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Chapter 04 - Job Costing

CHAPTER 4: JOB COSTING QUESTIONS


4-1 The purpose of any costing system is to (1) determine product and service cost, and value inventory, (2) facilitate management planning, cost control, and performance evaluation, and (3) facilitate managerial decision making. Management can use product costs to determine the product or service pricing, to assess the financial effect of adding or deleting a product, division or subsidiary, to evaluate a make or buy decision, and to evaluate department or division product profitability performance. Job costing is a product costing system that accumulates and assigns costs to a specific job. Process costing accumulates product or service costs by process or department and then assigns them to a large number of nearly identical products. Companies that are likely to use a job costing system have a wide variety of products or services. These companies include printing shops, accounting firms, equipment companies, and construction companies. Companies that are likely to use a process costing system have homogeneous products or services. Such companies include automobile manufacturers, food processors, and textile companies. Service industry companies most likely use a job costing system because each job is likely to have different quantities of materials and labor. A job cost sheet accumulates direct materials, direct labor, and factory overhead. The determination of a predetermined overhead rate has four steps: (1) estimate the factory overhead costs for an appropriate operating period, usually a year, (2) determine the most appropriate cost driver(s) for charging the factory overhead costs, (3) estimate the total amount or activity level of the chosen cost driver(s) for the operating period, (4) divide the estimated factory overhead costs by the estimated activity level of the chosen cost driver(s) to obtain the predetermined overhead rate(s). The predetermined factory overhead rates are applied to units instead of actual overhead costs because if the actual rate is applied to overhead costs the costs per unit for products produced in different periods will vary greatly.

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A material requisition is a source document that is used to request materials from the warehouse. A time ticket shows the time worked on each job, the pay rate, and the total labor cost chargeable to each job. The bill of materials is a list of different materials needed to manufacture a product or part. Since the overhead cost cannot be traced directly to a particular product, we need a good costing system, which can assign overhead accurately to specific products. Generally speaking, the more expensive or extensive a costing system is, the more information it provides and the more reliable it is. It is important to balance the cost of obtaining the appropriate cost with the information obtained. Costs originate with the purchase of materials. These costs and labor are transferred to work-in-process as work is done and eventually to finished goods. Overhead is applied to work-in-process as well. Work-in-process is forwarded to finished goods as work is completed. These costs are transferred from finished goods to cost of goods sold when the merchandise is sold. Underapplied overhead is the amount of actual factory overhead that exceeds the factory overhead applied. Overapplied overhead is the amount of factory overhead applied that exceeds the actual factory overhead cost. Underapplied or overapplied overhead can be disposed of in two ways: adjust the cost of goods sold account or adjust the production costs of the month; that is, prorate the difference among the amounts of the current periods applied overhead remaining in the ending balances of the work in process inventory, the finished goods inventory, and the cost of goods sold accounts. Due to the automation trend, the proper cost driver for a manufacturing firm would probably be machine hours because the costs are predominantly related to the equipment operation.

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4-13 Overhead can be overapplied if the actual overhead is less than expected or the actual level of the cost driver exceeds the estimate. 4-14 An actual costing system uses actual costs incurred for direct materials and direct labor and assigns or applies actual factory overhead to various jobs. Normal costing uses actual costs for direct materials and direct labor and applies factory overhead to various jobs using a predetermined basis. The best choice of a cost driver is that activity or output measure that best represents what drives or causes overhead. Cost of goods sold includes actual direct materials, actual direct labor, and applied factory overhead costs for products sold. Adjusted cost of goods sold equals normal cost of goods sold plus underapplied overhead (or less overapplied overhead).

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BRIEF EXERCISES 4-17 The application of job costing is very similar in manufacturing and service firms. Some differences are that service firms are likely to have a larger proportion of direct labor in jobs than are manufacturers. 4-18 4-19 $10 per machine hour x 16 hours = $160 The overhead rate for labor would be $80,000/4,000 labor hours = $20/labor hour and the machine-hour rate would be $80,000/8,000 machine hours = $10/machine hour. Since this is a machine shop, it might be appropriate to use a machine-hour based rate. Applied overhead is 59,000 units x $10/unit = $590,000. underapplied difference of $23,000 ($613,000 - $590,000). There is an

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4-21 Since the difference is underapplied, it must be added to the current balance of cost of goods sold: $90,000 + $10,000 = $100,000. 4-22 Job cost is $10,000 + $20,000 + ( 2 x $20,000) = $70,000. 4-23 Because of the greater variability of machine hours among jobs, job cost will be more strongly influenced by the use of machine hours. The fact that machine hours are significantly greater than labor hours suggests that workers attend to a number of different machines, and that the overall cost of the machines is somewhat greater than that of labor. In this case, a machine-based rate would be more appropriate, as the machine costs are a significant part of total overhead, and because the different jobs consume significantly different amounts of machine time. 4-24 When overhead is overapplied, this means that too much cost as been applied to WIP, finished goods, and cost of goods sold. The cost of goods sold account will be too high before adjusting for the overhead variance. 4-25 The departmental rate will likely be more accurate since it will take into account the fact that different jobs may require different amounts of resource from each department. Product costs will be less accurate if the overhead is pooled into a single plantwide rate, which ignores these differences in use of departmental recourses by the different jobs. Chapter 5 addresses this issue in some detail. 4-26 The information on units sold and the number of labor hours is irrelevant. First, determine the amount of overhead applied: Applied overhead = $222,000 - $20,400 (underapplied) = $201,600

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Second, determine the overhead rate: $210,000/50,000 units = $4.20 per unit Third, determine the number of units produced $201,600/$4.20 per unit = 48,000 units 4-27 The information on units sold and the number of labor hours is irrelevant. First, determine the amount of overhead applied: Applied overhead = $360,000 + $30,000 (overapplied) = $390,000 Second, determine the overhead rate: $350,000/700,000 units = $.50 per unit Third, determine the number of units produced $390,000/$.50 per unit = 780,000 units

EXERCISES

4-28 Job Costing (30 min) 1. Total cost of Job A: Sept. Direct materials requisitioned $65,000 Sept. Direct labor cost: 4,200 hours x $8.50/hour 35,700 Sept. Applied overhead: 4,200 hours x $6.50/hour* 27,300 Sept. 1 Work-in-process 31,200 Total cost of Job A $ 159,200 *predetermined OH rate = $617,500/95,000 direct labor hours = $6.50 2. Total overhead cost applied during September: Applied Overhead = total direct labor-hours x overhead rate = (4,200 + 3,500) x $6.50 per hour = $50,050

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3. Overapplied overhead for September: Actual Overhead = $13,500 + $6,000 + $7,000 + $7,500 + $12,000 = $46,000 Overapplied Overhead = $50,050 - $46,000 = $4,050 4-29 Choice of a costing system (40 Min) 1. New Century Software, Inc @ http://www.newcenturysoftware.com/ The goal of New Century Software, Inc. is to provide products and services to help meet the facilities-based information needs of the pipeline industry through the use of Geographic Information Systems (GIS), Automated Mapping and Facilities Management (AM/FM) software. The company's Windows-based software products provide an integrated approach to GIS implementation and augment the functionality of leading GIS packages. Based in Fort Collins, Colorado, the company has assisted in the development of GIS for pipeline companies in the United States by providing facilities database consulting, data conversion services, and integrated software applications. The company uses job costing. Reasons: The costing could be precisely calculated by the basis of the different job. Each identifiable job has different needs from clients and is associated with different cost. Costs can be readily identified with specific products or projects because of low volume of products or services.
2.

Kinkos @ http://www.fedex.com

Kinko's, a unit of FedEx Corporation, is a provider of a variety of office and business services such as copying and printing. The company uses job costing.

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Reasons: Costs can be precisely calculated by the basis of the different jobs. There are a wide variety of different services for individual clients. The products and services are especially tailored to the customers need. 4-29 (Continued -1) 3. TXI Cement @ http://www.txi.com/ TXI Cement has a history in the cement industry of 90 years. They are one of only two companies in the USA that produces white cement. TXI Cement is constantly trying to be energy efficient, by generating electricity, and using alternate energy and raw materials sources. Distribution of products is done via two cement plants in Southern California as well as terminals in San Diego and Stockton. TXI is one of the largest bagged cement producers in the USA. Cement is a finely ground, manufactured mineral product that when combined with water, sand, gravel and other materials forms concrete, the most widely used construction material in the world. The company uses process costing. Reasons: High volume, low cost product. It is not economically feasible to keep track of the detailed cost elements applied to each unit of production (the bag of cement). 4. Paramount Pictures @ http://www.paramount.com/ Paramount pictures, the motion picture production company, is a unit of Viacom, a large company in the entertainment industry with such labels as MTV Films, Nickelodeon Movies, and DreamWorks Studios. It offers an array of choices in the form of movies, TV shows, and musical entertainment.

