Warren SM Ch.19 Final

CHAPTER 17

CHAPTER 19job order costING

EYE OPENERS1.Product cost information is used by managers to (1) establish product prices, (2) control operations, and (3) develop financial statements.

2.a.Job order cost system and process cost system.

b.The job order cost system provides a separate record of each quantity of product that passes through the factory.

c.Process cost systems accumulate costs for each department or process within a factory.

3.Job order costing is used by firms that sell custom goods and services to customers. The job order system is frequently associated with firms that will produce a product or service specifically to a customer order.

4.No. A job order cost system is not appropriate because workers could not physically differentiate between the products being worked on in different orders.

5.Work in Process6.Materials should not be issued by the storekeeper without a properly authorized materials requisition. Both the storekeeper and the recipient of the materials should initial the materials requisition when the materials are issued to indicate release of the proper amount of materials from the storeroom.

7.a.Purchase invoice or receiving report

b.Materials requisition

8.A job cost sheet is the subsidiary ledger to the work in process control account. The cost of materials, labor, and overhead are listed on the job cost sheet for each job. A summary of all the job cost sheets during an accounting period is the basis for journal entries to the control accounts.

9.a.The clock card is a means of recording the hours spent by employees in the factory. The time ticket is a means of recording the time the employee spends on a specific job or, in cases of indirect labor (factory overhead), the department in which the time was spent.

b.The total time reported on an employees time tickets for a payroll period is compared with the time reported on the employees clock cards as an internal check on the accuracy of payroll disbursements.

10.The sources of the debits to Work in Process are:

a.Summary of the materials requisitions for direct materials.

b.Summary of the time tickets for direct labor.

c.Data obtained when applying the predetermined factory overhead rate for factory overhead.

11.The use of a predetermined factory overhead rate in job order cost accounting assists management in pricing jobs. By estimating the cost of direct materials and direct labor based on past experience and by applying the factory overhead rate, the cost of a job can be estimated. The predetermined rate also permits the determination of the cost of a job shortly after it is finished, which enables management to adjust future pricing policies to achieve the best combination of revenue and expense.

12.a.The predetermined factory overhead rate is determined by dividing the bud-geted factory overhead for the forth-coming year by an estimated activity base, one that will equitably apply the factory overhead costs to the goods manufactured.

b.Direct labor cost, direct labor hours, and machine hours.

13.a.(1)If the amount of factory overhead applied is greater than the actual factory overhead, factory overhead is overapplied.

(2)If the amount of actual factory overhead is greater than the amount applied, factory overhead is underapplied.

b.Underapplied

c.Deferred credit

14.The simplest satisfactory procedure for disposing of a relatively minor balance in the factory overhead account is to transfer it to Cost of Goods Sold.

15.a.Materials

b.Work in Process

c.Finished Goods16.Job cost information can be used to identify trends in unit costs over time for like products. Comparative job cost sheets for like products can be used to investigate possible reasons for cost changes. This information can help managers identify changes in efficiency, methods, procedures, and prices used in the manufacturing process.

17.Job order cost accumulation would be most appropriate for professional service firms that provide extended, project-type services for clients. Examples would be architectural, consulting, advertising, or legal services. Job cost sheets would accumulate all direct costs of servicing the client. Such costs would include labor, materials, travel, and subcontracted services. In addition, overhead would be applied using a predetermined overhead rate. The costs accumulated by the job cost sheet would be treated as work in process (a current asset) until the service is completed. Once completed, the cost would be transferred to the cost of services on the income statement.

PRACTICE EXERCISEsPE 191A

May9Materials

324,000

Accounts Payable

324,000

$324,000 = 54,000 $6.May21Work in Process

254,000*

Materials

254,000

*Job 70$110,000 = 22,000 $5

Job 71 144,000 = 24,000 $6

Total$254,000PE 191B

June2Materials

32,000

Accounts Payable

32,000

$32,000 = 4,000 $8.June12Work in Process

13,600*

Materials

13,600

*Job 30$ 7,200 = 1,200 $6

Job 32

6,400 = 800 $8

Total$13,600PE 192A

Work in Process

420,000*

Wages Payable

420,000

*Job 70

$180,000 = 10,000 hours $18

Job 71

240,000 = 12,000 hours $20

Total$420,000PE 192B

Work in Process

37,400*

Wages Payable

37,400

*Job 30$19,200 = 1,200 hours $16

Job 32 18,200 = 1,300 hours $14

Total$37,400PE 193A

Factory Overhead

140,000

Materials

24,500

Wages Payable

64,500

Utilities Payable

5,800

Accumulated Depreciation

45,200

PE 193B

Factory Overhead

24,000

Materials

6,000

Wages Payable

7,600

Utilities Payable

3,200

Accumulated Depreciation

7,200

PE 194A

a.$2.40 = $600,000/250,000 direct labor hours

b.Job 70$24,000 = 10,000 hours $2.40 per hour

Job 71 28,800 = 12,000 hours $2.40 per hour

Total$52,800c.Work in Process

52,800

Factory Overhead

52,800

PE 194B

a.$8.00 = $200,000/25,000 direct labor hours

b.Job 30$ 9,600 = 1,200 hours $8.00 per hour

Job 32 10,400 = 1,300 hours $8.00 per hour

Total$20,000c.Work in Process

20,000

Factory Overhead

20,000

PE 195A

a.

