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MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual

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

Questions
1. Job-order costing is used in those manufacturing situations where there
are many different products produced each period. Each product or job is
different from all others and requires separate costing. Process costing is
used in those manufacturing situations where a single, homogeneous
product, such as cement, bricks, or gasoline, is produced for long periods
at a time.
2. The job cost sheet is used in accumulating all costs assignable to a
particular job. These costs would include direct materials cost traceable
to the job, and manufacturing overhead cost allocable to the job. When a
job is completed, the job cost sheet is used to compute the cost per
completed unit. The job cost sheet is then used as a control document for:
(1) determining how many units have been sold and determining the cost
of these units; and (2) determining how many units are still in inventory at
the end of a period and determining the cost of these units on the balance
sheet.
3. Many production costs cannot be traced directly to a particular product or
job, but rather are incurred as a result of overall production activities.
Therefore, in order to be assigned to products, such costs must be
allocated to the products in some manner. Examples of such costs would
include utilities, maintenance on machines, and depreciation of the factory
building. These costs are indirect production costs.
4. A firm will not know its actual manufacturing overhead costs until after a
period is over. Thus, if actual costs were used to cost products, it would
be necessary either (1) to wait until the period was over to add overhead
costs to jobs, or (2) to simply add overhead cost to jobs as the overhead
cost was incurred day by day. If the manager waits until after the period
is over to add overhead cost to jobs, then cost data will not be available
during the period. If the manager simply adds overhead cost to jobs as
the overhead cost is incurred, then unit costs may fluctuate from month to
month. This is because overhead cost tends to be incurred somewhat
evenly from month to month (due to the presence of fixed costs), whereas
production activity often fluctuates. For these reasons, most firms use
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Chapter 10 Systems Design: Job-Order Costing and Process Costing

predetermined overhead rates, based on estimates of overhead cost and


production activity, to apply overhead cost to jobs.
5. An allocation base should act as a cost driver in the incurrence of the
overhead cost; that is, the base should cause the overhead cost. If the
allocation base does not really cause the overhead, then costs will be
incorrectly attributed to products and jobs and their costs will be distorted.
6. A process costing system is appropriate in those situations where a
homogeneous product is produced on a continuous basis.
7. In a process costing system, costs are accumulated by department.
8. First, the activity performed in a department must be performed uniformly
on all units moving through it. Second, the output of the department must
be homogeneous.
9. The reason cost accumulation is simpler is that costs only need to be
identified by department - not by separate job. Usually there will be only
a few departments in a company, whereas there can be hundreds or even
thousands of jobs in a job-order costing system.
10. A quantity schedule shows the physical flow of units through a department
during a period. It serves several purposes. First, it provides the manager
with information relative to activity in his or her department and also
shows the manager the stage of completion of any in-process units.
Second, it serves as an essential guide in computing the equivalent units
and in preparing the other parts of the production report.
II. Exercises
Exercise 1 (Process Costing and Job Order Costing)
b.
c.
d.
e.

a. Job-order costing
Process costing
Process costing *
Job-order costing
Job-order costing

g.
h.
i.
j.

f. Process costing
Process costing
Job-order costing
Job-order costing
Job-order costing

* Some of the listed companies might use either a process costing or a joborder costing system, depending on how operations are carried out and how
homogeneous the final product is. For example, a plywood manufacturer
might use job-order costing if plywoods are constructed of different woods
or come in markedly different sizes.
Exercise 2 (Applying Overhead with Various Bases)
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Systems Design: Job-Order Costing and Process Costing Chapter 10

Requirement 1
Predetermined overhead rates:
Company X:
Predetermined
overhead rate

=
=

Estimated total manufacturing overhead cost


Estimated total amount of the allocation base
P432,000
60,000 DLHs

P7.20 per DLH

Company Y:
Predetermined
overhead rate

=
=

Estimated total manufacturing overhead cost


Estimated total amount of the allocation base
P270,000
90,000 DLHs

P3.00 per MH

Company Z:
Predetermined
overhead rate

Estimated total manufacturing overhead cost


Estimated total amount of the allocation base

P384,000
P240,000 materials cost

= 160% of materials cost

Requirement 2
Actual overhead costs incurred.........................................
Overhead cost applied to Work in Process:........................
58,000* actual hours P7.20 per hour.......................
Underapplied overhead cost..............................................

