strategic cost management chap007
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Chapter 7Job CostingSolutions to Review Questions
Companies using a job order cost system are likely to be performing services or manufacturing products according to specific customer orders and product specifications. Construction contractors, manufacturers of special equipment, aircraft manufacturers, CPA firms, attorneys, and hospitals all employ job order cost systems.
There are two primary reasons that cost allocation bases using direct labor are common. First, direct labor historically was the most important resource used in manufacturing. Second, direct labor usage is already recorded for products, meaning no additional record keeping is required.
The Manufacturing Overhead account is used to accumulate the actual manufacturing overhead costs as they are incurred. Manufacturing Overhead Applied represents the estimate of overhead that is used as a basis for computing work in process and other inventory costs. The applied account is used to facilitate recordkeeping during the period.
A materials requisition is used to document the authorization for issuances of materials from the storeroom while the source document (or receiving slip) is used to indicate quantities and descriptions of materials purchased and received. A time card or time record is used to record labor time for the product or service.
The job costing procedure is basically the same in both types of organizations, except that service firms use less direct materials. Also, service firms typically do not show inventories on their balance sheets, and use a Cost of Services Billed account rather than Cost of Goods Sold.
The costs of a product using normal costing are: Actual direct materials cost. Actual direct labor cost. Applied overhead, which is calculated as: Predetermined overhead rate x actual allocation base.
Mega has choices to make about the allocation base and the cost pools used to accumulate the overhead. This does not mean Mega can choose to do whatever it wants. The government has a set of contracting rules and an audit agency to enforce the rules. However, some interpretation is always required when classifying costs. Solutions to Critical Analysis and Discussion Questions
Actual costing requires knowing the actual costs of overhead as well as the actual direct cost for a job. By the time the actual overhead is known, the information is not timely for decision-making. In addition, actual costing requires allocations of many overhead costs to jobs, so it is only the total costs that are actual, not the job costs.
If materials costs are not properly assigned to jobs, management may later be misled in estimating the actual costs to complete future, similar jobs. Thus, profit planning may be in error. Profitable jobs may be rejected because errors in cost assignments have made the jobs look unprofitable or less profitable. If the company prepares bids on jobs, the bids may be in error if they are based on the wrong costs.
The allocation of overhead matters because decisions are made about individual products. Different allocations result in different reported product costs.
Answers will vary. Expect the managers in small construction firms to base their estimates on their own experience, not a formal model.
Answers will vary.
They would most likely use job costing since their jobs are typically easily identifiable and relatively unique.
Yes, a trial is a job for costing purposes.
Answers will vary. The steps might include:a.Measure the area of the walls;b.Multiply the area by the amount (fractions of a gallon) of paint required per square foot;c.Determine the number of coats of paint required;d.Multiply the amount of paint in step b by the number of coats in step c;e.Determine the costs of miscellaneous supplies (drop cloths, paint brushes, etc.);f.Estimate the labor time for painting by multiplying the area in step a by the amount of time per square foot;g.Multiply the time estimate in step f by the number of coats from step c;h.Multiply the time in step g by the cost of labor per hour;i.Estimate the time required for miscellaneous tasks (preparation, cleanup, etc.);j.Multiply the time from step i by the cost per hour;k. Add the cost of your time (supervision, quality check).
Answers will vary. Common responses are (labor) time, materials cost, wall area, and so on.
Answers will vary. In general, the answer is that this is not ethical. Although the correct allocation basis is subjective, it is difficult to justify the choice by the outcome. There might be other reasons, such as more valuable employees or other resources are used
on jobs for the larger company or that the larger company, being more complex, requires more overhead resources.However, the larger company might require fewer resources, because of economies of scale.Solutions to Exercises(30 min.)Assigning Costs to Jobs: Pawnee Workshops.a.
1.Materials Inventory16,000
Accounts Payable16,000
2.Manufacturing Overhead Control800
Materials Inventory800
3.Materials Inventory11,200
Accounts Payable11,200
4.Accounts Payable16,000
Cash16,000
5.Work-in-ProcessDirect Materials13,600
Materials Inventory13,600
6.Work-in-ProcessDirect Labor20,000
Wages Payable20,000
7.Manufacturing Overhead Control21,200
Cash21,200
8.Work-In-Process Overhead ($20,000 x 125%)25,000
Applied Manufacturing Overhead25,000
9.Manufacturing Overhead Control10,000
Accumulated DepreciationProperty, Plant, and Equipment 10,000
7-18. (continued)b.
Materials Inventory
Balance 10/129,640800 2. Ind. materials
1.16,00013,600 5. Direct materials
3.11,200
Balance 10/3142,440*
*$42,440 = $29,640 + $16,000 + $11,200 $800 $13,600
Work-in-process inventory
Balance 10/16,600
5. Direct materials13,60048,120 Per Finished
6. Direct labor20,000Goods T-account
8. Overhead applied25,000
Balance 10/3117,080
Manufacturing Overhead Control
2.800
7.21,200
9.10,000
Applied Manufacturing Overhead
25,0008.
Accounts Payable
4.16,00016,0001.
11,2003.
Cash
16,0004.
21,2007.
Wages Payable
20,0006.
7-18. (continued)
Accumulated DepreciationProperty, Plant, and Equipment
10,0009.
Finished Goods Inventory
Balance 10/133,200
Goods completed48,120*52,680Transfer to Cost
Balance 10/3128,640of Goods Sold
*$48,120 = $52,680 + $28,640 $33,200
Cost of Goods Sold
Balance 10/3152,680
(20 min.)Assigning Costs to Jobs: Fast Wheels, Inc.a.
1.Materials Inventory20,000
Accounts Payable20,000
2.Manufacturing Overhead Control1,000
Materials Inventory1,000
3.Materials Inventory25,000
Accounts Payable25,000
4.Accounts Payable20,000
Cash20,000
5.Work-in-ProcessDirect Materials30,000
Materials Inventory30,000
6.Work-in-ProcessDirect Labor25,000
Wages Payable25,000
7.Manufacturing Overhead Control21,500
Cash21,500
8.Work-In-ProcessOverhead ($25,000 x 125%)31,250
Applied Manufacturing Overhead31,250
9.Manufacturing Overhead Control5,000
Accumulated DepreciationProperty, Plant, and Equipment 5,000
7-19. (continued)b.
Materials Inventory
Balance 6/19,0001,000 2. Ind. materials
1.20,00030,000 5. Direct materials
3.25,000
Balance 6/3023,000*
*$23,000 = $9,000 + $20,000 + $25,000 $1,000 $30,000
Work-in-process inventory
Balance 6/116,500
5. Direct materials30,00044,500 Per Finished
6. Direct labor25,000Goods T-account
8. Overhead applied31,250
Balance 6/3058,250
Manufacturing Overhead Control
2.1,000
7.21,500
9.5,000
Applied Manufacturing Overhead
31,2508.