Job 70

Job 71

Direct materials

$110,000$144,000

Direct labor

180,000240,000

Factory overhead

24,000

28,800

Total costs

$314,000$412,800b.Job 70$39.25 = $314,000/8,000 units

Job 71$41.28 = $412,800/10,000 units

PE 195B

a.

Job 30

Job 32

Direct materials

$ 7,200$ 6,400

Direct labor

19,20018,200

Factory overhead

9,600

10,400

Total costs

$36,000$35,000b.Job 30$22.50 = $36,000/1,600 units

Job 32$20.00 = $35,000/1,750 units

PE 196A

$665,000 = $140,000 + (35,000 $15.00)**Cost per unit of goods produced during the year = $15.00 = $900,000/60,000 units

PE 196B

$71,000 = $14,000 + (9,500 $6.00)**Cost per unit of goods produced during the year = $6.00 = $120,000/20,000 units

EXERCISES

Ex. 191a.Materials requisitioned for use (both direct and indirect).

b.Factory labor used (both direct and indirect).

c.Application of factory overhead costs to jobs.

d.Jobs completed.

e.Cost of goods sold.

Ex. 192a.

Cost of goods sold:

Sales

$1,200,000

Less gross profit

320,000Cost of goods sold

$880,000

b.

Direct materials cost:

Materials purchased

$610,000

Less:Indirect materials

$45,000

Materials inventory

45,000

90,000Direct materials cost

$520,000

c.

Direct labor cost:

Total manufacturing costs for the period

$1,325,000

Less:Direct materials cost

$520,000

Factory overhead

175,000*

695,000Direct labor cost

$630,000*$110,000 + $45,000 + $20,000

Ex. 193a.

RECEIVEDISSUEDBALANCE

ReceivingReportNumberQuantityUnitPriceMaterialsRequi-sitionNumberQuantityAmountDateQuantityAmountUnitPrice

May 1300$2,400$ 8.00

24210$10.00May 23002,4008.00

2102,10010.00

101340$2,800*May 61701,70010.00

3014012.00May 121701,70010.00

1401,68012.00

1142002,060**May 211101,32012.00

*May 6 issuance300 at $8.00$2,400

40 at $10.00

400

$2,800

**May 21 issuance170 at $10.00$1,700

30 at $12.00

360

$2,060

b.Ending wire cable balance:

110 at $12.00

$1,320c.Work in Process ($2,800 + $2,060)

4,860

Materials

4,860

d.Comparing quantities on hand as reported in the materials ledger with predetermined order points enables management to order materials before a lack of materials causes idle time. Also, the subsidiary ledger can include columns for recording quantities ordered, so that management can have easy access to information about materials on order.

Ex. 194Work in Process

98,600Factory Overhead

1,450

Materials

100,050Ex. 195a.Materials

658,000

Accounts Payable

658,000

b.Work in Process

653,500

Factory Overhead

13,000

Materials

666,500

c.

Polyester

FabricFillingLumberGlue

Balance, June 1

$25,000$7,500$56,000$2,400

June purchases

126,000175,000345,00012,000

Less: June requisitions

(117,500)

(158,000)

(378,000)

(13,000)Balance, June 30

$33,500$24,500$23,000$1,400Ex. 196Work in Process

24,275Factory Overhead

11,200

Wages Payable

35,475Ex. 197a.Work in Process

2,224.00

Factory Overhead

176.00

Wages Payable

2,400.00

Supporting Calculations:

Labor Costs (Hourly Rate Hours)

Direct

Labor

Hourly

(sum ofIndirect

RateJob 201Job 202Job 203job costs)Labor

John Washington$20.00$400.00$200.00$140.00$740.00$60.00

George Jefferson22.00220.00330.00286.00

836.00

44.00

Thomas Adams18.00216.00252.00180.00

648.00

72.00

$2,224.00$176.00b.The direct labor costs in the completed jobs would become part of finished goods inventory. The direct labor costs in Job 203 would remain part of work in process inventory.