P420,000
417,600
P2,400

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


Exercise 3 (Departmental Overhead Rates)
Requirement 1
Milling Department:
Predetermined
overhead rate

Estimated total manufacturing overhead cost


Estimated total amount of the allocation base

P510,000
60,000 machine-hours
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= P8.50 per machine-hour

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

Assembly Department:
Predetermined
overhead rate

Estimated total manufacturing overhead cost


Estimated total amount of the allocation base

P800,000
P640,000 direct labor cost

= 125% of direct labor cost

Requirement 2
Milling Department: 90 MHs P8.50 per MH
Assembly Department: P160 125%
Total overhead cost applied

Overhead Applied
P765
200
P965

Requirement 3
Yes; if some jobs required a large amount of machine time and little labor cost,
they would be charged substantially less overhead cost if a plantwide rate
based on direct labor cost were being used. It appears, for example, that this
would be true of job 123 which required considerable machine time to
complete, but required only a small amount of labor cost.
Exercise 4 (Process Costing Journal Entries)
Work in ProcessMixing.......................................................................................
330,000
Raw Materials Inventory.................................................................................
330,000

Work in ProcessMixing.......................................................................................
260,000
Work in ProcessBaking........................................................................................
120,000
Wages Payable.................................................................................................
380,000
Work in ProcessMixing.......................................................................................
190,000
Work in ProcessBaking........................................................................................
90,000
Manufacturing Overhead.................................................................................
280,000
Work in ProcessBaking........................................................................................
760,000
Work in ProcessMixing................................................................................
760,000
Finished Goods........................................................................................................
980,000
Work in ProcessBaking................................................................................
980,000
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Systems Design: Job-Order Costing and Process Costing Chapter 10

Exercise 5 (Quantity Schedule, Equivalent Units, and Cost per Equivalent


Unit Weighted Average Method)
Requirement 1
Weighted-Average Method
Quantity
Schedule
Gallons to be accounted for:
Work in process, May 1 (materials 80%
complete, labor and overhead 75%
complete)
Started into production
Total gallons accounted for

80,000
760,000
840,000
Equivalent Units
Materials
Labor
Overhead

Gallons accounted for as follows:


Transferred to the next department..............
Work in process, May 31 (materials 60%
complete, labor and overhead 20%
complete)................................................
Total gallons accounted for...............................

790,000

790,000

790,000

790,000

50,000
840,000

30,000
820,000

10,000
800,000

10,000
800,000

Requirement 2
Total Costs Materials
Cost to be accounted for:
Work in process, May 1...............................................
P 146,600
P 68,600
Cost added during the month.......................................
1,869,200
907,200
Total cost to be accounted for (a)......................................
P2,015,800
P975,800
Equivalent units (b)...........................................................

820,000
Cost per equivalent unit (a) (b)......................................
P1.19

Labor
P30,000
370,000
P400,000
800,000
+ P0.50

Overhead
P 48,000
592,000
P640,000
800,000
+ P0.80

Whole Unit

P2.49

Exercise 6 (Quantity Schedule, Equivalent Units, and Cost per Equivalent


Unit FIFO Method)
Requirement 1
FIFO Method
Quantity
Schedule
Gallons to be accounted for:
Work in process, May 1 (materials 80%

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


complete, labor and overhead 75%
complete)
Started into production
Total gallons accounted for

760,000
840,000
Equivalent Units
Materials
Labor
Overhead

Gallons accounted for as follows:


Transferred to the next department:
From the beginning inventory................. 80,000
Started and completed this month**...... 710,000
Work in process, May 31 (materials 60%
complete, labor and overhead 20%
complete)................................................ 50,000
Total gallons accounted for............................... 840,000

16,000*
710,000

20,000*
710,000

20,000*
710,000

30,000
756,000

10,000
740,000

10,000
740,000

* Work required to complete the beginning inventory.


