CHAPTER 4JOB COSTING

4-1 Cost pool––a grouping of individual cost items.Cost tracing––the assigning of direct costs to the chosen cost object.Cost allocation––the assigning of indirect costs to the chosen cost object.Cost-allocation base––a factor that links in a systematic way an indirect cost or group of

indirect costs to a cost object.

4-2 In a job-costing system, costs are assigned to a distinct unit, batch, or lot of a product or service. In a process-costing system, the cost of a product or service is obtained by using broad averages to assign costs to masses of identical or similar units.

4-3 An advertising campaign for Pepsi is likely to be very specific to that individual client. Job costing enables all the specific aspects of each job to be identified. In contrast, the processing of checking account withdrawals is similar for many customers. Here, process costing can be used to compute the cost of each checking account withdrawal.

4-4 The seven steps in job costing are: (1) identify the job that is the chosen cost object, (2) identify the direct costs of the job, (3) select the cost-allocation bases to use for allocating indirect costs to the job, (4) identify the indirect costs associated with each cost-allocation base, (5) compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job, (6) compute the indirect costs allocated to the job, and (7) compute the total cost of the job by adding all direct and indirect costs assigned to the job.

4-5 Two major cost objects that managers focus on in companies using job costing are (1) products or jobs, and (2) responsibility centers or departments.

4-6 Three major source documents used in job-costing systems are (1) job cost record or job cost sheet, a document that records and accumulates all costs assigned to a specific job, starting when work begins (2) materials requisition record, a document that contains information about the cost of direct materials used on a specific job and in a specific department; and (3) labor-time record, a document that contains information about the labor time used on a specific job and in a specific department.

4-7 The main concern with the source documents of job cost records is the accuracy of the records. Problems occurring in this area include incorrect recording of quantity or dollar amounts, materials recorded on one job being “borrowed” and used on other jobs, and erroneous job numbers being assigned to materials or labor inputs.

4-8 Two reasons for using an annual budget period area. The numerator reason––the longer the time period, the less the influence of seasonal

patterns, andb. The denominator reason––the longer the time period, the less the effect of variations in

output levels on the allocation of fixed costs.

4-1

4-9 Actual costing and normal costing differ in their use of actual or budgeted indirect cost rates:

ActualCosting

NormalCosting

Direct-cost ratesIndirect-cost rates

Actual ratesActual rates

Actual ratesBudgeted rates

Each costing method uses the actual quantity of the direct-cost input and the actual quantity of the cost-allocation base.

4-10 A house construction firm can use job cost information (a) to determine the profitability of individual jobs, (b) to assist in bidding on future jobs, and (c) to evaluate professionals who are in charge of managing individual jobs.

4-11 The statement is false. In a normal costing system, the Manufacturing Overhead Control account will not, in general, equal the amounts in the Manufacturing Overhead Allocated account. The Manufacturing Overhead Control account aggregates the actual overhead costs incurred while Manufacturing Overhead Allocated allocates overhead costs to jobs on the basis of a budgeted rate times the actual quantity of the cost-allocation base.

Underallocation or overallocation of indirect (overhead) costs can arise because of (a) the Numerator reason––the actual overhead costs differ from the budgeted overhead costs, and (b) the Denominator reason––the actual quantity used of the allocation base differs from the budgeted quantity.

4-12 Debit entries to Work-in-Process Control represent increases in work in process. Examples of debit entries under normal costing are (a) direct materials used (credit to Materials Control), (b) direct manufacturing labor billed to job (credit to Wages Payable Control), and (c) manufacturing overhead allocated to job (credit to Manufacturing Overhead Allocated).

4-13 Alternative ways to make end-of-period adjustments for underallocated or overallocated overhead are as follows:

(i) Proration based on the total amount of indirect costs allocated (before proration) in the ending balances of work in process, finished goods, and cost of goods sold.

(ii) Proration based on total ending balances (before proration) in work in process, finished goods, and cost of goods sold.

(iii) Year-end write-off to Cost of Goods Sold.(iv) Restatement of all overhead entries using actual indirect cost rates rather than

budgeted indirect cost rates.

4-14 A company might use budgeted costs rather than actual costs to compute direct labor rates because it may be difficult to trace direct labor costs to jobs as they are completed (for example, because bonuses are only known at the end of the year).

4-15 Modern technology such as electronic data interchange (EDI) is helpful to managers because it provides them with quick and accurate product-cost information that facilitates the management and control of jobs.