Ex. 198a.Work in Process

9,000

Factory Overhead

1,900

Wages Payable

10,900b.Work in Process

15,000

Factory Overhead

15,000

$9,000/$15 per hour = 600 hours

600 hours $25 per hour = $15,000Ex. 199a.Factory 1: $23.75 per machine hour ($475,000/20,000 machine hours)

b.Factory 2: $40.00 per direct labor hour ($600,000/15,000 direct labor hours)

c.Factory 1:

Work in Process

37,050

Factory Overhead

37,050

($23.75 1,560)

Factory 2:

Work in Process

54,000

Factory Overhead

54,000

($40.00 1,350)

d.Factory 1$950 debit (underapplied) ($37,050 $38,000)

Factory 2$2,000 credit (overapplied) ($54,000 $52,000)

Ex. 1910The estimated shop overhead is determined as follows:

Shop and repair equipment depreciation

$45,000

Shop supervisor salaries

125,800Shop property tax

22,600Shop supplies

16,600

Total shop overhead

$210,000The engine parts and shop labor are direct to the jobs and are not included in the shop overhead rate. The advertising and administrative expenses are selling and administrative expenses that are not included in the shop overhead but are treated as period expenses.

Ex. 1910Concluded

The estimated activity base is determined by dividing the shop direct labor cost by the direct labor rate, as follows:

= 40,000 hours

The predetermined shop overhead rate is:

= $5.25 per direct labor hour

Ex. 1911a.Estimated annual operating room overhead: $492,000

Estimated operating room activity base, number of operating room hours:

Hours per day

8

Days per week

6

Weeks per year (net of maintenance weeks)

50

Estimated annual operating room hours

2,400

Predetermined surgical overhead rate:

= $205 per hour

b.Gretchen Keltons procedure:

Number of surgical room hours

6

Predetermined surgical room overhead rate

$205

Procedure overhead

$1,230c.Actual hours used in November

192

Predetermined surgical room overhead rate

$205

Surgical room overhead applied, November

$39,360

Actual surgical room overhead incurred, November

38,500

Overapplied surgical room overhead (credit balance)

$860Ex. 1912a.Finished Goods

306,000

Work in Process

306,000

b.Cost of unfinished jobs at January 31:

Balance in Work in Process at January 1

$14,200

Add:Direct materials

115,400

Direct labor

124,500

Factory overhead

65,400$319,500

Less:Jobs finished during January

306,000

Balance in Work in Process at January 31

$13,500


39,100

Factory Overhead

1,200

Materials

40,300b.Work in Process

13,150

Factory Overhead

14,500

Wages Payable

27,650

c.Work in Process

10,520

Factory Overhead

10,520

Predetermined overhead rate:$3,800/$4,750 = 80% or

$1,960/$2,450 = 80%

Direct labor cost Predetermined factory overhead rate:

$13,150 80% = $10,520d.Finished Goods

31,160*

Work in Process

31,160

*$20,950 + $10,210

Ex. 1914a.SALSA INC.Income Statement

For the Month Ended May 31, 2010Revenues

$870,000

Cost of goods sold

485,000Gross profit

$385,000

Selling expenses

$210,000

Administrative expenses

75,400

285,400Income from operations

$99,600

b.Materials inventory:

Purchased materials

$244,000

Less: Materials used in production

210,000

Materials inventory, May 31

$34,000

Work in process inventory:

Materials used in production

$210,000

Direct labor

180,000

Factory overhead (75% $180,000)

135,000

Additions to work in process

$525,000

Less: Transferred to finished goods

510,000

Work in process inventory, May 31

$15,000

Finished goods inventory:

Transferred to finished goods

$510,000

Less: Cost of goods sold

485,000

Finished goods inventory, May 31

$25,000

Ex. 1915a.

Unit

DateJob No.QuantityProductAmountCost

Jan. 21240Alpha

$ 6,000$25

Jan. 15221,100Beta

8,8008

Feb. 338800Beta

8,00010

Mar. 756400Alpha

8,80022

Mar. 24651,500Gamma6,0004

May 19741,750Gamma10,5006

June 1287350Alpha

6,30018

Aug. 18922,200Gamma19,8009

Sept. 2100600Beta

4,8008

Nov. 14110500Alpha

7,00014

Dec. 121162,000Gamma24,00012Alpha Unit Costs

Ex. 1915Concluded

Beta Unit Costs

Gamma Unit Costs

As can be seen, the unit costs behave differently for each product. Gamma has increasing unit costs during the year, Beta is steady, and Alpha has decreasing unit costs during the year.

b.Management should want to determine why Gamma costs are increasing and why Alpha costs are decreasing. This information can be determined from the job cost sheets for each job. By comparing the cost sheets from job to job (for a particular product), management can isolate the cause of the cost changes. The cost sheets will show how materials, labor, and overhead are consumed across the production process for each job. This information can isolate the problem or opportunity areas.