Accounts Payable
4.20,00020,0001.
25,0003.
Cash
20,0004.
21,5007.
Wages Payable
25,0006.
7-19. (continued)
Accumulated DepreciationProperty, Plant, and Equipment
5,0009.
Finished Goods Inventory
Balance 6/165,000
Goods completed44,500*73,000Transfer to Cost
Balance 6/3036,500of Goods Sold
*$44,500 = $36,500 + $73,000 $65,000
Cost of Goods Sold
Balance 6/3073,000
(20 min.)Assigning Costs to Jobs: Tarnsdale Fabricators.a.
1.Materials Inventory17,000
Accounts Payable17,000
2.Work-in-ProcessDirect Materials16,800
Materials Inventory16,800
3.Manufacturing Overhead Control1,200
Materials Inventory1,200
4.Accounts Payable17,000
Cash17,000
5.Materials Inventory2,200
Work-in-ProcessDirect Materials2,200
6.Work-in-ProcessDirect Labor31,000
Cash31,000
7.Manufacturing Overhead Control17,200
Accounts Payable17,200
8.Manufacturing Overhead Control35,000
Accumulated DepreciationPlant35,000
9.Work-In-ProcessOverhead ($31,000 x 93%)*28,830
Applied Manufacturing Overhead28,830
* The predetermined rate is 93% (= $403,620 $434,000).7-20. (continued)b.
Materials Inventory
Balance 1/111,400*
1.17,00016,800 2. Direct materials
5.2,2001,200 3. Indirect materials
Balance 1/3112,600
* Beginning Balance = Ending Balance Additions + Uses $11,400 = $12,600 $17,000 $2,200 + $16,800 + $1,200
Work-in-process inventory
Balance 1/115,070*
2. Direct materials16,8002,2005.
6. Direct labor31,00079,000 Transferred to
9. Overhead applied28,830 Finished Goods
Balance 1/3110,500
*$15,070 = $10,500 $16,800 $31,000 $28,830 + $2,200 + $79,000
Manufacturing Overhead Control
3.1,200
7.17,200
8.35,000
Applied Manufacturing Overhead
28,8309.
Accounts Payable
4.17,00017,0001.
17,2007.
Cash
17,0004.
31,0006.
7-20. (continued)
Accumulated DepreciationProperty, Plant, and Equipment
35,0008.
Finished Goods Inventory
Balance 1/12,600
Goods completed79,000*74,500Transfer to Cost
Balance 1/317,100of Goods Sold
*$79,000 = $7,100 + $74,500 $2,600
Cost of Goods Sold
Balance 1/3174,500
(25 min.)Assigning Costs to Jobs: Cardinals, Inc.a.$96,000, the credit side of the Materials Inventory account.b.$72,000.Direct labor$90,000
Labor rate$30 per hour
Direct labor-hours$90,000 $30 = 3,000 hours
Manufacturing overhead applied3,000 x $24=$72,000
c.$180,000, the debit addition to the Finished Goods Inventory account.d.$138,000.BB + TI TO = EB
EB=$60,000 + ($96,000 + $90,000 + $72,000) $180,000
EB=$138,000
e.$6,000 (underapplied) = $78,000 $72,000.f.$96,000.Sales$270,000
Cost of Goods Solda$126,000
S&A costs48,000174,000
Operating profit$96,000
a The credit from Finished Goods Inventory for $120,000 plus $6,000 underapplied overhead.
1. (25 min.)Assigning Costs to Jobs: Blake Corporation.a.$447,000, the debit side of the Materials Inventory account.b.$10,000 overapplied (the difference between overhead control and overhead applied).c.$25/direct-labor hour (= $250,000 Applied 10,000 [= $350,000 $35] Direct Labor Hours).d.$822,000, the debit addition to the Finished Goods Inventory account.e. BB = EB TI + TO
BB=$400,000 ($402,000 + $350,000 + $250,000) + $822,000
BB=$220,000
f. Sales$1,020,000
Cost of Goods Solda$809,000
S&A costs222,0001,031,000
Operating profit($11,000)
a The credit from Finished Goods Inventory for $819,000 minus $10,000 overapplied overhead.(25 min.)Assigning Costs to Jobs: Pine Ridge Corporation.a.$190,000, the credit side of the Materials Inventory account.b.$5,000 underapplied (= $155,000 Control $150,000 Applied).c. 80% (= $150,000 Applied $187,500 Direct Labor Cost).d.$345,000, the debit addition to the Finished Goods Inventory account.
e. BB + TI TO = EB
EB=$100,000 + ($190,000 + $187,500 + $150,000) $345,000
EB=$282,500
f. Sales$600,000
Cost of Goods Solda$256,000
S&A costs105,000361,000
Operating profit$239,000
a The credit from Finished Goods Inventory for $251,000 plus $5,000 underapplied overhead.(10 min.)Predetermined Overhead Rates: Tappan, Inc.
Direct material used$700,000c
Direct labor800,000b
Manufacturing overhead applied500,000a
Total manufacturing cost during the year$2,000,000
Supporting Computationsa Applied manufacturing overhead: $500,000 = 25% x total manufacturing cost (25% x $2,000,000).b Direct labor: 62.5% of direct labor equals $500,000, so direct labor was $800,000 (= $500,000 62.5%).c Direct material used equals total manufacturing cost less direct labor and manufacturing overhead applied [$2,000,000 ($800,000 + $500,000) = $700,000].(15 min.)Predetermined Overhead Rates: Mark Corp.a. Application rate:$90,000 = 45% of direct labor
$200,000
Job 301:$50,000 x .45 =$22,500
Job 302:75,000 x .45 =33,750
Job 303: 100,000 x .45 =45,000
$101,250
b.$97,000 $101,250 = $4,250 overapplied manufacturing overhead.(10 Min.) Prorate Under- or Overapplied Overhead: Mark Corp.First, determine the percentage of overhead applied is in each account:
Applied Overhead% of Total Applied
Work in process inventory$10,12510%(= $10,125 $101,250)
Finished goods30,37530(= $30,375 $101,250)
Cost of goods sold 60,750 60(= $60,750 $101,250)
Total$101,250100%
Second, allocate the overapplied overhead to each account and record as follows:
Applied manufacturing overhead$101,250
Work-in-process inventory (10% x $4,250)425
Finished goods inventory (30% x $4,250)1,275
Cost of good sold (60% x $4,250)2,550
Manufacturing overhead control$97,000
(15 min.)Predetermined Overhead Rates: Aspen Company.a. Application rate:$625,000 = 125% of direct labor
$500,000
Job 2-1:$195,000 x 1.25 =$243,750
Job 2-2:325,000 x 1.25 =406,250
Job 2-3: 130,000 x 1.25 =162,500
$812,500
b.$825,000 $812,500 = $12,500 underapplied manufacturing overhead.
