CHAPTER 5
PRODUCT AND SERVICE COSTING:
JOB-ORDER SYSTEM
DISCUSSION QUESTIONS
1. Cost measurement is the process of determining the dollar amounts of direct materials, direct labor, and overhead that should
be assigned to production. Cost accumulation (or assignment) is the process of associating costs with the units produced. Essentially, cost measurement is concerned with
whether actual or estimated costs should be
used, and cost assignment is concerned
with whether costs should be assigned to
jobs or processes.
6. Additional source documents must be developed to track use of multiple drivers in an
activity-based costing system. Thus, if a purchasing rate is developed based on number
of purchase orders, then a source document
tracing the use of purchase orders by individual jobs must be created.
7. Activity drivers are those factors that drive or
cause the consumption of overhead. Knowing what drives overhead costs allows a
more accurate assignment of overhead
costs to products.
2. Actual costing is rarely used because managers cannot wait until the end of the year to
obtain product costs. Information on product
costs is needed as the year unfolds for planning, control, and decision making.
8. Expected actual activity is the level of production activity expected for the coming year.
Normal activity is the long-run average activity
level. Practical activity is the level of activity
achievable under efficient operating conditions. Theoretical activity is the level of activity
achievable under ideal operating conditions.
3. Job-order costing accumulates costs by jobs,
and process costing accumulates costs by
processes. Job-order costing is suitable for operations that produce custom-made products
that receive different doses of manufacturing
costs. Process costing, on the other hand, is
suitable for operations that produce homogeneous products that receive equal doses of
manufacturing costs in each process.
9. Assignment using normal activity produces
less fluctuation in period-to-period overhead
assignments. It also avoids assigning the
costs of idle capacity to products when production is down.
10.
4. The principal difference between a manual
and an automated system is the nature of
the records. In an automated system, terminals can be used to input data directly to the
job, thus eliminating the need for many
source documents such as time tickets and
requisition forms. Even if these forms are
used and the data are entered on a batch
basis, the job-order cost sheet has been replaced with an electronic record. Instead of
cabinets with collections of job-order cost
sheets, files are collections of job records located on disk or tape.
When normal costing is used, the actual use
of overhead is not assigned to jobs. Instead,
applied overhead is assigned.
11. Unit cost:
Direct materials ....................
Direct labor ...........................
Overhead ($5 × 1,000) .........
Total...............................
$ 7,500
10,000
5,000
$22,500
Unit cost = $22,500/500 = $45
12.
5. Materials requisition forms serve as the
source document for posting materials usage
and costs to individual jobs. Time or work
tickets serve a similar function for labor.
Predetermined overhead rates are used to
assign overhead costs to individual jobs.
More paperwork is required. Labor and
materials are assigned to departments in a
process-costing system. In a job-order system, labor and materials must be tracked to
each job, requiring time tickets and more
use of materials requisitions. Additionally, a
job-order system requires a separate job
sheet for each job.
5-1
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13.
The normal cost of goods sold uses applied
overhead only. Adjusted cost of goods sold
is the normal cost of goods sold adjusted for
an overhead variance (increased for underapplied and decreased for overapplied).
14.
The cost of spoilage in this case is charged
to Overhead Control, because the demands
of the job itself did not lead to the spoilage.
15.
In this case, the spoilage was due to the
demands of this particular job and would be
charged to the job.
5-2
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CORNERSTONE EXERCISES
Cornerstone Exercise 5.1
1.
Budgeted direct labor cost = $25 × 20,000 direct labor hours = $500,000
Overhead rate = $260,000/$500,000 = 0.52, or 52% of direct labor cost
2.
Balance, June 1 .............................
Direct materials ..............................
Direct labor .....................................
Applied overhead ...........................
Total ...........................................
3.
Job 39
$23,700
18,900
10,000
5,200
$57,800
Job 40
$34,600
21,400
18,500
9,620
$84,120
Job 41
$17,000
8,350
3,000
1,560
$29,910
Job 42
$
0
12,000
2,900
1,508
$16,408
New budgeted direct labor cost = $20 × 20,000 direct labor hours = $400,000
New overhead rate = $260,000/$400,000 = 0.65, or 65% of direct labor cost
The applied overhead for all jobs would be higher since the new rate is higher
and the costs would be higher. (This assumes that there is no change in actual
direct labor hours. Actual direct labor hours were not given in the problem.)
Cornerstone Exercise 5.2:
1.
Ending Work in Process consists of Jobs 41 and 42:
Job 41 ..................................................................
Job 42 ..................................................................
Ending Work in Process .................................
$29,910
16,408
$46,318
2.
Ending balance in Finished Goods is Job 40 at $84,120.
3.
Cost of goods sold = Job 39 = $57,800
4.
Price of Job 39 = $57,800 × 1.3 = $75,140
5.
If the customer for Job 40 was able to pay for it by June 30, the balance in
Finished Goods would be zero and Cost of Goods Sold would consist of
Jobs 39 and 40 and would total $141,920 ($57,800 + $84,120).
