Chapter 4
4-17
1.
(20 min.) Actual costing, normal costing, accounting for manufacturing
overhead.
Budgete d manufactur ing
overhead rate
Actual manufactur ing
overhead rate
=
Budgeted manufactur ing
overhead costs
Budgeted direct manufactur ing
labor costs
=
$1,750,000
= 1.75 or 175%
$1,000,000
=
Actual manufactur ing
overhead costs
Actual direct manufactur ing
labor costs
$1,862,000
= 1.9 or 190%
$980,000
Costs of Job 626 under actual and normal costing follow:
=
2.
Direct materials
Direct manufacturing labor costs
Manufacturing overhead costs
$30,000  1.90; $30,000  1.75
Total manufacturing costs of Job 626
Actual
Costing
Normal
Costing
$ 40,000
30,000
$ 40,000
30,000
57,000
$127,000
52,500
$122,500
3.
Total manufacturing overhead
allocated under normal costing =
Actual manufacturing  Budgeted
labor costs
overhead rate
= $980,000  1.75
= $1,715,000
Underallocated manufacturing =
overhead
Actual manufacturing – Manufacturing
overhead costs
overhead allocated
= $1,862,000  $1,715,000 = $147,000
There is no under- or overallocated overhead under actual costing because
overhead is allocated under actual costing by multiplying actual manufacturing labor
costs and the actual manufacturing overhead rate. This, of course equals the actual
manufacturing overhead costs. All actual overhead costs are allocated to products. Hence,
there is no under- or overallocatead overhead.
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
Machine-Hours


Direct Manuf.
Labor Cost
Indirect Costs
COST OBJECT:
PRODUCT
DIRECT
COST
Assembly Department
Manufacturing Overhead
Direct Costs
Direct
Materials
Direct
Manufacturing
Labor
Budgeted manufacturing overhead divided by allocation base:
Machining overhead
Assembly overhead:
$1,800,000
= $36 per machine-hour
50,000
$3,600,000
= 180% of direct manuf. labor costs
$2,000,000
2.
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)
$72,000
27,000
$99,000
Machining
$2,100,000
Assembly
$ 3,700,000
1,980,000
—
$ 120,000
—
3,960,000
$ (260,000)
4-21
(2025 min.) Job costing, consulting firm.
1.
Budgeted indirect-cost rate = $13,000,000 ÷ $5,000,000 = 260% of professional
labor costs
INDIRECT
COST
POOL

Consulting
Consulting
Support
Support
COST
ALLOCATION
BASE

Professional
Professional
Labor
LaborCosts
Costs
COST OBJECT:
JOB FOR
CONSULTING
CLIENT
DIRECT
COSTS
2.


Indirect Costs
Direct Costs
Professional
Labor
At the budgeted revenues of $20,000,000, Taylor’s operating income of
$2,000,000 equals 10% of revenues.
Markup rate = $20,000,000 ÷ $5,000,000 = 400% of direct professional labor
costs
3.
Budgeted costs
Direct costs:
Director, $200  3
$ 600
Partner, $100  16
1,600
Associate, $50  40
2,000
Assistant, $30  160
4,800
Indirect costs:
Consulting support, 260%  $9,000
Total costs
$ 9,000
23,400
$32,400
As calculated in requirement 2, the bid price to earn a 10% income-to-revenue margin is
400% of direct professional costs. Therefore, Taylor should bid 4  $9,000 = $36,000 for
the Red Rooster job.
Bid price to earn target operating income-to-revenue margin of 10% can also be
calculated as follows:
or,
Let R = revenue to earn target income
R – 0.10R = $32,400
0.90R = $32,400
R = $32,400 ÷ 0.90 = $36,000
Direct costs
$ 9,000
Indirect costs
23,400
Profit (0.40  9,000)
3,600
Bid price
$36,000
4-22
(15–20 min.) Service industry, time period used to compute indirect cost
rates.
1.
Direct labor costs
Variable costs as
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
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
60%
$168,000
300,000
$468,000
$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%
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
Budgeted Variable Overhead Rate Used
January–March
July–Sept
rate
rate
$10,000
$10,000
6,000
6,000
5,400
6,000
3,600
6,000
170%
(100% of $6,000)
Full cost of Job 332
$27,400
$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
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
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. 12/31/2006
(1) Purchases
Bal. 12/31/2007
Bal. 12/31/2006
(2) Direct materials
(4) Direct manuf. labor
(7) Manuf. overhead
allocated
Bal. 12/31/2007
Materials Control
100
(2) Issues
800
(3) Issues
90
Work-in-Process Control
60
(8)Goods completed
710
1,300
Bal. 12/31/2006
(8) Goods completed
Bal. 12/31/2007
(10) Goods sold
Cost of Goods Sold
4,020
(11) Adjust for over-allocation
Bal. 12/31/2007
3,890
Indirect materials
Indirect manuf. labor
Depreciation
Miscellaneous
(11) To close
4,120
2,080
30
Finished Goods Control
500
(10) Goods sold
4,120
600
(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.
4,020
130
1,950
2,080
0
4-25
(20 min.) Job costing, journal entries, and source documents (continuation
of 4-24).
The analysis of source documents and subsidiary ledgers follows:
1. a. Approved purchase invoice
b. dr. Materials record, “received” column
cr. Accounts payable subsidiary ledger, account for creditor
2. a. Materials requisition record
b. dr. Job cost records
cr. Materials record, “issued” column
3. a. Materials requisition record
b. dr. Department overhead cost records, appropriate column
cr. Materials record, “issued” column
4. a. Summary of labor-time records or daily time analysis. This summary is
sometimes called a labor cost distribution summary.
b. dr. Job cost records
dr. Department overhead cost records, appropriate columns for
various classes of indirect labor
cr. Wages payable subsidiary ledger
5. a. Special authorization from the responsible accounting officer
b. dr. Department overhead cost records, appropriate columns
cr. Accumulated depreciation subsidiary ledger
6. a. Various approved invoices and special authorizations
b. dr. Department overhead cost records, appropriate columns
7. a. Use of an authorized budgeted manufacturing overhead rate
b. dr. Job cost record
8. a. Completed job cost records
b. dr. Finished goods records, received column
cr. Job cost record, completed column
9. a. Approved sales invoice
b. dr. Accounts receivable subsidiary ledger
cr. Sales ledger, if any
10. a. Costed sales invoice
b. cr. Finished goods records, issued column
4-31
11. a. Special authorization from the responsible accounting officer
b. Subsidiary records are generally not used for these entries
(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.
Direct costs:
Professional labor, $65  100; $65  150
Indirect costs:
Legal support, $55  100; $55  150
Richardson
Punch
$ 6,500
$ 9,750
5,500
$12,000
8,250
$18,000
4-32
(25–30 min.) Service industry, job costing, two direct- and indirect-cost
categories, law firm (continuation of 4-31).
Although not required, the following overview diagram is helpful to understand
Keating’s job-costing system.
INDIRECT
COST
POOL
COST
ALLOCATION
BASE

