Chapter 17 Job Order Costing - eBookon

Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–1

Chapter 17

Job Order Costing

Review Questions

1. If the manager knows the cost to produce each unit of product, then the manager can plan and

control the cost of resources needed to create the product and deliver it to the customer. It

enables them to set selling prices that will lead to profits, compute cost of goods sold for the

income statement, and compute the cost of inventory for the balance sheet.

2. Companies that manufacture unique products or provide specialized services, such as

accounting firms, music studios, health-care providers, building contractors, and custom

furniture manufacturers, use job order costing systems.

3. Companies that produce identical units through a series of production steps or processes,

such as soft drink companies, surfboard manufacturers, and medical equipment

manufacturers, use process costing systems.

4. A job cost record is a document that shows the direct materials, direct labor, and

manufacturing overhead costs for an individual job and allows the company to track the cost

of individual jobs.

5. When a company finishes a job, it totals the costs and transfers them to Finished Goods

Inventory, an asset account. These costs are called Cost of Goods Manufactured. When the

jobs units are sold, the costing system moves the costs from Finished Goods Inventory, an

asset, to Cost of Goods Sold, an expense. These costs are called Cost of Goods Sold.

6. May 31—Work-in-Process Inventory on the balance sheet; June 30—Finished Goods

Inventory on the balance sheet; July 31—Cost of Goods Sold on the income statement.

7.

Date Accounts and Explanation Debit Credit

Raw Materials Inventory XX

Accounts Payable XX

This transaction increases assets (Raw Materials Inventory) and increases liabilities

(Accounts Payable).

8. The use of a subsidiary ledger allows for better control of inventory as it helps track the

quantity and cost of each type of material used in production. A subsidiary ledger contains

the details of a general ledger account, and the sum of the subsidiary ledger equals the

balance in the general ledger account.

17–2 Horngren’s Financial & Managerial Accounting 4/e Solutions Manual

9. The cost of direct materials is transferred out of Raw Materials Inventory (credit) and is

assigned to Work-in-Process Inventory (debit). The cost of indirect materials is transferred

out of the Raw Materials Inventory account (credit) and is accumulated in the Manufacturing

Overhead account (debit).

10.


Work-In-Process Inventory (direct labor) XX

Manufacturing Overhead (indirect labor) XX

Wages Payable XX

This transaction increases assets (Work-in-Process Inventory), increases liabilities (Wages

Payable), and decreases equity (Manufacturing Overhead).

11. The following are examples of manufacturing overhead costs:

a. Plant utilities

b. Depreciation on manufacturing plant and equipment

c. Plant insurance

d. Plant property taxes

e. Rent on the manufacturing plant

They are considered indirect costs because they can’t be easily traced to individual jobs.

12. The predetermined overhead allocation rate is the estimated manufacturing overhead cost per

unit of the allocation base, calculated at the beginning of the period.

13. The allocation base is a denominator that links overhead costs to the products. Ideally, the

allocation base is the primary cost driver of manufacturing overhead. Examples: direct labor

hours, direct labor cost, machine hours.

14. Manufacturing overhead is allocated to jobs based on a predetermined overhead allocation

rate. The rate should be based on the main cost driver.

15. Unit product cost = Cost of goods manufactured / Total units produced.

16. To allocate manufacturing overhead, Work-in-Process Inventory is debited and

Manufacturing Overhead is credited. Work-in-Process Inventory, an asset, is increased and

Manufacturing Overhead is decreased, which increases equity.

17. When a job is completed, Finished Goods Inventory is debited and Work-in-Process

Inventory is credited. The effect on the accounting equation is that one asset (Finished

Goods Inventory) is increased and another asset (Work-in-Process Inventory) is decreased.


18. One journal entry is required to recognize the revenue earned and another journal entry is

required to remove the product from inventory when it is shipped to the customer and

recognize the expense incurred.


Accounts Receivable XX

Sales Revenue XX

Cost of Goods Sold XX

Finished Goods Inventory XX

19. Underallocated overhead occurs when actual manufacturing overhead costs are more than

allocated manufacturing overhead costs. Overallocated overhead occurs when actual

manufacturing overhead costs are less than allocated manufacturing costs. This is caused by

the fact that overhead is allocated using a predetermined overhead allocation rate that is

based on estimates.

20. The overhead is overallocated because the company allocated more than the actual overhead

costs. The amount is $325 ($5,575 – $5,250).

21.


Manufacturing Overhead 325

Cost of Goods Sold 325

22. Costs are accumulated in various accounts as they are incurred. Direct costs are assigned to

individual jobs and recorded on the job cost records. Manufacturing overhead costs (indirect

costs) are allocated to individual jobs based on a predetermined overhead allocation rate. The

Manufacturing Overhead account is adjusted at the end of the period for the amount of

underallocated or overallocated manufacturing overhead.

23. Service companies, like manufacturing companies, work on individual, unique jobs and need

to know the cost of the jobs. Knowing the full cost of a job allows for better pricing

decisions.

24. Indirect costs are allocated to jobs using the predetermined overhead allocation rate.


Short Exercises

S17-1

S17-2

Account Is increased by: Is decreased by:

Raw Materials Inventory Materials purchased Materials used

Work-in-Process Inventory Direct materials used

Direct labor incurred

Manufacturing overhead allocated

Completion of jobs

Finished Goods Inventory Completion of jobs Shipping sold jobs

Cost of Goods Sold Shipping sold jobs

Adjusting entry

Adjusting entry

S17-3


Raw Materials Inventory ($71,000 + $1,100) 72,100

Accounts Payable 72,100

Work-in-Process Inventory 64,000


Raw Materials Inventory 64,250

Raw Materials Inventory

Bal. 34,000 64,250 Used

Purchased 72,100

Bal. 41,850

The ending balance of the Raw Materials Inventory account is $41,850.