5-3
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Cornerstone Exercise 5.3
1.
Materials handling rate = $72,000/3,000 = $24 per move
Engineering rate = $165,000/10,000 = $16.50 per change order
Other overhead rate = $280,000/50,000 = $5.60 per direct labor hour
2.
Balance, July 1 ...................
Direct materials ..................
Direct labor cost .................
Materials handling ..............
Engineering .........................
Other overhead ...................
Total ................................
$13,322
Job 13-43
$20,300
6,500
18,000
1,056
495
5,040
$51,391
Job 13-44
$19,800
8,900
20,000
1,248
660
5,600
$56,208
Job 13-45 Job 13-46
$ 2,300
$
0
12,700
9,800
32,000
2,400
696
120
330
330
8,960
672
$ 56.986
3.
Ending Work in Process consists of Jobs 13-45 and 13-46 = $70,308.
4.
Cost of goods sold = Job 13-43 + Job 13-44 = $107,599
5.
If Job 13-46 required no engineering changes, the cost of that job would be
$330 lower and no other job would be affected.
Cornerstone Exercise 5.4
1.
Cost of the Tramel job with normal spoilage:
Direct materials ..................................................
Direct labor .........................................................
Applied overhead ($500 × 1.4) ...........................
Total job cost...................................................
2.
$1,900
500
700
$3,100
Cost of rework:
Direct materials ..................................................
Direct labor .........................................................
Applied overhead ($100 × 1.4) ...........................
Total rework cost ............................................
$400
100
140
$640
Journal entry:
Overhead Control .....................................................
Materials ................................................................
Payroll ....................................................................
500
5-4
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400
100
Cornerstone Exercise 5.4
3.
(Concluded)
If the rework required $200 of direct labor cost rather than $100, the cost of
the Tramel job would not be affected since the rework was not included. Instead, $600 would be debited to Overhead Control and $200 would be credited to Payroll.
Cornerstone Exercise 5.5
1.
Cost of the Tramel job with spoilage:
Direct materials ($1,900 + $400) ........................
Direct labor ($500 + $100) ..................................
Applied overhead ($600 × 1.4) ...........................
Total job cost ...................................................
$2,300
600
840
$3,740
2.
No journal entry is needed.
3.
If the additional rework required $200 of direct labor rather than $100, then
the total cost of the Tramel job would increase by $240 to $3,980 [$3,740 +
$100 + ($100 × 1.4)].
5-5
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EXERCISES
Exercise 5.6
a.
Bicycle production is manufacturing. The product is tangible and fairly homogeneous. (One bicycle model is much the same as another.) Production is
separate from consumption.
b.
Pharmaceuticals are manufacturing. A drug is tangible, and consumption is
separate from production. The product is not heterogeneous in that variation
is minimized. (Drug companies must meet certain standards regulating allowable variation in the chemical composition of each tablet or dose.)
c.
Income tax preparation is a service. It is heterogeneous in that the quality of
work varies from preparer to preparer and also to various returns prepared
by the same preparer. While the printed return is tangible, the knowledge required for it is not. In addition, the return cannot be prepared without the assistance of the taxpayer. Production and consumption are intertwined.
d.
The application of artificial nails is a service. It is heterogeneous in that the
quality of work varies from manicurist to manicurist. Additionally, the same
manicurist may do a better job with some customers than with others. The
production and consumption process are overlapping. While the nails are
tangible, the application process is not and cannot be inventoried.
e.
Glue production is manufacturing. The product is tangible and fairly homogeneous. (One bottle of glue is much the same as another produced by the
same firm.) Production is separate from consumption.
f.
Child care is a service. The services rendered are not tangible and cannot be
inventoried. They are heterogeneous. One caregiver differs from another, and
the same caregiver may vary in quality (e.g., patience, creativity) throughout
the day and/or with different children. Production and consumption take
place simultaneously.
5-6
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Exercise 5.7
1.
EcoScape Company should use job-order costing because each installation
is unique and made to order. Materials may differ from job to job, as may direct labor.
2.
Predetermined overhead rate = $50,400/6,720 = $7.50 per direct labor hour
Average wage rate = $66,495/6,045 = $11 per direct labor hour
Direct materials ...................................................
Direct labor ($11 × 20) ........................................
Overhead ($7.50 × 20) .........................................
Total cost .........................................................
3.
$3,500
220
150
$3,870
The company cannot use an actual cost system; it needs to know the cost of
each installation as it is completed. Since overhead is incurred unevenly
throughout the year, and certain overhead bills arrive after the need for unit
costs occur, overhead must be applied to production using a predetermined
rate.
Exercise 5.8
1.
Irrigation Specialties should use a process-costing system because each watering system is like every other so the cost of direct materials, direct labor,
and overhead stays constant from job to job.
2.
If Irrigation Specialties uses an actual costing system, the average amounts
for actual direct materials, actual direct labor, and actual overhead must be
calculated for each month.
