CHAPTER 4

JOB COSTIG

4-17 (20 min.) Actual costing, normal costing, accounting for manufacturing overhead.

Budgeted manufacturing
Budgeted manufacturing overhead costs
1. =
overhead rate Budgeted direct manufacturing
labor costs

$1,750,000
= = 1.75 or 175%
$1,000,000

Actual manufacturing
Actual manufacturing overhead costs
=
overhead rate Actual direct manufacturing
labor costs

$1,862,000
= = 1.9 or 190%
$980,000
2. Costs of Job 626 under actual and normal costing follow:

Actual ormal
Costing Costing
Direct materials $ 40,000 $ 40,000
Direct manufacturing labor costs 30,000 30,000
Manufacturing overhead costs
$30,000 × 1.90; $30,000 × 1.75 57,000 52,500
Total manufacturing costs of Job 626 $127,000 $122,500

4-1
 Total manufacturing overhead Actual manufacturing × Budgeted
3. =
allocated under normal costing labor costs overhead rate

= $980,000 × 1.75

= $1,715,000

Underallocated manufacturing = Actual manufacturing – Manufacturing

overhead overhead costs overhead allocated

= $1,862,000 − $1,715,000 = $147,000

There is no under- or overallocated 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.

Budgeted indirect- Budgeted indirect costs $8,000,000

1. = =
cost rate Budgeted direct labor-hours 160,000 hours
= $50 per direct labor-hour

Actual indirect- Actual indirect costs $6,888,000

= =
cost rate Actual direct labor-hours 164,000 hours
= $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 Mission

Model Model
Normal costing
Direct costs
Direct materials $106,450 $127,604
Direct labor 36,276 41,410
142,726 169,014
Indirect costs
Assembly support ($50 × 900; $50 × 1,010) 45,000 50,500
Total costs $187,726 $219,514

4-2
2b. Actual costing
Direct costs
Direct materials $106,450 $127,604
Direct labor 36,276 41,410
142,726 169,014
Indirect costs
Assembly support ($42 × 900; $42 × 1,010) 37,800 42,420
Total costs $180,526 $211,434

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. Once
the 900 direct labor-hours are known for the Laguna Model (June 2007), 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 2007 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.

INDIRECT
COST
POOL
} Assembly
Support

COST
ALLOCATION
BASE
} Direct
Labor-Hours

COST OBJECT:
RESIDENTIAL
HOME
} Indirect Costs
Direct Costs

DIRECT
COSTS } Direct
Materials
Direct
Manufacturing
Labor

4-3
4-19 (10 min.) Budgeted manufacturing overhead rate, allocated manufacturing overhead.

Budgeted manufacturing overhead

1. Budgeted manufacturing overhead rate =
Budgeted machine hours

$2,850, 000
= = $15/machine-hour
190, 000 machine-hours

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 $2,925,000
Actual manufacturing overhead costs 2,910,000
Overallocated manufacturing overhead $ 15,000

4-4
4-20 (20-30 min.) Job costing, accounting for manufacturing overhead, budgeted rates.
1. An overview of the product costing system is

INDIRECT
COST
POOL
} Machining Department
Manufacturing Overhead
Assembly Department
Manufacturing Overhead

COST
ALLOCATION
BASE
} Machine-Hours Direct Manuf.
Labor Cost

}
COST OBJECT:
PRODUCT
Indirect Costs
Direct Costs

DIRECT
COST} Direct
Materials
Direct
Manufacturing
Labor

Budgeted manufacturing overhead divided by allocation base:

$1,800,000
Machining overhead = $36 per machine-hour
50,000
$3,600,000
Assembly overhead: = 180% of direct manuf. labor costs
$2,000,000

2. Machining department, 2,000 hours × $36 $72,000

Assembly department, 180% × $15,000 27,000
Total manufacturing overhead allocated to Job 494 $99,000

3. Machining Assembly
Actual manufacturing overhead $2,100,000 $ 3,700,000
Manufacturing overhead allocated,
55,000 × $36 1,980,000 —
180% × $2,200,000 — 3,960,000
Underallocated (Overallocated) $ 120,000 $ (260,000)

4-5
4-23 (10–15 min.) Accounting for manufacturing overhead.