General
Support
Secretarial
Support

Professional
Labor-Hours
Partner
Labor-Hours
COST OBJECT:
JOB FOR
CLIENT

DIRECT
COST
}
Indirect Costs
Direct Costs
Professional
Associate Labor
Professional
Partner Labor
1.
Budgeted compensation per professional
Divided by budgeted hours of billable
time per professional
Budgeted direct-cost rate
*Can also be calculated as
Professional
Partner Labor
$ 200,000
Professional
Associate Labor
$80,000
÷1,600
$125 per hour*
÷1,600
$50 per hour†
Total budgeted partner labor costs
Total budgeted partner labor - hours
$200,000  5 $1,000,000
=
1,600  5
8,000
†
Can also be calculated as
=
Total budgeted associate labor costs
Total budgeted associate labor - hours
$80,000  20 $1,600,000
=
1,600  20
32,000
2.
Budgeted total costs
Divided by budgeted quantity of allocation base
Budgeted indirect cost rate
=
General
Secretarial
Support
Support
$1,800,000
$400,000
÷ 40,000 hours ÷ 8,000 hours
$45 per hour
$50 per hour
=
$125
=
$ 50
3.
Richardson
Punch
Direct costs:
Professional partners, $125  60; $125  30
Professional associates, $50  40; $50  120
Direct costs
Indirect costs:
General support, $45  100; $45  150
Secretarial support, $50  60; $50  30
$7,500
2,000
$3,750
6,000
$ 9,500
4,500
3,000
$ 9,750
6,750
1,500
7,500
$17,000
Indirect costs
8,250
$18,000
Total costs
4.
Single direct - Single indirect
(from Problem 4-31)
Multiple direct – Multiple indirect
(from requirement 3 of Problem 4-32)
Difference
Richardson
Punch
$12,000
$18,000
17,000
18,000
$ 5,000
undercosted
$
0
no change
The Richardson and Punch jobs differ in their use of resources. The Richardson job
has a mix of 60% partners and 40% associates, while Punch has a mix of 20% partners
and 80% associates. Thus, the Richardson job is a relatively high user of the more costly
partner-related resources (both direct partner costs and indirect partner secretarial
support). The refined-costing system in Problem 4-32 increases the reported cost in
Problem 4-31 for the Richardson job by 41.7% (from $12,000 to $17,000).
4-34
1.a.
(15 min.) Normal costing, overhead allocation, working backward.
Manufacturing overhead allocated = 200% × Direct manufacturing labor cost
$3,600,000 = 2 × Direct manufacturing labor cost
Direct manufacturing labor cost =
b.
$3,600,000
= $1,800,000
2
Total manufacturing = Direct material + Direct manufacturing + Manufacturing
cost
used
labor cost
overhead allocated
$8,000,000 = Direct material used + $1,800,000 + $3,600,000
Direct material used = $2,600,000
2.
Work in Process + Total manufacturing cost =
1/1/2007
Cost of goods manufactured + Work in Process
1/1/2007
Denote Work in Process on 12/31/2007 by X
$320,000 + $8,000,000 = $7,920,000 + X
4-40
1.
X = $400,000
(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.