chapter 10 - answer

CHAPTER 9

MANAGEMENT ACCOUNTING - Solutions Manual

Chapter 10 Systems Design: Job-Order Costing and Process CostingSystems Design: Job-Order Costing and Process Costing Chapter 10

CHAPTER 10SYSTEMS DESIGN: JOB-ORDER COSTING AND PROCESS COSTING

I.Questions1. Job-order costing is used in those manufacturing situations where there are many different products produced each period. Each product or job is different from all others and requires separate costing. Process costing is used in those manufacturing situations where a single, homogeneous product, such as cement, bricks, or gasoline, is produced for long periods at a time.

2. The job cost sheet is used in accumulating all costs assignable to a particular job. These costs would include direct materials cost traceable to the job, and manufacturing overhead cost allocable to the job. When a job is completed, the job cost sheet is used to compute the cost per completed unit. The job cost sheet is then used as a control document for: (1) determining how many units have been sold and determining the cost of these units; and (2) determining how many units are still in inventory at the end of a period and determining the cost of these units on the balance sheet.

3. Many production costs cannot be traced directly to a particular product or job, but rather are incurred as a result of overall production activities. Therefore, in order to be assigned to products, such costs must be allocated to the products in some manner. Examples of such costs would include utilities, maintenance on machines, and depreciation of the factory building. These costs are indirect production costs.

4. A firm will not know its actual manufacturing overhead costs until after a period is over. Thus, if actual costs were used to cost products, it would be necessary either (1) to wait until the period was over to add overhead costs to jobs, or (2) to simply add overhead cost to jobs as the overhead cost was incurred day by day. If the manager waits until after the period is over to add overhead cost to jobs, then cost data will not be available during the period. If the manager simply adds overhead cost to jobs as the overhead cost is incurred, then unit costs may fluctuate from month to month. This is because overhead cost tends to be incurred somewhat evenly from month to month (due to the presence of fixed costs), whereas production activity often fluctuates. For these reasons, most firms use predetermined overhead rates, based on estimates of overhead cost and production activity, to apply overhead cost to jobs.

5. An allocation base should act as a cost driver in the incurrence of the overhead cost; that is, the base should cause the overhead cost. If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and their costs will be distorted.

6. A process costing system is appropriate in those situations where a homogeneous product is produced on a continuous basis.

7. In a process costing system, costs are accumulated by department.

8. First, the activity performed in a department must be performed uniformly on all units moving through it. Second, the output of the department must be homogeneous.

9. The reason cost accumulation is simpler is that costs only need to be identified by department - not by separate job. Usually there will be only a few departments in a company, whereas there can be hundreds or even thousands of jobs in a job-order costing system.

10. A quantity schedule shows the physical flow of units through a department during a period. It serves several purposes. First, it provides the manager with information relative to activity in his or her department and also shows the manager the stage of completion of any in-process units. Second, it serves as an essential guide in computing the equivalent units and in preparing the other parts of the production report.11. By definition, manufacturing overhead consists of costs that cannot be practically traced to products or jobs. Therefore, if these costs are to be assigned to products or jobs, they must be allocated rather than traced.12. Assigning manufacturing overhead costs to jobs does not ensure a profit. The units produced may not be sold and if they are sold, they may not be sold at prices sufficient to cover all costs. It is a myth that assigning costs to products or jobs ensures that those costs will be recovered. Costs are recovered only by selling to customersnot by allocating costs.13.(a)Job-order costing and process costing have the same basic purposesto assign materials, labor, and overhead cost to products and to provide a mechanism for computing unit product costs.

(b)Both systems use the same basic manufacturing accounts.

(c)Costs flow through the accounts in basically the same way in both systems.

14.The company will want to distinguish between the costs of the metals used to make the medallions, but the medals are otherwise identical and go through the same production processes. Thus, operation costing is ideally suited for the companys needs.II.ExercisesExercise 1 (Process Costing and Job Order Costing)

a.Job-order costing

f.Process costingb.Process costing

g.Process costingc.Process costing *

h.Job-order costingd.Job-order costing

i.Job-order costing

e.Job-order costing

j.Job-order costing

*Some of the listed companies might use either a process costing or a job-order costing system, depending on how operations are carried out and how homogeneous the final product is. For example, a plywood manufacturer might use job-order costing if plywoods are constructed of different woods or come in markedly different sizes.