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The company uses job costing. Reasons: High cost, low volume projects. The company produces movies, television shows and home entertainment packages; each job goes through costing separately since every project is highly customized. 4-29 (continued -2) 5. Evian @ http://www.evian.com/ Evian Natural Spring Water is bottled exclusively at its source in Evian-lesBains located in the French Alps. Filled, sealed bottles are then shipped to over 120 countries throughout the world. Evian spring water is perfect by nature. Naturally pure and fresh, it is not artificially treated or processed in any way. Its unique source in the heart of the French Alps guarantees Evian natural spring waters remarkable purity. The company uses process costing. Reasons: High volume low cost product, sold in individual bottles. It is not economically feasible to keep track of the detailed cost elements applied to each unit of production. 4-29 (continued - 3)

6. IRCON @ http://www.irconinternational.com/

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IRCON's diverse global capabilities are in the construction industry, such as in runways, terminal buildings, aircraft maintenance hangars & utility buildings, and commercial buildings. IRCON undertakes execution of turnkey railway electrification projects, high voltage sub-stations, transmission lines and industrial electrification works, both in India and abroad. Services offered cover the entire spectrum of activities including construction of new railway lines, rehabilitation/conversion of existing lines, station buildings and facilities, bridges, tunnels, signaling and telecommunication networks, railway electrification, setting up of production units for manufacture of rolling stock, maintenance depots/workshops concrete sleepers and track components on turn-key basis. The company uses job costing. Reasons: High cost, low volume orders. The company is an engineering, procurement and construction organization. Each project is fairly large in dollar value and uses large sums of material and labor. Each individual task within the project is broken into single cost entities including material, labor and overhead. 4-30 Choice of a Costing System (60 Min) 1. Zurich Financial Services Group: www.zurich.com The Zurich Financial Services Group is a global leader in the financial services industry, providing its customers with solutions in the area of financial protection and asset accumulation. The Group concentrates its activities in five business segments: non-life and life insurance, reinsurance, Farmers Management Services, and asset management. Headquartered in Zurich, Switzerland, the Group's worldwide presence builds on strong positions in its three key markets - the United States, the United Kingdom and Switzerland. Because Zurich FSG provides unique solutions to customers, particularly in the high net worth area, the company uses a job costing system. Each customer is handled individually and products, such as insurance, asset management services, and reinsurance, are provided as needed.

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2. Reichhold Chemical Company: http://www.reichhold.com/ Reichhold is a large manufacturer of chemical products including coatings (epoxy, acrylic and other resins), latex (in a joint venture with Dow Chemical Company), and composites (gelcoats and resins used in the manufacture of fiberglass products including boats, bathroom fixtures, and other applications). The chemical manufacturing industry is characterized by high volume production involving a number of manufacturing processes, so that process costing is a good choice for Reichhold. 3. Nestle S.A.: www.nestle.com Nestle is one of the leading food companies in the world. Its product portfolio includes brands such as Nescafe, Maggi, Perrier and Buitoni. The whole food production process is a continuous high-volume one and so will have a process costing system. 4-30 (continued -1) Coca-Cola: http://www.coca-cola.com/ Coca-Cola is the worlds most recognized brand, with more than 400 different beverage sales brands sold in more than 200 countries. Coca-Cola was first sold in 1886, a product of the invention of Dr. John Pemberton, a local pharmacist, in Atlanta, Georgia. The production of beverages is a process industry with a variety of raw materials being mixed, processed and then packaged into the final product. The company uses a process costing system.
4.

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4-31 Job Costing in Aircraft Manufacturing (15 min) A key difficulty in these companies is that much of the overhead cost for the job is for capacity costs that are incurred for a multiple-year period. Thus, the determination of the overhead rate must determine an amount for each year by determining in effect what portion of the total capacity costs should be attributed to each year in which the job is being completed. In simple terms, this might mean using straight-line depreciation for plant and equipment needed for the job, or an allocation across the years based on the number of aircraft to be produced in each year and the capacity utilization expected for each year. Considerations of possible future changes in the terms of the contract for the job (to increase or decrease the number of aircraft in the order, for example), should also be considered. The determination of the budgeted overhead rates in these cases requires the careful judgment of the management accountant. 4-32 Journal Entries (20 min) 1. Predetermined Overhead Rate = $1,980,000 / 66,000 machine hours = $30 per machine-hour 2. Journal Entries: a. Materials Inventory 900,000 Accounts Payable 180,000 lbs x $5 = $900,000 b. Work-in-Process Inventory 525,000 ($600,000 - $75,000) Factory Overhead 75,000 (15,000 lbs x $5/lb) Materials Inventory (120,000 x$5) c. Work-in-Process Inventory Factory Overhead Accrued Payroll d. Factory Overhead Accumulated Depreciation 240,000 40,000 75,700

900,000

600,000

280,000 75,700

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e. Factory Overhead Prepaid Insurance f. Factory Overhead Cash g. Finished Goods Inventory Work-in-Process Inventory

3,500 8,500

3,500 8,500

84,500 84,500 77,000 103,950

h. Cost of Goods Sold 77,000 Finished Goods Inventory Accounts Receivable 103,950 Sales $77,000 x 1.35 billing rate = $103,950 4-32 (continued -1)

i. Work-in-Process Inventory 231,000 Factory Overhead 231,000 $30 per machine hour x 7,700 machine hours = $231,000

3. Actual factory overhead: $75,000 + $40,000 + $75,700 + $3,500 + $8,500 = $202,700 Overapplied overhead = $231,000 - $202,700 = $ 28,300 The journal entry to close the overhead account is as follows: Factory Overhead 28,300 Cost of Goods Sold 28,300

4-33 Working with Unknowns

(20 min)

1. From Job G15: $6,050/$8,800 = 0.6875 overhead rate 2. Job A23: $24,000 x 0.6875 = $16,500 applied overhead

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Total applied overhead: A23 $16,500 C76 24,750 G15 6,050 $47,300 $48,600 - $47,300 = $1,300 underapplied overhead 3. For Job C76: $24,750 / .6875 = $36,000 direct labor Therefore, $148,650 - ($36,000 + $61,000 + $24,750) ($8,800 + $6,050) = $12,050 direct materials for Job G15 $42,000 + $61,000 + $12,050 = $115,050 cost of direct materials issued 4-34 Application of Factory Overhead (20 min) 1. Predetermined Factory Overhead Rate = $568,000 / 71,000 direct labor hours = $8 per direct labor hour 2. Applied Overhead = $8 x 71,500 = $572,000 Actual Overhead 582,250 Underapplied Overhead $10,250 3. Journal entry to transfer underapplied overhead to Cost of Goods Sold Cost of Goods Sold Factory Overhead 10,250 10,250

4-35 Service Industry; Overhead Rate, Pricing (20 min) 1. Predetermined Overhead Rate = $325,000 / 25,000 hours = $13 per professional hour 2. Total Cost = $32,000 + ($50 x 1,200) + ($13 x 1,200)

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= $32,000 + $60,000 + $15,600 = $107,600 Total Revenue = $107,600 x 150% = $161,400

4-36 Spoilage and Scrap (20 Min) Background Information: Job X12 (specific normal spoilage for a particular job) Cost of spoiled units $600 Disposal value of spoiled unit $300 Job Y34 (common normal spoilage, abnormal spoilage, and scrap) Cost of spoiled units Common normal spoilage $400 Abnormal spoilage $200 Sale value of scrap $ 80 Sale of scrap common to all jobs $120 1. Journal entries to record spoilage costs: a. To record the normal spoilage attributable to Job X12 Materials Inventory (disposal price of the spoiled goods) 300 Work-in-Process Inventory: Job X12 300

b. To record the normal and abnormal spoilages incurred in Job Y34 Factory Overhead (normal spoilage cost) Loss from Abnormal Spoilage Work-in-Process Inventory: Job Y34 2. Journal entries to record scrap sold: a. To record the scrap sold attributable to a specific job Cash Work-in-Process Inventory: Job Y34 b. To record the scrap sold common to all jobs 80 80 400 200

600

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Cash Factory Overhead

120

120

PROBLEMS 4-37 Job Costing (25 min) 1. Actual Factory Overhead: $30,000 + $23,000 + $46,000 + $12,000 + $15,000 = $126,000 2. Underapplied Overhead: First, applied overhead = ($10,000 + $18,000 + $34,000 + $16,000) x 160% = $124,800 Underapplied overhead = $126,000 - $124,800 = $1,200 3. Cost of Goods Sold for Job No. 125: $77,500 + $1,000 + $10,000 + ($10,000 x 160%) = $104,500 4. Work-in-Process Ending Inventory (Jobs 128, 129, and 130): [$26,000 + $18,000 + ($18,000 x 160%)] + [$12,000 + $34,000 + ($34,000 x 160%)] + [$4,000 + $16,000 + ($16,000 x 160%)] = $218,800

