CHAPTER 3
Product Costing and Cost Accumulation in
a Batch Production Environment
3-2
In a job-order costing system, costs are assigned to batches or job orders
of production. Job-order costing systems are used by firms that produce
relatively small numbers of dissimilar products. In a process-costing
system, production costs are averaged over a large number of product
units. Process-costing systems are used by firms that produce large
numbers of nearly identical products.
3-4
a. Material requisition form: A document upon which the production
department supervisor requests the release of raw materials for
production.
b. Labor time record: A document upon which employees record the time
they spend working on each production job or batch.
c. Job-cost record: A document on which the costs of direct material,
direct labor, and manufacturing overhead are recorded for a particular
production job or batch. The job-cost sheet is a subsidiary ledger
account for the Work-in-Process Inventory account in the general
ledger.
3-9
The difference between actual and normal costing systems involves the
procedure for applying manufacturing overhead to Work-in-Process
Inventory. Under actual costing, applied overhead is the product of the
actual overhead rate (computed at the end of the period) and the actual
amount of the cost driver used. Under normal costing, applied overhead is
the product of the predetermined overhead rate (computed at the
beginning of the period) and the actual amount of the cost driver used.
3-16
When direct material, direct labor, and manufacturing-overhead costs are
incurred, they are applied to Work-in-Process Inventory by debiting the
account. When goods are finished, the costs are removed from that
account with a credit, and they are transferred to Finished-Goods
Inventory by debiting that account. Subsequently, when the goods are
sold, Finished-Goods Inventory is credited, and the costs are added to
Cost of Goods Sold with a debit.
EXERCISE 3-23 (10 MINUTES)
1. Process
2. Job-order
3. Job-order (contracts or projects)
4. Process
5. Process
6. Job-order
7. Process
8. Job-order (contracts or projects)
9. Process
10. Job-order
EXERCISE 3-25 (25 MINUTES)
JOB-COST RECORD
Job Number
TB78
Description
Date Started
8/11
Date Completed
teddy bears
8/20
Number of Units Completed
Direct Material
Requisition Number
Quantity
201
500
208
600
Date
8/11
8/12
Unit Price
$.90
.40
Cost
$450
240
Rate
$14
Cost
$7,700
Direct Labor
Hours
550
Date
8/15
Time Card Number
82
Date
8/15
Manufacturing Overhead
Activity Base
Quantity
direct-labor hours
550
1,000
Application Rate
$3
Cost
$1,650
Cost Summary
Cost Item
Total Direct Material
Total Direct Labor
Total Manufacturing Overhead
Total Cost
Unit Cost
Date
8/30
Amount
$ 690
7,700
1,650
$10,040
$ 10.04
Shipping Summary
Units Remaining
Units Shipped
In Inventory
800
200
Cost Balance
$2,008*
*200 units remaining in inventory$10.04 = $2,008
EXERCISE 3-26 (15 MINUTES)
1.
Applied manufacturing overhead
= total manufacturing costs  30%
= $1,250,000  30%
= $375,000
Applied manufacturing overhead
= direct-labor cost  80%
Direct-labor cost = applied manufacturing overhead  80%
= $375,000  .8
= $468,750
2.
Direct-material used = total manufacturing cost
– direct labor cost
– applied manufacturing overhead
= $1,250,000 – $468,750 – $375,000
= $406,250
3.
Let X denote work-in-process inventory on December 31.
Total
manufacturing
cost
$1,250,000
work-in-process
+
inventory,
–
Jan. 1
+
.75X
–
work-in-process
inventory,
Dec. 31
X
=
cost of
goods
manufactured
= $1,212,500
.25X = $1,250,000 – $1,212,500
X = $150,000
Work-in-process inventory on December 31 amounted to $150,000.
EXERCISE 3-31 (20 MINUTES)
1.
Raw material:
Beginning inventory ..................................................................................
Add: Purchases .........................................................................................
Deduct: Raw material used .......................................................................
Ending inventory .......................................................................................
$142,000
?
652,000
$162,000
Therefore, purchases for the year were ...................................................
$672,000
2.