4-2

4-16 (10 min) Job order costing, process costing.

a. Job costing l. Job costingb. Process costing m. Process costingc. Job costing n. Job costingd. Process costing o. Job costinge. Job costing p. Job costingf. Process costing q. Job costingg. Job costing r. Process costingh. Job costing (but some process costing) s. Job costingi. Process costing t. Process costingj. Process costing u. Job costingk. Job costing

4-18 (20 -30 min.) Job costing, normal and actual costing.

1. = =

= $50 per direct labor-hour

= =

= $42 per direct labor-hour

These rates differ because both the numerator and the denominator in the two calculations are different—one based on budgeted numbers and the other based on actual numbers.

2a. Laguna Model

Mission Model

Normal costingDirect costs

Direct materialsDirect labor

Indirect costsAssembly support ($50 900; $50 1,010)

Total costs

$106,450 36,276 142,726

45,000 $187,726

$127,604 41,410 169,014

50,500 $219,514

4-3

2b. Actual costingDirect costs

Direct materialsDirect labor

Indirect costsAssembly support ($42 900; $42 1,010)

Total costs

$106,450 36,276 142,726

37,800 $180,526

$127,604 41,410 169,014

42,420 $211,434

3. Normal costing enables Anderson to report a job cost as soon as the job is completed, assuming that both the direct materials and direct labor costs are known at the time of use. Once the 900 direct labor-hours are known for the Laguna Model (June 2007), Anderson can compute the $187,726 cost figure using normal costing. Anderson can use this information to manage the costs of the Laguna Model job as well as to bid on similar jobs later in the year. In contrast, Anderson has to wait until the December 2007 year-end to compute the $180,526 cost of the Laguna Model using actual costing.

Although not required, the following overview diagram summarizes Anderson Construction’s job-costing system.

4-4

4-5

4-20 (20-30 min.) Job costing, accounting for manufacturing overhead, budgeted rates.

1. An overview of the product costing system is

Budgeted manufacturing overhead divided by allocation base:

Machining overhead = $36 per machine-hour

Assembly overhead: = 180% of direct manuf. labor costs

2. Machining department, 2,000 hours $36 $72,000Assembly department, 180% $15,000 27,000Total manufacturing overhead allocated to Job 494 $99,000

3. Machining AssemblyActual manufacturing overhead $2,100,000 $ 3,700,000Manufacturing overhead allocated,

55,000 $36 1,980,000 — 180% $2,200,000 — 3,960,000

Underallocated (Overallocated) $ 120,000 $ (260,000)

4-6

4-22 (15–20 min.) Service industry, time period used to compute indirect cost rates.

1.  Jan–March April–June July–Sept Oct–Dec TotalDirect labor costs $400,000 $280,000 $250,000 $270,000 $1,200,000Variable overhead costs as

a percentage of direct labor costs 90% 60% 60% 60%

Variable overhead costs (Percentage direct labor costs) $360,000 $168,000 $150,000 $162,000 $ 840,000Fixed overhead costs 300,000 300,000 300,000 300,000 1,200,000Total overhead costs $660,000 $468,000 $450,000 $462,000 $2,040,000Total overhead costs as a percentage of direct labor costs 165% 167% 180% 171% 170%

Budgeted Overhead Rate Used

Job 332Jan–March

RateJuly–Sept

RateAverage

Yearly RateDirect materials $10,000 $10,000 $10,000Direct labor costs 6,000 6,000 6,000Overhead allocated (variable + fixed) (165%; 180%; 170% of $6,000) 9,900 10,800 10,200Full cost of Job 332 $25,900 $26,800 $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% 

  Budgeted Variable Overhead Rate Used

Job 332January–March

rateJuly–Sept

rateDirect materials $10,000 $10,000Direct labor costs 6,000 6,000Variable overhead allocated (90%; 60%; of $6,000) 5,400 3,600Fixed overhead allocated (100% of $6,000) 6,000 6,000Full cost of Job 332 $27,400 $25,600

4-7

(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 (3545 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:

4-8

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

800800

(2) Work-in-Process Control Materials Control

710 710

(3) Manufacturing Overhead Control Materials Control

100 100

(4) Work-in-Process ControlManufacturing Overhead Control Wages Payable Control

1,300900

2,200(5) Manufacturing Overhead Control

Accumulated Depreciation––buildings and manufacturing equipment

400

400(6) Manufacturing Overhead Control

Miscellaneous accounts 550

550(7) Work-in-Process Control

Manufacturing Overhead Allocated (1.60 $1,300 = $2,080)