Ex. 1916a.The first item to note is that the cost did not go up due to any increases in the cost of labor or materials. Rather, the cost of the plaques increased because Job 212 used more labor and materials per unit than did Job 201. Specifically, Job 201 required exactly the same number of backboards and brass plates as the number of actual plaques shipped. However, Job 212 required six more backboards and brass plates than the number actually shipped (48 vs. 42). In addition, the labor hours for Job 201 were as follows:

Engraving:(60 units 20 min. per unit)/60 min. = 20 hours

Assembly:(60 units 10 min. per unit)/60 min. = 10 hours

These are the labor hours to be expected for 60 plaques. However, the labor hours expected for Job 212 were:

Engraving:(42 units 20 min. per unit)/60 min. = 14 hours

Assembly:(42 units 10 min. per unit)/60 min. = 7 hours

Job 212s 42 labor hours are 21 more (42 hrs. 21 hrs.) than should have been expected for a job of 42 plaques [(42 30 min.)/60 min. = 21 hrs.]. As a result, the additional hours of labor cost, applied factory overhead, and direct materials cost cause the unit cost of Job 212 to increase.

b.Apparently, the engraving and assembly work is becoming sloppy. Job 212 required 48 engraved brass plates in order to get 42 with acceptable quality. It is likely that the engraver is not being careful in correctly spelling the names. The names should be supplied to the engraver using large typewritten fonts so that it is easy to read the names. The engraver should be instructed to be careful in engraving the names. The assembly operation also needs some improvement. It took 48 assembly operations to properly assemble 42 plaques. It may be that the plates are assembled off-register (crooked) to the backboard. This could be improved by using a fixture to properly align the plate to the backboard. Alternatively, its possible misengraved plaques were assembled to backboards and needed to be disassembled, reengraved, and reassembled to new backboards.

Ex. 1917a.

June4Work in Process (600 hrs. $200)

120,000

Salaries Payable

120,000

8Work in Process

21,000

Cash

21,000

12Work in Process (300 hrs. $260)

78,000

Salaries Payable

78,000

16Work in Process

64,000

Consultant Fees Payable

64,000

24Work in Process (900 $55)

49,500

Office Overhead

49,500

30Office Overhead

35,000

Cash

35,000

30Office Overhead

12,000

Supplies

12,000

30Salaries Payable

180,000

Cash

180,000

30Accounts Receivable

380,000

Fees Earned

380,000

30Cost of Services

332,500

Work in Process

332,500*

*$120,000 + $21,000 + $78,000 + $64,000 + $49,500b.Office overhead incurred ($35,000 + $12,000)

$47,000

Office overhead applied

49,500

Overapplied overhead

$(2,500)

c.Fees earned

$380,000

Cost of services

330,000*

Gross profit

$50,000

*$332,500 $2,500. Assumes the over- or underapplied office overhead is closed to cost of services annually.

Note to Instructors: The consultant fees and travel costs can be directly assigned to the case and thus are not treated as office overhead. Costs such as secretarial and administrative salaries and supplies would be part of office overhead incurred.


316,000

Salaries Payable

316,000

b.Work in Process

631,000

Accounts Payable

631,000

c.Work in Process (50% $631,000)

315,500

Agency Overhead

315,500

d.Cost of Services

777,500

Work in Process

777,500

Cost of completed jobs, $777,500:

ClintonPryor

Bank

Airlines

June 1 balance

$80,000$24,000

June costs:

Direct labor

56,00025,000

Media

210,000185,000

Overhead

105,000

92,500

Total costs

$451,000$326,500

PROBLEMS

Prob. 191A

a.Materials

350,000

Accounts Payable

350,000

b.Work in Process

240,000

Factory Overhead

35,000

Materials

275,000

c.Work in Process

279,000

Factory Overhead

45,500

Wages Payable

324,500

d.Factory Overhead

128,600

Selling Expenses

116,400

Administrative Expenses

72,500

Accounts Payable

317,500

e.Factory Overhead

14,500

Selling Expenses

12,300


8,900

Prepaid Expenses

35,700

f.Depreciation ExpenseOffice Building

42,000

Depreciation ExpenseOffice Equipment

21,500

Factory Overhead

14,500

Accumulated DepreciationFixed Assets

78,000

g.Work in Process

256,400

Factory Overhead

256,400

h.Finished Goods

726,500

Work in Process

726,500

i.Cost of Goods Sold

715,000

Finished Goods

715,000

Prob. 192A

1.a.Materials

23,400

Accounts Payable

23,400

b.Work in Process

39,575

Factory Overhead

4,110

Materials

21,515

Wages Payable

22,170

c.Factory Overhead

4,500

Accounts Payable

4,500

d.Factory Overhead

1,560

Accumulated DepreciationMachinery

and Equipment

1,560

e.Work in Process

10,000

Factory Overhead (200 hours $50)

10,000

f.Finished Goods

27,285

Work in Process

27,285

Computation of cost of jobs finished:

DirectDirectFactory

JobMaterialsLaborOverheadTotal

No. 201$2,350$2,200$ 900$5,450

No. 2022,8752,9701,500

7,345

No. 2031,9001,4901,200

4,590

No. 2054,1004,1501,650

9,900

Total

$27,285

g.Accounts Receivable

27,240

Sales

27,240

Cost of Goods Sold

17,385

Finished Goods

17,385

Computation of cost of jobs sold:

Job

No. 201

$5,450

No. 202

7,345

No. 203

4,590

Total

$17,385

Prob. 192AConcluded2.

