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CHAPTER 4JOB COSTING
4-1 Cost pool––a grouping of individual cost items.Cost tracing––the assigning of direct costs to the chosen cost object.Cost allocation––the assigning of indirect costs to the chosen cost object.Cost-allocation base––a factor that links in a systematic way an indirect cost or group
of indirect costs to a cost object.
4-2 In a job-costing system, costs are assigned to a distinct unit, batch, or lot of a product or service. In a process-costing system, the cost of a product or service is obtained by using broad averages to assign costs to masses of identical or similar units.
4-3 An advertising campaign for Pepsi is likely to be very specific to that individual client. Job costing enables all the specific aspects of each job to be identified. In contrast, the processing of checking account withdrawals is similar for many customers. Here, process costing can be used to compute the cost of each checking account withdrawal.
4-4 The seven steps in job costing are: (1) identify the job that is the chosen cost object, (2) identify the direct costs of the job, (3) select the cost-allocation bases to use for allocating indirect costs to the job, (4) identify the indirect costs associated with each cost-allocation base, (5) compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job, (6) compute the indirect costs allocated to the job, and (7) compute the total cost of the job by adding all direct and indirect costs assigned to the job.
4-5 Two major cost objects that managers focus on in companies using job costing are: (1) products or jobs, and (2) responsibility centers or departments.
4-6 Three major source documents used in job-costing systems are: (1) job cost record or job cost sheet, a document that records and accumulates all costs assigned to a specific job, starting when work begins (2) materials requisition record, a document that contains information about the cost of direct materials used on a specific job and in a specific department; and (3) labor-time record, a document that contains information about the labor time used on a specific job and in a specific department.
4-7 The main concern with the source documents of job cost records is the accuracy of the records. Problems occurring in this area include incorrect recording of quantity or dollar amounts, materials recorded on one job being “borrowed” and used on other jobs, and erroneous job numbers being assigned to materials or labor inputs.
4-8 Two reasons for using an annual budget period are:a. The numerator reason––the longer the time period, the less the influence of seasonal
patterns, andb. The denominator reason––the longer the time period, the less the effect of variations in
output levels on the allocation of fixed costs.
4-1
4-9 Actual costing and normal costing differ in their use of actual or budgeted indirect cost rates:
ActualCosting
NormalCosting
Direct-cost ratesIndirect-cost rates
Actual ratesActual rates
Actual ratesBudgeted rates
Each costing method uses the actual quantity of the direct-cost input and the actual quantity of the cost-allocation base.
4-10 A house construction firm can use job cost information (a) to determine the profitability of individual jobs, (b) to assist in bidding on future jobs, and (c) to evaluate professionals who are in charge of managing individual jobs.
4-11 The statement is false. In a normal costing system, the Manufacturing Overhead Control account will not, in general, equal the amounts in the Manufacturing Overhead Allocated account. The Manufacturing Overhead Control account aggregates the actual overhead costs incurred while Manufacturing Overhead Allocated allocates overhead costs to jobs on the basis of a budgeted rate times the actual quantity of the cost-allocation base.
Underallocation or overallocation of indirect (overhead) costs can arise because of: (a) Numerator reason––the actual overhead costs differ from the budgeted overhead costs, and (b) Denominator reason––the actual quantity used of the allocation base differs from the budgeted quantity.
4-12 Debit entries to Work-in-Process Control represent increases in work in process. Examples of debit entries under normal costing are: (a) direct materials used (credit to Materials Control), (b) direct manufacturing labor billed to job (credit to Wages Payable Control), and (c) manufacturing overhead allocated to job (credit to Manufacturing Overhead Allocated).
4-13 Alternative ways to make end-of-period adjustments for underallocated or overallocated overhead are:
(i) Proration based on the total amount of indirect costs allocated (before proration) in the ending balances of work in process, finished goods, and cost of goods sold.
(ii) Proration based on total ending balances (before proration) in work in process, finished goods, and cost of goods sold.
(iii) Year-end write-off to Cost of Goods Sold.(iv) Restate all overhead entries using actual indirect cost rates rather than budgeted
indirect cost rates.
4-14 A company might use budgeted costs rather than actual costs to compute direct labor rates because it may be difficult to trace direct labor costs to jobs as they are completed (for example, because bonuses are only known at the end of the year).
4-15 Modern technology such as electronic data interchange (EDI) is helpful to managers because it provides them with quick and accurate product-cost information that facilitates the management and control of jobs.
4-2
4-16 (10 min) Job order costing, process costing.
a. Job costing l. Job costingb. Process costing m. Process costingc. Job costing n. Job costingd. Process costing o. Job costinge. Job costing p. Job costingf. Process costing q. Job costingg. Job costing r. Process costingh. Job costing (but some process costing) s. Job costingi. Process costing t. Process costingj. Process costing u. Job costingk. Job costing
4-17 (20 min.) Actual costing, normal costing, accounting for manufacturing overhead.
1. =
= = 1.75 or 175%
=
= = 1.9 or 190%
2. Costs of Job 626 under actual and normal costing follow:
Actual NormalCosting Costing
Direct materials $ 40,000 $ 40,000Direct manufacturing labor costs 30,000 30,000Manufacturing overhead costs $30,000 1.90 ; $30,000 1.75 57,000 52,500Total manufacturing costs of Job 626 $127,000 $122,500
3. =
= $980,000 1.75= $1,715,000
4-3
4-17 (Cont’d.)
=
= $1,862,000 $1,715,000 = $147,000
There is no under- or over allocated overhead under actual costing because overhead is allocated under actual costing by multiplying actual manufacturing labor costs and the actual manufacturing overhead rate. This, of course equals the actual manufacturing overhead costs. All actual overhead costs are allocated to products. Hence, there is no under- or overallocatead overhead.
4-18 (20 -30 min.) Job costing, normal and actual costing.
1. = =
= $50 per direct labor-hour
= =
= $42 per direct labor-hour
These rates differ because both the numerator and the denominator in the two calculations are different—one based on budgeted numbers and the other based on actual numbers.
2a. Laguna Model Mission ModelNormal costingDirect costs
Direct materialsDirect labor
Indirect costsAssembly support ($50 900; $50 1,010)
Total costs
$106,450 36,276 142,726
45,000 45,000 $187,726
$127,604 41,410 169,014
50,500 50,500 $219,514
2b. Actual costingDirect costs
Direct materialsDirect labor
Indirect costsAssembly support ($42 900; $42 1,010)
Total costs
$106,450 36,276 142,726
37,800 37,800 $180,526
$127,604 41,410 169,014
42,420 42,420 $211,434
4-18 (Cont’d.)
4-4
3. Normal costing enables Anderson to report a job cost as soon as the job is completed, assuming that both the direct materials and direct labor costs are known at the time of use/work. Once the 900 direct labor-hours are known for the Laguna Model (June 2004), Anderson can compute the $187,726 cost figure using normal costing. Anderson can use this information to manage the costs of the Laguna Model job as well as to bid on similar jobs later in the year. In contrast, Anderson has to wait until the December 2004 year-end to compute the $180,526 cost of the Laguna Model using actual costing.
Although not required, the following overview diagram summarizes Anderson Construction’s job-costing system.