2,0802,080

(8) Finished Goods Control Work-in-Process Control

4,1204,120

(9) Accounts Receivable Control (or Cash) Revenues

8,0008,000

(10) Cost of Goods Sold Finished Goods Control

4,0204,020

(11) Manufacturing Overhead Allocated Manufacturing Overhead Control Cost of Goods Sold

2,0801,950

130

4-9

3.Materials Control

Bal. 12/31/2008(1) Purchases

100800

(2) Issues(3) Issues

710100

Bal. 12/31/2009 90

Work-in-Process ControlBal. 12/31/2008(2) Direct materials(4) Direct manuf. labor(7) Manuf. overhead

allocated

60710

1,300

2,080

(8)Goods completed 4,120

Bal. 12/31/2009 30

Finished Goods ControlBal. 12/31/2008(8) Goods completed

5004,120

(10) Goods sold 4,020

Bal. 12/31/2009 600

Cost of Goods Sold(10) Goods sold 4,020 (11) Adjust for overallocation 130

Bal. 12/31/2009 3,890

Manufacturing Overhead Control(3) Indirect materials(4) Indirect manuf. labor(5) Depreciation(6) Miscellaneous

100900400

550

(11) To close 1,950

Bal. 0

Manufacturing Overhead Allocated(11) To close 2,080 (7) Manuf. overhead allocated 2,080

Bal. 0

4-10

4-11

4-26 (45 min.) Job costing, journal entries.

Some instructors may wish to assign Problem 4-24. It demonstrates the relationships of journal entries, general ledger, subsidiary ledgers, and source documents.

1. An overview of the product-costing system is

2. Amounts in millions.

(1) Materials ControlAccounts Payable Control

150150

(2) Work-in-Process ControlMaterials Control

145145

(3) Manufacturing Department Overhead ControlMaterials Control

10 10

(4) Work-in-Process ControlWages Payable Control

90 90

(5) Manufacturing Department Overhead ControlWages Payable Control

30 30

(6) Manufacturing Department Overhead ControlAccumulated Depreciation

19 19

(7) Manufacturing Department Overhead ControlVarious liabilities

9 9

(8) Work-in-Process ControlManufacturing Overhead Allocated

63 63

(9) Finished Goods ControlWork-in-Process Control

294294

(10a) Cost of Goods SoldFinished Goods Control

292292

(10b) Accounts Receivable Control (or Cash )Revenues

400400

4-12

Manufacturing Overhead

Machine-Hours

Indirect CostsDirect Costs

DirectMaterials

DirectManuf. Labor

INDIRECTCOSTPOOL

COSTALLOCATION

BASE

COST OBJECTPRODUCT

DIRECTCOSTS

The posting of entries to T-accounts is as follows:

Materials Control Work-in-Process ControlBal. 12(1) 150

(2) 145(3) 10

Bal. 2(2) 145(4) 90(8) 63

(9) 294

Bal. 6

Finished Goods Control Cost of Goods SoldBal. 6(9) 294

(10a) 292 (10a) 292(11) 5

Manufacturing DepartmentOverhead Control Manufacturing Overhead Allocated

(3) 10(5) 30(6) 19(7) 9

(11) 68 (11) 63 (8) 63

Accounts Payable Control Wages Payable Control(1) 150 (4) 90

(5) 30

Accumulated Depreciation Various Liabilities(6) 19 (7) 9

Accounts Receivable Control Revenues(10b) 400 (10b) 400

The ending balance of Work-in-Process Control is $6.

3. (11) Manufacturing Overhead Allocated 63Cost of Goods Sold 5

Manufacturing Department Overhead Control 68

Entry posted to T-accounts in Requirement 2.

4-13

4-28 (2030 min.) Job costing; actual, normal, and variation from normal costing.

1. Actual direct cost rate for professional labor = $58 per professional labor-hour

Actual indirect cost rate = = $48 per professional labor-hour

= = $60 per professional labor-hour

Budgeted indirect cost rate = = $45 per professional labor-hour

(a)ActualCosting

(b)NormalCosting

(c)Variation of

Normal CostingDirect-Cost Rate $58

(Actual rate)$58

(Actual rate)$60

(Budgeted rate)Indirect-Cost Rate $48

(Actual rate)$45

(Budgeted rate)$45

(Budgeted rate)

2. (a)ActualCosting

(b)NormalCosting

(c)Variation of

Normal CostingDirect CostsIndirect CostsTotal Job Costs

$58 120 = $ 6,960

48 120 = 5,760

$12,720

$58 120 = $ 6,960

45 120 = 5,400

$12,360

$60 120 = $ 7,200 45 120 = 5,400

$12,600

All three costing systems use the actual professional labor time of 120 hours. The budgeted 110 hours for the Pierre Enterprises audit job is not used in job costing. However, Chirac may have used the 110 hour number in bidding for the audit.