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4-38 Job Costing (40 min) Valport Company Statement of Cost of Goods Manufactured For the Year Ended November 30, 2010 ($000s omitted) Materials inventory Materials purchases ($965+98) Less: Indirect materials ($125+9) Materials inventory Direct Materials Used Direct Labor Manufacturing Overhead Applied Indirect materials ($125 +9) Indirect Labor ($345+30) Utilities ($245+22) Depreciation (385+35) Total Manufacturing Costs Add: Work-In-Process Less: Work-In-Process Cost of Goods Manufactured 12/1/09 11/30/2010 ($845+80) $134 375 267 420 12/1/09 11/30/2010 $ 105 1,063 134 85 949 925

1,196 $3,070 60 150 $2,980

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2. Finished Goods Inventory 12/1/09 Plus: Cost of Goods Manufactured Less: Finished Goods Inventory 11/30/2010 Cost of Goods Sold 4-39 Job Costing (30 min) 1. Overapplied OH= $7,700, a decrease in COGS 2. Total Mfg cost for X= $83,800; Y= $75,400 $ 125 2,980 225 $2,880

Data Section
Job X Material A Material B Job Y Material A Material B

Direct Ma terials $ 6,000 2,000

Dire ct La bor Machine Hours $ 16,000 1,300

$ $ 15,000 7,000

12,000

900 Factory Ove rhea d Applie d $46 per machine hr

2,200

Solution
Factory Overhe ad Analysis Actual Factory OH: Indirect Materials Indirect Labor Utilities Depreciation Insurance Tota l Actual Factory OH Less: Applied Factory OH Unde r/ove rapplie d Factory OH Adjust Differe nce to COGS $42,000 28,000 3,000 18,000 2,500 $93,500 101,200 (2,200 MH x $46/MH) ($7,700)OVERAPPLIED (7,700) Decrease Cost of Goods Sold by this Amount

Breakdow n of Job Costs


Job X Tota l Direct Materials Cost Tota l Direct Labor Cost Applied Overhea d Machine Hours x Application rate Tota l Applied Ove rhead Cost Tota l Ma nufacturing Costs $8,000 16,000 Job Y $22,000 12,000 Total

1,300 $46 59,800 $83,800

900 $46 41,400 $ $75,400 101,200

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4-40 Job Costing (alternative to 4-39) (30 min) 1. Underapplied OH = $31,350 2. Total Mfg cost for Job 1467= $357,913; for Job 1469 = $330,363
Data Section
Job 1467 Material A Material B Job 1469 Material A Material B Factory Overhead Applied $39.50 per machine hr $ 71,250 33,250 10,450 $ 28,500 9,500 $ 57,000 4,275 Direct Materials $ Direct Labor 76,000 Labor Hours 6,175

Solution
Factory Overhead Analysis Actual Factory OH Indirect Materials Indirect Labor Utilities Depreciation Insurance Total Actual Factory OH Less: Applied Factory OH Under/overapplied Factory OH Adjust Difference to COGS $199,500 133,000 14,250 85,500 11,875 $444,125 412,775 (10,450 x $39.50) $31,350 UNDERAPPLIED 31,350 Increase in Cost of Goods Sold

Breakdown of Job Costs


Job 1467 Total Direct Materials Cost Total Direct Labor Cost Applied Overhead Machine Hours Application rate Total Applied Overhead Cost Total Manufacturing Costs 6,175 $39.50 243,913 $357,913 4,275 $39.50 168,863 $330,363 $38,000 76,000 Job 1469 $104,500 57,000

T ta o l

$ 1 ,7 5 42 7

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4-41 Journal Entries and Accounting for Overhead (35 min) 1. Predetermined Overhead Rate = $ 120,000 / 8,000 = $15 per DL hour 2. Journal Entries a. Materials Inventory Accounts Payable b. Work-in-Process Inventory- Job S10 Work-in-process Inventory - Job C20 Work-in-Process Inventory - Job M54 Factory Overhead Materials Inventory c. Work-in-Process Inventory- Job S10 Work-in-Process Inventory- Job C20 Work-in-Process Inventory- Job M54 Factory Overhead Salary Expense (S & A) Accrued Payroll d. Factory Overhead Depreciation Expense (S & A) Accumulated Depreciation e. Advertising Expense (S & A) Cash f. Factory Overhead Accounts Payable (or Cash) g. Factory Overhead Accounts Payable (or Cash) 90,000 23,000 42,000 22,000 4,000 6,110 4,030 1,820 2,500 6,000 2,200 1,700 3,900 6,000 1,300 1,600 6,000 1,300 1,600 13,800 90,000

91,000

20,460

h. Work-in-Process Inventory 13,800 Factory overhead Applied Overhead = $15 x 920 hours = $13,800

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4-41 (continued -1) i. Finished Goods Inventory-Job S10 46,660 Work-in-Process Inventory- Job S10 46,660 $6,110 / $13 = 470 direct labor-hours $10,500 + $23,000 + $6,110 + ($15 x 470) = $46,660 j. Accounts Receivable 59,000 Sales Cost of Goods Sold 54,000 Finished Goods Inventory - Job J21 k. Cash 25,000 Accounts Receivable 3. Ending balance of the Materials Inventory = Beginning balance + Purchases - Uses = $27,000 + $90,000 - $91,000 = $26,000 4. Ending balance of the Work-in-Process Inventory = Job C20 Cost + Job M54 Cost = (Direct Materials + Direct Labor + Applied Overhead) of 2 jobs = ($42,000 + $22,000) + ($4,030 + $1,820) + [$15 x (310 + 140)] = $64,000 + $5,850 + $6,750 = $76,600 where direct labor-hours for Job C20 = $4,030 / $13 = 310 hours for Job M54 = $1,820 / $13 = 140 hours Alternative approach: Ending WIP = Beginning WIP + DM + DL + Applied OH - FG = $10,500 + ($23,000 + $42,000 + $22,000) + ($6,110 + $4,030 + $1,820) + $13,800 - $46,660 = $76,600 5. Actual Overhead = $4,000 + $2,500 + $2,200 + $1,300 + $1,600 = $11,600 $11,600 (Actual) - $13,800 (Applied) = $2,200 Overapplied Overhead 59,000 54,000 25,000

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4-42 Journal Entries, Schedule of Cost of Goods Manufactured (50-60 min) 1. Predetermined Overhead Rate = $1,235,475 / 86,700 = $14.25 per direct labor-hour 2. a. Direct Materials Inventory Accounts Payable $25 x 5,000 = $125,000 b. Materials Inventory Accounts Payable $36 x 50 = $1,800 c. Work-in-Process Inventory Factory Overhead Direct Materials Inventory Supplies Inventory $25 x 3,500 = $87,500 $36 x 30.5 = $1,098 125,000 125,000

1,800

1,800

87,500 1,098 87,500

1,098

d. Work-in-Process Inventory 141,900 Factory Overhead 46,000 Cash 187,900 $187,900 - $46,000 = $141,900 Direct labor-hours used = $141,900 / $22 = 6,450 hours e. Factory Overhead Cash f. Factory Overhead Prepaid Insurance g. Factory Overhead Accumulated Depreciation (Factory Asset) h. Selling & Administrative Expense Accumulated Depreciation 15,230 15,230 3,500 8,200 3,500 8,200

2,400 2,400

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4-42 (Continued -1)

i. Selling & Administrative Expense Cash j. Factory Overhead Cash k. Selling & Administrative Expense Cash

5,500 5,500 13,500 13,500 13,250 13,250

l. Applied Overhead = $14.25 x 6,450 DL hour = $91,912.50 Work-in-Process Inventory 91,912.50 Factory overhead 91,912.50 m. Finished Goods Inventory Work-in-Process Inventory n. Accounts Receivable Sales Revenue Cost of Goods Sold Finished Goods Inventory 146,000 146,000 132,000

132,000 112,000 112,000

3. Actual Overhead = $1,098 + $46,000 + $15,230 + $3,500 + $8,200 + $13,500 = $87,528 Overapplied Overhead = $91,912.50 - $87,528 = $4,384.50

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4-42 (Continued -2) 4. Apex Corporation Schedule of Cost of Goods Manufactured and Sold For the month ended August 31, 2010 __________________________________________________ Direct materials: Beginning materials inventory $ 0 Purchases 125,000 Total materials available 125,000 Deduct: ending materials inventory (37,500) $ 87,500.00 Direct labor 141,900.00 Factory overhead applied 91,912.50 Total manufacturing costs 321,312.50 Add: beginning work-in-process inventory 0.00 Deduct: ending work-in-process inventory ( 175,312.50) Cost of goods manufactured 146,000.00 Add: beginning finished goods inventory 0.00 Deduct: ending finished goods inventory (34,000.00) Normal cost of goods sold 112,000.00 Deduct: overapplied overhead ( 4,384.50) Cost of goods sold $107,615.50 5. Apex Corporation Income Statement For the month ended August 31, 2010 __________________________________________________ $132,000.00 ( 107,615.50) 24,384.50 21,150.00 $ 3,234.50