4-19 (10 min.) Budgeted manufacturing overhead rate, allocatedmanufacturing overhead.
1. Budgeted manufacturing overhead rate =
= = $15/machine-hour
2. Manufacturing overhead allocated = Actual machine-hours × Budgeted manufacturing overhead rate = 195,000 × $15 = $2,925,000
3. Since manufacturing overhead allocated is greater than the actual manufacturing overhead costs, Waheed overallocated manufacturing overhead:
Manufacturing overhead allocated $2,925,000Actual manufacturing overhead costs 2,910,000Overallocated manufacturing overhead $ 15,000
4-5
4-20 (20-30 min.) Job costing, accounting for manufacturing overhead, budgeted rates.
1. An overview of the product costing system is:
Budgeted manufacturing overhead divided by allocation base:
Machining overhead = $36 per machine-hour
Assembly overhead: = 180% of direct manuf. labor costs
2. Machining department, 2,000 hours $36 $72,000Assembly department, 180% $15,000 27,000Total manufacturing overhead allocated to Job 494 $99,000
3. Machining AssemblyActual manufacturing overhead $2,100,000 $ 3,700,000Manufacturing overhead allocated,
55,000 $36 1,980,000180% $2,200,000 3,960,000
Underallocated (Overallocated) $ 120,000 $ (260,000)
4-6
4-21 (2025 min.) Job costing, consulting firm.1. Budgeted indirect-cost rate = $13,000,000 ÷ $5,000,000 = 260% of professional labor costs
2. At the budgeted revenues of $20,000,000, Taylor’s operating income of $2,000,000 equals 10% of revenues.Markup rate = $20,000,000 ÷ $5,000,000 = 400% of direct professional labor costs
3. Budgeted costsDirect costs:
Director, $200 3 $ 600Partner, $100 16 1,600Associate, $50 40 2,000Assistant, $30 160 4,800 $ 9,000
Indirect costs:Consulting support, 260% $9,000 23,400
Total costs $32,400
Bid price to earn target operating income-to-revenue margin of 10% can be calculated as follows:
Let R = revenue to earn target income R – 0.10R = $32,4000.90R = $32,400R = $32,400 ÷ 0.90 = $36,000
or, Direct costs 9,000 Indirect costs 23,400 Profit (0.40 9,000) 3,600 Bid price $36,000
4-7
COSTALLOCATION
BASE
ConsultingSupport
ConsultingSupport
COST OBJECT:JOB FOR
CONSULTINGCLIENT
DIRECTCOSTS
Indirect Costs
Direct Costs
INDIRECTCOSTPOOL
ProfessionalLabor Costs
ProfessionalLabor Costs
ProfessionalLabor
4-22 (2030 min.) Computing indirect-cost rates, job costing.
1a.Budgeted
FixedIndirect Costs
BudgetedHours
Budgeted Fixed
Indirect CostRate per Hour
Budgeted Variable
Indirect CostRate per Hour
Budgeted TotalIndirect Cost
Rate per Hour
Jan.March $ 50,000 20,000 $ 2.50 $10 $12.50AprilJune 50,000 10,000 5.00 10 15.00JulySept. 50,000 4,000 12.50 10 22.50Oct.Dec. 50,000 6,000 8.33 10 18.33
b. $200,000 40,000 $ 5.00 $10 $15.00
2a. All four jobs use 10 hours of professional labor time. The only difference in job costing is the indirect cost rate. The quarterly-based indirect job costs are:
Hansen: (10 $12.50) = $125.00Kai: ( 6 $12.50) + (4 $15.00) = $135.00Patera: ( 4 $15.00) + (6 $22.50) = $195.00Stevens: ( 5 $12.50) + (2 $22.50) + (3 $18.33) = $162.50
Hansen Kai Patera Stevens
Revenues, $65 10Direct costs, $30 10Indirect costsTotal costsOperating income
$650 300
125 425 $225
$650 300
135 435 $215
$650 300
195 495 $155
$650 .00 300.00
162 .50 462 .50 $187 .50
2b. Using annual-based indirect job-cost rates, all four customers will have the same operating income:
Revenues, $65 10 hours $650Direct costs, $30 10 hours 300Indirect costs, $15 10 hours 150Total costs 450Operating income $200
4-8
4-22 (Cont’d.)
3. All four jobs use 10 hours of professional labor time. Using the quarterly-based indirect-cost rates, there are four different operating incomes because the work done on them is completed in different quarters. In contrast, using the annual indirect-cost rate, all four customers show the same operating income. All these different operating income figures for jobs with the same number of professional labor-hours are due to the allocation of fixed indirect costs.
An overview of the Tax Assist job-costing system is:
4-23 (1015 min.) Accounting for manufacturing overhead.
1. Budgeted manufacturing overhead rate =
= $35 per machine-hour
2. Work-in-Process Control 6,825,000 Manufacturing Overhead Allocated 6,825,000(195,000 machine-hours $35 per machine-hour = $6,825,000)
3. $6,825,000 – $6,800,000 = $25,000 overallocated, an insignificant amount.
Manufacturing Overhead Allocated 6,825,000 Manufacturing Department Overhead Control 6,800,000 Cost of Goods Sold 25,000
4-9
OfficeSupport
ProfessionalLabor-Hours
Indirect Costs
Direct Costs
INDIRECTCOSTPOOL
COSTALLOCATION
BASE
COST OBJECT:JOB
DIRECTCOST
Professional
Labor
4-24 (35 45 min.) Job costing, journal entries.
Some instructors may also want to assign Exercise 4-25. It demonstrates the relationships of the general ledger to the underlying subsidiary ledgers and source documents.
1. An overview of the product costing system is:
2. & 3.This answer assumes COGS given of $4,020 does not include the writeoff of overallocated manufacturing overhead.
4-10
4-24 (Cont’d.)
2. (1) Materials Control Accounts Payable Control
800 800
(2) Work-in-Process Control Materials Control
710 710
(3) Manufacturing Overhead Control Materials Control
100 100
(4) Work-in-Process ControlManufacturing Overhead Control Wages Payable Control
1,300900
2,200(5) Manufacturing Overhead Control
Accumulated Depreciation––buildings and manufacturing equipment
400
400(6) Manufacturing Overhead Control
Miscellaneous accounts 550
550(7) Work-in-Process Control
Manufacturing Overhead Allocated (1.60 $1,300 = $2,080)
2,0802,080
(8) Finished Goods Control Work-in-Process Control
4,1204,120
(9) Accounts Receivable Control (or Cash) Revenues
8,0008,000
(10) Cost of Goods Sold Finished Goods Control
4,0204,020
(11) Manufacturing Overhead Allocated Manufacturing Overhead Control Cost of Goods Sold
2,0801,950
130
3.Materials Control
Bal. 12/31/2003(1) Purchases
100800
(2) Issues(3) Issues
710100
Bal. 12/31/2004 90
Work-in-Process ControlBal. 12/31/2003(2) Direct materials(4) Direct manuf. labor(7) Manuf. overhead
allocated
60710
1,300
2,080
(8) Goods completed 4,120
Bal. 12/31/2004 30
4-11
4-24 (Cont’d.)Finished Goods Control
Bal. 12/31/2003(8) Goods completed
5004,120
(10) Goods sold 4,020
Bal. 12/31/2004 600
Cost of Goods Sold(10) Goods sold 4,020 (11) Adjust for over-
allocation 130Bal. 12/31/2004 3,890
Manufacturing Overhead Control(3) Indirect materials(4) Indirect manuf. labor(5) Depreciation(6) Miscellaneous
100900400
550
(11) To close 1,950
Bal. 0
Manufacturing Overhead Allocated(11) To close 2,080 (7) Manuf. overhead allocated 2,080
Bal. 0
4-25 (20 min.) Job costing, journal entries, and source documents (continuation of 4-24).