Work in ProcessFinished Goods

(b)39,575(f)27,285(f)27,285(g)17,385

(e)

10,000

Bal. 22,290Bal. 9,900

3.Schedule of unfinished jobs:

DirectDirectFactory


No. 204

$6,450$5,460$3,750$15,660

No. 206

2,9802,6501,000 6,630

Balance of Work in

Process, April 30

$22,290

4.Schedule of completed jobs:

DirectDirectFactory


Finished Goods, April 30

(Job 205)

$4,100$4,150$1,650$9,900Prob. 193A

1. and 2.

JOB ORDER COST SHEET

CustomerQueen Mercury

DateMay 10, 2010

Address10 Rhapsody Lane

Date wantedJune 12, 2010

Lake Forest

Date completedJune 8, 2010

ItemReupholster couch and chair

Job. No.

10-206

ESTIMATE

Direct MaterialsDirect LaborSummary

AmountAmountAmount

40 meters at $12480.0024 hours at $15360.00Direct materials 480.00

Direct labor 360.00

Factory overhead 180.00

Total480.00Total360.00Total cost1,020.00

ACTUAL


Mat.

Req.

No.Descrip-

tionAmountTime

Ticket

No.Descrip-

tionAmountItemAmount

21024

meters

at $12288.00H2518 hours

at $14.50261.00Direct materials

Direct labor 540.00

391.50

21221

meters

at $12252.00H349 hours

at $14.50130.50Factory overhead 195.75

Total540.00Total391.50Total cost1,127.25

Comments:

The direct materials cost exceeded the estimate by $60 because 5 meters of materials were spoiled. The direct labor cost exceeded the estimate by $31.50 because an additional 3 hours of labor were used by an inexperienced employee that worked for $0.50/hr. less.

Prob. 194A

1.Supporting calculations:

Job No.Quan-tityJuly 1Work inProcessDirectMaterialsDirectLaborFactoryOverheadTotalCostUnitCostUnitsSoldCost ofGoodsSold

No. 21 200$6,000$20,000 $15,000$24,000$65,000$325.00160$52,000

No. 22 40016,00034,000 26,00041,600117,600$294.0032094,080

No. 23 20014,000 8,00012,80034,80000

No. 24 25030,000 25,00040,00095,000$380.0021079,800

No. 25 18022,000 17,50028,00067,500$375.0015056,250

No. 26

140

8,000

4,500

7,200

19,70000

Total

1,370$22,000$128,000

$96,000$153,600$399,600$282,130

A.$144,000. Materials applied to production in July + indirect materials.

($128,000 + $16,000)

B.$22,000. From table above and problem.

C.$128,000. From table above.

D.$96,000. From table above.

E.$153,600. ($96,000 1.6) and from table above.

F.$345,100. ($65,000 + $117,600 + $95,000 + $67,500)

G.$282,130. From table above.

H.$24,000. Wages incurred less direct labor applied to production in July.

($120,000 $96,000)

2.July balances:

Materials$ 6,000($30,000 + $120,000 $144,000)

Work in Process$54,500*($34,800 + $19,700, Job 23 and Job 26)

Finished Goods$62,970**($345,100 $282,130)

Factory Overhead$ 3,400 Dr.underapplied ($22,000 + $24,000 + $16,000

+ $95,000 $153,600)

*or ($22,000 + $128,000 + $96,000 + $153,600 $345,100)

**

Units in

UnitTotal

Job No.Inventory

Cost

Cost

Job 2140

$325$13,000

Job 2280

29423,520

Job 2440

38015,200

Job 2530

375

11,250

Total

$62,970Prob. 195A

1.

DIGITAL TUNES INC.