Direct labor:
Total manufacturing cost ..........................................................................
Deduct: Direct material .............................................................................
Direct labor and manufacturing overhead ...............................................
3.
4.
$1,372,000
652,000
$ 720,000
Direct labor + manufacturing overhead
Direct labor + (60%) (direct labor)
(160%) (direct labor)
=
=
=
$720,000
$720,000
$720,000
Direct labor
=
$720,000
1.6
Direct labor
=
$450,000
Cost of goods manufactured:
Work in process, beginning inventory ..................................................
Add: Total manufacturing costs ............................................................
Deduct: Cost of goods manufactured ...................................................
Work in process, ending inventory .......................................................
$ 160,000
1,372,000
?
$ 60,000
Therefore, cost of goods manufactured was .......................................
$1,472,000
Cost of goods sold:
Finished goods, beginning inventory ......................................................
Add: Cost of goods manufactured ...........................................................
Deduct: Cost of goods sold ......................................................................
Finished goods, ending inventory ...........................................................
$ 180,000
1,472,000
?
$ 220,000
Therefore, cost of goods sold was ...........................................................
$1,432,000
EXERCISE 3-33 (20 MINUTES)
NOTE: Budgeted sales revenue, although given in the exercise, is irrelevant to the
solution.
1.
Predetermined overhead rate
=
budgetedmanufacturing overhead
budgetedlevel of cost driver
(a)
$650,000
= $32.50 per machine hour
20,000 machine hours
(b)
$650,000
= $26.00 per direct-labor hour
25,000 direct - labor hours
(c)
$650,000
$325,000 *
=
$2.00 per direct-labor dollar or 200%
of direct-labor cost
*Budgeted direct-labor cost = 25,000$13
2.
Actual
manufacturing
overhead
–
applied
manufacturing
overhead
=
overapplied or
underapplied
overhead
(a)
$690,000 – (22,000)($32.50)
=
$25,000 overapplied overhead
(b)
$690,000 – (26,000)($26.00)
=
$14,000 underapplied overhead
(c)
$690,000 – ($364,000†)(200%)
=
$38,000 overapplied overhead
†Actual
direct-labor cost = 26,000$14
EXERCISE 3-34 (5 MINUTES)
1.
2.
Work-in-Process Inventory ......................................................
Manufacturing Overhead ...............................................
690,000
Work-in-Process Inventory ......................................................
Manufacturing Overhead ...............................................
715,000*
690,000
715,000
*Applied manufacturing overhead = $715,000
= 22,000 hours x $32.50 per machine hour
EXERCISE 3-35 (15 MINUTES)
1.
Predetermined overhead rate = $1,040,000 / 80,000 hours = $13.00 per hour
2.
To compute actual manufacturing overhead:
Depreciation ...............................................................................................
Property taxes............................................................................................
Indirect labor ..............................................................................................
Supervisory salaries .................................................................................
Utilities .......................................................................................................
Insurance ...................................................................................................
Rental of space ..........................................................................................
Indirect material:
Beginning inventory, January 1 ........................................................
$ 48,000
Add: Purchases ..................................................................................
102,000
Indirect material available for use .....................................................
$150,000
Deduct: Ending inventory, December 31 ..........................................
70,000
Indirect material used ........................................................................
Actual manufacturing overhead ...............................................................
Overapplied
overhead
=
actual
manufacturing
overhead
–
applied
manufacturing
overhead
$250,000
21,000
82,000
220,000
61,000
34,000
310,000
80,000
$1,058,000
=
$1,058,000 – ($13.0083,000*) = $21,000
*Actual direct-labor hours.
3.
Manufacturing Overhead ...........................................................
Cost of Goods Sold ..........................................................
4.
21,000
21,000
In the electronic version of the solutions manual, press the CTRL key and click
on the following link: 10E - BUILD A SPREADSHEET 03-35.XLS
NOTE: Budgeted selling and administrative expense, although given in the exercise, is
irrelevant to the solution.
PROBLEM 3-43 (35 MINUTES)
1.
Predetermined overhead rate = budgeted overhead ÷ budgeted directlabor cost
= $2,730,000 ÷ $2,100,000 = 130% of direct labor cost
2.