The analysis of source documents and subsidiary ledgers follows:1. a. Approved purchase invoice
b. dr. Materials record, "received" columncr. Accounts payable subsidiary ledger, account for creditor
2. a. Materials requisition recordb. dr. Job cost records
cr. Materials record, "issued" column
3. a. Materials requisition recordb. dr. Department overhead cost records, appropriate column
cr. Materials record, "issued" column
4. a. Summary of labor-time records or daily time analysis. This summary is sometimes called a labor cost distribution summary.
b. dr. Job cost recordsdr. Department overhead cost records, appropriate columns for various classes of indirect laborcr. Wages payable subsidiary ledger
5. a. Special authorization from the responsible accounting officerb. dr. Department overhead cost records, appropriate columns
cr. Accumulated depreciation subsidiary ledger
4-12
4-25 (Cont’d.)
6. a. Various approved invoices and special authorizationsb. dr. Department overhead cost records, appropriate columns
7. a. Use of an authorized budgeted manufacturing overhead rateb. dr. Job cost record
8. a. Completed job cost recordsb. dr. Finished goods records, received column
cr. Job cost record, completed column
9. a. Approved sales invoiceb. dr. Accounts receivable subsidiary ledger
cr. Sales ledger, if any
10. a. Costed sales invoiceb. cr. Finished goods records, issued column
11. a. Special authorization from the responsible accounting officerb. Subsidiary records are generally not used for these entries
4-26 (45 min.) Job costing, journal entries.
Some instructors may wish to assign Problem 4-24. It demonstrates the relationships of journal entries, general ledger, subsidiary ledgers, and source documents.
1. An overview of the product-costing system is:
4-13
Manufacturing Overhead
Machine-Hours
Indirect CostsDirect Costs
DirectMaterials
DirectManuf. Labor
INDIRECTCOSTPOOL
COSTALLOCATION
BASE
COST OBJECTPRODUCT
DIRECTCOSTS
4-26 (Cont’d.)
2. Amounts in millions.
(1) Materials ControlAccounts Payable Control
150150
(2) Work-in-Process ControlMaterials Control
145145
(3) Manufacturing Department Overhead ControlMaterials Control
10 10
(4) Work-in-Process ControlWages Payable Control
90 90
(5) Manufacturing Department Overhead ControlWages Payable Control
30 30
(6) Manufacturing Department Overhead ControlAccumulated Depreciation
19 19
(7) Manufacturing Department Overhead ControlVarious liabilities
9 9
(8) Work-in-Process ControlManufacturing Overhead Allocated
63 63
(9) Finished Goods ControlWork-in-Process Control
294294
(10a) Cost of Goods SoldFinished Goods Control
292292
(10b) Accounts Receivable Control (or Cash )Revenues
400400
The posting of entries to T-accounts is:
Materials Control Work-in-Process ControlBal. 12(1) 150
(2) 145(3) 10
Bal. 2(2) 145(4) 90(8) 63
(9) 294
Bal. 6
Finished Goods Control Cost of Goods SoldBal. 6(9) 294
(10a) 292 (10a) 292(11) 5
Manufacturing DepartmentOverhead Control Manufacturing Overhead Allocated
(3) 10(5) 30(6) 19(7) 9
(11) 68 (11) 63 (8) 63
4-14
4-26 (Cont’d.)
Accounts Payable Control Wages Payable Control(1) 150 (4) 90
(5) 30
Accumulated Depreciation Various Liabilities(6) 19 (7) 9
Accounts Receivable Control Revenues(10b) 400 (10b) 400
The ending balance of Work-in-Process Control is $6.
3. (11) Manufacturing Overhead Allocated 63Cost of Goods Sold 5
Manufacturing Department Overhead Control 68
4-27 (15-20 min.) Job costing, unit cost, ending work in process.
1. Cost of Job M1:Direct materials $ 75,000Direct manufacturing labor 270,000Manufacturing overhead allocated 180,000*Total cost $525,000
*Budgeted rate $30 × 6,000 direct manufacturing labor-hours = $180,000
2. Per unit cost =
= = $35 per unit
3. Finished Goods Control 525,000 Work in Process Control 525,000
4. The work in process consists of Job M2 only:
Direct materials $ 50,000Direct manufacturing labor 210,000Manufacturing overhead allocated 150,000†Work in process May 31 $410,000
† Budgeted rate of $30 × 5,000 direct manufacturing labor-hours.
4-15
4-28 (2030 min.) Job costing; actual, normal, and variation of normal costing.
1. Actual direct cost rate for professional labor = $58 per professional labor-hour
Actual indirect cost rate = = $48 per professional labor-hour
= = $60 per professional labor-hour
Budgeted indirect cost rate = = $45 per professional labor-hour
(a)ActualCosting
(b)NormalCosting
(c)Variation of
Normal CostingDirect-Cost Rate $58
(Actual rate)$58
(Actual rate)$60
(Budgeted rate)Indirect-Cost Rate $48
(Actual rate)$45
(Budgeted rate)$45
(Budgeted rate)
2. (a)ActualCosting
(b)NormalCosting
(c)Variation of
Normal CostingDirect CostsIndirect CostsTotal Job Costs
$58 120 = $ 6,960 48 120 = 5,760
$12,720
$58 120 = $ 6,960 45 120 = 5,400
$12,360
$60 120 = $ 7,200 45 120 = 5,400
$12,600
All three costing systems use the actual professional labor time of 120 hours. The budgeted 110 hours for the Pierre Enterprises audit job is not used in job costing. However, Chirac may have used the 110 hour number in bidding for the audit.
The actual costing figure of $12,720 exceeds the normal costing figure of $12,360, because the actual indirect-cost rate ($48) exceeds the budgeted indirect-cost rate ($45). The normal costing figure of $12,360 is less than the variation of normal costing (based on budgeted rates for direct costs) figure of $12,600, because the actual direct-cost rate ($58) is less than the budgeted direct-cost rate ($60).
Although not required, the following overview diagram summarizes Chirac’s job-costing system.
4-16
4-28 (Cont’d.)
4-28 Excel ApplicationJob Costing
Chirac & Partners
Original DataBudget for 2001
Professional labor comp. $960,000 Audit support dept. costs $720,000
Professional labor-hours billed 16,000 Actual Results for 2001Audit support dept. costs $744,000
Professional labor-hours billed 15,500 Actual professional labor cost rate $58
Problem 1 Actual costing Normal costing Variation from normal costing
Direct cost rate $58 $58 $60 Indirect cost rate $48 $45 $45
Problem 2Direct Costs: Actual Costing Normal costing Variation of normal costing
Professional labor $ 6,960 $ 6,960 $ 7,200Indirect Costs:
Audit support $ 5,760 $ 5,400 $ 5,400Total job cost $12,720 $12,360 $12,600
4-17
4-29 (20-30 min.) Job costing, service industry, actual, normal, variation from normal costing.