Average Amounts
June
Direct materials ........................................ $18,000
Direct labor ...............................................
12,000
Overhead ..................................................
10,900
Total cost .................................................. $40,900
÷ number of installations ............................
60
Total cost ...................................................... $ 682
3.
July
$24,000
16,000
12,340
$52,340
80
$ 654
August
$36,000
24,000
14,500
$74,500
120
$ 621
Predetermined overhead rate = $54,000/600 = $90 per system installed
Unit cost per system = $300 + $200 + $90 = $590
The cost of the basic system does not change from month to month.
5-7
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Exercise 5.9
1.
The two measures of activity level considered by Reggie are expected actual
activity and theoretical activity.
2.
Predetermined overhead rate using expected actual activity:
Predetermined overhead rate = $12,000/(100 × 25 hours) = $4.80 per hour
Predetermined overhead rate using theoretical activity:
Predetermined overhead rate = $12,000/(125 × 25 hours) = $3.84 per hour
3.
Reggie should use expected actual activity because it is unlikely that he will
approach the theoretical activity level, especially with a new business. The
expected actual activity level will be more likely to spread the overhead over
the actual jobs, without a large overhead variance. Notice that Reggie cannot
use normal activity level because he has not been in business for a number
of years.
Exercise 5.10
1.
Because the business is so small (Reggie is the only employee), all he really
needs is a job-order cost sheet. Actually, a folder for each job would do. He
would file all receipts for materials purchased (these are source documents)—or prorate to the particular job the cost of lumber, etc.—in the folder.
He could also file notes recording his time spent on the job. Of course, he
will need a good system for accumulating costs, since he may need to refer
to those to calculate actual overhead and direct materials purchases.
2.
Now, the business is considerably larger. Reggie will no longer be able to reconstruct job costs from memory, since he is not the only one working on the
various jobs. Now, he will need labor time tickets to help workers keep track
of the time spent on the jobs. A more formal job-order cost sheet will also be
needed, and periodic entries must be made to assign costs to the jobs.
5-8
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Exercise 5.11
1.
Job 78:
Direct materials ...................................................
Direct labor ..........................................................
Overhead ($8.40 × 220) .......................................
Total job cost ...................................................
$1,560
3,000
1,848
$6,408
Unit cost = $6,408/200 = $32.04
Job 79:
Direct materials ...................................................
Direct labor ..........................................................
Overhead ($8.40 × 200) .......................................
Total job cost ...................................................
$ 990
3,000
1,680
$5,670
Unit cost = $5,670/180 = $31.50
2.
Job 80:
Direct materials ...................................................
Direct labor ..........................................................
Overhead ($8.40 × 400) .......................................
Ending Work in Process .................................
3.
Finished Goods........................................
Work in Process ...................................
$2,400
3,300
3,360
$9,060
12,078*
12,078
*Job 78 + Job 79 = $6,408 + $5,670 = $12,078
Cost of Goods Sold .................................
Finished Goods ....................................
5,670
Accounts Receivable (or Cash) ..............
Sales Revenue ......................................
7,938**
5,670
7,938
**$5,670 × 140% = $7,938
5-9
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Exercise 5.12
1.
Using Job 114 (any of the three jobs could be used, the overhead rate will be
the same):
Predetermined overhead rate = $1,170/$1,800
= 0.65, or 65% of direct labor cost
2.
Job 114
Balance, April 1......................................... $ 5,381
Direct materials ........................................ 16,500
Direct labor ...............................................
1,800
Applied overhead .....................................
1,170
Total ...................................................... $ 24,851
3.
Ending Work in Process consists of Jobs 114 and 116:
Job 114 ................................................................
Job 116 ................................................................
Ending Work in Process.................................
4.
Cost of goods sold = Job 115 = $22,496
5.
Price of Job 115 = $22,496 × 1.25 = $28,120
Job 115
$ 5,214
12,200
3,080
2,002
$ 22,496
Job 116
$10,745
5,000
1,440
936
$18,121
$24,851
18,121
$42,972
5-10
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Exercise 5.13
1.
Journal entries:
a. Materials .........................................................
Accounts Payable ......................................
29,000
b. Work in Process.............................................
Materials .....................................................
33,700
c. Work in Process.............................................
Wages Payable ...........................................
6,320
d. Work in Process.............................................
Overhead Control.......................................
4,108*
29,000
33,700
6,320
4,108
*$6,320 × $0.65 = $4,108
e. Overhead Control...........................................
Various Accounts ......................................
4,415
f. Finished Goods ..............................................
Work in Process.........................................
22,496
g. Cost of Goods Sold .......................................
Finished Goods ..........................................
22,496
Accounts Receivable .....................................
Sales Revenue ...........................................
4,415
22,496
22,496
28,120**
28,120
**$22,496 × 125% = $28,120
2.
Bal.
(a)
Materials
12,730
(b)
29,000
8,030
Bal.
(f)
Finished Goods
8,700
(g)
22,496
22,496
8,700
33,700
Bal.