Sales Cost of Goods Sold Gross Margin Selling & Administrative Expense* Net Income

* S & A Expense = $2,400 + $5,500 + $13,250 = $21,150

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4-43 Journal Entries (alternative to 4-42) (40 min) 1. Predetermined Overhead Rate = $527,805 / 31,700 = $16.65 per direct labor-hour 2. a. Factory Overhead Prepaid Insurance b. Finished Goods Inventory Work-in-Process Inventory c. Selling & Administrative Expense Accumulated Depreciation d. Materials Inventory Accounts Payable $15 x 21 = $315 e. Factory Overhead Cash 1,495 62,390 1,025 1,025 315 315 1,495 62,390

6,510 6,510

f. Work-in-Process Inventory 60,700 Factory Overhead 19,600 Cash 80,300 $80,300 - $19,600 = $60,700 Direct labor-hours used = $60,700 / $20 = 3,035 hours g. Factory Overhead Cash h. Direct Materials Inventory Accounts Payable $11 x 2,100 = $23,100 i. Accounts Receivable Sales Revenue Cost of Goods Sold Finished Goods Inventory 5,770 5,770 23,100 23,100

56,410 47,860 47,860

56,410

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4-43 (continued -1) j. Work-in-Process Inventory Factory Overhead Direct Materials Inventory Supplies Inventory $11 x 1,495 = $16,445 $15 x 13 = $195 k. Selling & Administrative Expense Cash l. Factory Overhead Accumulated Depreciation (Factory Asset) m. Selling & Administrative Expense Cash 16,445 195

16,445

195

5,660 3,505

5,660 3,505

2,350

2,350

n. Applied Overhead = $16.65 x 3,035 DL hours = $50,532.75 Work-in-Process Inventory 50,532.75 Factory Overhead 50,532.75 3. Actual Overhead = $1,495 + $6,510 + $19,600 + $5,770 + $195 + $3,505 = $37,075 Overapplied Overhead = $50,532.75 - $37,075 = $13,457.75

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Chapter 04 - Job Costing

4-43 (continued -2) 4. Accuzeit Corporation Schedule of Cost of Goods Manufactured and Sold For the month ended April 30, 2010 __________________________________________________

Direct materials: Beginning materials inventory $ 0.00 Purchase 23,100.00 Total materials available 23,100.00 Deduct: ending materials inventory (6,655.00) $ 16,445.00 Direct labor 60,700.00 Factory overhead applied 50,532.75 Total manufacturing costs 127,677.75 Add: beginning work-in-process inventory 0.00 Deduct: ending work-in-process inventory (65,287.75) Cost of goods manufactured 62,390.00 Add: beginning finished goods inventory 0.00 Deduct: ending finished goods inventory (14,530.00) Normal cost of goods sold 47,860.00 Deduct: overapplied overhead (13,457.75) Cost of goods sold $ 34,402.25 5. Accuzeit Corporation Income Statement For the month ended April 30, 2010 __________________________________________________ $ 56,410.00 ( 34,402.25) 22,007.75 9,035.00 $ 12,972.75

Sales Cost of Goods Sold Gross Margin Selling & Administrative Expense* Net Income

* S & A Expense = $1,025 + $5,660 + $2,350 = $9,035

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Chapter 04 - Job Costing

4-44 Service Industry Job Costing (15 min) 1. $225,000 / $180,000 = 125% of professional labor cost This is used to allocate the budgeted overhead for the period to each specific account based on the direct professional labor that has occurred for each account. 2. Amount of overhead charged to: Barry Account: 125% x $2,200 = $2,750 Miles Account: 125% x $8,400 = $10,500 3. Computation of the total contract cost: Cost Barry Account Miles Account Direct labor 2,200 8,400 Overhead 2,750 10,500 Total $ 4,950 $18,900

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Chapter 04 - Job Costing

4-45 Job Cost Sheets; Departmental Rates 1.


DATA: Requistions for materials or time tickets
Department Number Job No. Mat. Quant. Mat. Price Mat. Cost Labor Hours

(40 min)

1 1 1 1 2 1 1 2 Labor $ $

2906 2906 2906 2906 2907 2908 2908 2908

4,550 4,430

$ $

1.34 1.35

$ $

6,097 5,981 1,102 810 136 151 32

110 1,000 23

$ $ $

22.18 9.00 48.00

$ $ $

2,440 9,000 1,104

Department 1 Department 2 SOLUTION Materials


Department Number

6.50 8.88

Overhead $ 3.00 per labor hour 150% per labor dollar

Job No.

Mat. Quant.

Mat. Price

Mat. Cost

1 1 1 1 2 1 1 2

2906 2906 2906 2906 2906 Total 2907 2907 Total 2908 2908 2908 2908 Total Grand Total

4,550 4,430

$ $

1.34 1.35

$ $

6,097 5,981

110 1,000 23

$ $ $

22.18 9.00 48.00

$ $ $ $ $ $

12,078 2,440 2,440 9,000 1,104 10,104

$ 24,621.30
Labor Hours Labor Cost

Labor
Department Number Job No.

1 1 1 1 2 1 1 2

2906 2906 2906 2906 2906 Total 2907 2907 Total 2908 2908 2908 2908 Total Grand Total Job 2906 Job 2907 0 $3.00 $0.00 $ 0 8.88 150% 0.00 $5,736.00 $ 136.00 8.88 150% 1,811.52 $1,811.52

1,102 810 1,912 136 136 151 32 183 2,231

12,428 1,208 982 284 1,266

$ 14,901.34

Job 2908 151 $3.00 $453.00 $ 32.00 8.88 150% 426.24 $879.24

Applied Overhead Labor hours Dept 1 OH Rate in Dept 1 Subtotal Dept 1 Labor Hours Dept 2 Labor Cost Dept 2 OH Rate in Dept 2 Subtotal for Dept 2 Total Applied OH Total Job Cost Materials Labor Overhead

1,912 $3.00 $5,736.00

$ 8,426.76

12,078 12,428 5,736

2,440 1,208 1,812

10,104 1,266 879

$ 24,621.30 14,901.34 8,426.76 $ 47,949.40

$ 30,241.50

5,459.00

12,248.90

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Chapter 04 - Job Costing

4-45 (Continued -2) 2. The solution for requirement two is shown below
DATA: Requistions for materials or time tickets
Department Number Job No. Mat. Quant. Mat. Price Mat. Cost Labor Hours

1 1 1 1 2 1 1 2 Labor $ $

2906 2906 2906 2906 2907 2908 2908 2908

4,550 4,430

$ $

1.34 1.35

$ $

6,097 5,981 1,102 810 136 151 32

110 1,000 23

$ $ $

22.18 9.00 48.00

$ $ $

2,440 9,000 1,104

Department 1 Department 2 SOLUTION Materials


Department Number

7.15 11.10

Overhead $ 3.00 per labor hour 150% per labor dollar

Job No.

Mat. Quant.

Mat. Price

Mat. Cost

1 1 1 1 2 1 1 2

2906 2906 2906 2906 2906 Total 2907 2907 Total 2908 2908 2908 2908 Total Grand Total

4,550 4,430

$ $

1.34 1.35

$ $

6,097 5,981

110 1,000 23

$ $ $

22.18 9.00 48.00

$ $ $ $ $ $

12,078 2,440 2,440 9,000 1,104 10,104

$24,621.30
Labor Hours Labor Cost

Labor
Department Number Job No.