1. = $225 per professional labor-hour
Actual indirect cost rate = = $113.09 per professional labor-hour
= = $200 per professional labor-hour
Budgeted indirect-cost rate = = $130 per professional labor-hour
(a) (b) (c)Actual Normal Variation from
Costing Costing Normal Costing Direct-cost rate $225 $225 $200
(Actual rate) (Actual rate) (Budgeted rate)
Indirect-cost rate $113.09 $130 $130(Actual rate) (Budgeted rate) (Budgeted rate)
2.Actual Normal Variation from
Costing Costing Normal Costing Direct costs $225 × 575 = $129,375 $225 × 575 = $129,375 $200 × 575 = $115,000Indirect costs $113.09 × 575 = 65,027 $130 × 575 = 74,750 $130 × 575 = 74,750Total job costs $194,402 $204,125 $189,750
The differences in job costs arise from the different uses of actual versus budgeted rates. The actual costing figure of $194,402 is less than the normal costing figure of $204,125, because the actual indirect cost rate ($113.09) is less than the budgeted indirect-cost rate ($130). The normal costing figure of $204,125 exceeds the variation from normal costing figure (based on budgeted rates for direct costs) of $189,750, because the actual direct cost rate ($225) exceeds the budgeted direct-cost rate ($200).
All three job-costing systems use the actual professional labor-hours of 575. The budgeted 500 hours is not used in the job-costing system. However, it may have been used by Web Creations in budgeting on the Amazing.com job. If Web Creations quoted a fixed price, it may well have lost money on this job.
4-18
4-30 (2030 min) Job costing, accounting for manufacturing overhead, budgeted rates.
1. An overview of the job-costing system is:
2. Budgeted manufacturing overhead divided by allocation base:a. Machining Department:
= $50 per machine-hourb. Finishing Department:
= 200% of direct manufacturing labor costs
3. Machining Department overhead, $50 130 hours $6,500Finishing Department overhead, 200% of $1,250 2,500Total manufacturing overhead allocated $9,000
4. Total costs of Job 431:Direct costs:
Direct materials––Machining Department $14,000––Finishing Department 3,000
Direct manufacturing labor —Machining Department 600—Finishing Department 1,250 $18,850
Indirect costs:Machining Department overhead, $50 130 $6,500Finishing Department overhead, 200% of $1,250 2,500 9,000
Total costs $27,850
The per-unit product cost of Job 431 is $27,850 ÷ 200 units = $139.25 per unit
4-30 (Cont’d.)
The point of this part is (a) to get the definitions straight and (b) to underscore that overhead is allocated by multiplying the actual amount of the allocation base by the budgeted rate.
5.
Machining FinishingManufacturing overhead incurred (actual) $11,200,000 $7,900,000Manufacturing overhead allocated
220,000 hrs. $50 11,000,000200% of $4,100,000 8,200,000
Underallocated manufacturing overhead $ 200,000Overallocated manufacturing overhead $ 300,000Total overallocated overhead = $300,000 – $200,000 = $100,000
4-19
6. A homogeneous cost pool is one where all costs have the same or a similar cause-and-effect or benefits-received relationship with the cost-allocation base. Solomon likely assumes that all its manufacturing overhead cost items are not homogeneous. Specifically, those in the Machining Department have a cause-and-effect relationship with machine-hours, while those in the Finishing Department have a cause-and-effect relationship with direct manufacturing labor costs. Solomon believes that the benefits of using two cost pools (more accurate product costs and better ability to manage costs) exceeds the costs of implementing a more complex system.
4-31 (1520 min.) Service industry, job costing, law firm.
1.
4-20
4-31 (Cont’d.)
=
= = $65 per professional labor-hour
Note that the budgeted professional labor-hour direct-cost rate can also be calculated by dividing total budgeted professional labor costs of $2,600,000 ($104,000 per professional 25 professionals) by total budgeted professional labor-hours of 40,000 (1,600 hours per professional 25 professionals), $2,600,000 40,000 = $65 per professional labor-hour.
=
=
= = $55 per professional labor-hour
4. Richardson PunchDirect costs:
Professional labor, $65 100; $65 150Indirect costs:
Legal support, $55 100; $55 150
$ 6,500
5,500 $12,000
$ 9,750
8,250 $18,000
4-21
2.
3.
4-32 (25-30 min.) Service industry, job costing, two direct and indirect cost categories, law firm (continuation of 4-31).
Although not required, the following overview diagram is helpful to understand Keating’s job-costing system.
1. ProfessionalPartner Labor
ProfessionalAssociate Labor
Budgeted compensation per professionalDivided by budgeted hours of billable time per professionalBudgeted direct-cost rate
$ 200,000
÷1,600 $125 per hour*
$80,000
÷1,600 $50 per hour†
*Can also be calculated as =
= = $125
†Can also be calculated as =
= = $ 50
2. GeneralSupport
SecretarialSupport
Budgeted total costsDivided by budgeted quantity of allocation baseBudgeted indirect cost rate
$1,800,000÷40,000 hours$45 per hour
$400,000÷8,000 hours$50 per hour
4-22
ProfessionalLabor-Hours
GeneralSupport
COST OBJECT:JOB FOR
CLIENT
INDIRECTCOSTPOOL
COSTALLOCATION
BASE
}
DIRECTCOST
Indirect Costs
Direct Costs
PartnerLabor-Hours
SecretarialSupport
ProfessionalAssociate Labor
ProfessionalPartner Labor
4-32 (Cont’d.)3. Richardson Punch
Direct costs:Professional partners, $125 60; $125 30Professional associates, $50 40; $50 120
Direct costsIndirect costs:
General support, $45 100; $45 150Secretarial support, $50 60; $50 30
Indirect costsTotal costs
$7,500 2,000
$ 9,500
4,500 3,000
7,500$17,000
$3,750 6,000
$ 9,750
6,750 1,500
8,250$18,000
4. Richardson PunchSingle direct - Single indirect (from Prob. 4-31)Multiple direct – Multiple indirect (from requirement 3 of Prob. 4-32)
Difference
$12,000
17,000
$5,000undercosted
$18,000
18,000
no change
The Richardson and Punch jobs differ in their use of resources. The Richardson job has a mix of 60% partners and 40% associates, while Punch has a mix of 20% partners and 80% associates. Thus, the Richardson job is a relatively high user of the more costly partner-related resources (both direct partner costs and indirect partner secretarial support). The refined-costing system in Problem 4-32 increases the reported cost in Problem 4-31 for the Richardson job by 41.7% (from $12,000 to $17,000).
4-33 (2025 min.) Proration of overhead.
1. Budgeted manufacturing overhead rate is $4,800,000 ÷ 80,000 = $60 per machine-hour.
2. = – = $4,900,000 – $4,500,000*= $400,000
*$60 75,000 actual machine-hours = $4,500,000
4-23
4-33 (Cont’d.)a. Write-off to Cost of Goods Sold
Account
AccountBalance(Before
Proration)
Write-off of $400,000
UnderallocatedManufacturing
Overhead
AccountBalance(After
Proration)
Work in ProcessFinished GoodsCost of Goods SoldTotal
$ 750,0001,250,000
8,000,000 $10,000,000
$ 00
400,000 $400,000
$ 750,0001,250,000
8,400,000 $10,400,000
b. Proration based on ending balances (before proration) in Work in Process, Finished Goods and Cost of Goods Sold.