a. A manufacturer of refrigerators Process

b. A manufacturer of specialty wakeboards Job Order

c. A manufacturer of luxury yachts Job Order

d. A professional services firm Job Order

e. A landscape contractor Job Order

f. A custom home builder Job Order

g. A cell phone manufacturer Process

h. A manufacturer of frozen pizzas Process

i. A manufacturer of multivitamins Process

j. A manufacturer of tennis shoes Process


S17-4

Total materials used ($50 + $ 205 – $35) $220

Direct materials used ($15 + $285 + $135 – $550 – $45) $160

Indirect materials used ($220 – $160) $60

S17-5



Manufacturing Overhead ($570 + $880) 1,450

Wages Payable 79,450

S17-6

Manufacturing Overhead = $26,000 + $5,500 + $38,000 = $69,500


Manufacturing Overhead 26,000



Accumulated Depreciation 5,500



These costs are not overhead costs:

Wood is a direct material

Depreciation on the delivery truck is a selling and administrative expense (period

cost, not a product cost)

Assembly-line workers’ wages are direct labor


S17–7

Direct materials $ 500

Direct labor 430

Manufacturing overhead ($430 × 0.80) 344

Total cost of Job 303 $ 1,274

S17-8

Predetermined

Overhead

Allocation Rate

= Total estimated overhead cost

Total estimated quantity of the overhead allocation base

=

$65,000 = $13 per DLHr

5,000 DLHr

Allocated Manufacturing

Overhead Cost =

Predetermined

Overhead

Allocation Rate

×

Actual Quantity of the

Allocation Based used by

Each Job

= $13 per DLHr × 4,850 DLHr

= $63,050




S17-9

Requirement 1

Total debits = $3,400 + $12,000 + $36,500 = $51,900

Requirement 2

Total credits = $53,900

Requirement 3

Overallocated by $2,000 (Difference between total debits and total credits = $53,900 – $51,900)


S17-10

Requirements 1, 2 and 3

Allocated overhead – Actual Overhead

$207,000 – $197,000 = $10,000 overallocated

S17-11


Finished Goods Inventory 45,000


Accounts Receivable 85,000

Sales Revenue 85,000

Cost of Goods Sold 40,000


S17-12


Cost of Goods Sold ($163,000 – $152,000) 11,000


S17-13

Requirement 1

Work hours per year = Hours per week × Weeks per year

= 40 hours × 50 hours

= 2,000 hours

Yearly rate / Hours per year = Cost per hour

$104,400 / 2,000 hours = $52.20 per hour

Requirement 2

Hours worked × Rate per hour = Direct Labor Cost

12 hours × $52.20 per hour = $626.40


S17-14

Requirement 1

Predetermined

Overhead

Allocation Rate

= Total estimated overhead costs


=

$240,000 = $30 per DLHr

8,000 DLHr

Requirement 2

Indirect Costs = Predetermined Overhead

Allocation Rate ×

Actual Quantity of the

Allocation Base Used

= $30 per DLHr × 12 DLHr = $360


Exercises

E17-15

a. Companies that produce small quantities of many different products. Job Order

b. A company that pulverizes wood into pulp to manufacture cardboard. Process

c. A company that manufactures thousands of identical files. Process

d. Companies that produce large numbers of identical products. Process

e. A computer repair service that makes service calls to homes. Job Order

f. A company that assembles electronic parts and software to manufacture

millions of portable media players.

Process

g. A textbook publisher that produces titles of a particular book in batches. Job Order

h. A company that bottles milk into one-gallon containers. Process

i. A company that makes large quantities of one type of tankless hot water

heaters.

Process

j. A governmental agency that takes bids for specific items it utilizes where

each item requires a separate bid.

Job Order

E17-16

a. A record used to assign direct labor cost to specific

jobs.

4. Labor Time Record

b. Request for the transfer of materials to the production

floor.

5. Materials Requisition

c. Document that shows the direct materials, direct labor,

and manufacturing overhead costs for an individual

job.

2. Job Cost Record

d. An accounting system that accumulates costs by

process.

6. Process Costing System

e. The production of a unique product or specialized

service

1. Job

f. Used by companies that manufacture unique products

or provide specialized services.

3. Job Order Costing System

E17-17

(a) Work-in-Process

Inventory

(b) Finished Goods

Inventory

(c) Cost of Goods

Sold

Job Cost Job Cost Job Cost

3 $ 6,900 4 $ 4,400 1 $ 3,100

2 13,000

Total $ 6,900 Total $ 4,400 Total $ 16,100


E17-18




Purchase of raw materials on account.




Raw materials used in production.




Labor incurred in production.

E17-19

Requirement 1

Predetermined

Overhead

Allocation Rate



=

$115,000 = 1.60 or 160% of direct labor cost

$71,875

Requirement 2


Dec. 31 Work-in-Process Inventory ($73,000 × 160%) 116,800


Requirement 3

Manufacturing Overhead

119,000 116,800

Manufacturing overhead is underallocated by $2,200 ($119,000 − $116,800).


E17-19, cont.

Requirement 4

E17-20

Requirement 1

Predetermined

Overhead

Allocation Rate



=

$840,000 = $12 per MHr

70,000 MHr

Requirement 2


Dec. 31 Work-in-Process Inventory (67,000 MHr × $12/MHr) 804,000


Requirement 3


600,000 804,000

40,000

17,000

147,000 Bal.

Manufacturing overhead is overallocated by $147,000.

Requirement 4


Dec. 31 Manufacturing Overhead 147,000


This entry decreases Cost of Goods Sold.


Dec. 31 Cost of Goods Sold 2,200



E17-21

Requirement 1

Allocated manufacturing

overhead /

Predetermined overhead

allocation rate = Machine hours

$405,900 / $41 per MHr = 9,900 MHr

Requirement 2

Allocated overhead – Actual Overhead =

$405,900 – $428,000 = $22,100 underallocated

Requirement 3




E17-22

Requirement 1


Jun. 30 Finished Goods Inventory ($38,000 + 36,000) 74,000


Requirement 2

Work-in-Process Inventory

Jun. 1 Bal. 20,000

Direct materials used 31,000

Direct labor assigned to jobs 33,000 38,000 Job 142 completed

MOH allocated to jobs 13,000 36,000 Job 143 completed

Jun. 30 Bal. 23,000

Requirement 3


Jun. 30 Accounts Receivable 46,000





E17-22, cont.