(10 Min.) Prorate Over- or Underapplied Overhead: Aspen Company.First, determine the percentage of overhead applied in each account:
Applied Overhead% of Total Applied
Work in process inventory (Job 2-3)$162,50020%(= $162,500 $812,500)
Finished goods (Job 2-2)406,25050(= $406,250 $812,500)
Cost of goods sold (Job 2-1) 243,750 30(= $243,750 $812,500)
Total$812,500100%
Second, allocate the overapplied overhead to each account and record as follows:
Applied manufacturing overhead$812,500
Work-in-process inventory (20% x $12,500)2,500
Finished goods inventory (50% x $12,500)6,250
Cost of good sold (30% x $12,500)3,750
Manufacturing overhead control$825,000
(20 min.)Applying Overhead Using a Predetermined Rate: Marys Landscaping.Since Job No. 3318 is the only job in the account, the ending balance of the account must equal the total cost of the job. We can find the accounts ending balance using the basic cost equation:BB + TI TO = EBEB=$12,500 + ($81,000 + $54,000 + $43,200) $162,000
EB=$28,700
We are told that direct labor for Job No. 3318 is $3,375 and that overhead is applied at a rate of 80% of direct labor cost. So,Factory overhead=80% x $3,375
=$2,700
To solve for direct materials we set up the cost equation,Total cost=direct materials + direct labor + factory overhead
$28,700=direct materials + $3,375 + $2,700
Direct materials=$28,700 $3,375 $2,700
Direct materials=$22,625
(10 min.)Applying Overhead Using a Predetermined Rate: Turco Products.The ending balance in Work in Process can be determined from the following T-acocunt:
Work-in-process inventory
Balance 9/170,200
Direct materials421,200832,000 To Finished Goods Inventory
Direct labor262,600
Overhead applied315,120
Balance 9/30237,120**
* $237,120 = $70,200 + $421,200 + $262,600 + $315,120 $832,000$237,120 = Materials + Direct Labor + Applied overhead for job 9-27;Materials = $237,120 $35,100 ($35,100 x 120%) = $159,900.(10 min.)Calculating Over- or Underapplied Overhead: Tonys Textiles.
Application rate:$210,000= $6.00 per machine hour
35,000 hours
Overhead applied = 38,500 hours x $ 6.00 = $231,000Overhead incurred = $227,500Overapplied overhead = $227,500 $231,000 = $3,500(25 min.)Job Costing in a Service Organization: Arthurs Olde Consulting Corporation.a.Beginning of monthDirect LaborApplied Overhead(@60%)Total
SY-400$23,040+$13,824=$36,864
SY-40315,120+$9,072=$24,192
During monthBeginning TotalAdditional DirectLaborAdditional Applied Overhead(@60%)
Total
SY-400$36,864+$25,200+$15,120=$77,184
SY-403$24,192+$72,000+$43,200=$139,392
b.Direct LaborApplied Overhead(@60%)Total
SY-404$51,120*+$30,672=$81,792
*$51,120 = $148,320 $25,200 $72,000c.Overhead applied during month:
SY-400$ 15,120
SY-40343,200
SY-40430,672
Total$88,992
Under- or overapplied amount = $88,992 applied $90,000 actual = $1,008 underapplied.(30 min.)Job Costing In A Service Organization: RCMP.
a.Wages PayableWork in ProcessCost of Services Billed
600,000a600,000a672,000c672,000c12,000d
72,000b
Service Overhead ControlApplied Service O.H.
60,00060,000d72,000d72,000b
a$200 per hour x 900 hours for Alberta Company, and $200 per hour x 2,100 hours for Ontario Corp.b$24 per hour x 900 hours for Alberta Company, and $24 per hour x 2,100 hours for Ontario Corp.cSum of work done during August, all billed to clients.dClosing entry to record overapplied overhead of $12,000 (= $72,000 applied $60,000 actual)
b.Royal Consulting and Mediation PracticeIncome StatementFor the Month Ended August 31
Sales revenue$1,200,000a
Cost of services billed$672,000
Subtract: Overapplied service overhead12,000660,000
Gross margin$540,000
Marketing and administration240,000
Operating profit$300,000
a$1,200,000 = 3,000 hours x $400(30 min.)Job Costing In A Service Organization: AB.
a.Wages PayableWork in ProcessCost of Services Billed
220,000a220,000a264,000c264,000c2,000d
44,000b
Service Overhead ControlApplied Service O.H.
42,00042,000d44,000d44,000b
a$200 per hour x 440 hours for Massive Airframes, and $200 per hour x 660 hours for Gigantic Drydocks.b$40 per hour x 440 hours for Massive Airframes, and $40 per hour x 660 hours for Gigantic Drydocks Corp.cSum of work done during March, all billed to clients.dClosing entry to record overapplied overhead of $2,000 (= $44,000 applied $42,000 actual).
b.Allocation BustersIncome StatementFor the Month Ended March 31
Sales revenue$550,000a
Cost of services billed$264,000
Subtract: Overapplied service overhead2,000262,000
Gross margin$288,000
Marketing and administration200,000
Operating profit$88,000
a$550,000 = 1,100 hours x $500
(30 min.)Job Costing In A Service Organization: TechMaster.
a.Wages PayableWork in ProcessCost of Services Billed
65,625a65,625a105,000c105,000c4,375d
39,375b
Service Overhead ControlApplied Service O.H.