(b)
(c)
(d)
Work in Process
21,340
(f)
22,496
33,700
6,320
4,108
42,972
5-11
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Exercise 5.14
1.
Predetermined overhead rate using Job 70 = $1,425/$1,900 = 0.75, or 75%
2.
Balance, August 1 .......
Direct materials ...........
Direct labor ..................
Applied overhead ........
Total ........................
3.
70
$4,925
800
1,000
750
$7,475
71
$4,275
1,235
1,400
1,050
$7,960
72
$ 2,425
3,550
2,200
1,650
$9,825
73
—
$5,000
1,800
1,350
$8,150
—
$ 560
860
645
$2,065
76
—
$ 80
172
129
$381
$7,960
1,350
381
$9,691
Cost of goods sold for August consists of Jobs 72 and 75:
Job 72 ..................................................................
Job 75 ..................................................................
Cost of goods sold .........................................
5.
75
By August 31, Jobs 71, 74, and 76 are still in process:
Job 71 ..................................................................
Job 74 ..................................................................
Job 76 ..................................................................
Work in process, August 31 ...........................
4.
74
—
$ 300
600
450
$1,350
$ 9,825
2,065
$11,890
August sales revenue = $11,890 × 1.20 = $14,268
Exercise 5.15
Cairle Company
Income Statement
For the Month of August
Sales ...........................................................................................................
Cost of goods sold ....................................................................................
Gross margin .............................................................................................
Selling and administrative expenses .......................................................
Operating income ......................................................................................
5-12
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$14,268
11,890
$ 2,378
1,200
$ 1,178
Exercise 5.16
1.
a. Materials .........................................................
Accounts Payable ......................................
45,670
b. Work in Process.............................................
Materials .....................................................
40,990
c. Work in Process.............................................
Wages Payable ...........................................
22,400
d. Overhead Control...........................................
Cash ............................................................
9,020
e. Work in Process.............................................
Overhead Control.......................................
8,800*
45,670
40,990
22,400
9,020
8,800
*($22,400/$14) × $5.50 = $8,800
2.
f. Finished Goods ..............................................
Work in Process.........................................
58,000
g. Accounts Receivable .....................................
Sales Revenue ...........................................
73,750
Cost of Goods Sold .......................................
Finished Goods ..........................................
59,000
58,000
73,750
59,000
Ending balances:
a. Materials Inventory = $1,200 + $45,670 – $40,990 = $5,880
b. WIP Inventory = $3,400 + $40,990 + $22,400 + $8,800 – $58,000 = $17,590
c. Overhead Control = $9,020 – $8,800 = $220
d. Finished Goods Inventory = $2,630 + $58,000 – $59,000 = $1,630
5-13
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Exercise 5.17
1.
Job 39:
Direct materials ..................................................
Direct labor .........................................................
Overhead ($2.30 × 360) ......................................
Total job cost...................................................
$ 700
1,980
828
$3,508
Unit cost = $3,508/60 = $58.47 (rounded)
Job 40:
Direct materials ..................................................
Direct labor .........................................................
Overhead ($2.30 × 400) ......................................
Total job cost...................................................
$ 680
2,480
920
$4,080
Unit cost = $4,080/100 = $40.80
2.
Job 41:
Direct materials ..................................................
Direct labor .........................................................
Overhead ($2.30 × 200) ......................................
Ending Work in Process.................................
3.
Finished Goods ..................................................
Work in Process ..............................................
$ 800
1,240
460
$2,500
7,588*
7,588
*$3,508 + $4,080 = $7,588
Cost of Goods Sold ............................................
Finished Goods ...............................................
4,080
Accounts Receivable .........................................
Sales Revenue ................................................
5,712**
4,080
5,712
**$4,080 × 140% = $5,712
5-14
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Exercise 5.18
1.
Job 13-280:
Direct materials ..............................................................
Direct labor .....................................................................
Applied overhead:
Setting up ..................................................................
Machining ..................................................................
Other overhead .........................................................
Total job cost .................................................................
$4,730
2,000
$ 400
408
1,600
2,408
$9,138
Unit cost = $9,138/200 = $45.69
Job 13-282:
Direct materials ..............................................................
Direct labor .....................................................................
Applied overhead:
Setting up ..................................................................
Machining ..................................................................
Other overhead .........................................................
Total job cost .................................................................
$5,600
800
$500
204
640
1,344
$7,744
Unit cost = $7,744/100 = $77.44
2.
Job 13-281:
Direct materials ..............................................................
Direct labor .....................................................................
Applied overhead:
Setting up ..................................................................
Machining ..................................................................
Other overhead .........................................................
Ending Work in Process ...............................................
3.
Finished Goods...................................................
Work in Process ..............................................
$ 3,800
4,600
$ 300
510
3,680
4,490
$12,890
16,882*
16,882
*$9,138 + $7,744 = $16,882
Cost of Goods Sold ............................................
Finished Goods ...............................................
9,138
Accounts Receivable ..........................................
Sales Revenue .................................................