Exercise 2 (Applying Overhead with Various Bases)Requirement 1

Predetermined overhead rates:

Company X:

Company Y:

Company Z:

Requirement 2

Actual overhead costs incurred

P420,000

Overhead cost applied to Work in Process:

58,000* actual hours P7.20 per hour

417,600

Underapplied overhead cost

P2,400

* 7,000 hours + 30,000 hours + 21,000 hours = 58,000 hours

Exercise 3 (Departmental Overhead Rates)Requirement 1

Milling Department:

Assembly Department:

Requirement 2

Overhead Applied

Milling Department: 90 MHs P8.50 per MHP765

Assembly Department: P160 125% 200

Total overhead cost appliedP965

Requirement 3Yes; if some jobs required a large amount of machine time and little labor cost, they would be charged substantially less overhead cost if a plantwide rate based on direct labor cost were being used. It appears, for example, that this would be true of job 123 which required considerable machine time to complete, but required only a small amount of labor cost.

Exercise 4 (Process Costing Journal Entries)Work in ProcessMixing

330,000

Raw Materials Inventory

330,000

Work in ProcessMixing

260,000

Work in ProcessBaking

120,000

Wages Payable

380,000


190,000


90,000

Manufacturing Overhead

280,000


760,000


760,000

Finished Goods

980,000


980,000

Exercise 5 (Quantity Schedule, Equivalent Units, and Cost per Equivalent Unit Weighted Average Method)Requirement 1

Weighted-Average Method

Quantity Schedule

Gallons to be accounted for:

Work in process, May 1 (materials 80% complete, labor and overhead 75% complete)

80,000

Started into production

760,000

Total gallons accounted for

840,000

Equivalent Units

MaterialsLaborOverhead

Gallons accounted for as follows:

Transferred to the next department

790,000790,000790,000790,000


50,00030,00010,00010,000


840,000820,000800,000800,000

Requirement 2Total CostsMaterialsLaborOverheadWhole Unit

Cost to be accounted for:

Work in process, May 1

P 146,600P 68,600P30,000P 48,000

Cost added during the month

1,869,200 907,200 370,000 592,000

Total cost to be accounted for (a)

P2,015,800P975,800P400,000P640,000

Equivalent units (b)

820,000800,000800,000

Cost per equivalent unit (a) (b)

P1.19+ P0.50+ P0.80= P2.49

Exercise 6 (Quantity Schedule, Equivalent Units, and Cost per Equivalent Unit FIFO Method)

Requirement 1

FIFO Method

Quantity Schedule

Gallons to be accounted for:


80,000


760,000


840,000

Equivalent Units

MaterialsLaborOverhead

Gallons accounted for as follows:

Transferred to the next department:

From the beginning inventory

80,00016,000*20,000*20,000*

Started and completed this month** 710,000710,000710,000710,000


50,00030,00010,00010,000


840,000756,000740,000740,000

*Work required to complete the beginning inventory.

**760,000 gallons started 50,000 gallons in ending work in process = 710,000 gallons started and completed.

Requirement 2

Total CostsMaterialsLaborOverheadWhole Unit



P 146,600

Cost added during the month (a)

1,869,200P907,200 P370,000 P592,000

Total cost to be accounted for

P2,015,800


756,000740,000740,000


P1.20+ P0.50+ P0.80= P2.50

Exercise 7

Requirement (1)

The direct materials and direct labor costs listed in the exercise would have been recorded on four different documents: the materials requisition form for Job KC123, the time ticket for Kristine, the time ticket for Clarisse, and the job cost sheet for Job KC123.