35,00035,000d39,375d39,375b
a$75 per hour x 875 hours.b$45 per hour x 875 hours.cSum of work done during August, all billed to clients.dClosing entry to record overapplied overhead of $4,375 (= $39,375 applied $35,000 actual).
b.TechMasterIncome StatementFor the Month Ended August 31
Sales revenue$175,000a
Cost of services billed$105,000
Subtract: Overapplied service overhead4,375100,625
Gross margin$74,375
Marketing and administration55,000
Operating profit$19,375
a$175,000 = 875 hours x $200
Solutions to Problems(15 min.)Estimate Machine-Hours Worked From Overhead Data: Sydney Corp.With $80,000 in fixed costs expected and 20,000 machine hours expected, the application rate for the fixed costs was $4.00 per machine hour (= $80,000 20,000 hours). Overhead applied = Budgeted overhead + Overapplied overhead = $80,000 + $11,000 = $91,000. = Machine hours worked x $4 per machine hour.Machine hours worked = $91,000 $4 = 22,750 machine hours.(25 min.)Estimate Hours Worked From Overhead Data: Valley Corp.60,450 direct labor-hours were worked. With $234,000 in fixed costs expected and 58,500 direct-labor-hours expected, the application rate for the fixed costs was $4.00 per direct labor-hour. If the underapplied overhead, all due to production volume, is $3,900, then 975 fewer than expected direct labor-hours were worked ($3,900 $4 per hour). Consequently, 57,525 (= 58,500 975) direct labor-hours were worked.Also, see T accounts below:
Manufacturing Overhead ControlApplied Manufacturing Overhead
234,000(given as actual = expected)230,100(= $4 x Actual hours worked)
From these accounts, we solve for actual hours worked: Actual hours worked = $230,100 $4 = 57,525 hours worked.
(40 min.)Assigning CostsMissing Data.(a)$100,000, the other side of the credit to the Accounts PayableMaterials Suppliers account.(b)$94,000, From the Materials Inventory account, $8,000 + $100,000 $4,300 $9,700 = $94,000.(c)$121,000 = $162,000 + $119,500 $124,300 $36,200.(d)$180,500, the charge to Work-in-process inventory that is not due to direct materials or direct labor.(e)From the Work-in-Process Inventory account:
$400,100 = $22,300 + $180,500 + $121,000 + $94,000 $17,700.(f)$402,800 from the Cost of Goods account.(g)$11,500 = $14,200 + $400,100 (from e) $402,800 (from f).(h)$31,600 (charged to Manufacturing Overhead Control) = $235,700 $204,100.(i)$3,200 (charged to Manufacturing Overhead Control) = $24,300 $21,100.
(50 min.)Assigning CostsMissing Data.Materials Inventory
Balance 11/145,400(a)86,200Direct materials
Purchases113,600(a)16,400Indirect materials
Balance 11/3056,400
Work-in-Process Inventory
Balance 11/132,600
(given)Direct materials86,200
(b)Direct labor176,000374,400 (d)
(b)Overhead applied264,000
(d)Balance 11/30184,400
(h)Proration6,270
Balance 11/30190,670
Finished Goods Inventory
Balance 11/1129,600
(d)374,400(c)403,000
Balance 11/30101,000
(h)Proration3,762
Balance 11/30104,762
Cost of Goods Sold
(c)403,000
(h)Proration15,048
Manufacturing Overhead Control
(a)16,400
(e)26,000
(f)48,200
(g)198,480289,080(h)
Applied Manufacturing Overhead
(given)264,000
(h)264,000
7-39. (continued)
Wages Payable
(b)176,000
(e)26,000
Sales Revenue
(given)725,400
(a)From the work in process account, we obtain the $86,200 in direct materials issued. The beginning balance equals the ending balance of $56,400 minus the increase of $11,000 equals $45,400. The unaccounted balance represents indirect materials and is determined as:$45,400 + $113,600 $56,400 $86,200 (debit to work in process)
=$16,400
(b)Let X = Direct labor costsOverhead applied=150% X
$264,000=150% X
X=$176,000
(c)Let X = Cost of goods soldSales=180% X
$725,400=180% X
X=$403,000
(d)Finished goods BB = Finished Goods EB + $28,600BB=101,000 + 28,600
BB=$129,600
Cost of goods manufactured=Finished goods EB + Cost of goods sold Finished Goods BB
=$101,000 + $403,000 $129,600
=$374,400
Work in process EB=$32,600 + $86,200 + $176,000 + $264,000 $374,400
=$184,400
(e)Indirect labor=Total credits to Wages Payable Direct labor
=$202,000 $176,000
=$26,000
7-39. (continued)(f)Charge factory depreciation to manufacturing overhead.(g)Charge overhead to manufacturing overhead.(h)Proration to:Work-in-process(25% x $25,080)$6,270
Finished goods(15% x $25,080)3,762
Cost of goods sold (60% x $25,080)15,048
$25,080
(40 min.)Analysis Of Overhead Using A Predetermined Rate: Kansas Company.a.$10.60 per DLH. $1,908,000 = $10.60 per DLH
180,000
b.$475,500.Beginning balance$162,000
Direct materials135,000
Direct labor84,000*
Overhead applied94,500**
$475,500
*The wage rate for direct labor is $8.00 per hour. $8.00 x 10,500 hours = $84,000.**$9.00 x 10,500 direct labor-hours.c. $54,000 (= $9.00 x 6,000 direct labor-hours)d. $229,500 (= $9.00 x 25,500 direct labor-hours)
e.$220,500.Supplies$18,000
Indirect labor wages51,000
Supervisory salaries108,000
Factory facilities19,500
Factory equipment costs24,000
$220,500
f.Credit it to cost of goods sold. The amount is clearly not material (0.1% of cost of goods sold), so it is not worth the effort involved in prorating.
Overapplied Overhead$0
Cost of Goods Sold2,937,000*
Work-in-Process Inventory114,000
Finished Goods Inventory246,000
*$2,940,000 $3,000
If it were material, then the proper answer would be to prorate it between work-in-process inventory, finished goods inventory, and cost of goods sold.(40 min.)Analysis Of Overhead Using A Predetermined Rate: UCD Company.a.$49 per DLH. $980,000 = $49 per DLH
20,000
b.$890,300.Beginning balance$91,300
Direct materials281,000
Direct labor168,000*
Overhead applied350,000**
$890,300
*The wage rate for direct labor is $24.00 per hour. $24.00 x 7,000 hours = $168,000.**$50.00 x 7,000 direct labor-hours.c. $92,500 (= $50.00 x 1,850 direct labor-hours)d. $595,000 (= $50.00 x 11,900 direct labor-hours)e.$344,500.Supplies$76,700
Indirect labor wages63,000
Supervisory salaries128,000
Factory facilities36,900
Factory equipment costs39,900
$344,500
f.In this case, the underapplied overhead is relatively large (it is greater than 10% of cost of goods sold, so the company might consider it material and decide to prorate it. (The decision depends, at least in part, on the how the resulting information will be used and who would be using it.) Without more detailed information on the direct labor (or applied overhead), we will allocate the underapplied overhead based on account balances. The share would be 70% (= $28 million $40 million for cost of goods sold), 10% (= $4 million $40 million for Work-In-Process Inventory), and 20% (= $8 million $40 million for cost of goods sold) for Finished Goods Inventory. This yields:
Underapplied Overhead$0
Cost of Goods Sold$30,100,000*
Work-in-Process Inventory4,300,000**
Finished Goods Inventory8,600,000***
*$28,000,000 + (70% x $3,000,000)
**$4,000,000 + (10% x $3,000,000)
***$8,000,000 + (20% x $3,000,000)
(30 min.)Finding Missing Date: BackupsRntUsa.February 29: Ending Work-in-process inventory: only one job is remaining in ending Work-in-process inventory.