Income Statement

For the Year Ended December 31, 2010

Sales

$13,600,000

Cost of goods sold

3,187,500

Gross profit

$10,412,500

Selling expenses:

Media campaign

$4,000,000

Promotional materials

1,700,000

Shipping expenses

212,500

Total selling expenses

$5,912,500

Administrative expenses:

Legal expenses

1,200,000

Total operating expenses

7,112,500

Income from operations

$3,300,000

Supporting calculations:

Sales:850,000 units $16 = $13,600,000

Cost of goods sold:850,000 units $3.75 = $3,187,500

Manufacturing cost per unit (CD):

Direct materials:

Blank CD

$1.80

Jewel case

0.60

Song lyric insert

0.60

Total direct materials

$3.00

Direct labor

0.25

Factory overhead

0.50*

Total manufacturing cost per CD

$3.75

*$1,200/2,400 CDs per hour

Promotional materials:42,500 stores $40 = $1,700,000

Shipping expenses:850,000 units $0.25 = $212,500

2.Finished Goods balance, December 31, 2010:

(1,000,000 units 850,000 units) $3.75 = $562,500

Work in Process, December 31, 2010:

25,000 units ($3.00 + $0.50) = $87,500

The materials and copying have already been applied to the 25,000 units.

Only the direct assembly labor has yet to be applied for these units.

Prob. 191Ba.Materials

450,000

Accounts Payable

450,000

b.Work in Process

420,500

Factory Overhead

4,500

Materials

425,000

c.Work in Process

290,000

Factory Overhead

95,000

Wages Payable

385,000

d.Factory Overhead

125,400

Selling Expenses

87,500


56,400

Accounts Payable

269,300

e.Factory Overhead

12,500

Selling Expenses

14,500


8,500

Prepaid Expenses

35,500

f.Factory Overhead

25,300

Depreciation ExpenseOffice Equipment

31,600

Depreciation ExpenseStore Equipment

7,600

Accumulated DepreciationFixed Assets

64,500

g.Work in Process

261,500

Factory Overhead

261,500

h.Finished Goods

965,000

Work in Process

965,000

i.Cost of Goods Sold

952,400

Finished Goods

952,400

Prob. 192B1.a.Materials

68,000

Accounts Payable

68,000

b.Work in Process

123,250

Factory Overhead

13,700

Materials

66,000

Wages Payable

70,950

c.Factory Overhead

2,750

Accounts Payable

2,750

d.Factory Overhead

1,870

Accumulated DepreciationMachinery

and Equipment

1,870

e.Work in Process

17,250

Factory Overhead (690 hours $25)

17,250

f.Finished Goods

80,575

Work in Process

80,575

Computation of cost of jobs finished:

DirectDirectFactory


No. 401$ 9,200$ 9,250$2,700

$21,150

No. 40211,00013,4002,75027,150

No. 4036,4005,0002,15013,550

No. 4058,6007,4002,725

18,725

Total

$80,575

g.Accounts Receivable

82,800

Sales

82,800

Cost of Goods Sold

67,025

Finished Goods

67,025

Computation of cost of jobs sold:

Job

No. 401

$21,150

No. 402

27,150

No. 405

18,725

Total

$67,025Prob. 192BConcluded

2.

Work in ProcessFinished Goods

(b)123,250(f)80,575(f)80,575(g)67,025

(e)

17,250

Bal. 59,925

Bal. 13,550

3.Schedule of unfinished jobs:

DirectDirectFactory


No. 404

$18,200$17,400$4,000

$39,600

No. 406

8,5008,9002,925

20,325

Balance of Work in

Process, May 31

$59,9254.Schedule of completed jobs:

DirectDirectFactory


Finished Goods, May 31

(Job 403)

$6,400$5,000$2,150$13,550Prob. 193B1. and 2.

JOB ORDER COST SHEET

CustomerTed Austin

DateJune 1, 2010

Address409 Patterson St.

Date wantedAug. 5, 2010

Vienna

Date completedAug. 2, 2010

ItemReupholster couch and chairs

Job. No.

10110

ESTIMATE


AmountAmountAmount

24 meters at $14336.0014 hours at $18252.00Direct materials336.00

Direct labor252.00

Factory overhead189.00

Total336.00Total252.00Total cost777.00

ACTUAL


Mat.

Req.

No.Descrip-

tionAmountTime

Ticket

No.Descrip-

tionAmountItemAmount

21010 meters

at $14140.00H166 hours

at $18108.00Direct materials

Direct labor 364.00

288.00

21216 meters

at $14224.00H2110 hours

at $18180.00Factory overhead 216.00

Total364.00Total288.00Total cost868.00

Comments:

The direct materials cost exceeded the estimate by $28 because 2 meters of materials were spoiled. The direct labor cost exceeded the estimate by $36 because an additional 2 hours of labor were used by an inexperienced employee.

Prob. 194B1.Supporting calculations:

Job No.Quan-tityAug. 1Work inProcessDirectMaterialsDirectLaborFactoryOverheadTotalCostUnitCostUnitsSoldCost ofGoodsSold

No. 101 100$8,000$25,000 $18,000$9,000$60,000$600.0080$48,000

No. 102 12514,00032,000 22,00011,00079,000$632.0011069,520

No. 103 15040,000 34,00017,00091,000

00

No. 104 12520,000 12,5006,25038,750$310.0011535,650

No. 105 20036,000 20,00010,00066,000$330.0016052,800

No. 106

100

18,000

9,600

4,800

32,40000

Total

800$22,000$171,000

$116,100$58,050$367,150$205,970

A.$175,500. Materials applied to production in August + indirect materials.