AccountAccount Balance
(Before Proration)
Proration of $400,000Underallocated
Manufacturing Overhead
AccountBalance(After
Proration)
Work in ProcessFinished GoodsCost of Goods SoldTotal
$ 750,0001,250,000
8,000,000 $10,000,000
( 7.5%)(12.5%)(80 .0 %)100 .0 %
0.075 $400,000 = $ 30,0000.125 $400,000 = 50,0000.800 $400,000 = 320,000
$400,000
$ 780,0001,300,000
8,320,000 $10,400,000
c. Proration based on the allocated overhead amount (before proration) in the ending balances of Work in Process, Finished Goods, and Cost of Goods Sold.
Account
AccountBalance(Before
Proration)
Allocated OverheadComponent in
the Account Balance(Before Proration)
Proration of $400,000Underallocated
Manufacturing Overhead
AccountBalance(After
Proration)
Work in Process $ 750,000 $ 240,000a ( 5.33%)0.0533 $400,000 = $ 21,320 $ 771,320
Finished Goods 1,250,000 660,000b (14.67%)0.1467 $400,000 = 58,680 1,308,680
Cost of Goods Sold 8,000,000 3,600,000c (80.00%)0.800 $400,000 = 320,000 8,320,000
Total $10,000,000 $4,500,000 100.00% $400,000 $10,400,000 a$60 4,000 machine-hours; b$60 11,000 machine-hours; c$60 60,000 machine-hours
3. Alternative (c) is theoretically preferred over (a) and (b). Alternative (c) yields the same ending balances in work in process, finished goods, and cost of goods sold that would have been reported had actual indirect cost rates been used.
Chapter 4 also discusses an adjusted allocation rate approach that results in the same ending balances as does alternative (c). This approach operates via a restatement of the indirect
4-24
costs allocated to all the individual jobs worked on during the year using the actual indirect cost rate.
4-25
4-34 (15 min.) Normal costing, overhead allocation, working backwards.
1. Manufacturing overhead allocated = 200% × Direct manufacturing labor costs $3,600,000 = 2 × Direct manufacturing labor costs
Direct manufacturing labor costs = = $1,800,000
2. = + +
$8,000,000 = Direct material used + $1,800,000 + $3,600,000
Direct material used = $2,600,000
3. + Total manufacturing costs = Cost of goods manufactured +
Denote Work in Process on 12/31/2004 by X
$320,000 + $8,000,000 = $7,920,000 + X
X = $400,000
4-35 (40 min.) Proration of overhead, two indirect-cost pools.
Machining DepartmentTotal actual machine-hours = 67,500 + 4,500 + 18,000 = 90,000 machine-hours
= 90,000 × $60 = $5,400,000
= –
= $6,200,000 – $5,400,000 = $800,000
Assembly DepartmentTotal actual direct manufacturing labor-hours = 90,000 + 4,800 + 25,200 = 120,000 direct manuf. labor-hoursManufacturing overhead allocated = 120,000 × $40 = $4,800,000
= –
= $4,800,000 – $4,700,000 = $100,000
4-26
4-35 (Cont’d.)
1a. Write-off to Cost of Goods Sold leads to(i) higher Cost of Goods Sold of $800,000 as a result of underallocation of
manufacturing overhead in the Machining Department;(ii) lower Cost of Goods Sold of $100,000 as a result of overallocation of manufacturing
overhead in the Assembly Department. Hence,
Cost of Goods Sold = $16,000,000 + $800,000 – $100,000 = $16,700,000
1b. Proration based on ending balances (before proration) in Work in Process, Finished Goods, and Cost of Goods Sold.Account balance in each account after proration follows.
Account
Account Balance(Before Proration)
(1)
Proration of $800,000Underallocated
Overhead inManufacturing Dept.
(2)
Proration of $(100,000)OverallocatedOverhead in
Assembly Dept.(3)
Account Balance (After Proration)(4) = (1) + (2) + (3)
Work in Process $ 3,250,000 (16.25%) 0.1625 × $800,000 =$130,000 0.1625 × ($100,000) =$ (16,250) $ 3,363,750Finished Goods 750,000 (3.75%) 0.0375 × $800,000 = 30,000 0.0375 × ($100,000) = (3,750) 776,250Cost of Goods Sold 16,000,000 (80.00%) 0.80 × $800,000 = 640,000 0.80 × ($100,000) = (80,000) 16,560,000
$20,000,000 (100.00%) $800,000 $(100,000) $20,700,000
1c. Proration based on the overhead allocated (before proration) in the ending balances of Cost of Goods Sold, Finished Goods, and Work in Process for each department follows.
Machining Department
Overhead Costs Allocated to EachAccount in Machining Department Proration of $800,000
Using Budgeted Machine-Hour Rate × Underallocated MachiningAccount Actual Machine-Hours Department Overhead
Work in process $60 × 18,000 = $1,080,000 (20%) 0.20 × $800,000 = $160,000Finished goods $60 × 4,500 = 270,000 ( 5%) 0.05 × $800,000 = 40,000Cost of goods sold $60 × 67,500 = 4,050,000 (75%) 0.75 × $800,000 = 600,000
$5,400,000 100% $800,000Assembly Department
Overhead Costs Allocated to EachAccount in Assembly Department Using
Budgeted Direct Manuf. Labor-Hour Proration of ($100,000) Rate × Actual Direct Manuf. Overallocated Assembly Account Labor-Hours Department Overhead
Work in process $40 × 25,200 = $1,008,000 (21%) 0.21 × ($100,000) = $ (21,000)Finished goods $40 × 4,800 = 192,000 ( 4%) 0.04 × ($100,000) = (4,000)Cost of goods sold $40 × 90,000 = 3,600,000 (75%) 0.75 × ($100,000) = (75,000)
$4,800,000 100% $(100,000)
4-27
4-35 (Cont’d.)
Account balances in each account after proration of underallocated Machining Department costs and overallocated Assembly Department costs follow.
Proration Proration of $800,000 of ($100,000)
Underallocated Overallocated Machining Assembly Department Department
Account Balance Overhead Overhead (Before (calculated (calculated Account Balance
Account Proration) earlier) earlier) (After Proration) (1) (2) (3) (4) = (1) + (2) + (3)
Work in process $ 3,250,000 $160,000 $ (21,000) $ 3,389,000Finished goods 750,000 40,000 (4,000) 786,000Cost of goods sold 16,000,000 600,000 (75,000) 16,525,000
$20,000,000 $800,000 $(100,000) $20,700,000
2. If the purpose is to report the most accurate inventory and cost of goods sold figures, the preferred method is to prorate based on the manufacturing overhead allocated amount in the Inventory and Cost of Goods Sold accounts (as in requirement 1c). Note, however, that prorating based on ending balances in Work in Process, Finished Goods, and Cost of Goods Sold (as in requirement 1b) yields a close approximation to the more accurate proration in requirement 1c. Also note that the Write-off to Cost of Goods Sold method (as in requirement 1a) results in account balances in Work in Process, Finished Goods, and Cost of Goods sold that are not very different from the most accurate method. Furthermore, the Write off to Cost of Goods Sold method is simpler than the other methods. Depending on the objectives of proration, a manager may prefer any one of the methods over the other two.