Requirement 4

Sales Revenue $ 46,000


Gross Profit $ 10,000

E17-23

KELLY COMPANY

Schedule of Cost of Goods Manufactured

Year Ended December 31, 2014

(in millions)

Beginning Work-in-Process Inventory $ 10

Direct Materials Used:

Beginning Raw Materials Inventory $ 5

Purchases of Raw Materials 35

Raw Materials Available for Use 40

Ending Raw Materials Inventory (7)

Direct Materials Used $ 33

Direct Labor 42


Total Manufacturing Costs Incurred during the Year 96

Total Manufacturing Costs to Account for 106

Ending Work-in-Process Inventory (16)

Cost of Goods Manufactured $ 90


E17-23, cont.

KELLY COMPANY

Income Statement

Year Ended December 31, 2014

(in millions)

Sales Revenue $ 225

Cost of Goods Sold:

Beginning Finished Goods Inventory $ 8

Cost of Goods Manufactured 90

Cost of Goods Available for Sale 98

Ending Finished Goods Inventory (12)

Cost of Goods Sold 86

Gross Profit 139

Selling and Administrative Expenses 83

Total Operating Expenses 83

Net Income $ 56


E17-24

Item Accounts and Explanation Debit Credit

a. Website Expenses 2,900

Cash 2,900

b. Work-in-Process Inventory 9,000



c. Raw Materials Inventory 24,000


d. Work-in-Process Inventory 9,500



e. Manufacturing Overhead 10,000

Accumulated Depreciation—Plant 10,000


Prepaid Insurance 1,300


Property Tax Payable 4,200

f. Work-in-Process Inventory ($9,000 × 250%) 22,500


g. Finished Goods Inventory 38,000


h. Accounts Receivable 20,000


h. Cost of Goods Sold 10,000


i. Cost of Goods Sold 3,500


Actual overhead ($6,000 + $4,500 + $10,000 + $1,300

+ $4,200) – allocated overhead ($22,500) = $3,500


E17-25

a. Purchased materials on account.

b. Used direct and indirect materials in production (requisitioned direct and indirect materials).

c. Incurred and assigned manufacturing wages as direct and indirect labor.

d. Expired insurance on factory plant and/or equipment.

e. Allocated manufacturing overhead to jobs.

f. Completed jobs (transferred Work-in-Process Inventory to Finished Goods Inventory; Cost

of Goods Manufactured).

g. Sold inventory (Cost of Goods Sold).

h. Adjusted underallocated balance of Manufacturing Overhead to Cost of Goods Sold.

E17-26

a. Requisitioned Raw Materials in the amount of $23,000.

b. Direct Materials assigned to Work-in-Process Inventory, $20,000.

c. Completed jobs and assigned costs to Finished Goods Inventory, $36,000.

d. Sold and shipped completed jobs, $29,000.

e. Labor incurred, $8,000 (direct labor assigned to Work-in-Process, $7,000; indirect labor

accumulated in Manufacturing Overhead, $1,000).

f. Manufacturing Overhead adjusted for underallocated overhead, $2,000.

g. Jobs sold and costs assigned to Cost of Goods Sold, $29,000.


E17-27

Requirement 1a

Direct labor costs / Direct labor hours = Direct labor cost rate

$2,450,000 / 19,600 DLHr = $125 per DLHr

Requirement 1b

Indirect costs:

Office rent $ 370,000

Support staff salaries 1,282,500

Utilities 430,000

Total indirect costs $ 2,082,500

Predetermined

Overhead

Allocation Rate



=

$2,082,500 = 0.85 = 85% of direct labor costs

$2,450,000

Requirement 2

Direct labor: 240 DLHr × $125 per DLHr $ 30,000

Indirect costs: $30,000 × 85% 25,500

Total predicted cost $ 55,500

Requirement 3

Predicted cost $ 55,500

Desired profit ($55,500 × 45%) 24,975

Required service revenue $ 80,475

Martin should bid $80,475


Problems (Group A)

P17-28A

Requirement 1 Bluebird uses a job order costing system. We know this because Bluebird’s costing records show

costs being accumulated for each job.

Requirement 2

BLUEBIRD MANUFACTURING

Computation of Work-in-Process Inventory, Finished Goods Inventory,

and Cost of Goods Sold for October and November

Date

Work-in-Process

Inventory

Finished

Goods Inventory Cost of Goods Sold


October 31: 3 $ 400 2 $ 1,800 1 $ 1,900

4 800

Total $ 1,200 $ 1,800 $ 1,900

November 30: 6 $700 4 $ 2,000 2 $ 1,800

3 1,900

5 550

Total $ 700 Total $ 2,000 Total $ 4,250

Requirement 3


Oct. 31 Finished Goods Inventory (Jobs 1 & 2) 3,700


Nov. 30 Finished Goods Inventory (Jobs 3, 4 & 5) 4,450



P17-28A, cont.

Requirement 4


Nov. 30 Accounts Receivable 2,100

Sales Revenue 2,100

30 Cost of Goods Sold 1,900


Requirement 5

The gross profit for Job 3 is:

Sales revenue $ 2,100

Cost of goods sold 1,900

Gross profit $ 200


P17-29A

Requirement 1

JOB COST RECORD

Job Number 423

Customer Stick People Pictures

Job Description 5,900 DVDs

Direct Materials Direct Labor Manufacturing Overhead

Date

Requisition

Number Amount Date

Labor

Time

Record

Number Amount Date Rate Amount

4/2 63 $ 341 4/2 655 $140 4/3 125%

of DL

costs*

$500

4/2 64 675

4/3 74 126 4/3 656 260

Cost Summary Direct Materials $1,142

Direct Labor 400


Total Cost $2,042

Unit Cost $0.35**

*$540,000 / $432,000 = 125%

**$2,042 / 5,900 DVDs = $0.35 per DVD (rounded)

Requirement 2


Apr. 3 Work-in-Process Inventory 1,142


3 Work-in-Process Inventory 400

Wages Payable 400




P17-29A, cont.

Requirement 3


Apr. 3 Finished Goods Inventory 2,042


3 Accounts Receivable (5,900 DVDs × $1.30/DVD) 7,670

Sales Revenue 7,670



P17-30A

Requirement 1

Predetermined

Overhead

Allocation Rate



=

$1,100,000 = 0.40 = 40% of direct labor cost

$2,750,000


P17-30A, cont.