13,707**
9,138
13,707
**$9,138 × 150% = $13,707
5-15
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Exercise 5.19
1.
a. Materials .........................................................
Accounts Payable ......................................
113,300
b. Work in Process ............................................
Overhead Control ..........................................
Materials .....................................................
82,500
8,800
c. Work in Process ............................................
Overhead Control ..........................................
Wages Payable ..........................................
67,000
18,750
d. Overhead Control ..........................................
Various Payables .......................................
46,200
e. Work in Process ............................................
Overhead Control ......................................
73,700*
113,300
91,300
85,750
46,200
73,700
*$67,000 × 110% = $73,700
f. Finished Goods .............................................
Work in Process ........................................
230,000
g. Cost of Goods Sold .......................................
Finished Goods .........................................
215,000
Accounts Receivable.....................................
Sales Revenue ...........................................
230,000
215,000
301,000**
301,000
**140% × $215,000 = $301,000
h. Cost of Goods Sold .......................................
Overhead Control ......................................
50***
50
***Actual overhead = $8,800 + $18,750 + $46,200 = $73,750
Actual overhead .........................................
Applied overhead.......................................
Underapplied ........................................
$73,750
73,700
$
50
5-16
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Exercise 5.19
2.
(Concluded)
After underapplied overhead is charged to cost of goods sold:
Overhead Control
8,800
73,700
18,750
46,200
50
50
0
3.
Work in Process
10,000
230,000
82,500
67,000
73,700*
3,200
*No actual overhead costs were assigned to Work in Process as the company
does not use an actual cost system. The amount assigned to Work in Process was the applied overhead of $73,700.
Exercise 5.20
1.
Setup rate = $156,000/1,200 = $130 per setup
Purchasing rate = $187,500/15,000 = $12.50 per part
Other overhead rate = $420,000/50,000 = $8.40 per direct labor hour
2.
Balance, March 1 ........
Direct materials ...........
Direct labor ..................
Applied overhead:
Setups .....................
Purchasing .............
Other overhead ...........
Total cost ................
Job 15
$34,500
28,000
10,000
Job 16
$39,890
37,900
8,500
Job 17
$24,090
25,350
23,000
Job 18
$
0
11,000
12,900
Job 19
$
0
13,560
8,000
2,600
1,875
5,460
$82,435
1,820
2,250
4,872
$95,232
4,550
2,500
13,440
$92,930
1,040
6,250
7,308
$38,498
1,950
3,750
4,368
$31,628
3.
Ending balance in Work in Process = Job 18 + Job 19
= $38,498 + $31,628 = $70,126
4.
Cost of goods sold = Job 15 + Job 16 + Job 17
= $82,435 + $95,232 + $92,930 = $270,597
5-17
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accessible website, in whole or in part.
CPA-TYPE EXERCISES
Exercise 5.21
c.
March 1, balance
Direct materials
Direct labor
Applied overhead
Less: transfer to Finished Goods
Work-in-Process balance, March 31
$ 12,000
50,000
30,000
24,000
( 100,000)
$ 16,000
Job 83 = Direct materials + Direct labor + Applied overhead
$16,000 = Direct materials + ($3,400/0.8) + $3,400
Direct materials = $8,350
Exercise 5.22
d.
Overhead rate =( $120,000 + $200,000)/80,000 = $4 per direct labor hour
Direct materials
Direct labor
Applied overhead ($4 × 2,000)
Cost of proposed job
$ 4,000
6,000
8,000
$18,000
Exercise 5.23
d.
Exercise 5.24
a.
Purchasing and receiving rate = $60,000/(500 + 2,000) = $24/purchase order
Product X allocation = $24 × 500 = $12,000
Product Y allocation = $24 × 2,000 = $48,000
Exercise 5.25
c.
5-18
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accessible website, in whole or in part.
PROBLEMS
Problem 5.26
1.
a. Materials .........................................................
Accounts Payable ......................................
60,100
b. Work in Process.............................................
Overhead Control...........................................
Materials .....................................................
50,000
8,800
c. Work in Process.............................................
Overhead Control...........................................
Administrative Expense ................................
Selling Expense .............................................
Wages Payable ...........................................
75,000
36,000
28,000
19,000
d. Overhead Control...........................................
Accumulated Depreciation........................
10,400
e. Overhead Control...........................................
Property Taxes Payable ............................
1,450
f. Overhead Control...........................................
Prepaid Insurance ......................................
6,200
g. Overhead Control...........................................
Utilities Payable .........................................
5,500
h. Selling Expense .............................................
Cash ............................................................
7,900
i. Administrative Expense ................................
Selling Expense .............................................
Accumulated Depreciation........................
800
1,650
j. Administrative Expense ................................
Accounts Payable ......................................
750
k. Work in Process ($18 × 4,000) ......................
Overhead Control.......................................
72,000
l. Finished Goods ..............................................
Work in Process.........................................
160,000
60,100
58,800
158,000
10,400
1,450
6,200
5,500
7,900
2,450
750
72,000
160,000
5-19
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accessible website, in whole or in part.
