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

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production activity often fluctuates. For these reasons, most firms use
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)

a. Job-order costing f. Process costing

b. Process costing g. Process costing
c. Process costing * h. Job-order costing
d. Job-order costing i. Job-order costing
e. Job-order costing j. Job-order costing
* Some of the listed companies might use either a process costing or a job-
order 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.

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Exercise 2 (Applying Overhead with Various Bases)

Requirement 1

Predetermined overhead rates:

Company X:
Predetermined Estimated total manufacturing overhead cost
= Estimated total amount of the allocation base
overhead rate
P432,000
= 60,000 DLHs = P7.20 per DLH
Company Y:

Predetermined Estimated total manufacturing overhead cost

= Estimated total amount of the allocation base
overhead rate
P270,000
= 90,000 DLHs = P3.00 per MH
Company Z:

Predetermined Estimated total manufacturing overhead cost

= Estimated total amount of the allocation base
overhead rate
P384,000
= P240,000 materials cost = 160% of materials cost

Requirement 2

Actual overhead costs incurred......................................... P420,000

Overhead cost applied to Work in Process:........................
58,000* actual hours × P7.20 per hour....................... 417,600
Underapplied overhead cost.............................................. P  2,400

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

Exercise 3 (Departmental Overhead Rates)

Requirement 1

Milling Department:

Predetermined Estimated total manufacturing overhead cost

= Estimated total amount of the allocation base
overhead rate
P510,000
= 60,000 machine-hours = P8.50 per machine-hour
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Assembly Department:

Predetermined Estimated total manufacturing overhead cost

= Estimated total amount of the allocation base
overhead rate
P800,000
= P640,000 direct labor cost = 125% of direct labor cost

Requirement 2
Overhead Applied
Milling Department: 90 MHs × P8.50 per MH P765
Assembly Department: P160 × 125% 200
Total overhead cost applied 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 Process—Mixing.......................................................................................
330,000
Raw Materials Inventory.................................................................................
330,000

Work in Process—Mixing.......................................................................................
260,000
Work in Process—Baking........................................................................................
120,000
Wages Payable.................................................................................................
380,000

Work in Process—Mixing.......................................................................................
190,000
Work in Process—Baking........................................................................................
90,000
Manufacturing Overhead.................................................................................
280,000

Work in Process—Baking........................................................................................
760,000
Work in Process—Mixing................................................................................
760,000

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Finished Goods........................................................................................................
980,000
Work in Process—Baking................................................................................
980,000

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) 80,000
Started into production 760,000
Total gallons accounted for 840,000

Equivalent Units
Materials Labor Overhead
Gallons accounted for as follows:
Transferred to the next department.............. 790,000 790,000 790,000 790,000
Work in process, May 31 (materials 60%
complete, labor and overhead 20%
complete)................................................ 50,000 30,000 10,000 10,000
Total gallons accounted for............................... 840,000 820,000 800,000 800,000

Requirement 2
Total Costs Materials Labor Overhead Whole Unit
Cost to be accounted for:
Work in process, May 1...............................................
P 146,600 P 68,600 P 30,000 P 48,000
Cost added during the month.......................................
1,869,200 907,200 370,000 592,000
Total cost to be accounted for (a)......................................
P2,015,800 P975,800 P400,000 P640,000
Equivalent units (b)...........................................................
— 820,000 800,000 800,000
Cost per equivalent unit (a) ÷ (b)...................................... P1.19 + P0.50 + P0.80 = P2.49

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

Unit – FIFO Method)

Requirement 1

FIFO Method

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Quantity
Schedule
Gallons to be accounted for:
Work in process, May 1 (materials 80%
complete, labor and overhead 75%
complete) 80,000
Started into production 760,000
Total gallons accounted for 840,000

Equivalent Units
Materials Labor Overhead
Gallons accounted for as follows:
Transferred to the next department:
From the beginning inventory................. 80,000 16,000* 20,000* 20,000*
Started and completed this month**...... 710,000 710,000 710,000 710,000
Work in process, May 31 (materials 60%
complete, labor and overhead 20%
complete)................................................ 50,000 30,000 10,000 10,000
Total gallons accounted for............................... 840,000 756,000 740,000 740,000

* 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 Labor Overhead Whole Unit
Cost to be accounted for:
Work in process, May 31.............................................
P 146,600
Cost added during the month (a)..................................
1,869,200 P907,200 P370,000 P592,000
Total cost to be accounted for............................................
P2,015,800
Equivalent units (b)........................................................... 756,000 740,000 740,000
Cost per equivalent unit (a) ÷ (b)...................................... P1.20 + P0.50 + P0.80 = P2.50

