Mowen 2ce Solutions - ch05

CHAPTER 5
JOB-ORDER COSTING
DISCUSSION QUESTIONS
1. Job-order costing accumulates costs by 7. Overapplied overhead means that the ap-
jobs, and process costing accumulates costs plied overhead is more than the actual over-
by processes. Job-order costing is suitable head. As a result, the unadjusted cost of
for operations that produce custom-made goods is too large (because too much over-
products that receive different doses of head has been applied). So, Cost of Goods
manufacturing costs. Process costing, on Sold will decrease by the amount of over-
the other hand, is suitable for operations that applied overhead.
produce homogeneous products that receive
equal amounts of manufacturing costs in 8. Unless all your jobs (lawns) are the same
each process. size and require the same services, you will
need to use a job-order costing system. At a
2. Job-order costing is appropriate for many minimum, you will need job-order cost
service firms. The key factor is that differing sheets for each customer. You will need la-
amounts of resources must be used for dif- bour time tickets to record the amount of
ferent jobs. Examples of service firms that time spent on each job, both to cost the job
use job-order costing are law firms, account- and to pay the individual doing the work. A
ing firms, dental offices, automobile repair, materials requisition form may be needed if
and architectural firms. The key point is that fertilizer or weed control products are used
the costs of each job are unique to the job (alternatively, it may be possible to just list
and must be tracked by job. the amount of product used directly on the
job-order cost sheet). The more complicated
3. Normal costing defines product cost as the your business becomes (e.g., mowing, ferti-
sum of actual direct materials, actual direct lizing, trimming shrubbery, planting shrubs
labour, and applied overhead. The differ- and trees), the more source documents will
ence between actual costing and normal be needed to keep track of time, materials,
costing lies in the treatment of overhead. Ac- and use of capital equipment (e.g., trimmers,
tual costing uses actual overhead; normal brush hogs). Basically, as the business
costing uses applied overhead. grows, the need for more formal accounting
and source documentation grows.
4. Actual overhead rates are rarely used be-
cause managers cannot wait until the end of 9. Multiple overhead rates often produce a
the year to obtain product costs. Information more accurate assignment of overhead
on product costs is needed as the year un- costs to jobs. This can be true if the depart-
folds for planning, control, and decision ments through which products pass have
making. different amounts of overhead and if the var-
ious products spend differing amounts of
5. Overhead is assigned to production using
the predetermined rate. The predetermined time in the departments. For example, a
company may have two departments, but
overhead rate is equal to estimated over-
some products only go through one depart-
head divided by estimated activity level. The
predetermined overhead rate is multiplied by ment. It would be more accurate to assign
less overhead cost to the products using on-
the actual activity level or the cost driver on
ly one department. This can be easily ac-
which the rate is based.
complished using departmental overhead
6. Underapplied overhead means that the ap- rates.
plied overhead is less than the actual over-
head. As a result, the unadjusted cost of 10. Materials requisition forms serve as the
goods is too small (because too little over- source document for posting materials us-
head has been applied). So, Cost of Goods age and costs to individual jobs. Time tickets
Sold will increase by the amount of under- serve a similar function for labour. Prede-
applied overhead. termined overhead rates are used to assign
overhead costs to individual jobs.
Copyright © 2015 by Nelson Education Ltd. 5-1

11. Because the overhead rate is based on 17. Without any allocation of support depart-
direct labour cost, the amount of overhead ment costs, users may view services as a
applied will increase. As a result, the total free good and consume more of the service
cost of each job will go up. than is optimal. Allocating support depart-
ment costs would encourage managers to
12. The overhead variance is the difference use the service until such time as the mar-
between applied overhead and actual over- ginal cost of the service is equal to the mar-
head. Typically, that variance is relatively ginal benefit.
small, and it is closed to Cost of Goods
Sold. If overhead is underapplied, the vari- 18. The identification and use of causal factors
ance is added to Cost of Goods Sold. If ensures that support department costs are
overhead is overapplied, the variance is accurately assigned to users. This increases
subtracted from Cost of Goods Sold. the legitimacy of the control function and
enhances product-costing accuracy.
13. The cost of a job is often strongly related to
the price charged. Logically enough, the 19. a. Number of employees
higher the cost of the job, the higher the
price charged to the customer. This relation- b. Square metres
ship makes sense not only to the business, c. Kilograms of laundry
but also to the customer. By comparing the
cost of the individual job with the price d. Orders processed
charged, the firm can determine the profit at-
tributable to each job. Then, the firm can de- e. Maintenance hours worked
cide whether the profit is sufficient to contin-
f. Number of employees
ue offering the product or service under the
current terms. g. Number of transactions processed
14. Because advertising expense is a period 20. The direct method allocates the direct costs
expense, it has no effect on overhead— of each support department directly to the
either applied or actual. Therefore, changes producing departments. No consideration is
in advertising expense cannot affect manu- given to the fact that other support depart-
facturing cost or cost of goods sold. ments may use services. The sequential
method allocates support department costs
15. A departmental overhead rate application
sequentially. First, the costs of the centre
can be easily converted to a plantwide rate.
providing the greatest service to all user de-
First, the estimated overhead for all depart-
partments, including other support depart-
ments is totalled, and a single plantwide
ments, are allocated. Next, the costs of the
driver is chosen. The plantwide overhead
second greatest provider of services are al-
rate is simply the estimated plantwide over-
located to all user departments, excluding
head divided by the plantwide driver. When
any department(s) whose costs have al-
overhead is applied, the predetermined
ready been allocated. This continues until all
plantwide rate is multiplied by the actual
support department costs have been allo-
amount of driver used in the factory.
cated. The principal difference in the two
16. Producing departments work directly on the methods is the fact that the sequential
products and services being made, whereas method considers some interactions among
support departments provide indirect sup- support departments and the direct method
port to the producing departments. ignores interactions.
5-2 Copyright © 2015 by Nelson Education Ltd.