Requirement 2


Aug. 31

a. Raw Materials Inventory 400,000


b. Work-in-Process Inventory1 270,000


c. Work-in-Process Inventory2 187,000

Construction Overhead3

13,000


d. Construction Overhead 6,200

Accumulation Depreciation—Equipment 6,200

e. Construction Overhead 40,000

Cash 37,000


f. Work-in-Process Inventory4 74,800

Construction Overhead 74,800

g. Finished Goods Inventory5

255,600




Cost of Goods Sold6

142,800


1$54,000 + $68,000 + $63,000 + $85,000 = $270,000

2$42,000 + $35,000 + $57,000 + $53,000 = $187,000

3$200,000 – $187,000 = $13,000

4 $187,000 × 40% = $74,800

5 House 402: $54,000 + $42,000 + ($42,000 × .40) = $112,800

House 404: $63,000 + $57,000 + ($57,000 × .40) = $142,800

Total: $112,800 + $142,800 = 255,600 6From above, House 404 = $142,800


P17-30A, cont.

Requirement 3

Work-in-Process Inventory Finished Goods Inventory

(b) DM 270,000 255,600 (g) COGM (g) COGM 255,600 142,800 (h) COGS

(c) DL 187,000 Bal. 112,800

(f) OH 74,800

Bal. 276,200

Requirement 4

QUAINT CONSTRUCTION, INC.

Reconciliation of Work-in-Process Inventory Subsidiary

and Control Accounts

House

#403

House

#405

Total WIP

Balance

Unfinished houses:

Direct Materials $ 68,000 $ 85,000

Direct Labor 35,000 53,000

Construction Overhead (40% of direct labor) 14,000 21,200

Total cost equals Ending Work-in-Process Inventory $ 117,000 $ 159,200 $ 276,200

Requirement 5


Reconciliation of Finished Goods Inventory Subsidiary


House #402

Completed, unsold house:

Direct Materials $ 54,000

Direct Labor 42,000

Construction Overhead (40% of direct labor) 16,800

Total cost equals Ending Finished Goods Inventory $ 112,800


P17-30A, cont.

Requirement 6


Gross Profit on Homes Sold in August

House #404

Sales revenue $ 250,000

Cost of goods sold 142,800

Gross profit $ 107,200

The gross profit must cover these types of costs: selling and administrative expenses, income tax

expense, and other expenses.

P17-31A

Requirement 1

Predetermined

Overhead

Allocation Rate



=

$211,000* = $8.44 per MHr

25,000 MHrs

*$12,000 + $47,000 + $24,000 + $41,000 + $87,000 = $211,000

Requirement 2

*32,100 MHrs × $8.44 per MHr


28,500 270,924*

48,000

45,000

96,850

83,000

Bal. 30,426


P17-31A, cont.

Requirement 3




Requirement 4

The actual manufacturing overhead rate is not known until the end of the period. Managers need

to make decisions throughout the period. Accountants use predetermined overhead allocation

rates to give managers product cost information when they need it—today.


P17-32A

Requirement 1


a. Cash 152,000


b. Selling and Administrative Expenses 28,000

Cash 28,000

c. Accounts Payable 36,000

Cash 36,000

d. Raw Materials Inventory ($22,900 + $3,800) 26,700


e. Work-in-Process Inventory ($850 + $7,650) 8,500



f. Work-in-Process Inventory ($3,500 + $16,600) 20,100



g. Wages Payable ($1,700 + $32,200) 33,900

Cash 33,900

h. Manufacturing Overhead 2,600


i. Work-in-Process Inventory 10,050

Manufacturing Overhead ($20,100 × 50%) 10,050

j. Finished Goods Inventory 45,500


k. Accounts Receivable 111,000




l. Cost of Goods Sold 8,450


($1,000 + $14,900 + $2,600 – $10,050)


P17-32A, cont.

Requirement 2 Cash Accounts Receivable

Bal. 14,000 28,000 (b) Bal. 155,000 152,000 (a)

(a) 152,000 36,000 (c) (k) 111,000

33,900 (g) Bal. 114,000

Bal. 68,100

Raw Materials Inventory Work-in-Process Inventory

Bal. 5,700 9,500 (e) Bal. 39,400 45,500 (j)

(d) 26,700 (e) 8,500

Bal. 22,900 (f) 20,100

(i) 10,050

Bal. 32,550

Finished Goods Inventory Plant Assets

Bal. 20,400 45,500 (k) Bal. 200,000

(j) 45,500

Bal. 20,400

Accumulated Depreciation Accounts Payable

72,000 Bal. (c) 36,000 127,000 Bal.

2,600 (h) 26,700 (d)

74,600 Bal. 117,700 Bal.

Wages Payable Common Stock

(g) 33,900 1,700 Bal. 142,000 Bal.

35,000 (f)

2,800 Bal.

Retained Earnings Sales Revenue

91,800 Bal. 111,000 (k)

Cost of Goods Sold

(k) 45,500

(l) 8,450

Bal. 53,950


Selling and Administrative Expenses

(e) 1,000 10,050 (i) (b) 28,000

(f) 14,900 8,450 (l)

(h) 2,600

Bal. 0


P17-32A, cont.

Requirement 2, cont.

Raw Materials Inventory subsidiary ledger:

Paper Indirect Materials

Bal. 4,700 8,500 (e) Bal. 1,000 1,000 (e)

(d) 22,900 (d) 3,800

Bal. 19,100 Bal. 3,800

Total balances equal balance of Raw Materials Inventory, $22,900 ($19,100 + $3,800).

Work-in-Process Inventory subsidiary ledger:

Job 120 Job 121

Bal. 39,400 45,500 (j) Bal.

(e)

0

7,650

(e) 850

(f) 3,500 (f) 16,600

(i) 1,750 (i) 8,300

Bal. 0 Bal. 32,550

Balance equals balance of Work-in-Process Inventory, $32,550 ($0 + $32,550).

Finished Goods Inventory subsidiary ledger:

Large Stars Small Stars

Bal. 9,400 45,500 (k)45,500 Bal. 11,000

(j) 45,500

Bal. 9,400

Total balances equal balance of Finished Goods Inventory, $20,400 ($9,400 + $11,000).


P17-32A, cont.