1 1 1 1 2 1 1 2

2906 2906 2906 2906 2906 Total 2907 2907 Total 2908 2908 2908 2908 Total Grand Total Job 2906 Job 2907 0 $3.00 $0.00 $ 0 11.10 150% 0.00 $5,736.00 $ 136.00 11.10 150% 2,264.40 $2,264.40

1,102 810 1,912 136 136 151 32 183 2,231

13,671 1,510 1,080 355 1,435

$ 16,615.25

Job 2908 151 $3.00 $453.00 $ 32.00 11.10 150% 532.80 $985.80

Applied Overhead Labor hours Dept 1 OH Rate in Dept 1 Subtotal Dept 1 Labor Hours Dept 2 Labor Cost Dept 2 OH Rate in Dept 2 Subtotal for Dept 2 Total Applied OH Total Job Cost Materials Labor Overhead

1,912 $3.00 $5,736.00

$8,986.20
Ttl oa

12,078 13,671 5,736

2,440 1,510 2,264 6,213.80

10,104 1,435 986 12,524.65

$ 24,621.30 16,615.25 8,986.20 $ 50,222.75

$ 31,484.30

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Chapter 04 - Job Costing

(continued -3) 3. Using Pivot Tables in Excel provides the flexibility to easily manipulate the data to find summary information from the data. The solution for Part 3, identical to that in Part 1, but using Pivot Tables (see tutorial for Pivot Tables at the end of the solution for 4-45): 4-45 (continued -4)
4.45

DATA: Requistions for materials or time tickets


Department Number Job No. Mat. Quant. Mat. Price Mat. Cost Labor Hours

1 1 1 1 1 1 2 2 Rates: Department 1 Department 2 Labor $ $

2906 2906 2906 2906 2908 2908 2907 2908

4,550 4,430

$ $

1.34 1.35

$ $

6,097 5,981 1,102 810

1,000 110 23 Overhead

$ $ $

9.00 22.18 48.00

$ $ $

9,000 2,440 1,104 151 136 32

6.50 8.88

3 per labor hour 1.5 per labor dollar

Solution: First, do a Pivot Table on Jobs and Departments for labor hours and materials cost: Job No. Department Number Data 1 Sum of Materials Cost Sum of Labor Hours 2 Sum of Materials Cost Sum of Labor Hours 2906 12077.5 1912 2907 2908 Grand Total 9000 21077.5 151 2063 1104 3543.8 32 168 10104 24621.3 183 2231

Total Sum of Materials Cost Total Sum of Labor Hours Then, complete the cost report below to obtain cost for each job: Job 2906 Total Materials Cost Direct Labor Hours Labor Rate Subtotal Total Direct Labor Cost Applied Overhead Labor hours Dept 1 OH Rate in Dept 1 Subtotal Dept 1 Labor Hours Dept 2 Labor Cost Dept 2 OH Rate in Dept 2 Subtotal for Dept 2 Total Applied Overhead Total Job Cost Dept 1 1912 6.50 12428.00

12077.5 1912

2439.8 136 2439.8 136

$12,077.50 Dept 2 0 8.88 $ 0.00 $12,428.00

Job 2907 $2,439.80 Dept 1 0 6.50 0 Dept 2 136 8.88 1207.68 $1,207.68 Dept 1

Job 2908 $10,104.00 Dept 2 32 8.88 284.16 $1,265.66

151 6.50 981.50

1912 $3.00 $5,736.00 $ 0 8.88 150% 0.00 $5,736.00 $30,241.50

0 $3.00 $0.00 $ 136.00 8.88 150% 1,811.52 $1,811.52 $5,459.00

151 $3.00 $453.00 $ 32.00 8.88 150% 426.24 $879.24 $12,248.90

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Chapter 04 - Job Costing

4. Using Pivot Tables in Excel provides the flexibility to easily manipulate the data to find summary information from the data. The solution for Part 4, identical to that in Part 2, but using Pivot Tables:
DATA: Requistions for materials or time tickets
Department Number Job No. Mat. Quant Mat. Price Mat. Cost Labor Hours

1 1 1 1 1 1 2 2 Rates: Department 1 Department 2 Labor $ $

2906 2906 2906 2906 2908 2908 2907 2908

4,550 4,430

$ $

1.34 1.35

$ $

6,097 5,981 1,102 810

1,000 110 23 Overhead

$ $ $

9.00 22.18 48.00

$ $ $

9,000 2,440 1,104 151 136 32

7.15 11.10

3 per labor hour 1.5 per labor dollar

Solution: First, do a Pivot Table on Jobs and Departments for labor hours and materials cost: Job No. Department Number Data 1 Sum of Materials Cost Sum of Labor Hours 2 Sum of Materials Cost Sum of Labor Hours 2906 12077.5 1912 2907 2908 Grand Total 9000 21077.5 151 2063 1104 3543.8 32 168 10104 24621.3 183 2231

Total Sum of Materials Cost Total Sum of Labor Hours

12077.5 1912

2439.8 136 2439.8 136

Then, complete the cost report below to obtain cost for each job: Job 2906 Total Materials Cost Direct Labor Hours Labor Rate Subtotal Total Direct Labor Cost Applied Overhead Labor hours Dept 1 OH Rate in Dept 1 Subtotal Dept 1 Labor Hours Dept 2 Labor Cost Dept 2 OH Rate in Dept 2 Subtotal for Dept 2 Total Applied Overhead Total Job Cost Dept 1 1912 7.15 13670.80 $12,077.50 Dept 2 0 11.10 $ 0.00 $13,670.80 Job 2907 $2,439.80 Dept 1 0 7.15 0 Dept 2 136 11.10 1509.60 $1,509.60 Dept 1 151 7.15 1079.65 Job 2908 $10,104.00 Dept 2 32 11.10 355.20 $1,434.85

1912 $3.00 $5,736.00 $ 0 11.10 150% 0.00 $5,736.00 $31,484.30

0 $3.00 $0.00 $ 136.00 11.10 150% 2,264.40 $2,264.40 $6,213.80

151 $3.00 $453.00 $ 32.00 11.10 150% 532.80 $985.80 $12,524.65

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Chapter 04 - Job Costing

4-45 (continued -4) Tutorial and Illustration: Creating and Using Pivot Tablesthe following steps can be used to create a pivot table that in turn, can be used to evaluate various data sets with ease. By exploring the pivot tables within Excel you can use this feature to perform many different summations and calculations. This tutorial will only show you a simple version of a pivot table. The data for the tutorial is taken from the self study problem at the end of the chapter, the Watkins Machinery Company.
1. Enter the data for the problem into a spreadsheet, as follows:
P r h s dP o u t uc a e r d c Indirect Ma teria ls Indirect Ma teria ls Ma teria Y l Ma teria Y l Ma teria X l Ma teria X l Indirect Ma teria ls Ma teria X l Ma teria X l Ma teria X l Ma teria Y l Ma teria Y l Ma teria Y l Indirect Ma teria ls Ma teria X l Ma teria X l Ma teria Y l Ma teria Y l Ma teria X l Ma teria Y l Ma teria Y l Indirect Ma teria ls P r h s dP o u t uc a e r d c Indirect Ma teria ls Indirect Ma teria ls Ma teria Y l Ma teria Y l Ma teria X l Ma teria X l Indirect Ma teria ls Ma teria X l Ma teria X l Ma teria X l Ma teria Y l Ma teria Y l Ma teria Y l Indirect Ma teria ls Ma teria X l Ma teria X l Ma teria Y l Ma teria Y l Ma teria X l Ma teria Y l Ma teria Y l Indirect Ma teria ls D te A o n a mu t 0 /2 /0 $3 0 2 6 8 ,0 0 0 /0 /0 3 1 8 1 5 ,2 0 0 /0 /0 3 3 8 80 0 0 /0 /0 3 4 8 1 0 ,6 0 0 /0 /0 3 6 8 1 0 ,2 0 0 /0 /0 3 8 8 1 0 ,6 0 0 /1 /0 3 0 8 1 5 ,2 0 0 /1 /0 3 1 8 80 0 0 /1 /0 3 1 8 2 0 ,0 0 0 /1 /0 3 2 8 1 0 ,0 0 0 /1 /0 3 4 8 70 0 0 /1 /0 3 4 8 50 0 0 /1 /0 3 8 8 2 0 ,3 0 0 /1 /0 3 9 8 1 5 ,2 0 0 /2 /0 3 0 8 1 0 ,0 0 0 /2 /0 3 0 8 1 0 ,0 0 0 /2 /0 3 0 8 2 0 ,0 0 0 /2 /0 3 4 8 90 0 0 /2 /0 3 4 8 1 0 ,4 0 0 /2 /0 3 5 8 20 0 0 /2 /0 3 6 8 1 0 ,0 0 0 /2 /0 3 6 8 1 5 ,2 0 A p dto p lie : Indirect Indirect Job 1 1 0 Job 1 2 0 Job 1 1 0 Job 1 2 0 Indirect Job 1 1 0 Job 1 1 0 Una pplied Job 1 1 0 Job 1 2 0 Job 1 1 0 Indirect Una pplied Job 1 1 0 Una pplied Job 1 2 0 Job 1 2 0 Job 1 1 0 Una pplied Indirect

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Chapter 04 - Job Costing

2. Go to the Insert tab on the ribbon, and select the PivotTable button.

3. Once you click on the PivotTable button a new screen will pop-up.

Select your data on the sheet, and check that you would like the pivot table to be created in a new sheet as seen below

4. Now you can click OK. 5. As you can see, your pivot table is shown within a new sheet, and now a new box has opened on the left side of your screen. This box allows you to modify the data within Excel. The lists shown in the Fields box are the headers of your data columns in the Data sheet. You should now select the field names, and drag them into the boxes below. For a detailed example see the screen captures below:

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Chapter 04 - Job Costing

6. When you look at the pivot table you can see that it has summed

up left-to-right, and top-to-bottom. This data is the same as the information given in parts a and b of the self-study problem.