Problem 5.26
2.
Bal.
(a)
Bal.
(l)
(Concluded)
Materials
7,500
(b)
60,100
8,800
58,800
Finished Goods
50,000
160,000
210,000
Bal.
(b)
(c)
(k)
Work in Process
37,000
(l)
160,000
50,000
75,000
72,000
74,000
(b)
(c)
(d)
(e)
(f)
(g)
Overhead Control
8,800
(k)
72,000
36,000
10,400
1,450
6,200
5,500
3,650*
*Overapplied overhead.
3.
Jerico Company
Statement of Cost of Goods Manufactured
For the Month Ended May 31, 20XX
Direct materials .............................................................
Direct labor ....................................................................
Overhead:
Supplies ....................................................................
Indirect labor .............................................................
Depreciation, plant, and equipment ........................
Property taxes...........................................................
Utilities, factory.........................................................
Insurance ..................................................................
Plus: Overapplied overhead ....................................
Overhead applied .................................................
Manufacturing costs added ..........................................
Add: Beginning work in process .................................
Less: Ending work in process .....................................
Cost of goods manufactured ........................................
4.
$ 50,000
75,000
$ 8,800
36,000
10,400
1,450
5,500
6,200
$68,350
3,650
72,000
$197,000
37,000
(74,000)
$160,000
Cost of goods sold decreases by $3,650.
5-20
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accessible website, in whole or in part.
Problem 5.27
1.
Overhead rate = $162,500/50,000 = $3.25 per machine hour
Direct materials ...................................................
Direct labor ..........................................................
Overhead ($3.25 × 200 MHr) ...............................
Total manufacturing cost ..............................
Plus 40% markup ................................................
Bid price .........................................................
2.
Purchasing rate
Setup cost rate
Engineering rate
Other cost rate
= $40,000/5,000
= $37,500/500
= $45,000/2,500
= $40,000/50,000
Job 2
$ 9,340
2,100
650
$12,090
4,836
$16,926
= $8 per purchase order
= $75 per setup
= $18 per engineering hour
= $0.80 per machine hour
Direct materials ...................................................
Direct labor ..........................................................
Overhead:
Purchasing ($8 × 15); ($8 × 20) .....................
Setups ($75 × 3); ($75 × 4) .............................
Engineering ($18 × 45); ($18 × 10) ................
Other ($0.80 × 200); ($0.80 × 200) .................
Total manufacturing cost ...................................
Plus 40% markup ................................................
Bid price .........................................................
3.
Job 1
$4,500
1,200
650
$6,350
2,540
$8,890
Job 1
$4,500
1,200
Job 2
$ 9,340
2,100
120
225
810
160
$7,015
2,806
$9,821
160
300
180
160
$12,240
4,896
$17,136
The activity-based approach to assigning overhead gives a more accurate
cost figure because so much of the overhead is non-unit-level and there is
product diversity.
5-21
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accessible website, in whole or in part.
Problem 5.28
1.
$37,500/7,500 = $5.00 per direct labor hour
2.
$90,000/7,500 = $12.00 per direct labor hour
3.
May 20:
Direct materials (600 × $0.02) ........................
Direct labor (0.75 × $8) ...................................
Applied overhead (0.75 × $5) .........................
Total job cost ..............................................
$12.00
6.00
3.75
$21.75
June 20:
Direct materials (600 × $0.02) ........................
Direct labor (0.75 × $8) ...................................
Applied overhead (0.75 × $12) .......................
Total job cost ..............................................
4.
$12.00
6.00
9.00
$27.00
Photocopying overhead rate = $37,500/7,500 = $5.00 per direct labor hour
Computer-aided printing overhead rate = $52,500/2,000 = $26.25 per machine
hour
The use of two rates more accurately costs the jobs in this shop as it shows
a better cause-and-effect relationship between activity and overhead cost.
Problem 5.29
1.
Bid prices with plantwide rate:
Plantwide rate = $2,500,000/250,000 = $10 per direct labor hour
Prime costs .........................................................
Overhead .............................................................
Total costs .....................................................
Markup (50%) ......................................................
Total bid revenues .........................................
Units ....................................................................
Unit bid price..................................................
Job 97-28
$120,000
60,000*
$180,000
90,000
$270,000
÷ 14,400
$ 18.75
Job 97-35
$50,000
10,000*
$60,000
30,000
$90,000
÷ 1,500
$ 60.00
*(6,000 × $10); (1,000 × $10)
5-22
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accessible website, in whole or in part.
Problem 5.29
2.
(Concluded)
Bid prices with departmental rates:
Rates: Department A: $500,000/200,000 = $2.50 per direct labor hour
Department B: $2,000,000/120,000 = $16.67 per machine hour
Prime costs ........................................................
Overhead ............................................................
Total costs .....................................................
Markup (50%) .....................................................
Total bid revenues ........................................
Units ....................................................................