Requirement 3

HOWIE STARS

Trial Balance

June 30, 2014

Account Debit Credit

Cash $ 68,100

Accounts Receivable 114,000 Inventories:

Raw Materials 22,900 Work-in-Process 32,550 Finished Goods 20,400

Plant Assets 200,000

Accumulated Depreciation $ 74,600


Wages Payable 2,800

Common Stock 142,000

Retained Earnings 91,800




Selling and Administrative Expenses 28,000

Totals $ 539,900 $ 539,900

Requirement 4

HOWIE STARS


Month Ended June 30,2014

Beginning Work-in-Process Inventory $ 39,400

Direct Materials Used (Trans. e) $ 8,500

Direct Labor (Trans. f) 20,100

Manufacturing Overhead:

Indirect Materials (Trans. e) 1,000

Indirect Labor (Trans. f) 14,900

Depreciation—Plant and Equipment (Trans. h) 2,600

Total Manufacturing Overhead 18,500

Total Manufacturing Costs Incurred during the month 47,100

Total Manufacturing Costs to Account for 86,500

Ending Work-in-Process Inventory (32,550)

Cost of Goods Manufactured $ 53,950


P17-32A, cont.

Requirement 5

HOWIE STARS

Income Statement

Month ended June 30, 2014


Cost of Goods Sold:

Beginning Finished Goods Inventory $ 20,400

Cost of Goods Manufactured 53,950

Cost of Goods Available for Sale 74,350

Ending Finished Goods Inventory (20,400)


Gross Profit $57,050


Net Income $ 29,050

P17-33A

Requirement 1

Hourly rate

to the employer =

$1,800,000 per year = $288 per hour

6,250 hours per year

Predetermined

Overhead

Allocation Rate



=

$900,000* = 0.50 = 50% of direct labor costs

$1,800,000

*$765,000 + $46,000 + $27,000 + $62,000 = $900,000


P17-33A, cont.

Requirement 2

CROW DESIGN, INC.

Estimated Cost of Delicious Treats’ and Mesilla Chocolates’ Jobs

Delicious

Treats

Mesilla

Chocolates

Direct Costs:

Direct Labor

700 hours × $288 per hour $ 201,600

100 hours × $288 per hour $ 28,800

Software licensing costs 4,000 400

Travel costs 8,000 0

Total Direct Costs $ 213,600 $ 29,200

Allocated Indirect Costs:

50% × $201,600 100,800

50% × $ 28,800 14,400

Total Costs $ 314,400 $ 43,600

Requirement 3

Service Revenue – Total costs = Profit

Service Revenue = Total costs / 50%

Delicious Treats: $628,800


Service Revenue = $314,400 / 50%

Service Revenue = $628,800

Mesilla Chocolates: $87,200




Requirement 4

Crow Design, Inc. assigns costs to jobs to help the company set fees that cover all costs and

contribute to profit. Assigning costs to individual clients can also help Crow Design, Inc. control

costs.


Problems (Group B)

P17-34B

Requirement 1 Stratton Manufacturing uses a job order costing system. We know this because Stratton’s costing

records show costs being accumulated for each job.

Requirement 2

STRATTON MANUFACTURING

Computation of Work-in-Process Inventory, Finished Goods Inventory,

and Cost of Goods Sold for October and November

Date

Work-in-Process

Inventory

Finished Goods

Inventory

Cost of Goods

Sold


October 31: 3 $ 700 2 $ 1,100 1 $ 1,000

4 300

Total $1,000 Total $ 1,100 Total $ 1,000

November 30: 6 $500 4 $ 1,800 2 $ 1,100

3 2,100

5 650

Total $ 500 Total $ 1,800 Total $ 3,850

Requirement 3


Oct. 31 Finished Goods Inventory (Jobs 1 & 2) 2,100


Nov. 30 Finished Goods Inventory (Jobs 3, 4, & 5) 4,550



P17-34B, cont.

Requirement 4


Nov. 30 Accounts Receivable 2,200

Sales Revenue 2,200



Requirement 5

The gross profit for Job 3 is:



Gross Profit $ 100


P17-35B

Requirement 1

JOB COST RECORD

Job Number 423

Customer Leopard Pictures

Job Description 5,500 DVDs

Direct Materials Direct Labor Manufacturing Overhead

Date

Requisition

Number Amount Date

Labor

Time

Record

Number Amount Date Rate Amount

11/2 63 $372 11/2 655 $180 11/3 110%

of DL

costs*

$506

11/2 64 725

11/3 74 144 11/3 656 280

Cost Summary Direct Materials $1,241

Direct Labor 460


Total Cost $2,207

Unit Cost $0.40**

*$550,000 / $500,000 = 110%

**$2,207 / 5,500 DVDs = $0.40 per DVD (rounded)

Requirement 2


Nov. 3 Work-in-Process Inventory 1,241



Wages Payable 460




P17-35B, cont.

Requirement 3


Nov. 3 Finished Goods Inventory 2,207


3 Accounts Receivable (5,500 DVDs × $1.60 per DVD) 8,800

Sales Revenue 8,800



P17-36B

Requirement 1

Predetermined

Overhead

Allocation Rate



=

$1,050,000 = 0.30 = 30% of direct labor cost

$3,500,000


P17-36B, cont.

Requirement 2


Aug. 31

a. Raw Materials Inventory 460,000


b. Work-in-Process Inventory1

273,000


c. Work-in-Process Inventory2

186,000

Construction Overhead3

24,000


d. Construction Overhead 6,000

Accumulated Depreciation––Equipment 6,000

e. Construction Overhead 44,000

Cash 36,000


f. Work-in-Process Inventory4 55,800

Construction Overhead 55,800

g. Finished Goods Inventory5

247,300




Cost of Goods Sold6

138,800


1$50,000 + $69,000 + $66,000 + $88,000 = $273,000

2$45,000 + $30,000 + $56,000 + $55,000 = $186,000

3$210,000 – $186,000 = $24,000

4 $186,000 × 30% = %55,800

5 House 402: $50,000 + $45,000 + ($45,000 × 0.30) = $108,500

House 404: $66,000 + $56,000 + ($56,000 × 0.30) = $138,800

Total: $108,500 + $138,800 = $247,300 6From above, House 404 = $138,800


P17-36B, cont.