7. The drop-down boxes within the pivot table allow you to modify what data will be shown within the pivot table. Select the dropdown box for Purchased Products and select only Material X. As you can see below, this changed your pivot table to only show data relevant to Material X.

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Chapter 04 - Job Costing

8. To change the format of the data within the pivot table is the same as changing the data of a normal cell. You can select from the formatting shortcut box, or you can right click on each, or all by selecting all the cells, and selecting Format cells Format your numbers into this format 2,222.

9. Your final result should look like the pivot table below:

4-46 Job Costing (40 min) 1. Total labor cost (2,800+3,800+1,700 direct labor factory hours used) x $30/DLH = $249,000 Applied Overhead $896,400 OH application rate = $896,400/$249,000 = 360% direct labor cost Beginning Materials Inventory = +Total materials purchased in July - Materials used in July ($21,340+26,000+16,000) = = Ending balance in Materials Inventory $ 42,500 45,000 63,340 $24,160

2.

4-34

Chapter 04 - Job Costing

3.

Actual factory overhead cost incurred during the month of July: Indirect labor (6,900hours x $30/hr) Rent Utility Repairs and maintenance Depreciation Other Actual factory overhead cost in July $207,000 129,500 188,600 194,600 127,100 176,600 $1,023,400

4.

Ending balance of work in process inventory account DM DL Applied OH Job C46 Job M24 $26,000 $16,000 114,000 51,000 410,400 183,600 $550,400 $250,600

$801,000

4.46

(continued -1) Cisneros Company Schedule of Cost of Goods Manufactured For the month ended July 31 Direct materials Direct labor Factory overhead applied Total current manufacturing costs Add: beginning work-in-process inventory Total manufacturing cost to account for Deduct: ending work-in-process inventory Cost of goods manufactured $ 63,340 249,000 896,400 1,208,740 54,000 1,262,740 (801,000) $461,740 $ 1,023,400 896,400 $ 127,000

5.

6.

Over- or under-applied overhead: Actual factory overhead cost incurred in July Total factory overhead applied in July Under-applied overhead

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Chapter 04 - Job Costing

7.

Cost per unit in Job A12 (100 units): Cost of goods manufactured (A12) Number of units Cost per unit $461,740 100 $4,617.40

8.

Cisneros Company Statement of Cost of Goods Sold For the month ended July 31 $ 75,000 461,740 536,740 196,080 340,660 127,000 $ 467,660

Finished goods beginning balance Cost of goods manufactured Cost of goods available for sale Less: Finished goods ending balance Cost of goods sold +Underapplied overhead Adjusted cost of goods sold

4-47 Assigning Overhead to Jobs; Ethics (20 min) The management accountant should keep the professional ethics code in mind. First, he or she should try to persuade other pilot project members and the company controller to strongly recommend the top management to adopt the more accurate departmental overhead rate method. If the company top management still would not listen, the management accountant should report the situation to the companys audit committee. 4-48 Operation Costing (30 Min) 1. Cost per pound: Raw Sweet Corn: $5,200 / 800 lbs = $6.50/lb Raw Regular Corn: $2,450 / 700 lbs = $3.50/lb Total pounds for separating and cleaning depts. 800 + 700 = 1,500 Total pounds for Creaming Department 700 Separating Department: $1,500 / 1,500 lbs = $1.00/lb Cleaning Department: $900 / 1,500 lbs = $0.60/lb

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Chapter 04 - Job Costing

Creaming Department: $210 / 700 lbs = $0.30/lb Total product cost per pound: Sweet Corn = $6.50 + $1.00 + $0.60 = $8.10 Regular Corn = $3.50 + $1.00 + $0.60 + $0.30 = $5.40 2. Journal Entries: a. To record the requisition of the raw corn for both types less the cream cost: WIP Inventory: Separation Department.......7,350 Direct Materials Inventory...........7,350 $5,200 + $2,450 - $300 = $7,350 b. To apply conversion costs to the Separation Department: WIP Inventory: Separation Department .......1,500 Conversion Costs Applied ...1,500 $1/lb x 1,500 lbs = $1,500 c. To transfer both types of corn to the Cleaning Department: WIP Inventory: Cleaning Department........8,850 WIP Inventory: Separation Department.....8,850 $7,350 + $1,500 = $8,850 4-48 (continued -1) d. To apply conversion cost to the Cleaning Department: WIP Inventory: Cleaning Department.......900 Conversion Costs Applied...... 900 $.60/lb x 1,500 lbs = $900 e. To transfer the Regular Corn to the Creaming Department and the Sweet Corn to Finished Goods Inventory: WIP Inventory: Creaming Department........3,270 Finished Goods Inventory......6,480 WIP Inventory: Cleaning Department......9,750

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Chapter 04 - Job Costing

$2,450 - $300 + ($1 x 700) + ($0.60 x 700) = $3,270 $5,200 + ($1 x 800) + ($0.60 x 800) = $6,480 $8,850 + $900 = $9,750 f. To transfer cream costs and conversion cost to the Creaming Department: WIP Inventory: Creaming Department.......510 Direct Materials Inventory....300 Conversion Costs Applied ......210 $.30/lb x 700 lbs = $210 g. To transfer the Creamed Corn to Finished Goods: Finished Goods Inventory........3,780 WIP Inventory: Creaming Department...3,780 $3,270 + $510 = $3,780 4-49 Spoilage, Rework and Scrap (30 Min) 1. Normal spoilage is the occurrence of unacceptable units arising under efficient operating conditions. Normal spoilage is an inherent result of the particular process or operation and is uncontrollable in the short run. The costs associated with normal spoilage are typically viewed as part of the cost of the good units produced. Abnormal spoilage is spoilage that is not expected to arise under efficient operating conditions and is not an inherent part of the production process. Accordingly, abnormal spoilage is usually considered controllable and is not included as a portion of the cost of good units produced but as an expense of the period. 2. a. Spoiled units are unacceptable units of production that are either discarded or sold for disposal value. b. Rework units are unacceptable units or production that are subsequently reconditioned into good units which can be sold as acceptable finished goods.

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Chapter 04 - Job Costing

c. Scrap represents inputs that do not become part of the output and have minor economic value when compared to the sales value of the completed product. 3. a. An analysis of the 5,000 units rejected by Richport Company for Job No. N1192-122 yields the following breakdown between normal and abnormal spoilage. Units Normal spoilage (see below)* 3,000 Abnormal spoilage: Design defect (given) 900 Other [5,000 (3,000 + 900)]1,100 2,000 Total units rejected 5,000 *Normal spoilage = .025 of units of good production (where good production = production before any spoilage) Good Production for 117,000 units = 117,000 / (1-.025)= 120,000 units; if we produced 120,000 units, we would expect a normal spoilage of 2.5% for a net of 117,000 units; so Normal spoilage = 120,000 x .025 = 3,000 units, or 120,000 117,000 = 3,000 4-49 (continued -1) b. The journal entries required to properly account for Job No. N1192122 is presented below and uses an average cost per unit of $57 ($6,954,000 / 122,000). Debit Credit Spoiled Inventory (4,100 x $7) $ 28,700 Loss from Abnormal Spoilage (b) 106,300 WIP Inventory (a) $135,000 Supporting Calculations: a) 900 abnormal spoiled units @ $57 1,100 other abnormal rejected units @ $57 3,000 normal spoiled units @ $7

$ 51,300 62,700 21,000 $135,000

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Chapter 04 - Job Costing

b)

$135,000 - $28,700 = $106,300

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Chapter 04 - Job Costing

4-50 Job Cost Sheets (40 min) 1. Solution using Pivot Tables: (See Note at end of Solution)
Solution Using Pivot Tables in Excel DATA: Requistions for materials or time tickets Department Number Job No. Mat. Quant. Mat. Price Mat. Cost Labor Hours 1 88X 6,650 $ 8.31 $ 55,262 1 88Y 2,130 $ 2.52 $ 5,368 1 88X 554 2 88Y 321 1 88Z 1,818 $ 9.16 $ 16,653 2 88Z 618 1 88Y 921 $ 4.18 $ 3,850 1 88Z 63 $ 3.23 $ 203 1 88Y 25 1 88Z 613 Rates: Department 1 Department 2 Labor $ 10.50 $ 9.50 Overhead $ 4.50 per labor hour 1.25 per labor dollar