The actual costing figure of $12,720 exceeds the normal costing figure of $12,360 because the actual indirect-cost rate ($48) exceeds the budgeted indirect-cost rate ($45). The normal costing figure of $12,360 is less than the variation of normal costing (based on budgeted rates for direct costs) figure of $12,600, because the actual direct-cost rate ($58) is less than the budgeted direct-cost rate ($60).

4-14

Although not required, the following overview diagram summarizes Chirac’s job-costing system.

4-15

4-30 (30 min.) Proration of overhead.

=

2. Overhead allocated = 50% Actual direct manufacturing labor cost = 50% $220,000 =$110,000

Overallocated plant overhead = Actual plant overhead costs – Allocated plant overhead costs = $106,000 – $110,000 = –$4,000

Overallocated plant overhead = $4,000

3a. All overallocated plant overhead is written off to cost of goods sold.

Both work in process (WIP) and finished goods inventory remain unchanged.

Account

Dec. 31, 2009 Balance(Before Proration)

(1)

Proration of $4,000Overallocated

Manuf. Overhead (2)

Dec. 31, 2009 Balance

(After Proration) (3) = (1) – (2)

WIP $ 50,000 $ 0 $ 50,000Finished Goods 240,000 0 240,000Cost of Goods Sold 560,000 4,000 556,000Total $850,000 $4,000 $846,000

3b. Overallocated plant overhead prorated based on ending balances:

Account

Dec. 31, 2009 Balance

(Before Proration) (1)

Balance as a Percent of Total

(2) = (1) ÷ $850,000

Proration of $4,000Overallocated

Manuf. Overhead (3) = (2) $4,000

Dec. 31, 2009 Balance

(After Proration) (4) = (1) – (3)

WIP $ 50,000 0.0588 0.0588 $4,000 =$ 235 $ 49,765Finished Goods 240,000 0.2824 0.2824 $4,000 = 1,130 238,870Cost of Goods Sold 560,000 0.6588 0.6588 $4,000 = 2,635 557,365Total $850,000 1.0000 $4,000 $846,000

3c. Overallocated plant overhead prorated based on 2009 overhead in ending balances:

Account

Dec. 31, 2009 Balance(Before

Proration) (1)

Allocated Manuf.

Overhead inDec. 31, 2009

Balance (2)

Allocated Manuf. Overhead in Dec. 31, 2009 Balance

as a Percent of Total (3) = (2) ÷ $110,000

Proration of $4,000 Overallocated

Manuf. Overhead (4) = (3) $4,000

Dec. 31, 2009 Balance(After

Proration) (5) = (1) – (4)

WIP $ 50,000 $ 10,000a 0.0909 0.0909 $4,000=$ 364 $ 49,636Finished Goods 240,000 30,000b 0.2727 0.2727 $4,000= 1,091 238,909Cost of Goods Sold 560,000 70,000c 0.6364 0.6364 $4,000=$2,545 557,455Total $850,000 $110,000 1.0000 $4,000 $846,000

4-16

a,b,c Overhead allocated = Direct manuf. labor cost 50% = $20,000; 60,000; 140,000 50%

4. Writing off all of the overallocated plant overhead to Cost of Goods Sold (CGS) is usually warranted when CGS is large relative to Work-in-Process and Finished Goods Inventory and the overallocated plant overhead is immaterial. Both these conditions apply in this case. ROW should write off the $4,000 overallocated plant overhead to Cost of Goods Sold Account.

4-32 (1520 min.) Service industry, job costing, law firm.

1.

2. =

=

= $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.

=

=

=

= $55 per professional labor-hour

4. Richardson PunchDirect costs:

Professional labor, $65 100; $65 150Indirect costs:

Legal support, $55 100; $55 150

$ 6,500

5,500 $12,000

$ 9,750

8,250 $18,000

4-17

3.

4-18

4-34 (2025 min.) Proration of overhead.