Requirement 3

Work-in-Process Inventory Finished Goods Inventory

(b) DM 273,000 247,300 (g) COGM (g) COGM 247,300 138,800 (h) COGS

(d) DL 186,000 Bal. 108,500

(f) OH 55,800

Bal. 267,500

Requirement 4

COTTAGE CONSTRUCTION, INC.

Reconciliation of Work-in-Process Inventory Subsidiary


House #403 House #405

Total WIP

Balance

Unfinished houses:

Direct Materials $ 69,000 $ 88,000 *

Direct Labor 30,000 55,000 *

Construction Overhead (30% of direct labor) 9,000 16,500 *

Total cost equals Ending Work-in-Process Inventory $ 108,000 $ 159,500 * $ 267,500

Requirement 5


Reconciliation of Finished Goods Inventory Subsidiary


House #402

Completed, unsold house:

Direct Materials $ 50,000

Direct Labor 45,000

Construction Overhead (30% of direct labor) 13,500

Total cost equals Ending Finished Goods Inventory $ 108,500


P17-36B, cont.

Requirement 6


Gross Profit on Homes Sold in August

House #404



Gross Profit $ 61,200

The gross profit must cover these types of costs: selling and administrative expenses, income tax

expense, and non-operating expenses.

P17-37B

Requirement 1

Predetermined

Overhead

Allocation Rate



=

$210,000* = $7.50 per MHr

28,000 MHrs

*$16,000 + $46,000 + $23,000 + $42,000 + $83,000 = $210,000

Requirement 2

*32,400 MHrs × $7.50 per MHr


26,500 243,000*

47,000

46,000

93,850

82,000

Bal. 52,350


P17-37B, cont.

Requirement 3


Dec 31 Cost of Goods Sold 52,350


Requirement 4

The actual manufacturing overhead rate is not known until the end of the period. Managers need

to make decisions throughout the period. Accountants use predetermined overhead allocation

rates to give managers product cost information when they need it—today.


P17-38B

Requirement 1


June 30

a. Cash 155,000


b. Selling and Administrative Expenses 22,000

Cash 22,000

c. Accounts Payable 37,000

Cash 37,000

d. Raw Materials Inventory ($26,600 + $4,200) 30,800


e. Work-in-Process Inventory ($900 + $7,850) 8,750



f. Work-in-Process Inventory ($4,800 + $18,500) 23,300



g. Wages Payable ($3,300 + $39,900) 43,200

Cash 43,200

h. Manufacturing Overhead 2,700


i. Work-in-Process Inventory 20,970

Manufacturing Overhead ($23,300 × 90%) 20,970

j. Finished Goods Inventory 53,020


k. Accounts Receivable 133,000




l. Cost of Goods Sold 3,030


($1,600 + $19,700 + $2,700 − $20,970)


P17-38B, cont.

Requirement 2

Cash Accounts Receivable

Bal. 17,000 22,000 (b) Bal. 170,000 155,000 (a)

(a) 155,000 37,000 (c) (k) 133,000

43,200 (g) Bal. 148,000

Bal. 69,800

Raw Materials Inventory Work-in-Process Inventory

Bal. 6,200 10,350 (e) Bal. 43,000 53,020 (j)

(d) 30,800 (e) 8,750

Bal. 26,650 (f) 23,300

(i) 20,970

Bal. 43,000

Finished Goods Inventory Plant Assets

Bal. 21,300 53,020 (k) Bal. 250,000

(j) 53,020

Bal. 21,300

Accumulated Depreciation Accounts Payable

71,000 Bal. (c) 37,000 133,000 Bal.

2,700 (h) 30,800 (d)

73,700 Bal. 126,800 Bal.

Wages Payable Common Stock

(g) 43,200 3,300 Bal. 144,000 Bal.

43,000 (f)

3,100 Bal.

Retained Earnings Sales Revenue

156,200 Bal. 133,000 (k)

Cost of Goods Sold

(k) 53,020

(l) 3,030

Bal. 56,050


Selling and Administrative Expenses

(e) 1,600 20,970 (i) (b) 22,000

(f) 19,700 3,030 (l)

(h) 2,700

Bal. 0


P17-38BA, cont.

Requirement 2, cont.

Raw Materials Inventory subsidiary ledger:

Paper Indirect Materials

Bal. 4,300 8,750 (e) Bal. 1,900 1,600 (e)

(d) 26,600 (d) 4,200

Bal. 22,150 Bal. 4,500

Total balances equal balance of Raw Materials Inventory, $26,650 ($22,150 + $4,500).

Work-in-Process Inventory subsidiary ledger:

Job 120 Job 121

Bal. 43,000 53,020 (j) Bal. 0

(e) 900 (e) 7,850

(f) 4,800 (f) 18,500

(i) 4,320 (i) 16,650

Bal. 0 Bal. 43,000

Balance equals balance of Work-in-Process Inventory, $43,000 ($0 + $43,000).

Finished Goods Inventory subsidiary ledger:

Large stars Small stars

Bal. 9,300 53,020 (k) Bal. 12,000

(j) 53,020 Bal. 12,000

Bal. 9,300

Total balances equal balance of Finished Goods Inventory, $21,300 ($9,300 + $12,000).


P17-38B, cont.

Requirement 3

SCHOOL STARS

Trial Balance

June 30, 2014

Account Title Debit Credit

Cash $ 69,800


Inventories: Raw Materials 26,650 Work-in-Process 43,000 Finished Goods 21,300

Plant Assets 250,000

Accumulated Depreciation $ 73,700


Wages Payable 3,100

Common Stock 144,000

Retained Earnings 156,200





Totals $ 636,800 $ 636,800

Requirement 4

SCHOOL STARS


Month Ended June 30, 2014

Beginning Work-in-Process Inventory $ 43,000

Direct Materials Used (Trans. e) $ 8,750

Direct Labor (Trans. f) 23,300

Manufacturing Overhead:

Indirect Materials (Trans. e) $ 1,600

Indirect Labor (Trans. f) 19,700

Depreciation—Plant and Equipment (Trans. h) 2,700

Total Manufacturing Overhead 24,000

Total Manufacturing Costs Incurred during the Month 56,050

Total Manufacturing Costs to Account for 99,050

Ending Work-in-Process Inventory (43,000)

Cost of Goods Manufactured $ 56,050


P17-38B, cont.

