cost
assigned of $4,500. What was the total materials cost incurred this period? Weighted
average costing is used.
g.
The WIP Inventory account had a beginning balance of $1,900 for conversion costs on
items in process and during the period $18,100 in conversion costs were charged to it. Also
during the period, $19,200 in costs were transferred out. There were 400 units in the
beginning inventory, and 4,800 units were transferred out during the period. How many
equivalent units are in the ending inventory? Weighted average costing is used.
h.
During the period, 1,050 units were transferred to the department. The 1,600 units
transferred out were charged to the next department at an amount that included $3,360 for
direct materials costs. The ending inventory was 25 percent complete with respect to direct
materials and had a cost of $630 assigned to it. How many units are in the ending
inventory? Weighted average costing is used.
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Problem 13 - Process Costing
Richard Chemical Company manufactures a product that requires processing in two
departments. All units from Department A are transferred to Department B. No additional
materials are added in Department B. Conversion costs are added continuously
throughout the process.
The following data pertain to the operations of Department B for the month of July:
Transferred from Department A during July: 12,000 units,
Department A costs
Conversion costs incurred during July
$75,000
162,000
In process, July 1, 3,000 units, 60% complete:
Department A costs
Department B conversion costs
$17,300
25,100
In process, July 31, 3,650 units, 80% complete.
Units transferred out: 11,000 units
Normal spoilage is equal to 2% of the good units transferred out. Spoilage is detected at
90% of the conversion process
Required –
Calculate the cost of goods manufactured and cost of abnormal spoilage assuming that
the Richard Company uses (a) FIFO and (b) Weighted Average.
CMA Accelerated Program 2011
© CMA Ontario, 2011