2. = –

= $4,900,000 – $4,500,000*= $400,000

*$60 75,000 actual machine-hours = $4,500,000

a. Write-off to Cost of Goods Sold

Account(1)

AccountBalance

(Before Proration)(2)

Write-off of $400,000

UnderallocatedManufacturing

Overhead(3)

AccountBalance

(After Proration)(4) = (2) + (3)

Work in ProcessFinished GoodsCost of Goods SoldTotal

$ 750,0001,250,000

8,000,000 $10,000,000

$ 00

400,000 $400,000

$ 750,0001,250,000

8,400,000 $10,400,000

b. Proration based on ending balances (before proration) in Work in Process, Finished Goods and Cost of Goods Sold.

Account(1)

Account Balance(Before Proration)

(2)

Proration of $400,000UnderallocatedManufacturing

Overhead(3)

AccountBalance

(After Proration)(4) = (2) + (3)

Work in ProcessFinished GoodsCost of Goods SoldTotal

$ 750,0001,250,000

8,000,000 $10,000,000

( 7.5%)(12.5%)(80 .0% )100 .0%

0.075 $400,000 = $ 30,0000.125 $400,000 = 50,0000.800 $400,000 = 320,000

$400,000

$ 780,0001,300,000

8,320,000 $10,400,000

c. Proration based on the allocated overhead amount (before proration) in the ending balances of Work in Process, Finished Goods, and Cost of Goods Sold.

Account(1)

AccountBalance(Before

Proration)(2)

Allocated OverheadIncluded in

the Account Balance(Before Proration)

(3) (4)

Proration of $400,000Underallocated

Manufacturing Overhead(5)

AccountBalance(After

Proration)(6) = (2) + (5)

Work in Process $ 750,000 $ 240,000a ( 5.33%) 0.0533 $400,000 = $ 21,320 $ 771,320Finished Goods 1,250,000 660,000b (14.67%) 0.1467 $400,000 = 58,680 1,308,680Cost of Goods Sold 8,000,000 3,600,000c (80.00%) 0.8000 $400,000 = 320,000 8,320,000

Total $10,000,000 $4,500,000 100.00 % $400,000 $10,400,000

a$60 4,000 machine-hours; b$60 11,000 machine-hours; c$60 60,000 machine-hours

4-19

3. Alternative (c) is theoretically preferred over (a) and (b). Alternative (c) yields the same ending balances in work in process, finished goods, and cost of goods sold that would have been reported had actual indirect cost rates been used.

Chapter 4 also discusses an adjusted allocation rate approach that results in the same ending balances as does alternative (c). This approach operates via a restatement of the indirect costs allocated to all the individual jobs worked on during the year using the actual indirect cost rate.

4-20

4-36 (40 min.) Proration of overhead with two indirect cost pools.

1.a. C & A department:

Overhead allocated = $40 4,000 Machine hours = $160,000

Underallocated overhead = Actual overhead costs – Overhead allocated = $163,000 – 160,000 = $3,000 underallocated

1.b. Finishing department:

Overhead allocated = $50 per direct labor-hour 2,000 direct labor-hours = $100,000

Overallocated overhead = Actual overhead costs – Overhead allocated = $87,000 – 100,000 = $13,000 overallocated

2a. All overallocated overhead is written off to cost of goods sold.

Both Work in Process and Finished goods inventory remain unchanged.

Account

Dec. 31, 2008 Balance(Before Proration)

(1)

Proration of $10,000Overallocated

Overhead(2)

Dec. 31, 2008 Balance

(After Proration)(3) = (1) + (2)

WIP $ 150,000 0 $ 150,000Finished Goods 250,000 0 250,000Cost of Goods Sold 1,600,000 +$3,000 –$13,000 1,590,000Total $2,000,000 $ 10,000 $1,990,000

2b. Overallocated overhead prorated based on ending balances

Account

Dec. 31, 2008 Balance(Before Proration)

(1)

Balance as a Percent of Total

(2) = (1) ÷ $2,000,000

Proration of $10,000Overallocated Overhead

(3) = (2) 10,000

Dec. 31, 2008 Balance(After Proration)

(4) = (1) – (3)WIP $ 150,000 0.075 0.075 × $10,000 = $ 750 $ 149,250Finished Goods 250,000 0.125 0.125 × $10,000 = 1,250 248,750Cost of Goods Sold 1,600,000 0.800 0.800 × $10,000 = 8,000 1,592,000Total $2,000,000 1.000 $10,000 $1,990,000

2c. Overallocated overhead prorated based on overhead in ending balances. (Note: overhead must be allocated separately from each department. This can be done using the number of machine hours/direct labor hours as a surrogate for overhead in ending balances.)