CORNERSTONE EXERCISES
Cornerstone Exercise 5–1
Estimated overhead
1. Predetermined overhead rate =
Estimated direct labour cost
$900,000
=
$1,200,000
= 0.75, or 75% of direct labour cost
2. Overhead applied to December production = 0.75 × $77,800 = $58,350
1. Applied overhead = Overhead rate × Actual direct labour cost

= 0.75 × $1,214,400 = $910,800
Actual overhead $913,000
Applied overhead 910,800
Overhead variance $ 2,200 underapplied
2. Unadjusted COGS $1,780,000

Add: Underapplied overhead 2,200
Adjusted COGS $1,782,200
Cornerstone Exercise 5-3
$828,000
1. Predetermined plantwide overhead rate =
331,200
= $2.50 per direct labour hour
2. Overhead applied in June = $2.50 × 27,800 = $69,500
3. Overhead variance = Applied overhead – Actual overhead

= $69,500 – $68,362
= $1,138 overapplied

$378,000
1. Cutting department overhead rate = = $1.80 per machine hour
210,000
$450,000
Sewing department overhead rate =
200,000
= $2.25 per direct labour hour
2. Overhead applied to cutting in June = $1.80 × 17,840 = $32,112

Overhead applied to sewing in June = $2.25 × 16,000 = $36,000
3. Cutting Department Sewing Department

Actual overhead $32,612 $35,750
Less: Applied overhead 32,112 36,000
Overhead variance $ 500 underapplied $ 250 overapplied
1. Since the predetermined overhead rate is not given, it must be calculated from
BWIP amounts using either Job 44 or Job 45. Using Job 44,
Applied overhead
Predetermined overhead rate =
Direct labour cost
$2,250
=
$3,600
= 0.625, or 62.5%
(The predetermined overhead rate using Job 45 is identical.)
2.
Job 44 Job 45 Job 46 Job 47
Beginning balance, June 1 $19,650 $ 8,400 $ 0 $ 0
Direct materials 4,500 18,300 2,400 2,100
Direct labour 3,000 7,200 6,000 1,800
Applied overhead 1,875 4,500 3,750 1,125
Total, June 30 $29,025 $38,400 $12,150 $5,025

Cornerstone Exercise 5–5 (Concluded)
3. By the end of June, Jobs 44, 45, and 47 have been transferred out of Work in Pro-
cess. Thus, the ending balance in Work in Process consists of Job 46.
Work in process, June 30 $12,150
While three jobs (44, 45, and 47) were transferred out of Work in Process and into
Finished Goods during June, only two jobs remain (Jobs 44 and 47).
Finished goods, June 1 $ 0
Job 44 29,025
Job 47 5,025
Finished goods, June 30 $34,050
4. One job, Job 45, was sold during June.

Cost of goods sold $38,400

Direct Allocation Method
Cafeteria Maintenance Pencils Pens Total
Overhead Costs $1,050,000 $875,000 $1,800,000 $2,225,000 $5,950,000
Employees 15 25 60 100 200

Allocation Ra-
tio 0.375 0.625 1.000
Square Metres
Coverage 15,000 5,000 100,000 125,000 245,000
Allocation Ra-
tio 0.444 0.556 1.000
Direct Labour
Hours 0 0 108,000 135,000 243,000
Allocation Ra-
tio 0.444 0.556 1.000
Direct Allocation Method
Department Costs $1,050,000 $875,000 $1,800,000 $2,225,000 $5,950,000
Allocations
-
Cafeteria Costs $1,050,000 $393,750 $656,250 $0
Maintenance Costs -$875,000 $388,889 $486,111 $0
Total Overhead
Costs $0 $0 $2,582,639 $3,367,361 $5,950,000