Requirement (2)

The costs for Job KC123 would have been recorded as follows:

Materials requisition form:

QuantityUnit CostTotal Cost

Blanks40P80.00P3,200

Nibs960P6.00 5,760

P8,960

Time ticket for KristineStartedEndedTime CompletedRateAmountJob Number

9:00 AM12:15 PM3.25P120.00P390.00KC123

Time ticket for ClarisseStartedEndedTime CompletedRateAmountJob Number

2:15 PM4:30 PM2.25P140.00P315.00KC123

Job Cost Sheet for Job KC123Direct materials

P8,960.00

Direct labor:

Kristine

390.00

Clarisse

315.00

P9,665.00

Exercise 8

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead

P586,000

Estimated total direct labor hours (DLHs)

40,000DLHs

= Predetermined overhead rate

P14.65per DLH

Exercise 9

Weighted-Average MethodMaterialsLaborOverheadTotal


P 14,550P23,620P118,100

Cost added during May

88,350 14,33071,650

Total cost (a)

P102,900P37,950P189,750

Equivalent units of production (b)

1,2001,1001,100


P85.75P34.50P172.50P292.75

Exercise 10

FIFO Method

MaterialsConversion

To complete beginning work in process:

Materials: 400 units x (100% 75%)

100

Conversion: 400 units x (100% 25%)

300

Units started and completed during the period (42,600 units started 500 units in ending inventory)

42,10042,100

Ending work in process

Materials: 500 units x 80% complete

400

Conversion: 500 units x 30% complete

150

Equivalent units of production

42,60042,550

III.ProblemsProblem 1Requirement 1

a.Raw Materials Inventory

210,000

Accounts Payable

210,000

b.Work in Process

178,000


12,000

Raw Materials Inventory

190,000

c.Work in Process

90,000


110,000

Salaries and Wages Payable

200,000

d.Manufacturing Overhead

40,000

Accumulated Depreciation

40,000

e.Manufacturing Overhead

70,000

Accounts Payable

70,000

f.Work in Process

240,000


240,000

30,000 MH x P8 per MH = P240,000.

g.Finished Goods

520,000

Work in Process

520,000

h.Cost of Goods Sold

480,000

Finished Goods

480,000

Accounts Receivable

600,000

Sales

600,000

P480,000 1.25 = P600,000

Requirement 2

Manufacturing OverheadWork in Process

(b)12,000240,000(f)Bal.42,000510,000(g)

(c)110,000(b)178,000

(d)40,000(c)90,000

(e)70,000(f)240,000

8,000Bal.30,000

(Overapplied overhead)

Problem 2Requirement 1

The costing problem does, indeed, lie with manufacturing overhead cost, as suggested. Since manufacturing overhead is mostly fixed, the cost per unit increases as the level of production decreases. The problem can be solved by use of predetermined overhead rates, which should be based on expected activity for the entire year. Many students will use units of product in computing the predetermined overhead rate, as follows:

Estimated manufacturing overhead cost, P840,000

Estimated units to be produced,200,000

The predetermined overhead rate could also be set on the basis of either direct labor cost or direct materials cost. The computations are:

Estimated manufacturing overhead cost, P840,000Estimated direct labor cost,P240,000

Estimated manufacturing overhead cost, P840,000Estimated direct materials cost,P600,000

Requirement 2Using a predetermined overhead rate, the unit costs would be:

Quarter

FirstSecondThirdFourth

Direct materials

P240,000P120,000P 60,000P180,000

Direct labor

96,00048,00024,00072,000

Manufacturing overhead:

Applied at P4.20 per units; 350% of direct labor cost, or 140% of direct materials cost

336,000 168,000 84,000 252,000

Total cost

P672,000P336,000P168,000P504,000

Number of units

produced

80,00040,00020,00060,000

Estimated cost per unit

P8.40P8.40P8.40P8.40

Problem 3


Quantity

Schedule

Pounds to be accounted for:


(all materials, 55% labor and

overhead added last month)

30,000

Started into production during

May

480,000

Total pounds

510,000

Equivalent Units

MaterialsLabor & Overhead

Pounds accounted for as follows:

Transferred to Department 2

490,000*490,000490,000


(all materials, 90% labor and

overhead added this month)

20,000 20,000 18,000

Total pounds

510,000510,000508,000

* 30,000 + 480,000 - 20,000 = 490,000.