Unit bid price .................................................
a($2.50
b($2.50
Job 97-28
$120,000
20,835a
$140,835
70,418
$211,253
÷ 14,400
$ 14.67
Job 97-35
$ 50,000
51,010b
$101,010
50,505
$151,515
÷ 1,500
$ 101.01
× 5,000) + ($16.67 × 500)
× 400) + ($16.67 × 3,000)
3.
Revenues
.............
Cost of goods sold .............
Gross profit
.............
Plantwide
$90,000
60,000
$30,000
Departmental
$362,768
241,845
$120,923
Differences
$272,768
181,845
$ 90,923
If plantwide overhead is used, only Job 97-35 would have been won. Therefore, the revenues and cost of goods sold pertain only to that job. If departmental rates had been used, the bids on both jobs would have been won.
Therefore, the revenues and cost of goods sold pertain to both jobs, and
gross profit would have gone up by $90,923.
4.
The departments differ significantly in their overhead intensity, with Department B being much more automated. Jobs spending more time in Department B ought to receive more overhead costs. Use of departmental rates
provides this outcome.
5-23
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accessible website, in whole or in part.
Problem 5.30
1.
Direct materials ($0.60 × 50) ..............................
Direct labor ($0.15 × 50) .....................................
Overhead ($0.20 × 50) ........................................
Total cost .........................................................
$30.00
7.50
10.00
$47.50
This spoilage is normal and should be added to Overhead Control.
2.
Price = $380 × 1.5 = $570 (Spoilage is not attributable to this job and should
not be added to job cost.)
3.
Spoilage cost is identical to that computed in Requirement 1. However, in
this case, the spoilage is attributable to demanding requirements of the job,
and the cost is added to the job cost.
4.
Price = ($380 + $47.50) × 1.5 = $641.25
Problem 5.31
1.
Direct materials (75 × $0.45) ..............................
Direct labor (1.2 × $8) .........................................
Overhead (1.2 × $4) ............................................
Total cost .........................................................
$33.75
9.60
4.80
$48.15
2.
Direct materials (75 × $0.45) ..............................
Direct labor (1.70 × $8) .......................................
Overhead (1.70 × $4) ..........................................
Total cost .........................................................
$33.75
13.60
6.80
$54.15
The rework cost is normal but is not attributable to the job, so it should be
assigned to overhead.
3.
The price charged for the new letters is 75 letters × $0.60 for a total of $45.
5-24
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accessible website, in whole or in part.
Problem 5.32
1.
Land .....................................................................
Direct Materials ...................................................
Direct labor ..........................................................
Subcontractor .....................................................
$ 7,813*
8,000
6,000
14,000
$35,813
*$250,000/8 = $31,250 per acre; $31,250 × 0.25 = $7,813
General condition costs and finance costs can be classified as production
costs and would correspond to overhead in a manufacturing firm. Most (if not
all) of the marketing costs are traceable to each job (advertising may be for
the subdivision and thus common to all units). Some may argue that finance
costs are not production costs, and they would classify these separately.
2.
Job-Order Cost Sheet
Job 3
MATERIALS
Req. No.
Amount
Materials
$8,000
Land
7,813
DIRECT LABOR
Hrs.
Rate
Amount
$ 6,000
Subctr.
OVERHEAD
Hrs.
Rate
Amount
General
$6,000*
Finance
4,765
14,000
Cost Summary
Direct materials ...............
Direct labor ......................
Overhead .........................
Total cost .........................
$15,813
20,000
10,765
$46,578
*$120,000/20 = $6,000 per unit
General condition costs are prorated to the 20 units. Finance costs are included as they are a cost of building the home. However, marketing costs are
a selling expense and are not inventoriable. The cost of the land was determined in Requirement 1.
3.
Overhead is equivalent to general conditions and finance costs. Finance
costs are traceable to each job; therefore, no allocation problem exists. Allocating general condition costs evenly among the housing units may create
unit cost distortions. It could be argued that larger homes, for example,
would place greater demands on site utilities, insurance, architect’s fees, and
decorating. Allocating these costs on the basis of square footage would likely provide more accurate cost assignments.
5-25
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accessible website, in whole or in part.
Problem 5.32
4.
(Concluded)
Production costs ................................................
Marketing costs ..................................................
Total cost .........................................................
$46,578
800
$47,378
Selling price = $47,378 × 140% = $66,329
Profit ....................................................................
$66,329
47,378
$18,951
Problem 5.33
1.
Job-Order Cost Sheet
Job 267
MATERIALS
Kind
Amount
Novocaine $14
Amalgam
18
DIRECT LABOR
OVERHEAD
Employee Hrs. Rate Amount Hrs. Rate Amount
Dentist
0.25 $60
$15
0.5 $32
$16
Asst.
0.50
20
10
Cost Summary
Direct materials ...............
Direct labor ......................
Overhead .........................
Total cost .........................
Gross profit computation:
Charge ........................................
Cost .............................................
Gross profit ............................
$32
25
16
$73
$110
73
$ 37
The X-ray is a direct cost of a job assuming that an X-ray is taken for each job.