4-21

For C & A department:

Account

Allocated Overhead in Dec. 31, 2008 Balance

(1)

Allocated Overhead in Dec. 31, 2008 Balance as a Percent of Total(2) = (1) ÷ $160,000

Proration of $3,000Underallocated

Overhead (3) = (2) $3000

WIP 200 $40 = $ 8,000 0.05 0.05 $3,000 = $ 150Finished Goods 600 $40 = 24,000 0.15 0.15 $3,000 = 450Cost of Goods Sold 3,200 $40 = 128,000 0.80 0.80 $3,000 = 2,400Total $160,000 1.00 $3,000

For finishing department:

Account

Allocated Overhead in Dec. 31, 2008 Balance

(4)

Allocated Overheadin Dec. 31, 2008

Balance as a Percent of Total(5) = (4) ÷ $100,000

Proration of $13,000Underallocated Overhead

(6) = (5) $13,000 WIP 100 $50 = $ 5,000 0.05 0.05 $13,000 = $ 650Finished Goods 400 $50 = 20,000 0.20 0.20 $13,000 = 2,600Cost of Goods Sold 1,500 $50 = 75,000 0.75 0.75 $13,000 = 9,750Total $100,000 1.00 $13,000

Account

Dec. 31, 2008 Balance(Before Proration)

(7)

Underallocated/ Overallocated

Overhead (8) = (3) – (6)

Dec. 31, 2009 Balance(After Proration)

(9) = (7) + (8)WIP $ 150,000 $150 – $650 = $ (500) $ 149,500Finished Goods 250,000 $450 – $2,600 = (2,150) 247,850Cost of Goods Sold 1,600,000 $2,400 – $9,750 = (7,350) 1,592,650Total $2,000,000 $(10,000) $1,990,000

3. The first method is simple and Cost of Goods Sold accounts for 80% of the three account amounts. The amount of overallocated and underallocated overhead is also immaterial. Allocation to the other two accounts is minimal. Therefore, write-off to cost of goods sold is the most cost effective alternative.

4-22

4-38 (4055 min.) Overview of general ledger relationships.

1. & 3. An effective approach to this problem is to draw T-accounts and insert all the known figures. Then, working with T-account relationships, solve for the unknown figures (here coded by the letter X for beginning inventory figures and Y for ending inventory figures).

Materials ControlXPurchases

15,00085,000

(1) 70,000

100,000 70,000Y 30,000

Work-in-Process ControlX(1) DM 70,000(2) DL 150,000(3) Overhead 90,000

10,000

310,000

(4) 305,000

(a)(c)

320,0005,0003,000

305,000

Y 23,000

Finished Goods ControlX(4)

20,000305,000

(5) 300,000

325,000 300,000Y 25,000

Cost of Goods Sold(5) 300,000 (d) 6,000

Manufacturing Department Overhead Control

(a)(b)

85,0001,0001,000

(d) 87,000

Manufacturing Overhead Allocated(d) 93,000 (3)

(c)90,0003,000

Manufacturing overhead cost rate = $90,000 ÷ $150,000 = 60%

Wages Payable Control(a) 6,000

Various Accounts(b) 1,000

4-23

2. Adjusting and closing entries:

(a) Work-in-Process Control 5,000Manufacturing Department Overhead Control 1,000

Wages Payable Control 6,000To recognize payroll costs

(b) Manufacturing Department Overhead Control 1,000Various accounts 1,000

To recognize miscellaneous manufacturing overhead

(c) Work-in-Process Control 3,000Manufacturing Overhead Allocated 3,000

To allocate manufacturing overhead

Note: Students tend to forget entry (c) entirely. Stress that a budgeted overhead allocation rate is used consistently throughout the year. This point is a major feature of this problem.

(d) Manufacturing Overhead Allocated 93,000Manufacturing Department Overhead Control 87,000Cost of Goods Sold 6,000

To close manufacturing overhead accounts and overallocated overhead to cost of goods sold

An overview of the product-costing system is

3. See the answer to 1.

4-24

4-40 (20 min.) Job costing, contracting, ethics.

1. Direct manufacturing costs:Direct materialsDirect 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. Direct manufacturing costs: Direct materials Direct manufacturing labora

Indirect manufacturing costs, 150% $5,000Total manufacturing costs

$25,000 5,000 $30,000

7,500 $37,500

a$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.

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