($171,000 + $4,500)

B.$22,000. From table above and problem.

C.$171,000. From table above.

D.$116,100. From table above.

E.$58,050. ($116,100 0.50) and from table above.

F.$243,750. ($60,000 + $79,000 + $38,750 + $66,000)

G.$205,970. From table above.

H.$3,900. Wages incurred less direct labor applied to production in August.

($120,000 $116,100)

2.August 31 balances:

Materials$ 6,500($32,000 + $150,000 $175,500)

Work in Process$123,400*($91,000 + $32,400, Job 103 and Job 106)

Finished Goods$ 37,780**($243,750 $205,970)

Factory Overhead$ 9,850 Dr.underapplied ($8,000 + $3,900 + $4,500

+ $51,500 $58,050)

*or ($22,000 + $171,000 + $116,100 + $58,050 $243,750)

**

Units in

UnitTotal

Job No.Inventory

Cost

Cost

Job 10120

$600$12,000

Job 10215

6329,480

Job 10410

3103,100

Job 10540

330

13,200

Total

$37,780Prob. 195B1.

MY WAY SOFTWARE INC.Income Statement

For the Year Ended December 31, 2010

Sales

$8,000,000

Cost of goods sold

1,620,000

Gross profit

$6,380,000

Selling expenses:

Advertising expenses

$1,380,000

Salespersons commissions

1,200,000

Advertising design

1,400,000

Total selling expenses

3,980,000

Income from operations

$2,400,000

Supporting calculations:

Sales:80,000 units $100 = $8,000,000

Cost of goods sold:80,000 units $20.25 = $1,620,000

Manufacturing cost per unit:

Direct materials:

Blank CD

$2.50

Packaging

4.00

Manual

12.00

Total direct materials

$18.50

Direct labor

0.50

Factory overhead cost

1.25*

Total manufacturing cost per CD

$20.25

*$2,500/2,000 CDs per hour

Salespersons commissions: $8,000,000 15% = $1,200,000

2.Finished Goods balance, December 31, 2010:

(100,000 units 80,000 units) $20.25 = $405,000

Work in Process, December 31, 2010:

4,000 units ($18.50 + $1.25) = $79,000

The materials and copying have already been applied to the 4,000 units.

Only the direct assembly labor has yet to be applied for these units.

SPECIAL ACTIVITIES

Activity 191Two or three trends seem apparent. Starting with the most obvious:

a.There appears to be a strong Friday effect. The unit cost on Friday increases dramatically, then falls on Monday. Apparently, the workforce is preparing early for the weekend.

b.There also appears to be a general increasing trend in the unit cost. Every Friday effect is larger than the previous Friday. Much the same can be said about the other days of the week.

c.Its hard to tell, but there may also be a within week trend. The unit cost appears to increase gradually from Monday through Thursday, before jumping on Friday. At the very least, Mondays are the best operating days, while Fridays are the worst.

A number of further pieces of information should be requested.

a.First, it would be good to verify these trends with some other products. This trend is probably not product-related but related generally to the day of the week. This would mean that the trend should be apparent in the other products.

b.The data should be sorted by shift and by employee. Its possible that the effect is stronger on one shift than on another or that just a few employees are responsible for the effect. It may not be prevalent in the general population of workers.

c.The FridayMonday phenomenon is likely related to the workforce, but the same cannot be said about the larger increasing trend over the four weeks. It could be caused by any number of factors. A good first look would be to isolate materials costs to see if these are contributors. How much of the effect is labor and how much is material should be verified. Its possible that the general increase in cost over time is the result of loss of machine tolerances. Thus, more and more material is being required to produce a unit of product.

d.Has there been any significant change in supervisors or crucial employees that may explain this effect?

e.Have prices increased gradually for the raw materials?

Activity 1921.The unit costs are influenced by both the price and quantity of inputs. On the price side, the cost of steel has dropped from $750 to $740 per ton. This is apparently the result of the purchasing managers decision to reduce the cost of raw materials by going to a new vendor. No other input prices change. Some of the input quantities changed for the worse. Specifically:

Job 110 Job 130

Steel input per unit of product

3.0 tons3.50 tons

Foundry labor per unit of product

11 hours12.50 hours

Welding labor per unit of product

16 hours17.50 hours

These numbers were determined by dividing the number of units produced by the total input quantities to discover the inputs per unit. The inputs for the components and shipping labor were unchanged between the two jobs.