III. Problems

Problem 1

Requirement 1

a. Raw Materials Inventory.............................................. 210,000

Accounts Payable..................................................... 210,000

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b. Work in Process........................................................... 178,000

Manufacturing Overhead............................................. 12,000
Raw Materials Inventory.......................................... 190,000

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

Manufacturing Overhead Work in Process

(b) 12,000 240,000 (f) Bal. 42,000 510,000 (g)
(c) 110,000 (b) 178,000
(d) 40,000 (c) 90,000
(e) 70,000 (f) 240,000
8,000 Bal. 30,000
(Overapplied
overhead)

Problem 2

Requirement 1

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The costing problem does, indeed, lie with manufacturing overhead cost, as
suggested. Since manufacturing overhead is mostly fixed, the cost per unit
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:

Quarter
First Second Third Fourth
Direct materials................... P240,000 P120,000 P 60,000 P180,000
Direct labor......................... 96,000 48,000 24,000 72,000
Manufacturing overhead:
Applied at P4.20 per
units; 350% of direct
labor cost, or 140% of
direct materials cost 336,000 168,000 84,000 252,000

Total cost....................... P672,000 P336,000 P168,000 P504,000

Number of units
produced........................... 80,000 40,000 20,000 60,000
Estimated cost per unit........ P8.40 P8.40 P8.40 P8.40

Problem 3

Weighted-Average Method
Quantity
Schedule

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Pounds to be accounted for:

Work in process, May 1
(all materials, 55% labor and
overhead added last month).......... 30,000
Started into production during
May................................................ 480,000
Total pounds............................. 510,000

Equivalent Units
Labor &
Materials Overhead
Pounds accounted for as follows:
Transferred to Department 2............ 490,000* 490,000 490,000
Work in process, May 31
(all materials, 90% labor and
overhead added this month).......... 20,000 20,000 18,000
Total pounds............................. 510,000 510,000 508,000
* 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:

Quantity Equivalent Units

Schedule Materials Conversion
Units accounted for as follows:
Transferred to next department.... 190,000 190,000 190,000
Work in process, April 30
(75% materials, 60%
conversion cost added this
month)...................................... 40,000 30,000 24,000
Total units and equivalent units
of production............................ 230,000 220,000 214,000

Requirement 2

Total Cost Materials Conversion Whole Unit

Work in process, April 1....... P 98,000 P 67,800 P 30,200
Cost added during the
month................................ 827,000 579,000 248,000
Total cost (a)..................... P925,000 P646,800 P278,200

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Equivalent units of
production (b) – 220,000 214,000
..........................................
Cost per EU (a)  (b)........... – P2.94 + P1.30 = P4.24

Requirement 3

Total units transferred....................................................... 190,000

Less units in the beginning inventory................................. 30,000
Units started and completed during April.......................... 160,000

Requirement 4

No, the manager should not be rewarded for good cost control. The reason for
the Mixing Department’s low unit cost for April is traceable to the fact that
costs of the prior month have been averaged in with April’s costs in computing
the lower, P2.94 per unit figure. This is a major criticism of the weighted-
average method in that the figures computed for product costing purposes
can’t 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)...... 35,000
Started into production................ 280,000
Total pounds to be accounted for...... 315,000

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Equivalent Units (EU)

Labor &
Materials Overhead
Pounds accounted for as follows:
Transferred to Blending*............. 270,000 270,000 270,000
Work in process, May 31
(materials all complete, labor
and overhead 2/3 complete)...... 45,000 45,000 30,000
Total pounds accounted for.............. 315,000 315,000 300,000
* 35,000 + 280,000 – 45,000 = 270,000.

Cost per Equivalent Unit Labor & Whole

Total Materials Overhead Unit
Cost to be accounted for:
Work in process, May 1.... P 63,700 P 43,400 P 20,300
Cost added during the
month 587,300 397,600 189,700
......................................
Total cost to be accounted
for (a) P651,000 P441,000 P210,000
..........................................

Equivalent units (b)............. 315,000 300,000

Cost per equivalent unit
(a)  (b)............................ P1.40 + P0.70 = P2.10

Cost Reconciliation

Total Equivalent Units (EU)

Cost Materials Conversion
Cost accounted for as follows:
Transferred to Blending:
270,000 pounds x P2.10
per pound.............................. P567,000 270,000 270,000
Work in process, May 31:
Materials, at P1.40 per EU...... 63,000 45,000
Labor and overhead, at P0.70
per EU................................... 21,000 30,000
Total work in process, May 31.... 84,000
Total costs accounted for.................. P651,000

Requirement 2

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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.
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. D 6. D 11. A 16. A
2. D 7. A 12. D 17. D
3. D 8. C 13. B 18. A
4. C 9. C 14. D 19. C
5. D 10. B 15. C 20. D

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