If X-rays are used for more than one treatment (as they often are), then it becomes a common cost. X-rays could be included in overhead, and services
could be priced to cover the cost of X-rays. Apparently, this practice treats Xrays as a profit-making activity, and they are therefore costed and priced separately.
5-26
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accessible website, in whole or in part.
Problem 5.33
2.
Surfaces
1
2
3
4
(Concluded)
Assistanta Dentistb Novocaine
$6.67
$10
$14
10.00
15
14
13.33
20
14
16.67
25
14
a(20/60)
× $20
(30/60) × $20
(40/60) × $20
(50/60) × $20
Amalgam
$12
18
24
30
b(20/60)
× 0.5 × $60
(30/60) × 0.5 × $60
(40/60) × 0.5 × $60
(50/60) × 0.5 × $60
OHc
$10.67
16.00
21.33
26.67
Total Cost
$53.33
73.00
92.67
112.33
c(20/60)
× $32
(30/60) × $32
(40/60) × $32
(50/60) × $32
Unit revenue ...................
Unit cost .........................
Gross profit ...............
1-Surface
$90.00
53.33
$36.67
2-Surface
$110.00
73.00
$ 37.00
3-Surface
$150.00
92.67
$ 57.33
4-Surface
$175.00
112.33
$ 62.67
Profit/revenue.................
40.7%
33.6%
38.2%
35.8%
The gross profit per unit increases as the surfaces increase, but the profit
percentage decreases. Whether this increase is fair (to either the patient or
the corporation) depends on what is considered a normal rate of return for
these services.
5-27
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accessible website, in whole or in part.
Problem 5.34
1.
Job-Order Cost Sheet
Potassium Aspartate
MATERIALS
DIRECT LABOR
Type
Quantity
Cost
Hrs. Rate
Amount
Aspartic 195.00 $1,121.25 16 $12.50
$200
Citric
15.00
30.30
K2CO3
121.50
563.76
Rice
30.00
12.90
OVERHEAD
Cost Rate Amount
$200 110%
$220
Cost Summary
Direct materials ............... $1,728.21
Direct labor ......................
200.00
Overhead .........................
220.00
Total cost ......................... $2,148.21
÷
300
Unit cost .......................... $
7.16
Price charged: $7.16 × 130% = $9.31
If overhead is allocated accurately, they should not sell at $8.80 as the job
earns less than the markup.
2.
Revenues ($2,148.21 × 130%) ..................
Cost of goods sold ...................................
Gross profit ...........................................
3.
Total actual costs:
Direct materials ........................................
Direct labor ...............................................
Applied overhead .....................................
Total .......................................................
$2,792.67
2,148.21
$ 644.46
$1,790.00
225.00
247.50
$2,262.50
Actual unit cost: $2,262.50/300 = $7.54
Unexpected loss:
Bid based on actual cost ($2,262.50 × 1.30) .....
Actual revenue ....................................................
Loss .................................................................
$2,941.25
2,792.67
$ 148.58
Possible reasons for loss:
a. Workers may have been wasteful with the materials.
b. Workers may have been inefficient.
c. Overhead costs may not have been controlled properly.
5-28
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accessible website, in whole or in part.
d. Expected costs were too optimistic.
Problem 5.34
4.
(Concluded)
Total billing:
Materials ..............................................................
Labor ....................................................................
Applied overhead ................................................
Underapplied overhead ......................................
Total cost .........................................................
Markup (30%) ......................................................
Total price ........................................................
$1,790.00
225.00
247.50
30.00
$2,292.50
687.75
$2,980.25
You could explain that Nutratask uses a predetermined overhead rate to assign overhead to jobs and that adding underapplied overhead is an adjustment required to assign actual overhead to the job. Adding underapplied
overhead to the job does not necessarily imply inefficient use of overhead
costs. It does imply that the estimated overhead cost of the job was not equal
to the actual cost. The customer could then be reminded that the agreement
was actual cost plus 30%. If the customer is still not satisfied, good relations
may require deletion of the $30 charge. In the future, problems like this could
be avoided by not showing two separate overhead charges.
Problem 5.35
Answers will vary.
CYBER RESEARCH CASE
5.36
Answers will vary.
The Collaborative Learning Exercise Solutions can be found on the
instructor website at http://login.cengage.com.
5-29
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accessible website, in whole or in part.
The following problems can be assigned within CengageNOW and are autograded. See the last page of each chapter for descriptions of these new assignments.




Analyzing Relationships—Calculate Cost of various jobs to show impact of
costs on WIP, Finished Goods, Cost of Goods Sold.
Integrative Problem—Job Order Costing, Support Department Allocation, Relevant Costing (Covering chapters 5, 7, and 17)
Integrative Problem—Job Costing, Joint Costs, Process Costing, Decentralization (Covering chapters 5, 6, 7, and 10)
Blueprint Problem—Job Order Costing
5-20
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accessible website, in whole or in part.