Sequential Allocation Method (Smallest First)
Overhead Costs $1,050,000 $875,000 $1,800,000 $2,225,000 $5,950,000
Employees 15 25 60 100 200

Allocation Ratio 0.375 0.625 1.000
Square Metres Cov-

erage 15,000 5,000 100,000 125,000 245,000
Allocation Ratio 0.063 0.417 0.520 1.000
Direct Labour Hours 0 0 108,000 135,000 243,000

Allocation Ratio 0.444 0.556 1.000
Allocations
Maintenance
Costs $55,125 -$875,000 $364,875 $455,000 $0
-
Cafeteria Costs $1,105,125 $414,422 $690,703 $0
Total Over-
head Costs $0 $0 $2,579,297 $3,370,703 $5,950,000

Reciprocal Allocation Method
Overhead Costs $1,050,000 $875,000 $1,800,000 $2,225,000 $5,950,000
Employees 15 25 60 100 200

Allocation Ratio - 0.1351 0.3243 0.5405 1.0000
Square Metres Cov-

erage 15,000 5,000 100,000 125,000 245,000
Allocation Ratio 0.0625 - 0.4167 0.5208 1.0000
Direct Labour
Hours 0 0 108,000 135,000 243,000
Allocation Ratio - - 0.444 0.556 1.000

Cornerstone Exercise 5–8 (Concluded)
Simultaneous Equa-
tions
Cafeteria Costs
(A) $1,050,000 + (0.0625 * Maintenance)
Maintenance
Costs (B) $875,000 + (0.1351 * Cafeteria)
Therefore
A = $1,050,000 + 0.0625B
B = $875,000 + 0.1351A
Solving for A A = $1,050,000 + .0625(875,000 + 0.1351A)

A = $1,050,000 + 54,688 + 0.0084A
A -0.0084A = 1,104,688
A=
1,114,046
Solving for B B = $875,000 + 0.1351A

B = $875,000 + (0.1351 * $1,114,046)
B = $875,000 + 150,508
B=
$1,025,508
Allocations
Cafeteria Costs -$1,114,046 $150,547 $361,312 $602,187 $0
Maintenance
Costs $64,094 -$1,025,508 $427,295 $534,119 $0
Total Over-
head Costs* $48 $39 $2,588,607 $3,361,306 $5,950,000
*Note: Differences are due to rounding errors.

EXERCISES
Exercise 5–9
a. Paint manufacturing—process
b. Auto manufacturing—process
c. Toy manufacturing—process
d. Custom cabinet making—job order
e. Airplane manufacturing (e.g., 767s)—job order
f. Personal computer assembly—process
g. Furniture making—process
h. Custom furniture making—job order
i. Dental services—job order
j. Hospital services—job order
k. Paper manufacturing—process
l. Auto repair—job order
m. Architectural services—job order
n. Landscape design services—job order
o. Light bulb manufacturing—process
Exercise 5–10
1. a. Auto manufacturing—a shop that builds autos from scratch (the way Rolls
Royce used to build cars, or a car that can be built from kits) would use job-
order costing. Large automobile manufacturers use process costing. (While
the customer may think the car is being built to order when selected among
options, actually, the manufacturer waits until enough of the same orders are
received to build a run of virtually identical cars.)
b. Dental services—basic dental services use job-order costing, but denturists (who
make only dentures) can use process costing. (It is important to recognize that
while the dentures themselves are uniquely shaped to fit each patient, the costs
involved do not differ from patient to patient.)
c. Auto repair—a general automobile repair shop uses job-order costing. However, a
shop devoted to only one type of service or repair (e.g., oil change) can use pro-
cess costing yet price the cost of the number of litres of oil used for each cus-
tomer.

Exercise 5–10 (Concluded)
d. Costume making—a small tailor shop would use job-order costing. However, a
large costume manufacturer that sews a certain number of costume designs
would use process costing.
2. CONCEPTUAL CONNECTION: The nature of the process differentiates job-order
costing from process costing. In a job-order costing environment each job differs
from every other one. In process costing, each product is the same and the pro-
cess of manufacturing is consistent.
Exercise 5–11
$1,140,000
1. Predetermined overhead rate = = $12 per direct labour hour
95,000
2. Applied overhead = $12 × 7,400 = $88,800
Exercise 5–12
$864,000
1. Predetermined overhead rate = = $2.70 per direct labour hour
320,000
2. Applied overhead = $2.70 × 7,950 = $21,465
3. Applied overhead = $2.70 × 330,400

= $892,080
Actual overhead $904,000
Applied overhead 892,080
Underapplied overhead $ 11,920
4. Adjusted Cost of Goods Sold = $942,680 + $11,920 = $954,600
5. Overhead variance means the difference between “applied overhead” and “actual
overhead incurred.” It is calculated by taking the difference between applied over-
head and actual overhead. At the end of the accounting period this amount is
added to cost of goods sold or deducted from cost of goods sold, depending on
whether it is underapplied or overapplied.