4-28
4-36 (35 min.) General ledger relationships, under- and overallocation.
The solution assumes all materials used are direct materials. A summary of the T-accounts for Needham Company before adjusting for under- or overallocation of overhead follows:
Direct Materials Control Work-in-Process Control1-1-2003 30,000Purchases 400,000
Material used for manufacturing 380,000
1-1-2003 20,000Direct materials 380,000
Transferred to finished goods 940,000
12-31-2003 50,000 Direct manuf. Labor 360,000Manuf. overhead Allocated 480,00012-31-2003 300,000
Finished Goods Control Cost of Goods Sold1-1-2003 10,000Transferred in from WIP 940,000
Cost of goods sold 900,000
Finished goods Sold 900,000
12-31-2003 50,000
Manufacturing Overhead Control Manufacturing Overhead AllocatedManufacturing Overhead Costs 540,000
Manufacturing overhead allocated to work in process 480,000
1. From Direct Materials Control T-account,Direct materials issued to production = $380,000 that appears as a credit.
2. Direct manufacturing labor-hours =
= = 24,000 hours
=
= 24,000 hours $20 = $480,000
3. From the debit entry to Finished Goods T-account, Cost of jobs completed and transferred from WIP = $940,000
4. From Work-in-Process T-account,
= $20,000 + $380,000 + $360,000 + $480,000 – $940,000
= $300,000
5. From the credit entry to Finished Goods Control T-account,
Cost of goods sold (before proration) = $900,0004-36 (Cont’d.)
4-29
6. = –
= $540,000 – $480,000= $60,000 underallocated
7. a. Write-off to Cost of Goods Sold will increase (debit) Cost of Goods Sold by $60,000. Hence, Cost of Goods Sold = $900,000 + $60,000 = $960,000.
b. Proration based on ending balances (before proration) in Work in Process, Finished Goods, and Cost of Goods Sold.
Account balances in each account after proration follows.
Account(1)
Account Balance(Before Proration)
(2)
Proration of $60,000 Underallocated
Manufacturing Overhead(3)
Account Balance(After
Proration)(4)=(2)+(3)
Work in Process $ 300,000 (24%) 0.24 $60,000 = $14,400 $ 314,400Finished Goods 50,000 ( 4%) 0.04 $60,000 = 2,400 52,400Cost of Goods Sold 900,000 (72%) 0.72 $60,000 = 43,200 943,200
$1,250,000 100% $60,000 $1,310,000
8. Needham’s operating income under the write-off to Cost of Goods Sold and Proration based on ending balances (before proration) follows
Write-off to Proration BasedCost of Goods on Ending
Sold Balances
Revenues $1,090,000 $1,090,000Cost of goods sold 960,000 943,200Gross margin 130,000 146,800Marketing and distribution costs 140,000 140,000Operating income/(loss) $ (10,000) $ 6,800
9. If the purpose is to report the most accurate inventory and cost of goods sold figures, the preferred method is to prorate based on the manufacturing overhead allocated component in the inventory and cost of goods sold accounts. Proration based on the balances in Work in Process, Finished Goods, and Cost of Goods Sold will equal the proration based on the manufacturing overhead allocated component if the proportions of direct costs to manufacturing overhead costs are constant in the Work in Process, Finished Goods and Cost of Goods Sold accounts. Even if this is not the case, the prorations based on Work in Process, Finished Goods, and Cost of Goods Sold will better approximate the results if actual cost rates had been used rather than the write-off to Cost of Goods Sold method.
4-30
4-36 (Cont’d.)Another consideration in Needham’s decision about how to dispose of underallocated
manufacturing overhead is the effects on operating income. The write-off to Cost of Goods Sold will lead to an operating loss. Proration based on the balances in Work in Process, Finished Goods, and Cost of Goods Sold will help Needham avoid the loss and show an operating income.
The main merit of the write-off to Cost of Goods Sold method is its simplicity. However, accuracy and the effect on operating income favor the preferred and recommended proration approach.
4-37 (4055 min.) Overview of general ledger relationships.
1. & 3. An effective approach to this problem is to draw T-accounts and insert all the known figures. Then, working with T-account relationships, solve for the unknown figures (here coded by the letter X for beginning inventory figures and Y for ending inventory figures).
Materials ControlXPurchases
15,00085,000
(1) 70,000
100,000 70,000Y 30,000
Work-in-Process ControlX(1) DM 70,000(2) DL 150,000(3) Overhead 90,000
10,000
310,000
(4) 305,000
(a)(c)
320,0005,0003,000
305,000
Y 23,000
Finished Goods ControlX(4)
20,000305,000
(5) 300,000
325,000 300,000Y 25,000
Cost of Goods Sold(5) 300,000 (d) 6,000
Manufacturing Department Overhead Control
(a)(b)
85,0001,0001,000
(d) 87,000
4-31
4-37 (Cont’d.)
Manufacturing Overhead Allocated(d) 93,000 (3)
(c)90,0003,000
Manufacturing overhead cost rate = $90,000 ÷ $150,000 = 60%
Wages Payable Control(a) 6,000
Various Accounts(b) 1,000
2. Adjusting and closing entries:
(a) Work-in-Process Control 5,000Manufacturing Department Overhead Control 1,000
Wages Payable Control 6,000To recognize payroll costs
(b) Manufacturing Department Overhead Control 1,000Various accounts 1,000
To recognize miscellaneous manufacturing overhead
(c) Work-in-Process Control 3,000Manufacturing Overhead Allocated 3,000
To allocate manufacturing overhead
Note: Students tend to forget entry (c) entirely. Stress that a budgeted overhead allocation rate is used consistently throughout the year. This point is a major feature of this problem.
(d) Manufacturing Overhead Allocated 93,000Manufacturing Department Overhead Control 87,000Cost of Goods Sold 6,000
To close manufacturing overhead accounts and over-allocated overhead to cost of goods sold
4-32
4-37 (Cont’d.)
An overview of the product-costing system is:
3. See the answer to 1.
4-38 (15 min.) General ledger relationships, under- and overallocation, service industry.
1. 1. Jobs-in-Process Control 150,000Cash Control 150,000
2. Direct Professional Labor Control 1,500,000Cash Control 1,500,000
3. Jobs-in-Process Control 1,450,000Direct Professional Labor Allocated 1,450,000
4. Engineering Support Overhead Control 1,180,000Cash Control 1,180,000
5. Jobs-in-Process Control 1,200,000Engineering Support Overhead Allocated 1,200,000
6. Cost of Jobs Billed 2,500,000Jobs-in-Process Control 2,500,000
4-33
4-38 (Cont’d.)2. Direct Professional Labor Allocated 1,450,000
Engineering Support Overhead Allocated 1,200,000Cost of Jobs Billed 30,000
Direct Professional Labor Control 1,500,000Engineering Support Overhead Control 1,180,000
4-39 (30 min.) Allocation and proration of manufacturing overhead.