Solution: First, do a Pivot Table on Jobs and Departments for labor hours and materials cost: Job No. Data 88X 88Y 88Z Grand Total 1 Sum of Materials Cost 5261.5 5 9217.38 16856.37 81335.25 Sum of Labor Hours 554 25 613 1192 2 Sum of Materials Cost 0 0 Sum of Labor Hours 321 618 939 Total Sum of Materials Cost 55261.5 9217.38 16856.37 81335.25 Total Sum of Labor Hours 554 346 1231 2131 Department Number Then, complete the cost report below to obtain cost for each job: Job 88X $55,261.50 Dept 1 554 10.50 5817.00 Dept 2 Job 88Y $9,217.38 Dept 2 321 9.50 3049.50 $3,312.00 Job 88Z $16,856.37 Dept 1 613 10.50 6436.50 Dept 2 618 9.50 5871.00 $12,307.50

Total Materials Cost Direct Labor Hours Labor Rate Subtotal Total Direct Labor Cost Applied Overhead Labor hours Dept 1 OH Rate in Dept 1 Subtotal Dept 1 Labor Hours Dept 2 Labor Cost Dept 2 OH Rate in Dept 2 Subtotal for Dept 2 Total Applied Overhead Total Job Cost

Dept 1 0 25 9.50 $ 10.50 0.00 262.5 $5,817.00

554 $4.50 $2,493.00 $ 0 9.50 125% 0.00 $2,493.00

25 $4.50 $112.50 $ 321.00 9.50 125% 3,811.88 $3,924.38

613 $4.50 $2,758.50 $ 618.00 9.50 125% 7,338.75 $10,097.25 $39,261.12

$63,571.50

$16,453.76

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Chapter 04 - Job Costing

4-50 (continued -1) 2. Solution using Pivot Tables in Excel: 4-50 (continued -2)
Requistions for materials or time tickets
Department Number Job No. Mat. Quant Mat. Price Mat. Cost Labor Hours

1 1 1 2 1 2 1 1 1 1 Rates: Department 1 Department 2

88X 88Y 88X 88Y 88Z 88Z 88Y 88Z 88Y 88Z Labor $ $

6,650 2,130

$ $

8.31 2.52

$ $

55,262 5,368 554 321

1,818 921 63

$ $ $

9.16 4.18 3.23

$ $ $

16,653 618 3,850 203 25 613

12.60 11.40

Overhead $ 4.50 per labor hour 1.25 per labor dollar

Solution: First, do a Pivot Table on Jobs and Departments for labor hours and materials cost: Job No. Data 88X 88Y 88Z Grand Total 1 Sum of Materials Cost 55261.5 9217.38 16856.37 81335.25 Sum of Labor Hours 554 25 613 1192 2 Sum of Materials Cost 0 0 Sum of Labor Hours 321 618 939 Total Sum of Materials Cost 55261.5 9217.38 16856.37 81335.25 Total Sum of Labor Hours 554 346 1231 2131 Department Number Then, complete the cost report below to obtain cost for each job: Job 88X Total Materials Cost Direct Labor Hours Labor Rate Subtotal Total Direct Labor Cost Applied Overhead Labor hours Dept 1 OH Rate in Dept 1 Subtotal Dept 1 Labor Hours Dept 2 Labor Cost Dept 2 OH Rate in Dept 2 Subtotal for Dept 2 Total Applied Overhead Total Job Cost Dept 1 554 12.60 6980.40 $55,261.50 Dept 2 Job 88Y $9,217.38 Dept 2 321 11.40 3659.40 $3,974.40 Job 88Z $16,856.37 Dept 1 613 12.60 7723.80 Dept 2 618 11.40 7045.20 $14,769.00

Dept 1 0 25 11.40 $ 12.60 0.00 315 $6,980.40

554 $4.50 $2,493.00 $ 0 11.40 125% 0.00 $2,493.00

25 $4.50 $112.50 $ 321.00 11.40 125% 4,574.25 $4,686.75

613 $4.50 $2,758.50 $ 618.00 11.40 125% 8,806.50 $11,565.00 $43,190.37

$64,734.90

$17,878.53

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Chapter 04 - Job Costing

Note: There is a tutorial explaining the use of Pivot tables in Excel at the end of the solution for problem 4-45. Note, also: The solution can be arrived at without using pivot tables. A convenient alternative would be to use the Data Sort and the Data Subtotals commands. For example, the following sequence would provide the needed job totals for materials and labor hours for each department for each job. a. Mark the data on materials requisitions and time tickets, and sort this by job number b. For the same range of data, use Data Subtotals by Job for Materials cost (see example screen shot below) to find the materials cost for each job

c. Return to Data Subtotals for the same range of data and select to remove subtotals d. Use Data Subtotals by Department for labor hours to find the labor hours for each department for each job.

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Chapter 04 - Job Costing

4-51 Job Costing; Quarterly and Annual Rates 1,2,3


Annual Number of machine hours/quarter Fixed Administrative Costs/qtr Overhead per quarter Overhead per machine hour Variable cost per machine hour Full Cost per machine hour Cost used in Pricing Orders/hr Price based on % markup Annual OH Rate Price Based on Annual Rate $ 36,250 100,000 1,800,000 First Quarter Second Quarter Third Quarter Fourth Quarter 5,000 12,500 7,500 11,250 $ 25,000 $ 25,000 $ 25,000 $ 25,000 450,000 450,000 450,000 450,000 90.00 36.00 60.00 40.00 45.00 45.00 45.00 45.00 135.00 81.00 105.00 85.00 85.00 127.50 135.00 202.50 81.00 121.50 105.00 157.50

150% 49.66

141.98

141.98

141.98

141.98

Using Quarterly Rate: Contribution Income Statement Revenue $ 5,851,875 $ Variable Costs 1,631,250 Contribution Fixed Costs Net Income $ 4,220,625 1,900,000 2,320,625 $

637,500 225,000 412,500 475,000

2,531,250 562,500 1,968,750 475,000 1,493,750

911,250 337,500 573,750 475,000

1,771,875 506,250 1,265,625 475,000

(62,500) $

98,750

790,625

Using Annual Rate: Contribution Income Statement Revenue $ 5,146,875 $ Variable Costs 1,631,250 Contribution Fixed Costs Net Income 3,515,625 1,900,000

709,914 225,000 484,914 475,000

1,774,784 562,500 1,212,284 475,000

1,064,871 337,500 727,371 475,000

1,597,306 506,250 1,091,056 475,000 616,056

$ 1,615,625 $ 9,914 $ 737,284 $ 252,371 $ Total operating income is lower because of lower price in high-volume quarters Note the reduced variability between quarters using the annual rate

CONVENTIONAL INCOME STATEMENTS Using Quarterly Rate: Conventional Income Statement Revenue $ 5,851,875 $ COGS 3,431,250 Gross Margin Non Operating Costs Net Income $ 2,420,625 100,000 2,320,625 $

637,500 675,000 (37,500) 25,000

2,531,250 1,012,500 1,518,750 25,000 1,493,750

911,250 787,500 123,750 25,000

1,771,875 956,250 815,625 25,000

(62,500) $

98,750

790,625

Using Annual Rate: Conventional Income Statement Revenue $ 5,146,875 $ COGS 3,431,250 Gross Margin Non Operating Costs Net Income $ 1,715,625 100,000 1,615,625 $

709,914 675,000 34,914 25,000 9,914

1,774,784 1,012,500 762,284 25,000

1,064,871 787,500 277,371 25,000

1,597,306 956,250 641,056 25,000

737,284

252,371

616,056

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Chapter 04 - Job Costing

Problem 4-51 (continued -1) 4. The analyses in parts 1-3 show: a) An annual pricing rate under the annual approach would be $141.98, while the quarterly approach would produce prices ranging from a low of $121.50 in the third quarter to high a of $202.50 in the second quarter. Note that the quarterly rates determined above are based on the assumption, stated in the case, that the rate for any quarter is based on the actual results of the prior quarter. b) The result of the quarterly policy as implemented is to have overhead rates and pricing rates relatively high in the high volume quarters, the quarters in which per-hour overhead rates are the lowest. This arises because the high and low quarters alternate, and the rates are calculated for one quarter to apply to the next. It appears that George and Steve may be unaware of the fact that volume differences between quarters affect their overhead rates and prices from quarter to quarter. Strategically, this means they are unable to compete effectively in price setting, given their cost information. c) The effect of using the quarterly rates, relative to the annual rates, is that prices and revenues are higher for the high volume months under the quarterly method. The result is higher variability of prices and profits, from quarter to quarter, using the quarterly rates. The annual rate approach reduces this variability among quarters. This could be used as a strong argument that the annual rate should be used, as the text argues. Note from examining the solution above that this is true whether we use the contribution income statement or the conventional full cost income statement. The higher variability of revenues and profits could cause strategic problems, such as creating problems in cash flow management, as cash flows fluctuate significantly from season to season. Total annual profit is greater under the quarterly rate approach ($2,320,625 relative to $1,615,625 for the annual rates) because the quarterly approach has higher rates in the high volume quarters. Total costs are the same in both approaches but revenues are higher for the quarterly approach. The fact that Mansfield is charging somewhat higher rates during the high volume months is probably what has caused some customers to say that some of Mansfields competitors have better prices. By using annual rates, Mansfield is likely to address this pricing problem and also to reduce the