Direct Materials$15,600
Direct Labor10,800 ($36 per hour x 300 hours)
Manufacturing Overhead5,400 ($18 per hour x 300 hours)
Total Cost of Ending Work in Process Inventory $31,800
b.Direct materials purchased during February:Since the accounts payable account is used only for direct material purchases, the months purchases can be determined from analyzing the accounts payable account:Beginning Balance+Transfers InTransfers Out=Ending Balance
$36,000+Transfers In$252,000=$54,000
Transfers In=$270,000
c.Actual manufacturing overhead incurred during February:$18 per hour x 5,200 total direct labor-hours = $93,600
d.Cost of goods sold during February:Beginning FinishedGoods Inventory+Cost of GoodsManufacturedCost of Goods Sold=Ending Finished Goods Inventory
$108,000+$564,000Cost of Goods Sold=$66,000
$672,000$66,000=Cost of Goods Sold
$606,000=Cost of Goods Sold
Chapter 07 - Job Costing
Chapter 07 - Job Costing
7-26 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
7-1 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.(30 min.)Cost AccumulationService: Youth Athletic Services.T-accounts (Not requiredsee next page for income statement)Wages, Salaries,and AccountsPayableManaging Direct Labor CostOfficiatingDirect Labor CostTraining Direct Labor CostDispute ResolutionDirect Labor CostUnassignedLabor Cost
4,8001,2001,8751,350375
(= $15 x 320)(= $15 x 80)(= $15 x 125)(= $15 x 90)(= $15 x 25)
9,600ManagingDirect Overhead CostOfficiating Direct Overhead CostTraining Direct Overhead CostDispute Resolution DirectOverhead Cost
5,060950200375
8753001,000
7002501501020050
7-43. (continued)Income StatementYouth Athletic ServicesIncome StatementFor Month Ending July 31ManagingOfficiatingTrainingDispute ResolutionTotal
Revenue$6,950$7,900$3,000$1,000$18,850
Cost of Services:
Labora$4,800$1,200$1,875$1,350
Direct Overheadb1,5252,1751,100260
Indirect Overheadc 384 96 150 108
Total costs of services$6,709$3,471$3,125$1,718$15,023
Department margin$ 241$4,429$(125)$(718)$3,827
Less other costs:
Unassigned labor costs (idle time)d375
Unassigned overhead indirect costse30
Marketing and administrative costsf6,075
Operating profit$(2,653)
aAmounts equal $15 per hour times direct labor-hours according to the problem (managing, $15 x 320 hours; etc.)bAmounts equal the sum of direct overhead items given in the problem.cRate =Total cost=$768 = $1.20 per hour. For managing, $1.20 x 320 hours = $384, etc.
Total hours640 hours worked
(including idle time)
d$375 = $15 x 25 hourse$30 = $768 $384 $96 $150 $108 = $1.20 x 25 hours.fSum of marketing and administrative costs ($3,000 + $2,250 + $600 + $225)
The McGraw-Hill Companies, Inc., 201328Fundamentals of Cost Accounting
7-43.(continued)Only Managing and Officiating are clearly profitable. Training is losing a small amount of money. The problem is in Dispute Resolution where the revenue is less than the direct labor. The company should reconsider the pricing policy for Dispute Resolution or consider dropping the service. The company should also consider the role of Mayes assistant considering the salary and the revenues.(25 min.)Job CostsService Company: Bay Accountants.
a.
Lake Lumber
Martys MarinaState Prison SystemUnassigned Costs (not required)
Total
Revenue$320,000$96,000$160,000$576,000
(= 2,000 x $160)(= 600 x $160)(= 1,000 x $160)
Labor$120,000$36,000$60,000$24,000240,000
(= 2,000 x $60)(= 600 x $60)(= 1,000 x $60)(= 400 x $60)
Overheada$30,000$9,000$15,0006,00060,000
Margin$170,000$51,000$85,000
a$30,000 = (2,000 4,000) x $60,000; $9,000 = (600 4,000) x $60,000; and so on.
7-48 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
7-44. (continued)b.Bay AccountantsIncome StatementFor Month Ending January 31
Revenue from clients$576,000
Less cost of services to clients:
Labor$216,000
Overhead54,000
Total cost of services to clients270,000
Gross margin$306,000
Less other costs:
Labor$24,000
Overhead6,000
Marketing and administrative costs40,000
Total other costs70,000
Operating profit$236,000
(50 min.)Job Costs In A Service Company: Petes Patios.Materials Inventory
Balance 9/1 (given)11,040192Indirect Materials
Purchases (given)1,3923,768Requisition
Balance 9/308,472
Work-in-Process Inventory
(a) Balance 9/19,5107,270Job PP-24(c)
(b) Job PP-244,08019,616Job PP-30(e)
(d) Job PP-3013,296
(f) New Job(s)10,872
Balance 9/3010,872
Finished Goods Inventory
Balance 1/1 ($4,704 + $1,896)6,600
(c) Job PP-247,2706,600Sold
(e) Job PP-3019,616
Balance 9/3026,886
a.Direct Materials + Direct Labor + Applied Overhead
=$2,038 + $1,280 + $768 + $3,360 + [50% ($768 + $3,360)]
=$9,510.
b.To complete Job PP-24:
$2,720 Direct Labor + ($2,720 x 50%) Applied Overhead
=$4,080.
c.Transfer to Finished Goods: Job PP-24 Beginning Inventory Cost + Current Cost
=$3,190 + $2,720 + 50%($2,720)
=$7,270.
d.To complete Job PP-30: $1,296 Materials + $8,000 Direct Labor + (50% x $8,000) Applied Overhead
=$1,296 + $8,000 + $4,000
=$13,296.
e.Transfer of Job PP-30: Beginning Inventory Cost + Current Cost
=[$1,280 + $3,360 + 50%($3,360)] + [$1,296 + $8,000 + 50%($8,000)]
=$19,616
7-45. (continued)
f.New Job Cost = Current Charges to WIP less Current Charges for Jobs PP-24 and PP-30:
=Current Materials + Direct Labor + Overhead Job PP-24 Current Cost Job PP-30 Current Cost
=$3,768 + $16,320 + $50%($16,320) $4,080(b)* $13,296(d)*
=$10,872
*These letters refer to solution parts b and d above.