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

Requirement 2
Total Costs Materials
Cost to be accounted for:
Work in process, May 31.............................................
P 146,600
Cost added during the month (a)..................................
1,869,200
P907,200
Total cost to be accounted for............................................
P2,015,800
Equivalent units (b)........................................................... 756,000
Cost per equivalent unit (a) (b)......................................
P1.20

Labor
P370,000
+

740,000
P0.50

Overhead

Whole Unit

P592,000
+

740,000
P0.80

P2.50

III. Problems
Problem 1
Requirement 1
a. Raw Materials Inventory.............................................. 210,000
Accounts Payable.....................................................
210,000
b. Work in Process........................................................... 178,000
Manufacturing Overhead............................................. 12,000
Raw Materials Inventory..........................................
190,000
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Systems Design: Job-Order Costing and Process Costing Chapter 10

c. Work in Process........................................................... 90,000


Manufacturing Overhead............................................. 110,000
Salaries and Wages Payable.....................................
200,000
d. Manufacturing Overhead............................................. 40,000
Accumulated Depreciation.......................................

40,000

e. Manufacturing Overhead............................................. 70,000


Accounts Payable.....................................................

70,000

f.

Work in Process........................................................... 240,000


Manufacturing Overhead..........................................
240,000
30,000 MH x P8 per MH = P240,000.

g. Finished Goods............................................................ 520,000


Work in Process.......................................................
520,000
h. Cost of Goods Sold...................................................... 480,000
Finished Goods.........................................................
480,000
Accounts Receivable.................................................... 600,000
Sales.........................................................................
600,000
P480,000 1.25 = P600,000
Requirement 2
(b)
(c)
(d)
(e)

Manufacturing Overhead
12,000
240,000
(f)
110,000
40,000
70,000
8,000
(Overapplied
overhead)

Bal.
(b)
(c)
(f)
Bal.

Work in Process
42,000
510,000
178,000
90,000
240,000
30,000

(g)

Problem 2
Requirement 1
The costing problem does, indeed, lie with manufacturing overhead cost, as
suggested. Since manufacturing overhead is mostly fixed, the cost per unit
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Chapter 10 Systems Design: Job-Order Costing and Process Costing

increases as the level of production decreases. The problem can be solved by


use of predetermined overhead rates, which should be based on expected
activity for the entire year. Many students will use units of product in
computing the predetermined overhead rate, as follows:
Estimated manufacturing overhead cost, P840,000
= P4.20 per unit.
Estimated units to be produced,
200,000
The predetermined overhead rate could also be set on the basis of either direct
labor cost or direct materials cost. The computations are:
Estimated manufacturing overhead cost, P840,000
= 350% of direct
Estimated direct labor cost,
P240,000
labor cost
Estimated manufacturing overhead cost, P840,000
140% of direct
Estimated direct materials cost,
P600,000 = materials cost
Requirement 2
Using a predetermined overhead rate, the unit costs would be:

Direct materials...................
Direct labor.........................
Manufacturing overhead:
Applied at P4.20 per
units; 350% of direct
labor cost, or 140% of
direct materials cost
Total cost.......................
Number of units
produced...........................
Estimated cost per unit........

First
P240,000
96,000

Quarter
Second
Third
P120,000 P 60,000
48,000
24,000

Fourth
P180,000
72,000

336,000

168,000

84,000

252,000

P672,000

P336,000

P168,000

P504,000

80,000
P8.40

40,000
P8.40

20,000
P8.40

60,000
P8.40

Problem 3
Weighted-Average Method
Quantity
Schedule

Pounds to be accounted for:


Work in process, May 1
(all materials, 55% labor and
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Systems Design: Job-Order Costing and Process Costing Chapter 10


overhead added last month)..........
Started into production during
May................................................
Total pounds.............................