2.A possible reason for this deterioration in performance is related to the purchasing managers decision to change vendors in order to secure a lower price per ton. The new vendor is apparently delivering a lower quality steel product to the company. As a result, the foundry operation is having to spend more time forming the steel parts. Moreover, the increased steel tons per unit is likely to be caused by scrapping some of the formed parts. The scrapped parts would need to be replaced by additional steel inputs, which would have the effect of increasing the number of tons required to make a unit of product. The welding operators are also apparently having difficulty welding the lower quality steel parts. As a result, longer welding time is required to assemble a completed unit.

Overall, management has learned that the drive for lower raw materials prices was a poor decision. The overall net result was higher costs from the additional waste caused by lower quality steel.

Activity 193

1.The engineer is concerned that direct labor is not related to overhead consumption because direct labor is a small part of the cost structure. Apparently, the company has replaced labor with expensive machine technology and support. This, of course, represents more factory overhead. Just because the direct labor is designed out of the product will not mean that this overhead will magically disappear. More likely, the direct labor hours will be replaced by machine-related factory overhead. Thus, the factory overhead goes up while the activity base (direct labor) goes down. Hence, the factory overhead rate will go up.

2.Since each direct labor hour now has $2,500 of factory overhead, small mistakes in the direct labor time estimates can have a large impact on the estimated cost of a product. This is very critical. If the company underestimates the direct labor content by a small amount, it will underbid and win the job. Unfortunately, the job will turn out to have less profitability than expected because the price is smaller than it should be. If the company overestimates the labor time, it will overbid the job. Thus, it will lose out to competitors who bid more accurately. This puts the company into a lose-lose situation when such small labor time errors have such large dollar impacts on the final cost estimate.

3.The engineers concern is valid. The company should consider replacing its direct labor time activity base with one that more accurately reflects its present resources. If the company is now highly automated, then machine hours may be a much more reasonable activity base.Activity 1941.Jack should record the debits for factory wages as a debit to Work in Process. The factory wages are product costs that must be accumulated in the cost of producing the product. Eventually, these wage costs will become part of finished goods inventory and cost of goods sold when the gift items are sold. Likewise, the depreciation should be recorded as a debit to Factory Overhead. The overhead is then applied to production work in process. Like the wages, the depreciation will also eventually become part of the finished goods inventory and cost of goods sold when the gift items are sold. Thus, both the wages and depreciation will end up on the income statement as cost of goods sold, not as individual expenses. The reason is because the accountant wants to match revenues and costs. Costs that are accumulated in the manufacture of products do not become expenses until the items are sold. Until that time, the costs are capitalized as inventory. If these costs were expensed immediately, the income for the firm would be understated for the period to the extent that there were any increases in the work in process or finished goods inventories.

2.Duke would not be concerned about immediately expensing administrative wages and depreciation because the benefits received from these costs are not product costs. Instead, these costs benefit a period of time. Thus, these costs should be expensed for the period.

Activity 195

1.Direct labor cost:

Total actual overhead, 20062010

$3,500,000

Total direct labor cost, 20062010

$14,000,000

Predetermined overhead rate ($3,500,000/$14,000,000)

25.0% of direct labor cost

Machine hours:

Total actual overhead, 20062010

$3,500,000

Total machine hours, 20062010

500,000 hours

Predetermined overhead rate($3,500,000/500,000 hours)

$7.00 per machine hour

2.

2010

2009

2008

Direct

Direct

Direct

LaborMachineLaborMachineLaborMachine

Cost

Hours

Cost

Hours

Cost

Hours

Actual overhead

$710,000$710,000$860,000$860,000$680,000$680,000

Applied overhead

705,000

714,000

862,500

854,000

675,000

686,000

(Over-) underapplied

overhead

$5,000$(4,000)$(2,500)$6,000$5,000$(6,000)

2007

2006

Direct

Direct

LaborMachineLaborMachine

Cost

Hours

Cost

Hours

Actual overhead

$640,000$640,000$610,000$610,000

Applied overhead

645,000

644,000

612,500

602,000

(Over-) underapplied

overhead

$(5,000)$(4,000)$(2,500)$8,000Activity 195Concluded

3.The best predetermined overhead rate is 25% of direct labor cost. Although the total overhead applied for each rate developed in part (1) is the same over the entire 5-year period (as a result of the method by which the predetermined overhead rates were developed), the predetermined overhead rate based on direct labor cost yields the least fluctuations in the amounts of over- or underapplied overhead considered on a year-by-year basis. With the rate based on direct labor cost, the over- or underapplied overhead ranges from $5,000 overapplied to $5,000 underapplied. This fluctuation in the over- or underapplied overhead compares favorably with the fluctuation resulting from using the current overhead base of direct materials ($6,000 overapplied to $5,000 underapplied over the past five years). For the machine-hour base, the over- or underapplied overhead ranges from $6,000 overapplied to $8,000 underapplied. Job Number

Job Number

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Documents

Warren SM Ch.19 Final