(55 min.)Tracing Costs In A Job Company: Dungan Cabinetry
a.(1)Materials Inventory53,700
Accounts Payable53,700
(2)Manufacturing Overhead1,500
Materials Inventory1,500
(3)Accounts Payable53,700
Cash53,700
(4)Work in ProcessDirect Materials25,500
Materials Inventory25,500
(5)Payroll42,000
Payroll Taxes Payable13,500
Cash28,500
(6)Payroll21,000
Fringe Benefits Payable21,000
(7)Work in Process (60% x $63,000)37,800
Manufacturing Overhead (30% x $63,000)18,900
Administrative and Marketing Costs (10% x $63,000)6,300
Payroll ($21,000 + $42,000)63,000
(8)Manufacturing Overhead32,400
Cash32,400
(9)Work in ProcessOverhead ($37,800 x 175%)66,150
Applied Manufacturing Overhead66,150
(10)Manufacturing Overhead Control17,250
Accumulated DepreciationProperty, Plant, and Equipment17,250
7-46. (continued)b.Materials Inventory
Balance 1/155,5751,500 (2)
(1)53,70025,500 (4)
Balance 1/3182,275a
a$82,275 = $55,575 + $53,700 $1,500 $25,500.Work-in-Process Inventory
Balance 1/112,37586,325Per Finished Goods
(4) Direct Materials25,500T-account
(7) Direct Labor37,800
(9) Overhead Applied66,150
Balance 1/3155,500b
b$55,500 = $12,375 + $25,500 + $37,800 + $66,150 $86,325.
Manufacturing Overhead Control
(2)1,500
(7)18,900
(8)32,400
(10)17,250
Applied Manufacturing Overhead
66,150 (9)
Accounts Payable
(3) 53,70053,700 (1)
7-46. (continued)
Cash
53,700(3)
28,500(5)
32,400(8)
Payroll
(5)42,000
(6)21,00063,000(7)
Payroll Taxes Payable
13,500(5)
Fringe Benefits Payable
21,000(6)
Administrative and Marketing Costs
(7)6,300
Accumulated DepreciationProperty, Plant, and Equipment
17,250(10)
Finished Goods
Balance 1/162,250
Goods Completed86,325a98,775 Cost of Goods Sold
Balance 1/3149,800
a$86,325 = $98,775 + $49,800 $62,250.
Cost of Goods Sold
Balance 1/3198,775
(50 min.)Cost Flows Through Accounts: Brighton Servicesa.T accounts.
Materials Inventory
137,200(1a)
93,000(1b)
94,000(1c)
Wages Payable
490,000(2a)
312,400(2b)
197,600(2c)
Variable Manufacturing Overhead
(Actual)(Applied)
62,00029,900 (3a)
27,500(3b)
4,600(3c)
Fixed Manufacturing Overhead
(Actual)(Applied)
209,200104,000 (4a)
88,200(4b)
17,000(4c)
Work-in-Process Inventory
(1)324,200761,100(a)
(2)1,000,000521,100(b)
(3)62,000
(4)209,200
(1) = the sum of the amounts (1a) + (1b) + (1c)(2) = the sum of the amounts (2a) + (2b) + (2c)(3) = the sum of the amounts (3a) + (3b) + (3c)(4) = the sum of the amounts (4a) + (4b) + (4c)a761,100 = 137,200 + 490,000 + 29,900 + 104,000b521,100 = 93,000 + 312,400 + 27,500 + 88,200
7-47. (continued)
Finished Goods Inventory
(a)761,100
(b)521,1001,282,200
Cost of Goods Sold
1,282,200
b.Total Direct Labor Costs = $4,000,000.Total Direct labor-hours=$4,000,000 = 200,000 hours.
$20 per Hour
Variable Manufacturing Overhead = .30 x $1,040,000 = $312,000.
Predetermined Variable Overhead Rate=$312,000
200,000
= $1.56 per Direct Labor-Hour.
Fixed Manufacturing Overhead = 0.70 x $1,040,000 = $728,000Predetermined Fixed Overhead Rate=$728,000
200,000
= $3.64 per Direct Labor-Hour.
7-47. (continued)c.T accountsMaterials Inventory
137,200(1a)
93,000(1b)
94,000(1c)
Wages Payable
490,000(2a)
312,400(2b)
197,600(2c)
Variable Manufacturing Overhead*
(Actual)(Applied)
62,00038,220 (3a)
Overapplied (5)16,00024,367(3b)
15,413(3c)
Fixed Manufacturing Overhead*
(Actual)(Applied)
209,20089,180 (4a)
56,857(4b)
35,963(4c)
27,200(5) Underapplied
*These can be divided into two accounts, one for actual and one for applied. We put them in one account to save space.
Work-in-Process Inventory
(1)324,200754,600(a)
(2)1,000,000486,624(b)
(3)78,000
(4)182,000
(1) = the sum of the amounts (1a) + (1b) + (1c) (2) = the sum of the amounts (2a) + (2b) + (2c) (3) = the sum of the amounts (3a) + (3b) + (3c) (4) = the sum of the amounts (4a) + (4b) + (4c)
7-47. (continued)
Finished Goods Inventory
(a)754,600
(b)486,6241,241,224
Cost of Goods Sold
1,241,224
Under-or Over-Applied Overhead
(5)27,20016,000(5)
d.ActualNormal
Sales Revenue$1,400,000$1,400,000
Less Cost of Goods Sold(1,282,200)(1,241,224)
Gross Margin$117,800$158,776
Less:
(Under-) Overapplied Overhead(11,200)
Marketing and Administrative Costs(112,000)(112,000)
Operating Profit (Loss)$ 5,800$35,576
(60 min.)Show Flow Of Costs To Jobs: Kims Asphalt.a.1.Payment received on account
Cash12,500
Accounts receivable12,500
2.Inventory purchase
Materials and equipment inventory9,400
Accounts payable9,400
3.Billing
Accounts receivable130,000
Sales revenue130,000
Cash75,000
Accounts receivable75,000
4.Indirect labor
Manufacturing overheadIndirect labor650
Wages payable650
5.Indirect materials issued
Manufacturing Overhead155
Materials and equipment inventory155
6.Overhead and advertising
Manufacturing Overhead [$550 + $675 + $320 + $200 + $325 + $450]2,520
Selling costsAdvertising600
Cash2,670
Accumulated Depreciation450
7.Charges to Work in Process
Work in processmaterials and equipment[$3,000 + $4,800 + $4,600 + $2,900]15,300
Work in processdirect labor[$4,500 + $6,750 + $5,900 + $1,600]18,750
Work in processoverhead applied [30% x $18,750]5,625
Materials inventory15,300
Wages payable18,750
Overhead applied5,625
8.Transfer of Job 33
Cost of installations completed and sold100,200
Work in processmaterials and equipment [$52,500 + $4,800] 57,300
Work in processdirect labor [$26,250 + $6,750]33,000
Work in processoverhead applied [30% x $33,000]9,900
Note: No finished goods inventory account is required.