1. Although not required, an overview of the product costing system follows:
= $0.60 per direct manufacturing labor dollar
The Work-in-Process inventory breakdown at the end of 2001 for Jobs 1768B and 1819C is:
Job 1768B Job 1819C TotalDirect materials (given)Direct manufacturing labor (given)Manufacturing overhead allocated, 60% DML$Total manufacturing costs
$22,00011,000
6,600 $39,600
$ 42,00039,000
23,400 $104,400
$ 64,00050,000
30,000 $144,000
The finished goods inventory at the end of 2001 is $156,000 (given). A direct manufacturing labor cost of $40,000 implies a budgeted manufacturing overhead costs component of $24,000.
4-39 (Cont’d.)
The COGS is $1,600,000 (given). The total direct manufacturing labor of $400,000 implies direct manufacturing labor in COGS of $310,000 ($400,000 – $11,000 – $39,000 – $40,000). Hence, manufacturing overhead allocated in COGS is 60% $310,000 = $186,000. Direct materials in COGS is $1,104,000 ($1,600,000 – $310,000 – $186,000).
The summary account information is:
DirectMaterials
Direct Manufacturing
Labor
ManufacturingOverheadAllocated Total
Work in processFinished goodsCost of goods soldTotal
$ 64,00092,000
1,104,000 $1,260,000
$ 50,00040,000
310,000 $400,000
$ 30,00024,000
186,000 $240,000
$ 144,000156,000
1,600,000 $1,900,000
4-34
2.= – = $240,000 – $186,840= $53,160
3a.
Account
AccountBalance
(Before Proration)(1)
Proration of $53,160
OverallocatedManuf.
Overhead(2)
End-of-YearBalance(After
Proration)(3)=(1)+(2)
Work in processFinished goodsCost of goods soldTotal
$ 144,000 (144/1,900 = 7.58%)156,000 (156/1,900 = 8.21%)
1,600,000 (1,600/1,900 = 84.21%)$1,900,000 100 .00 %
$( 4,030)( 4,364)
(44,766 ) $(53,160 )
$ 139,970151,636
1,555,234 $1,846,840
4-35
4-39 (Cont’d.)
3b.
Account
AccountBalance(Before
Proration)
Allocated Manuf. Overheadin Account
Balance(Before Proration)
Proration of $53,160
OverallocatedManufacturing
Overhead
AccountBalance(After
Proration)
Work in processFinished goodsCost of goods soldTotal
$ 144,000156,000
1,600,000 $1,900,000
$ 30,000 (12.5%)24,000 (10.0%)
186,000 (77 .5 %)$240,000 100 .0 %
$( 6,645)( 5,316)
(41,199 ) $(53,160 )
$ 137,355150,684
1,558,801 $1,846,840
4. The COGS amount when the overallocated overhead is immediately written off to COGS is $1,546,840 (see below) compared to $1,555,234 in 3(a) and $1,558,801 in 3(b) Thus, with a lower COGS, there is a higher operating income.
Account
AccountBalance
(Before Proration)
Write-off to COGS of $53,160
Overallocated
AccountBalance
(After Proration)
Work in processFinished goodsCost of goods soldTotal
$ 144,000156,000
1,600,000 $1,900,000
$ 00
(53,160 ) $(53,160 )
$ 144,000156,000
1,546,840 $1,846,840
5. The adjusted allocation rate approach would adjust the cost of job 1819C for the amount of manufacturing overhead overallocated to it. For 2004, manufacturing overhead is overallocated to each job by 22.15% ($53,160 $240,000). Hence, the cost of job 1819C would be decreased by22.15% Manufacturing overhead allocated to 1819C = 22.15% $23,400 = $5,183.10).
Cost of Job 1819C would then appear as follows:
Direct materials $42,000.00Direct manufacturing labor 39,000.00Manufacturing overhead allocated 23,400.00Adjustment for manufacturing overhead overallocated (5,183 .10 )Cost of job after adjustment for overallocation $99,216 .90
4-36
4-40 (20 min.) Job costing, contracting, ethics.
1. Direct manufacturing costs:Direct materialsDirect manufacturing labor
Indirect manufacturing costs,150% $6,000
Total manufacturing costs
$25,000 6,000 $31,000
9,000 $40,000
Aerospace bills the Navy $52,000 ($40,000 130%) for 100 X7 seats or $520 ($52,000 100) per X7 seat.
2. Direct manufacturing costs:Direct materialsDirect manufacturing labora
Indirect manufacturing costs,150% $5,000
Total manufacturing costs
$25,000
5,000 $30,000
7,500 $37,500
a$6,000 – $400 ($25 16) setup – $600 ($50 12) design
Aerospace should have billed the Navy $48,750 ($37,500 130%) for 100 X7 seats or $487.50 ($48,750 100) per X7 seat.
3. The problems the letter highlights (assuming it is correct) include:
a. Costs included that should be excluded (design costs),b. Costs double-counted (setup included as both a direct cost and in an indirect cost
pool), andc. Possible conflict of interest in Aerospace Comfort purchasing materials from a
family-related company.
Steps the Navy could undertake include:(i) Use only contractors with a reputation for ethical behavior as well as quality products
or services.(ii) Issue guidelines detailing acceptable and unacceptable billing practices by
contractors. For example, prohibiting the use of double-counting cost allocation methods by contractors.
(iii) Issue guidelines detailing acceptable and unacceptable procurement practices by contractors. For example, if a contractor purchases from a family-related company, require that the contractor obtain quotes from at least two other bidders.
(iv) Employ auditors who aggressively monitor the bills submitted by contractors.(v) Ask contractors for details regarding determination of costs.
4-37
4-41 (25 min.) Service industry, job costing, accounting for overhead costs, budgeted rates.
1. Overhead allocated to Job A21 as of 1/31/2004= 0.80 × Actual direct labor costs of Job A21 = 0.80 × $50,000 = $40,000
Overhead allocated to Job A24 as of 2/29/2004= 0.80 × Actual direct labor costs of Job A24 = 0.80 × $40,000 = $32,000
2. = 0.80 × Actual direct labor costs in February
= 0.80 × $120,000 = $96,000
Actual overhead costs incurred in February = $102,000Underallocated overhead costs = $102,000 – $96,000 = $6,000
3. Cost of Jobs Billed for February 2004Jobs-in-Process Control balance 1/31/2004 $120,000*Manufacturing costs in February:
Direct materials $150,000Direct labor 120,000Overhead costs allocated 96,000 366,000
Manufacturing costs to account for 486,000Jobs-in-Process Control balance 2/29/2004 92,000 † Cost of Jobs Billed unadjusted 394,000Adjustment for underallocated overhead costs in February:
Actual overhead costs $102,000Allocated overhead costs 96,000 6,000
Cost of Jobs Billed adjusted $400,000
*Cost of Job A21 = Direct materials + Direct labor + Overhead allocated = $30,000 + $50,000 + $40,000 = $120,000
†Cost of Job A24 = Direct materials + Direct labor + Overhead allocated= $20,000 + $40,000 + $32,000 = $92,000
4-38
Chapter 4 Internet Exercise
The Internet exercise is available to students only on the Prentice Hall Companion Website www.prenhall.com/horngren. Students can click on Cost Accounting, 11 th ed., and access the Internet Exercise for the chapter, which links to the Web site of a company or organization. The Internet Exercise on the Web will be updated periodically so that it is current with the latest information available on the subject organization's Web site. A printout copy of the Internet exercise for this chapter as of early 2002 appears below.