30,000
480,000
510,000
Equivalent Units
Labor &
Materials
Overhead

Pounds accounted for as follows:


Transferred to Department 2............
Work in process, May 31
(all materials, 90% labor and
overhead added this month)..........
Total pounds.............................

490,000*

490,000

490,000

20,000
510,000

20,000
510,000

18,000
508,000

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

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


Requirement 1
Weighted-Average Method
The equivalent units for the month would be:

Units accounted for as follows:


Transferred to next department....
Work in process, April 30
(75% materials, 60%
conversion cost added this
month)......................................
Total units and equivalent units
of production............................

Quantity
Schedule

Equivalent Units
Materials Conversion

190,000

190,000

190,000

40,000

30,000

24,000

230,000

220,000

214,000

Whole Unit

Requirement 2
Work in process, April 1......
Cost added during the
month................................
Total cost (a).....................
Equivalent units of
production (b)
..........................................

Total Cost
P 98,000

Materials
P 67,800

Conversion
P 30,200

827,000
P925,000

579,000
P646,800

248,000
P278,200

220,000

214,000

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


Cost per EU (a) (b)...........

P2.94

P1.30

P4.24

Requirement 3
Total units transferred.......................................................
Less units in the beginning inventory.................................
Units started and completed during April..........................

190,000
30,000
160,000

Requirement 4
No, the manager should not be rewarded for good cost control. The reason for
the Mixing Departments low unit cost for April is traceable to the fact that
costs of the prior month have been averaged in with Aprils costs in computing
the lower, P2.94 per unit figure. This is a major criticism of the weightedaverage method in that the figures computed for product costing purposes
cant be used to evaluate cost control or measure performance for the current
period.
Problem 5 (Preparation of Production Report from Analysis of Work in
Process T-account Weighted-Average Method)
Requirement 1
Weighted-Average Method
Quantity Schedule and Equivalent Units
Quantity
Schedule
Pounds to be accounted for:
Work in process, May 1
(materials all complete, labor
and overhead 4/5 complete)......
Started into production................
Total pounds to be accounted for......

35,000
280,000
315,000
Equivalent Units (EU)
Labor &
Materials
Overhead

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

Pounds accounted for as follows:


Transferred to Blending*.............
Work in process, May 31
(materials all complete, labor
and overhead 2/3 complete)......
Total pounds accounted for..............

270,000

270,000

270,000

45,000
315,000

45,000
315,000

30,000
300,000

Whole
Unit

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


Cost per Equivalent Unit
Cost to be accounted for:
Work in process, May 1....
Cost added during the
month
......................................
Total cost to be accounted
for (a)
..........................................

Total

Materials

Labor &
Overhead

P 63,700

P 43,400

P 20,300

587,300

397,600

189,700

P651,000

P441,000

P210,000

315,000

300,000

Equivalent units (b).............


Cost per equivalent unit
(a) (b)............................

P1.40

P0.70

P2.10

Cost Reconciliation
Total
Cost
Cost accounted for as follows:
Transferred to Blending:
270,000 pounds x P2.10
per pound..............................
Work in process, May 31:
Materials, at P1.40 per EU......
Labor and overhead, at P0.70
per EU...................................
Total work in process, May 31....
Total costs accounted for..................

Equivalent Units (EU)


Materials Conversion

P567,000

270,000

63,000

45,000

21,000
84,000
P651,000

270,000

30,000

Requirement 2
In computing unit costs, the weighted-average method mixes costs of the prior
period with current period costs. Thus, under the weighted-average method,
unit costs are influenced to some extent by what happened in a prior period.
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Chapter 10 Systems Design: Job-Order Costing and Process Costing

This problem becomes particularly significant when attempting to measure


performance in the current period. Good (or bad) cost control in the current
period might be concealed to some degree by the costs that have been brought
forward in the beginning inventory.

IV. Multiple Choice Questions


1.
2.
3.
4.
5.

D
D
D
C
D

6.
7.
8.
9.
10.

D
A
C
C
B

11.
12.
13.
14.
15.

A
D
B
D
C

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16.
17.
18.
19.
20.

A
D
A
C
D