7-48. (continued)
b.Overhead analysis:
Applied (Entry 7)$5,625
Incurred
Entry 4$650
Entry 5155
Entry 62,520
3,325
Overapplied$2,300
c.Inventory balances
Materials and Equipment Inventory
Balance 5/136,00015,300(7)
(2)9,400155(5)
Balance 5/3129,945
Work-in-process inventory
Balance 5/1119,550*
Current charges (7)39,675100,200(8) Job 33
Balance 5/3159,025
Cost of Goods Sold**
(8)100,200
2,300Overapplied overhead
Balance 5/3197,900
*Job 27 + Job 33 = $32,925 + $86,625 **Not required.
(70 min.)Reconstruct Missing Data: Toledo Farm Implements. This is a challenging problem. We put the work in process account for May on the board for the "big picture," then solve for each item in the account as follows:
Work-in-Process
(a)Balance, beginning172,400
(b)Direct materials140,628107,000Transferred to finished goods(d)
(c)Direct labor135,400408,028Disaster loss(f)
(e)Overhead applied66,600
Balance, ending0
The calculations are shown below. We usually present these using both T-accounts and the following formulas.
(a)Given
(b)Direct materials=Beginning inventory + Purchases Ending inventory Indirect materials
=$98,000a + $132,800* $86,000a $4,172 (from paper scrap)
=$140,628
*Purchases=Accounts payable, ending + Cash payments Accounts payable, beginning
=$100,200a + $75,800a $43,200a
=$132,800
( c)Direct labor=Payroll Indirect labor
=$164,800a $29,400a
=$135,400
(d) Cost transferred to finished goods inventory = Finished goods, ending + Cost of goods sold Finished goods, beginning=$75,000a + ($793,200a $697,200a) $64,000a
=$107,000
7-49. (continued)
(e)Overhead applied=Ending manufacturing overhead beginning manufacturing overhead + overapplied overhead
=$434,000a $369,800a + $2,400a
=$66,600
(f)Loss=$172,400a + $140,628 + $135,400 + $66,600 $107,000
=$408,028
Note: The insurance company may dispute paying the $2,400 overapplied overhead.aGiven in problem(70 min.)Find Missing Data: IYF Corporation. The calculations are shown below. We usually present these using both T-accounts and the following formulas.(a)Beginning inventory + Transfers in = Ending inventory + Transfers Out
Beginning inventory=Ending inventory + Transfers Out Transfers in
=$3,000 + $45,000 $37,000
=$11,000
(b) $8,000. Because any over- or underapplied is written off to Cost of Goods Sold, the difference between the Cost of Goods Sold journal entry ($45,000) and the Cost of Goods Sold amount on the income statement ($45,400) must be the amount of underapplied overhead. Underapplied overhead is 5% of overhead applied for June, so total overhead applied is $8,000 (= $400 5%)
(c)Overhead rate = 80% (= $8,000 $10,000)
(d)Overhead incurred=Overhead applied + Underapplied overhead
=$8,000 + $400
=$8,400
(e) $3,000.Work in process beginning + Manufacturing costs = Work in process ending + Transfers to Finished Goods Inventory.
But, Work in process ending = 2 x Work in process beginning.Therefore, Work in process beginning + Manufacturing costs = 2 x Work in process beginning + Transfers to finished goodsand,
Work in process beginning = Manufacturing costs Transfers to finished goods.
We know the amount of direct labor, but not the amount of direct materials transferred into production. For this, we use the inventory equation for direct materials. Direct materials beginning + Purchases = Direct materials ending + Transfers outDirect materials ending = Direct materials beginning $7,000, so Transfers out = $15,000 + $7,000 = $22,000.Work in process beginning = $22,000 (direct materials) + $10,000 (direct labor) + $8,000 (applied manufacturing overhead) $37,000 (transferred out) = $3,000.(f) $6,000 (= 2 x $3,000 work in process beginning).
(70 min.)Find Missing Data: NIC Enterprises.The calculations are shown below. We usually present these using both T-accounts and the following formulas.(a)Beginning inventory + Transfers in = Ending inventory + Transfers Out
Ending inventory=Beginning inventory + Transfers in Transfers Out
=$148,000 + $1,520,000 $1,460,000
=$208,000
(b) $500,000. Because any over- or underapplied is written off to Cost of Goods Sold, the difference between the Cost of Goods Sold journal entry ($1,460,000) and the Cost of Goods Sold amount on the income statement (the difference between revenues and gross profit or, $1,450,000) must be the amount of overapplied overhead. Overapplied overhead is 2% of overhead applied for September, so total overhead applied is $500,000 (= $10,000 2%)
(c)Overhead rate = 625% (= $500,000 $80,000)
(d)Overhead incurred=Overhead applied Underapplied overhead
=$500,000 $10,000
=$490,000
(e) $568,000.Work in process beginning + Manufacturing costs = Work in process ending + Transfers to Finished Goods Inventory.
But, Work in process ending = 1.25 x Work in process beginning.Therefore, Work in process beginning + Manufacturing costs
= 1.25 x Work in process beginning + Transfers to finished goodsand,
0.25 x Work in process beginning = Manufacturing costs Transfers to finished goods.We know the amount of direct labor, but not the amount of direct materials transferred into production. For this, we use the inventory equation for direct materials. Direct materials beginning + Purchases = Direct materials ending + Transfers outDirect materials ending = Direct materials beginning $25,000, so Transfers out = $1,057,000 + $25,000 = $1,082,000.0.25 x Work in process beginning = $1,082,000 (direct materials) + $80,000 (direct labor) + $500,000 (applied manufacturing overhead) $1,520,000 (transferred out) So, Work in process beginning = $142,000 0.25 = $568,000.(f) $710,000 (= 1.25 x $568,000 work in process beginning).
(45 min.)Incomplete DataJob Costing: Chelsea Household Renovations.The following information should be included (in summary) in a report to management.