The solution to the Internet exercise, which will also be updated periodically, is available to instructors from the Companion Website's faculty view. To access the solution, click on Cost Accounting, 11th ed., Faculty link, and then register once to obtain your password through the online form. After the initial registration, you will have a personal login ID and password to use to log in. A printout of the solution to the Internet exercise for this chapter as of early 2002 follows. The exercise and solution provide instructors with an idea of the content of the Internet exercise for this chapter.
Internet Exercise
This exercise provides you the opportunity to take a brief virtual tour of a process-cost manufacturer and a job-cost manufacturer. To take a tour of the Great Divide Brewing Company, go to http://www.greatdivide.com/, and click on the "take the tour" link. To take a tour of Steinway and Sons, a piano manufacturer, go to www.steinway.com/, scroll down the page, and click on the "Factory Tour" link.
1. What type of costing system is each company likely to use and why?
2. For Steinway and Sons provide examples of:a. Direct materials used in the manufacture of a pianob. Indirect materials used in the manufacture of a pianoc. Employees who might be classified as direct laborersd. Employees who might be classified as indirect laborerse. Types of manufacturing overhead in a piano plant
3. For The Great Divide Brewing Company provide examples of:a. Direct materials used in the brewing processb. Indirect materials used in the brewing processc. Employees who might be classified as direct laborersd. Employees who might be classified as indirect laborerse. Types of manufacturing overhead in a brewery
4. What allocation base(s) are Steinway and Sons and The Great Divide Brewery likely to use to allocate manufacturing overhead? Why?
Solutions to Internet Exercise
1. Steinway manufactures approximately 5,000 pianos per year. Each piano is unique with significant separately identifiable costs that can be tracked using a job-costing system. The Great Divide Brewing Company produces approximately 15,000 barrels of beer each year. Its beer is mass-produced, with no distinguishing characteristics, and more suitable for a process-costing system.
4-39
Internet Exercise (Cont’d.)
2a. Direct materials include wood for the casing and sounding board, cast iron plates, strings, hammers, pins, and keys.
2b. Indirect materials include glue, dowels, varnishes, small tools, stains, screws, nails, hinges, wheels, and sandpaper.
2c. Direct labor includes rim benders, cutters, assemblers, veneer finishers, keyboard calibrators, piano voicers, and tone regulators.
2d. Indirect labor includes shop supervisors, production managers, factory supervisors, and material handlers.
2e. Types of manufacturing overhead in a piano plant are rent or depreciation on the factory building, depreciation on equipment, utilities, indirect labor, and indirect materials.
3a. Direct materials include malted barley, water, yeast, carbon dioxide, bottles, caps, packaging materials, and honey and raspberries for special ales.
3b. Indirect materials include diatomaceous earth (filtering material) and sterile filter sheets.
3c. Direct labor includes employees working in the brewing process (mixing, fermenting, filtering, cooling, and carbonating), the bottling line, and the packaging line.
3d. Indirect labor includes factory and bottling line supervisors.
3e. Types of manufacturing overhead in a brewery are rent or depreciation on the factory building, depreciation on equipment, utilities, indirect labor, and indirect materials.
4. Steinway is likely to use direct labor to allocate manufacturing overhead. These costs are closely tracked in a job-costing system. Direct labor-hours is a more logical choice because the manufacturing process is labor-intensive, and direct labor-hours is a cost driver of manufacturing overhead costs.
The Great Divide Brewery is likely to use units of production to allocate overhead costs since their output is easy to count and homogenous. In addition, direct materials and labor may be difficult to trace to specific batches of beer.
4-40
Chapter 4Video Case
The video case can be discussed using only the case writeup in the chapter. Alternatively, instructors can have students view the videotape of the company that is the subject of the case. The videotape can be obtained by contacting your Prentice Hall representative. The case questions challenge students to apply the concepts learned in the chapter to a specific business situation.
DELL COMPUTER CORPORATION: COST ACCOUNTING FUNDAMENTALS AND JOB COSTING
1.Step1: Identify the job that is the chosen cost object. The job is an individual computer unit.
Step 2: Identify the direct costs of the job.The direct costs are: (1) materials used to make the computer, such as disk drives, CPU, memory chips, cables, and software and (2) labor for assembly and packaging of the computers.
Step 3: Select the cost allocation bases to use for allocating indirect costs to the job. The cost allocation base for overhead is units of production.
Step 4: Identify the indirect costs associated with each cost-allocation base.The indirect costs are facility costs (such as depreciation, rent and utilities), warehousing costs for raw materials, production engineering costs, plant supervisors, and quality management supervisors.
Step 5: Compute the rate per unit of each cost allocation base used to allocate indirect costs to job. Costs calculated in Step 4 divided by units of production.
Step 6: Compute the indirect costs allocated to the job.This is done by multiplying the indirect cost rate per unit of production in Step 5 by the number of units in the job.
Step 7: Compute the total costs of the job by adding all direct and indirect costs assigned to the job.
2. For purchases of materials:
Materials Control (debit)Accounts Payable Control (credit)
When materials are sent to the manufacturing plant floor (direct & indirect):Work-in-Process Control (debit)Manufacturing Dept. Overhead Control (debit)
Materials Control (credit)
4-41
When manufacturing labor wages (both direct & indirect) are incurred:Work-in-Process Control (debit)Manufacturing Dept. Overhead Control (debit)
Wages Payable Control (credit)
4-42
Video Case (Cont’d.)
Payment of manufacturing payroll at month-end:Wages Payable Control (debit)
Cash Control (credit)
Additional manufacturing department overhead costs, such asfacility costs (utilities, rent, repairs, equipment depreciation) and warehousing of raw materials are incurred:
Manufacturing Dept. Overhead Control (debit)Accounts Payable Control (credit)Accumulated Depreciation Control (credit)Prepaid Rent Control (credit)
When manufacturing overhead costs are allocated:Work-in-Process Control (debit)
Manufacturing Overhead Allocated (credit)
When individual units (jobs) are completed:Finished Goods Control (debit)
Work-in-Process Control (credit)
When jobs are sold:Cost of Goods Sold (debit)
Finsihed Goods Control (credit)
Write-off underallocated manufacturing overhead:Manufacturing Overhead Allocated (debit)Cost of Goods Sold (debit)
Manufacturing Dept. Overhead Control (Credit)
Incur period costs:Marketing expense (debit)
Accounts Payable Control (credit)
Sales on account:Accounts Receivable Control (debit)
Sales (credit)
3. Value would be added primarily in core business functions: production design, manufacturing, and customer service/technical support. Other areas, such as research and development, benefit from strategic partners who take on the engineering and design elements of new circuitry and components. Distribution is another area that Dell probably adds less value, and a partner (outsourced) could better manage it.
4. Examples of inventoriable costs are direct materials, direct manufacturing labor, and manufacturing overhead. Examples of period costs are salaries of research and development, marketing, distribution, technical support personnel, and customer service personnel.
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