Requirement 5

SCHOOL STARS

Income Statement

Month Ended June 30, 2014


Cost of Goods Sold:

Beginning Finished Goods Inventory $ 21,300

Cost of Goods Manufactured 56,050

Cost of Goods Available for Sale 77,350

Ending Finished Goods Inventory (21,300)


Gross Profit 76,950

Selling and Administrative Expense 22,000

Net Income $ 54,950

P17-39B

Requirement 1

Hourly rate

to the employer =

$2,000,000 per year = $250 per hour

8,000 hours per year

Predetermined

Overhead

Allocation Rate



=

$800,000* = 0.40 = 40% of direct labor costs

$2,000,000

*$664,000 + $47,000 + $23,000 + $66,000 = $800,000


P17-39B, cont.

Requirement 2

SKYLARK DESIGN, INC.

Estimated Cost of Food Coops’ and Martin Chocolates’ Jobs

Food

Coop

Martin

Chocolates

Direct Costs:

Direct labor

900 hours × $250 per hour $ 225,000

100 hours × $250 per hour $ 25,000

Software licensing costs 3,500 100


Total Direct Costs $ 239,500 $ 25,100


40% × $225,000 90,000

40% × $ 25,000 10,000

Total Costs $ 329,500 $ 35,100

Requirement 3



Food Coop: $659,000




Martin Chocolates: $70,200




Requirement 4

Skylark Design, Inc. assigns costs to jobs to help the company set fees that cover all costs and

contribute to profit. Assigning costs to individual clients also can help Skylark Design, Inc.

control costs.


Continuing Problem

P17-40

Requirement 1

Predetermined

Overhead

Allocation Rate



=

$198,000 = 0.20 = 20%

$990,000

*$105,000 +48,000 + $15,000 + $30,000 = $198,000

Requirement 2

DAVIS CONSULTING, INC.

Estimated Cost of Tommy’s Trains and Marcia’s Cookies Jobs

Tommy’s

Trains

Marcia’s

Cookies

Direct Costs:

Direct labor

730 hours × $180 per hour* $131,400

300 hours × $180 per hour* $54,000

Meal per diem 2,600 600


Total Direct Costs 145,000 54,600


20% × $131,400 26,280

20% × $ 54,000 10,800

Total Cost $171,280 $65,400

*$990,000 estimated direct labor costs / 5,500 estimated direct

labor hours = $180 per hour


P17-40, cont.

Requirement 3



Tommy’s Trains: $228,373




Marcia’s Cookies: $87,200




Requirement 4 Davis assigns costs to jobs to help the company set fees that cover all costs and contribute to

profit. Assigning costs to individual clients can also help Davis Consulting to control costs.


Critical Thinking

Decision Case 17-1

Requirement 1 The cost analysis for the second order is correct. The problem tells us that overhead is allocated

―based on direct labor cost,‖ and we can see from the first order that the allocation rate is 50% of

direct labor cost. Some students may point out that labor costs have gone up during the year, but

overhead costs presumably have not. This situation could result in an overallocation of overhead.

However, overallocated or underallocated amounts are adjusted at the end of the year.

Furthermore, all amounts, including both overhead costs and labor costs, were estimated at the

beginning of the year to calculate the predetermined overhead allocation rate. Estimates are, by

their nature, only ―educated guesses.‖ They may very well include ―contingency amounts‖ or

―cushions‖ for unknown factors, and it is expected that actual costs will differ from the amounts

estimated. (Alternatively, it may be pointed out that companies are free to revise their allocation

rates at any time if they feel it is warranted.)

Requirement 2 Hiebert should account for each order as a separate job. The orders were received at different

times, for different amounts, and the costs per box of the orders are not the same.

Requirement 3 Student responses will vary. Answers should make it clear that Hiebert is free to price his

products any way he sees fit. He may choose to keep the price per box the same as it was before,

and sacrifice a portion of the gross profit in order to keep his sales volume up and maintain

customer loyalty. Or, he could ―pass along‖ the cost increases by raising his prices, risking a

reduction in sales. Or, he could pick a price strategy somewhere in between these two points.

Hiebert will have to consider a number of factors such as supply and demand, current market

conditions, competition, and customer relations before deciding on whether to change the price

of the product.


Decision Case 17-2

Requirement 1

Consider the computation of the predetermined overhead allocation rate:

Total estimated overhead costs

Total estimated quantity of the allocation base

The advantages of monthly rates are:

The controller only has to estimate overhead costs and the allocation base (direct labor hours)

for the next month.

If the controller’s cost and allocation base estimates are more accurate, there will be less

overallocated or underallocated manufacturing overhead.

The disadvantages of monthly rates are:

The controller has to spend time estimating these amounts each month. (Although this might

help the controller keep a closer eye on costs.)

Monthly manufacturing overhead rates will vary significantly for reasons beyond managers’

control. For example, the December predetermined overhead allocation rate could be twice as

high as other months’ rates. While the costs should be approximately the same as in other

months, there are only half as many direct labor hours over which to spread the overhead

costs. It is not clear why a jar of preserves produced November 30 should have a much lower

cost than a jar produced on December 1.

Similarly, if Nature’s Own incurs particularly high air conditioning costs in July, then July’s

manufacturing overhead costs (numerator of the predetermined overhead allocation rate) will

be higher than in more temperate months, leading to a higher predetermined overhead

allocation rate.

Requirement 2

Most companies adopt a yearly approach to ―smooth out‖ seasonal effects and the effects of

other costs that do not occur on a regular basis so that all products produced during the year will

bear an equal burden of overhead costs. This not only prevents wild up and down swings in Cost

of Goods Sold, but also prevents similar swings in gross profit. Such swings can give a distorted

and misleading appearance to cost and profit data.


Ethical Issues 17-1

Requirement 1

Farley’s pricing policy states that the bid price should be based on:

Design cost + manufacturing cost + distribution cost + customer service cost + profit margin.

Using only manufacturing cost rather than full costs understates the cost of the job and results in

a lower bid price. By excluding the several hundred thousand dollars of design costs, the

company may submit a bid price that is too low. If the contract is executed at the current price,

Farley’s profit margin will be lower than expected, and the company may even incur a loss.