Work-in-ProcessCost of Goods Sold
Cash or Accounts PayableJob No. 61Job No. 61
18,400*M*8,0008,000M*8,000
L*38,40076,800L76,800
O319,20038,400O238,400
6/165,600123,200*
L138,400
O419,200
6/300
Wages PayableJob No. 62Job No. 62
128,000*M512,00012,000M12,000
L648,00048,000L48,000
O724,00024,000O24,000
6/30084,000
OverheadJob No. 63Underapplied Overhead
ActualAppliedM*6,40016,00010
80,000*64,0009L*41,600
O820,800
6/3068,800
Note: See footnotes on next page.
7-52. (continued)M refers to direct materialsL refers to direct laborO refers to manufacturing overhead*Numbers given in the problem1Labor to complete job is $76,800 since the beginning inventory was 50% complete2Applied overhead=$123,200 $8,000 $76,800
=$38,400
Applied overhead=$38,400
$76,800
=50%of direct labor dollars
3Overhead in beginning inventory=0.50 x $38,400
=$19,200
4Overhead applied in June=0.50 x $38,400
=$19,200
5Materials for Job No. 62=Purchases materials for Job No. 63
=$18,400 $6,400
=$12,000
6Labor for Job No. 62=Total direct labor costs Labor for Job No. 61 Labor for Job No. 63
=$128,000 $38,400 $41,600
=$48,000
7Overhead for Job No. 62=0.50 x $48,000
=$24,000
8Overhead for Job No. 63=0.50 x $41,600
=$20,800
7-52. (continued)
9Applied Overhead=$19,200 + $24,000 + $20,800
=$64,000
10Underapplied overhead=Actual Applied
=$80,000 $64,000
=$16,000
(25 min.) Job Costing and Ethics: Old Port Shipyards.(This problem is based on actual experience.) a.Olde TownNewton
Overhead cost$20,000,000$80,000,000
Direct labor-hours200,000200,000
Predetermined rate$100 per hour$400 per hour
(Overhead Hours)(= $20,000,000 200,000)(= $80,000,000 200,000)
b. The supervisor recognizes that if the government audit agency allows the overhead rates to be calculated on a location-specific basis, it will be better for Old Port to do the work at Newton, because the overhead, which will be part of the cost charged, will be higher than if it is done at Olde Town.c. The question is whether there is a functional difference in the two dry docks, so that the work is actually different. If there is not a functional difference or another valid reason for separating the costs, there might be an ethical issue.(25 min.) Job Costing and Ethics: Price and Waters.a.Chuck should refuse to charge the U.S. Department of Defense for work for General Motors. b.The fact that the consulting firm is being reimbursed for the government job and not the General Motors job gives the manager an incentive to try and shift costs to the government job. (If both jobs were fixed price, the total profits would remain the same regardless of the assignment of the costs.)(25 min.) Job Costing and Ethics: Global Partners.a.Because the choice is between direct labor hours and direct labor cost, the circumstance that would cause a difference is if different direct labor employees
were paid different amounts. If all are paid the same rate, the two bases will give the same result. b.In general, the result of the cost allocation is a weak justification for the choice of the base, especially when it means differences in prices charged. If employees are randomly assigned to jobs, hours is probably the better choice, because it avoids the distortion of direct labor rates, which are irrelevant for resource usage (given the random assignment). If different skill sets are required, allocating based on direct labor costs is probably better, because the labor rates will reflect the skill requirements.Solutions to Integrative Case(75 min.) Cost Estimation, Estimating Overhead Rates, Job Costing, and Decision-Making: OLeary Corporation.This problem relates overhead allocation to cost estimation and decision making. It uses some of the methods of Chapters 4 and 5.a. $965,400 (Work-in-Process Inventory) and $637,500 (Finished Goods Inventory).Job MC-275 is the only job in process. It has accumulated the following costs:Direct materials$495,000(Given)
Direct labor54,400(= $17 x 3,200 hours)
Manufacturing overhead416,000(= $130 x 3,200 hours)
$965,400
Job MC-270 is the only job in finished goods. It has accumulated the following costs:Direct materials$270,000(Given)
Direct labor42,500(= $17 x 2,500 hours)
Manufacturing overhead325,000(= $130 x 2,500 hours)
$637,500
b. $1,069,500.The predetermined overhead rate in year 3 is $140 per direct labor-hour. OLeary uses the actual rate from the previous year and $140 = $7,560,000 54,000 hours).Beginning costs $965,400(From requirement (a))
Additional direct material57,000(given)
Additional direct labor5,100(= $17 x 300 hours)
Manufacturing overhead42,000(= $140 x 300 hours)
$1,069,500
c. $1,240,000 overapplied.Overhead applied$10,360,000(= $140 x 74,000 hours)
Overhead incurred 9,120,000(Given)
Overapplied overhead$1,240,000
7-56. (continued)d. A variety of allocations can be used. Because we know how many direct labor hours are in each account from year 3, we will use this basis. Direct labor hours are the basis for applying overhead. If this were unknown, we could use total account balances. First, determine the number of direct labor-hours used in year 3 in each account. Direct labor hours, year 374,000(Given)
In work in process, end of year 37,400(6,100 in MC-397 + 1,300 in MC-399)
In finished goods, end of year 34,44011,840(1,740 in MC-389 + 2,700 in MC-390)
In cost of goods, year 362,160(74,000 11,840)
The allocation is then based on the relative amounts in each account:AccountPercentageAllocation
Work in process10% (= 7,400 74,000)$124,000(= .10 x $1,240,000)
Finished goods6 (= 4,440 74,000)74,400(= .06 x $1,240,000)
Cost of sales84 (= 62,160 74,000)1,041,600(= .84 x $1,240,000)
$1,240,000
Allocate Overapplied Overhead
Overhead applied1,240,000
Work in process124,000
Finished goods74,400
Cost of sales1,041,600
7-56. (continued)e. $567,500.This is a special order problem similar to those discussed in Chapter 4. The minimum bid would be the variable cost of the job, ignoring strategic or other considerations. The variable cost of the job (ignoring sales and administrative costs as instructed in the problem) consists of direct material, direct labor, and variable manufacturing overhead. To estimate the variable portion of overhead, we can use the high-low method discussed in Chapter 5. The high and low years are year 3 and year 4, respectively. (Note that these are also the most recent years, so they might also be the most relevant for the estimation.) Applying the high-low method:
$9,120,000 $7,560,000=$1,560,000
74,000 54,00020,000
=$78 per direct labor-hour
Total overhead (Year 3)$9,120,000
Total variable overhead (74,000 x $78)(5,772,000)
Total fixed overhead$3,348,000
The variable cost of the special job can be estimated as follows:Direct materials$ 92,500(Given)
Direct laborr85,000(= $17 x 5,000 hours)
Variable manufacturing overheadd 390,000(= $78 x 5,000 hours)
Total $567,500
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