$7,000,000
1. Budgeted manufacturing overhead rate =
200,000

= $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

4-6
4-27 (15 min.) Job costing, unit cost, ending work in progress.

1.
Direct manufacturing labor rate per hour $25
Manufacturing overhead cost allocated
per manufacturing labor-hour $20
Job M1 Job M2
Direct manufacturing labor costs $275,000 $200,000
Direct manufacturing labor hours
($275,000 ÷ $25; $200,000 ÷ $25) 11,000 8,000
Manufacturing overhead cost allocated
(11,000 × $20; 8,000 × $20) $220,000 $160,000

Job Costs May 2007 Job M1 Job M2

Direct materials $ 75,000 $ 50,000
Direct manufacturing labor 275,000 200,000
Manufacturing overhead allocated 220,000 160,000
Total costs $570,000 $410,000

2.
Number of pipes produced for Job M1 1,500
Cost per pipe ($570,000 ÷ 1,500) $380

3.
Finished Goods Control 570,000
Work-in-Process Control 570,000

4. Raymond Company began May 2007 with no work-in-process inventory. During May, it
started and finished M1. It also started M2, which is still in work-in-process inventory at the end
of May. M2’s manufacturing costs up to this point, $410,000, remain as a debit balance in the
Work-in-Process Inventory account at the end of May 2007.

4-7
4-28 (20−30 min.) Job costing; actual, normal, and variation from normal costing.

1. Actual direct cost rate for professional labor = $58 per professional labor-hour
$744,000
Actual indirect cost rate = = $48 per professional labor-hour
15,500 hours
Budgeted direct cost rate $960,000
for professional labor
= = $60 per professional labor-hour
16,000 hours
$720,000
Budgeted indirect cost rate = = $45 per professional labor-hour
16,000 hours

(a) (b) (c)

Actual ormal Variation of
Costing Costing ormal Costing
Direct-Cost Rate $58 $58 $60
(Actual rate) (Actual rate) (Budgeted rate)
Indirect-Cost Rate $48 $45 $45
(Actual rate) (Budgeted rate) (Budgeted rate)

2. (a) (b) (c)

Actual ormal Variation of
Costing Costing ormal Costing
Direct Costs $58 × 120 = $ 6,960 $58 × 120 = $ 6,960 $60 × 120 = $ 7,200
Indirect Costs 48 × 120 = 5,760 45 × 120 = 5,400 45 × 120 = 5,400
Total Job Costs $12,720 $12,360 $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).

4-8
 Although not required, the following overview diagram summarizes Chirac’s job-costing
system.
INDIRECT Audit
COST Support
POOL

COST
ALLOCATION Professional
BASE Labor-Hours

COST OBJECT:
JOB FOR Indirect Costs
AUDITING
PIERRE Direct Costs
& CO.

DIRECT
COST
Professional
Labor

4-9
4-30 (20−30 min) Job costing, accounting for manufacturing overhead, budgeted rates.

1. An overview of the job-costing system is:

INDIRECT
COST
POOL
} Machining Department
Manufacturing Overhead
Finishing Department
Manufacturing Overhead

COST
}
ALLOCATION
BASE
Machine-Hours
in Machining Dept.
Direct Manufacturing
Labor Costs
in Finishing Dept.

COST
COSTOBJECT:
}
OBJECT:
PRODUCTJOB
Indirect Costs
Direct Costs

}
DIRECT
COST
Direct
Materials
Direct
Manufacturing
Labor

2. Budgeted manufacturing overhead divided by allocation base:

a. Machining Department:

$10,000,000
= $50 per machine-hour
200,000

b. Finishing Department:

$8,000,000
= 200% of direct manufacturing labor costs
$4,000,000

4-10
3. Machining Department overhead, $50 × 130 hours $6,500
Finishing Department overhead, 200% of $1,250 2,500
Total 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 $6,500
Finishing 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

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 Finishing
Manufacturing overhead incurred (actual) $11,200,000 $7,900,000
Manufacturing overhead allocated
220,000 hours × $50 11,000,000
200% of $4,100,000 8,200,000
Underallocated manufacturing overhead $ 200,000
Overallocated manufacturing overhead $ 300,000
Total overallocated overhead = $300,000 – $200,000 = $100,000

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.

4-11