Requirement 2

Assuming that this error will have a significant negative impact on company profits, York will

have to discuss the situation with the company president, and he will have to make a

recommendation.

Possible alternatives are:

a. Farley, Inc. will live up to the contract, and absorb the losses in order to maintain good

relations with its customer.

b. Farley, Inc. will approach the customer and discuss renegotiating the contract.

c. Farley, Inc. will attempt to use legal tactics to annul the contract.

Each party would likely be affected by York’s decision:

The Controller, Paul York, may be fired, demoted, or in some other way penalized for not

catching the mistake before the contract was signed. On the other hand, he may be able to handle

the situation without any negative consequences if the customer is willing to renegotiate.

CompWest.com would prefer to pay the lowest price and may not want to renegotiate the

contract. CompWest.com could sue Farley if Farley simply refuses to honor the contract.

The first thing York should do is to immediately inform the president. It is possible that the

president may be able to offer other ideas as to how to resolve the situation.


Fraud Case 17-1

Requirement 1

The company is using direct labor hours as a cost driver to allocate overhead. By showing more

hours spent on military jobs, more overhead would be allocated to these jobs over civilian

contracts.

Requirement 2

By shifting costs from other contracts to the government contracts, the company is overcharging

the government and violating the contract agreement.

Requirement 3

Lower costs translate into higher profits. Additionally, the company can place bids lower than its

competitors because they have lower costs, thereby increasing their chances of being awarded

contracts.

Team Project 17-1

Requirement 1a

The total cost of Flight 1247, assuming a full plane (100% load factor):

Costs other than food and beverage:

Number of available seat miles × Cost per seat mile

[142 seats × 1,000 miles] × $0.084

142,000 seat miles × $0.084 = $11,928

Food and beverage costs:

Number of meals × Cost per meal

142 seats × $10 = 1,420

Total cost of flight 1247 $13,348

Requirement 1b

The revenue generated by Flight 1247, assuming a 100% load factor and average revenue per

one-way ticket of $102:

Number of seats × Average revenue per seat = Revenue

142 seats × $102.00 = $14,484


Team Project 17-1, cont.

Requirement 1c

The profit per Flight 1247, given the responses to 1a and 1b:

Revenue – Cost = Profit

$14,484 (1b) – $13,348 (1a) = $1,136

Requirement 2a

The total cost of Flight 53, assuming a full plane (100% load factor)

Costs other than food and beverage:

Number of available seat miles × Cost per seat mile

(162 seats × 1,000 miles) × $0.053

162,000 seat miles × $0.053 = $8,586

Food and beverage costs:

Number of snacks × Cost per snack

162 seats × $5 = 810

Total cost of flight 53 $9,396

Requirement 2b

The revenue generated by Flight 53, assuming a 100% load factor:

Number of seats × Revenue per seat = Revenue

162 seats × $75.00 = $12,150

The profit per Flight 53, given the responses to a. and b:

Revenue – Cost = Profit

$12,150 (2b) – $9,396 (2a) = $2,754



Requirement 3

Delta Flight 1247 JetBlue Flight 53

Revenues $ 14,484 $ 12,150

Costs 13,348 9,396

Profits $ 1,136 $ 2,754

1. Do nothing and wait until the budget carriers run out of money.

Given its lower cost, JetBlue is making profits ($2,754) even with the low airfare of $75 a ticket.

So the data do not support the vice president of operations’ opinion that JetBlue cannot continue

to operate with its existing low fare structure. While Delta is currently making a smaller profit

($1,136) on this same route, the vice president of marketing is concerned that failure to match

other airlines’ lower airfares will result in a loss of market share. As a result, Delta’s profits may

decline and even disappear. Thus, doing nothing is not a good alternative.

2. Cut airfares to match the competition. Delta offers a range of fares, including some that are close to those of the budget carriers. For

example, on Flight 1247 Delta offers some seats at $80. However, if Delta simply matched

JetBlue’s $75 airfare on this route, Flight 1247’s revenue would drop to $10,650 and result in a

loss because revenues would be less than costs:

Number of seats × Revenue per seat = Total Revenue

142 seats × $75.00 = $10,650

3. Institute a cost-cutting program.

Cost cutting would enable Delta to increase the profitability of its flights and, at the same time,

respond to competition with lower airfares. Comparing the costs of Delta’s Flight 1247 with

JetBlue’s Flight 53 suggests there is potential for Delta to cut costs. Delta’s total costs are 42%

[($13,348 − $9,396) / $9,396] higher than JetBlue’s. Delta should consider pursuing a cost-

cutting strategy.

4. Start a new budget airline.

This might be an acceptable strategy, especially if Delta has difficulty cutting the cost of its

existing airline operations. For this strategy to succeed, however, the new airline would have to

operate with far lower costs than Delta does at present. Delta would also have to carefully

consider the effect the new airline would have on the business of their existing airline. This

would be a significant change in corporate strategy that would require considerably more

analysis.



Requirement 4

Simplifying assumptions include:

A. Each airline has a 100% load factor.

This is unlikely to hold and average load factors differ between airlines. If JetBlue has a higher

load factor than Delta, this would further increase JetBlue’s profitability advantage over Delta.

B. Revenue is the same for each seat filled by an airline. (For Delta, the calculations that were

done using a single price of $102.)

This is not the case for Delta, because it offers a range of airfares. Therefore, Delta could try to

sell more of the higher-priced seats.

C. Airlines only compete on price.

Airlines offer other features to attract customers. For example, JetBlue emphasizes the comfort

of its leather seats, while Delta has a frequent flyer program and serves more destinations.

Customer service could also be a factor influencing the consumer’s choice.

D. Other factors may have a major impact, such as the routes being offered, times of flights,

which cities are being used as hubs, etc.

Communication Activity 17-1

Student responses will vary. A sample response: We use a predetermined overhead allocation

rate in order to estimate costs before work is done. The rate is multiplied by the actual quantity

of the allocation base to determine manufacturing overhead allocated. Manufacturing Overhead

is adjusted at the end of period for overallocated and underallocated overhead. Waiting until the

―real‖ rate is determined at the end of the accounting period does not provide cost data in a

timely manner during the accounting period.

Chapter 17 Job Order Costing - eBookon

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