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Chapter 04 - Job Costing

4-51 (continued -2) variability in profits among quarters. Of course, it also appears that going to the annual rate could also reduce profits. The demand figures used in the analysis are the actual figures for the prior year, so using an annual rate would have produced lower profits in the prior year if demand were the same. d) If the use of annual rates would significantly increase demand, then George and Steve should consider the change, as it would increase profits and reduce variability in pricing and profits across quarters. However, there is a significant difference in annual profit figures for the two methods ( $2,320,625 - $1,615,625 = $705,000, or 30% of current profit). This suggests that demand would have to increase significantly. There are two issues that now arise: can Mansfield achieve the significant increase in demand with annual rates? if the increased demand comes in the two busiest quarters (as is likely to happen), will Mansfield have the capacity to meet the increase? Note that the firms capacity per quarter is approximately 27 machines x 150 hours x 3 months = 12,150 machine hours. Right now the busiest quarter has 12,500 machine hours of demand, indicating that these machines are already used beyond planned capacity levels in this quarter, and thus, any increase in capacity means a need for more machines, an investment that should be carefully considered. e) Given the seasonality of the business, George and Steve may want to consider monthly profit reports, irrespective of the overhead rate and pricing method chosen. f) A good additional question for class discussion would be the following: What would be the effect of the choice of a quarterly or annual rate on the quarterly income statements if Mansfield were to close the overhead account quarterly and close the underapplied or overapplied overhead to cost of goods sold? The solution shown for parts 1,2 and 3 above assumes that underapplied or overapplied overhead is charged to cost of goods sold quarterly. The solution for overhead closed at year end for both the quarterly rate and the annual rate is shown below. The year end closing of the overhead variance tends to reduce the variability in profit across the quarters

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Chapter 04 - Job Costing

4-51 (continued -3) g) the high volume quarters are in effect charged a higher amount of overhead. Note that the overhead variances for the annual rate net to zero over the four quarters.
Using Quarterly Rate: Conventional Income Statement (Actual Costing: Using Last period's overhead rate for costing and for pricing; overhead closed at year end) Revenue $ 5,851,875 $ 637,500 $ 2,531,250 $ COGS Variable 1,631,250 225,000 562,500 Overhead Applied 2,270,000 200,000 1,125,000 Overhead Variance (470,000) 3,431,250 Gross Margin Non Operating Costs Net Income $ 2,420,625 100,000 2,320,625 $ 425,000 212,500 25,000 187,500 $ 1,687,500 843,750 25,000 818,750 $

911,250 337,500 270,000 607,500 303,750 25,000 278,750

1,771,875 506,250 675,000 1,181,250 590,625 25,000

565,625

Using Annual Rate: Conventional Income Statement (Normal costing: Annual rate for pricing and costing, overhead closed at year end) Revenue $ 5,146,875 $ 709,914 $ 1,774,784 COGS Variable 1,631,250 225,000 562,500 Overhead Applied 1,800,000 248,276 620,690 Overhead Variance 3,431,250 Gross Margin Non Operating Costs Net Income $ 1,715,625 100,000 1,615,625 $ 473,276 236,638 25,000 211,638 $ 1,183,190 591,595 25,000 566,595

1,064,871 337,500 372,414 709,914 354,957 25,000

1,597,306 506,250 558,621 1,064,871 532,435 25,000

329,957

507,435

4-52 Overhead Rates Used for Each Machine in a Printing Plant (Note: See also the Comments on Cost Management in Action at the end of the chapter regarding a similar costing situation) This short case is intended as a basis for class discussion that could initiate the following topics and questions: application of job costing in the printing industry; what are the factors driving the accuracy of product costing; how does the choice of job costing method affect pricing; what is the effect of cost allocation methods on management behavior, performance evaluation, and how does a chosen cost method advance or hinder the firms progress to its strategic goals? Some observations that I would bring out in this discussion include:

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Chapter 04 - Job Costing

EFS uses a job costing system in which materials and direct labor are traced to the job, and overhead is traced to each machine and then applied to the jobs based on machine usage A strength would be that EFS has put a lot of effort into tracing the printing costs accurately and using an overhead allocation approach that attempts to trace the costs of the machinery to the jobs that used that machinery I would begin a discussion of the EFS approach to allocating other overhead costs insurance, supervision, and office salaries to the jobs based on the capacity of the machines. That is, machines with more printing capacity (where capacity is the number of feet of forms produced per minute of machine time) will receive a larger portion of this portion of overhead. This is very much like a volume based rate, which is OK, but does not reflect the actual behavior of these costs. Suppose the total of other overhead is significant. Then small jobs on high capacity (fast) machines will be charged a relatively high rate. Conversely, large jobs on low-capacity machines will be charged a relatively low rate. How this would affect pricing and the allocation of jobs to machines is not easy to predict. The strategic issue is (as in Problem 4-51above) the (unknown) impact of cost calculations on competitive pricing, and therefore on the companys competitiveness. The success of the company depends on its ability to set a competitive price, recognizing that the company has unused capacity (in a seasonal business) in some periods of the year. Source: Jacci L. Rodgers, S. Mark Comstock and Karl Pritz, Customize Your Costing System, Management Accounting, May 1993, pp. 31-32. See also, Lisa Cross, Benefiting from Costing and Pricing Tools, Graphic Arts Monthly, July 2004, pp 32-34. 4-53 Plantwide vs. Departmental Overhead Rate (30 Min) 1. Empco Inc. is currently using a plantwide overhead rate that is applied on the basis of direct labor dollars. In general, a plantwide factory overhead rate is acceptable only if a similar relationship between overhead and direct labor exists in all departments, or the company manufactures products, which receive proportional services from each department.

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In most cases, departmental overhead rates are preferable to plantwide overhead rates because plantwide overhead rates do not provide: a framework for reviewing overhead costs on a departmental basis, identifying departmental cost overruns, or taking corrective action to improve departmental cost control. sufficient information about product profitability, thus, increasing the difficulties associated with management decisionmaking. 2. Because Empco uses a plantwide overhead rate applied on the basis of direct labor dollars, the elimination of direct labor in the Drilling Department through the introduction of robots may appear to reduce the overhead cost of the Drilling Department to zero. However, this change will not reduce fixed factory overhead expenses such as depreciation, plant supervision, etc. In reality, the use of robots is likely to increase fixed expenses because of increased depreciation expense. Under Empco's current method of allocating overhead costs, the remaining departments will merely absorb these costs. 4-53 (continued -1) 3. In order to improve the allocation of overhead costs , Empco should: establish separate overhead accounts (pools) and rates for the Drilling Department. identify, if possible, fixed and variable overhead costs and establish fixed and variable overhead rates. apply overhead costs to the Drilling Department on the basis of robot or machine hours.

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4-54 Plantwide vs. Departmental Overhead Rate (30 min) 1. Budgeted Overhead = ($146,000 + $94,000) + ($77,000 + $163,000) = $480,000 Budgeted Direct Labor-hours = 1,000 units x (12 + 8) hours = 20,000 hours Predetermined Overhead Rate = $480,000 / 20,000 = $24 per direct labor-hour 2. Budgeted Machine-hours = 1,000 units x (5 + 15) hours = 20,000 hours Predetermined Overhead Rate = $480,000 / 20,000 = $24 per machine-hour 3. Using Direct Labor-hours: Department A Department B Total DL-hours 1,000 x 12 1,000 x 8 = 12,000 hours = 8,000 hours 20,000 hours Overhead applied 12,000 x $24 8,000 x $24 = $288,000 = $192,000 $480,000 Using Machine-hours: Department A Department B Total Machine-hours 1,000 x 5 1,000 x 15 = 5,000 hours = 15,000 hours 20,000 hours Overhead applied 5,000 x $24 15,000 x $24 = $120,000 = $360,000 $480,000 4. If direct labor-hours are used to apply factory overhead, Department A is overcharged and Department B is undercharged. If machine hours are used, Department A is undercharged and Department B is overcharged. The reason is that each department has a different cost driver. Department A is labor intensive and Department B is machine intensive. Therefore, using one single plantwide overhead rate is not appropriate. 5. Using direct labor-hours for Department A: Predetermined Overhead Rate = $240,000 / 12,000 = $20 per direct labor-hour Applied Overhead = 1,000 units x 12 hours x $20 = $240,000 Using machine-hour for Department B: Predetermined Overhead Rate = $240,000 / 15,000 = $16 per machine-hour Applied Overhead = 1,000 units x 15 hours x $16 = $240,000

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