Problem 4 (Weighted-Average Method; Interpreting a Production Report)

Requirement 1Weighted-Average Method

The equivalent units for the month would be:

QuantityEquivalent Units

ScheduleMaterialsConversion

Units accounted for as follows:

Transferred to next department

190,000190,000190,000

Work in process, April 30

(75% materials, 60%

conversion cost added this

month)

40,000 30,000 24,000

Total units and equivalent units

of production

230,000220,000214,000

Requirement 2

Total CostMaterialsConversionWhole Unit

Work in process, April 1

P 98,000P 67,800P 30,200

Cost added during the

month

827,000 579,000 248,000

Total cost (a)

P925,000P646,800P278,200

Equivalent units of production (b)

220,000214,000

Cost per EU (a) ( (b)

P2.94+ P1.30= P4.24

Requirement 3

Total units transferred

190,000

Less units in the beginning inventory

30,000

Units started and completed during April

160,000Requirement 4

No, the manager should not be rewarded for good cost control. The reason for the Mixing Departments low unit cost for April is traceable to the fact that costs of the prior month have been averaged in with Aprils costs in computing the lower, P2.94 per unit figure. This is a major criticism of the weighted-average method in that the figures computed for product costing purposes cant be used to evaluate cost control or measure performance for the current period.Problem 5 (Preparation of Production Report from Analysis of Work in Process T-account Weighted-Average Method)

Requirement 1


Quantity Schedule and Equivalent Units

Quantity

Schedule

Pounds to be accounted for:


(materials all complete, labor

and overhead 4/5 complete)

35,000


280,000

Total pounds to be accounted for

315,000

Equivalent Units (EU)

MaterialsLabor & Overhead

Pounds accounted for as follows:

Transferred to Blending*

270,000270,000270,000


(materials all complete, labor

and overhead 2/3 complete)

45,000 45,000 30,000

Total pounds accounted for

315,000315,000300,000

* 35,000 + 280,000 45,000 = 270,000.

Cost per Equivalent UnitTotal MaterialsLabor & OverheadWhole

Unit



P 63,700P 43,400P 20,300

Cost added during the

month

587,300 397,600 189,700

Total cost to be accounted for (a)

P651,000P441,000P210,000


315,000300,000

Cost per equivalent unit

(a) ( (b)

P1.40+ P0.70= P2.10

Cost Reconciliation

TotalEquivalent Units (EU)

CostMaterialsConversion

Cost accounted for as follows:

Transferred to Blending:

270,000 pounds x P2.10

per pound

P567,000270,000270,000

Work in process, May 31:

Materials, at P1.40 per EU

63,00045,000

Labor and overhead, at P0.70

per EU

21,00030,000

Total work in process, May 31

84,000

Total costs accounted for

P651,000

Requirement 2

In computing unit costs, the weighted-average method mixes costs of the prior period with current period costs. Thus, under the weighted-average method, unit costs are influenced to some extent by what happened in a prior period. This problem becomes particularly significant when attempting to measure performance in the current period. Good (or bad) cost control in the current period might be concealed to some degree by the costs that have been brought forward in the beginning inventory.

IV.Multiple Choice Questions1. D6. D11. A16. A

2. D7. A12. D17. D

3. D8. C13. B18. A

4. C9. C14. D19. C

5. D10. B15. C20. D

Predetermined overhead rate

= P4.20 per unit.

350% of direct

labor cost

=

140% of direct

materials cost

=

=

Estimated total manufacturing overhead cost

Estimated total amount of the allocation base

P432,000

60,000 DLHs

=

=P7.20 per DLH

=P3.00 per MH

P270,000

90,000 DLHs

=



=


= 160% of materials cost

P384,000

P240,000 materials cost

=



=


= P8.50 per machine-hour

P510,000

60,000 machine-hours

=



=


= 125% of direct labor cost

P800,000

P640,000 direct labor cost

=



=


10-110-210-15

chapter 10 - answer

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