Additions (debits) total $7,802,500 [$2,800,000 + $2,175,000 + ($2,175,000 x
130%)].
3.
The finished-goods inventory consisted of job no. 3154, which cost
$175,750 [$78,000 + $42,500 + ($42,500 x 130%)].
4.
Since there is no work in process at year-end, all amounts in the Work-inProcess account must be transferred to Finished-Goods Inventory. Thus:
Finished-Goods Inventory .......................................7,880,900*
Work-in-Process Inventory ..........................
....................................................................................7,880,900
*Beginning balance in Work-in-Process Inventory + additions to the
account:
$78,400 + $7,802,500 = $7,880,900
5.
BBBC’s applied overhead totals 130% of direct-labor cost, or $2,827,500
($2,175,000 x 130%). Actual overhead was $2,777,000, itemized as follows,
resulting in overapplied overhead of $50,500.
Indirect materials used ........................................... $ 32,500
Indirect labor ........................................................... 1,430,000
Factory depreciation ...............................................
870,000
Factory insurance ...................................................
29,500
Factory utilities .......................................................
415,000
Total.................................................................... $2,777,000
6.
Manufacturing Overhead ......................................................
Cost of Goods Sold ..................................................
The company’s cost of goods sold totals $7,654,650:
Finished-goods inventory, Jan. 1……………. $
50,500
50,500
0
Add: Cost of goods manufactured…………..
7,880,900
Cost of goods available for sale……………... $ 7,880,900
Less: Finished-goods inventory, Dec. 31…..
175,750
Unadjusted cost of goods sold………………. $ 7,705,150
Less: Overapplied overhead………………….
50,500
Cost of goods sold……………………………... $ 7,654,650
7.
No, selling and administrative expenses are operating expenses of the
firm and are treated as period costs rather than product costs. Such costs
are unrelated to manufacturing overhead and cost of goods sold.
PROBLEM 3-46 (35 MINUTES)
1.
Predetermined overhead rate = budgeted overhead ÷ budgeted machine
hours
= $1,925,000 ÷ 35,000 = $55.00 per
machine hour
2.
(a)
Work-in-Process Inventory ...................................... 170,000*
Raw-Material Inventory .....................
170,000
Work-in-Process Inventory ...................................... 288,200**
Wages Payable ..............................................
288,200
* $45,000 + $90,000 + $33,000 = $170,000
** $80,000 + $49,000 + $140,000 + $19,200 = $288,200
(b)
Manufacturing Overhead ...................................................... 520,000
Accumulated Depreciation .......................................
72,000
Wages Payable .......................................................... 140,000
Manufacturing Supplies Inventory .......................... 15,000
Miscellaneous Accounts ..........................................
293,000
(c)
Work-in-Process Inventory .................................................. 605,000*
Manufacturing Overhead ..........................................
605,000
* (2,500 + 1,500 + 5,000 + 2,000) x $55.00 = $605,000
(d)
Finished-Goods Inventory ....................................... 692,000*
Work-in-Process Inventory ......................................
692,000
* Job 101: $182,000 + $45,000 + $80,000 + (2,500 x $55.00) =
$444,500
Job 102: $116,000 + $49,000 + (1,500 x $55.00) = $247,500
$692,000 = $444,500 + $247,500
(e)
Accounts Receivable ................................................ 319,800*
Sales Revenue ..............................................
319,800
* $247,500 + $72,300 = $319,800
Cost of Goods Sold .................................................. 247,500
Finished-Goods Inventory ........................... 247,500
3.
Job no. 103 and no. 104 are in production as of March 31:
Job 103: $92,000 + $140,000 + (5,000 x $55.00) ..................$507,000
Job 104: $33,000 + $19,200 + (2,000 x $55.00) .................... 162,200
Total ...........................................................................$669,200
4.
Finished-goods inventory increased by $444,500 ($692,000 - $247,500).
5.
The company’s actual overhead amounted to $520,000, whereas applied
overhead totaled $605,000. Thus, overhead was overapplied by $85,000.