Exercise 5–13
$620,000
1. Assembly department overhead rate =
155,000
= $4 per direct labour hour
$180,000
Testing department overhead rate =
120,000
= $1.50 per machine hour
2. Assembly department applied overhead = $4 × 13,000 = $52,000

Testing department applied overhead = $1.50 × 13,050 = $19,575
3. Assembly Department Testing Department

Actual overhead .................... $53,000 $15,500
Applied overhead .................. 52,000 19,575
Overhead variance .......... $ 1,000 $ (4,075)
Assembly department has underapplied overhead of $1,000.
Testing department has overapplied overhead of $4,075.
4. We cannot leave the overhead variance in the overhead control account because
this would render the numbers for cost of goods sold for the accounting period in-
accurate. Financial accounting requires that we report accurate numbers in the fi-
nancial statements.
Exercise 5–14
1. Job 24:
Beginning balance $ 330
Direct materials 475
Direct labour 280
Applied overhead 210
Total cost $1,295
$1,295
2. Unit cost = = $259
5

Exercise 5–15
1. Materials requisition form

2. Time ticket
3. Travel log
4. Job-order cost sheet
Exercise 5–16
$1,800
1. Job 730 direct labour hours = = 180
$10
$4,000
Job 731 direct labour hours = = 400
$10
$200
$10
$800
$10
2. August applied overhead for:

Job 730 = 180 × $11 = $1,980
Job 731 = 400 × $11 = $4,400
Job 732 = 20 × $11 = $220
Job 733 = 80 × $11 = $880
3. Job 730 Job 731 Job 732 Job 733

Beginning balance $10,400 $ 8,600 $0 $0
Direct materials 1,200 8,000 2,100 3,000
Direct labour 1,800 4,000 200 800
Applied overhead 1,980 4,400 220 880
Total $15,380 $25,000 $2,520 $4,680
4. Work in Process, August 31, consists of unfinished jobs:
Job 731 $25,000

Job 732 2,520
Job 733 4,680
Total $32,200
5. Price of Job 730 = $15,380 + 0.40($15,380) = $21,532

Exercise 5–17
1. Job 877 Job 878 Job 879 Job 880

Beginning balance $20,520 $0 $0 $0
Direct materials 13,960 7,000 350 4,800
Direct labour 13,800 10,000 1,500 4,000
2. Applied overhead in October for:

Job 877 = $13,800 × 0.85 = $11,730
Job 878 = $10,000 × 0.85 = $8,500
Job 879 = $1,500 × 0.85 = $1,275
Job 880 = $4,000 × 0.85 = $3,400
3. Work in Process, October 31:

Job 877 $60,010
Job 879 3,125
Job 880 12,200
Total $75,335
4. Cost of Job 878 = $7,000 + $10,000 + $8,500 = $25,500

Price of Job 878 = $25,500 + 0.5($25,500) = $38,250
Exercise 5–18
1. Balance in Work in Process (all incomplete jobs):
Job 303 $ 460

Job 306 230
Job 308 650
Job 309 1,035
Job 310 217
Total $2,592
2. Balance in Finished Goods (all jobs completed but not sold):
Beginning balance $ 0
Job 301 610
Job 304 2,670
Job 305 3,800
Total $7,080
3. Cost of Goods Sold = Job 302 + Job 307

= $1,300 + $300 = $1,600

Exercise 5–19
1. Job 73 Job 74 Job 75

Balance, July 1 $ 8,450 $0 $0
Direct materials 7,450 12,300 16,150
Direct labour 12,000 10,500 23,000
Applied overhead 8,000 7,000 20,000
Total $35,900 $29,800 $59,150
2. Work in Process, July 31 = Job 74 = $29,800
3. Finished Goods:
Beginning balance $ 49,000
Job 75 (transferred in) 59,150
Job 70 (sold) (19,000)
Ending balance, July 31 $ 89,150

= $19,000 + $35,900
= $54,900
5. Sales [$54,900 + (0.30 × $54,900)] ........................ $71,370
Cost of goods sold .............................................. 54,900
Gross margin ................................................... 16,470
Less:
Variable marketing (0.1 × $71,370) ................. $7,137
Fixed marketing ............................................... 2,000
Administrative expenses ................................ 4,800 13,937
Operating income ................................................. $ 2,533
Exercise 5–20
Job 213:
Total manufacturing cost
1. Number of units =
Unit cost
$855
=
$8.55
= 100

Exercise 5–20 (Continued)
2. Total sales revenue = Price per unit × Number of units

= $12 × 100
= $1,200
Overhead applied, Department 1

3. Direct labour hours, Department 1 =
$6
$90
=
$6
= 15
Direct labour cost, Department 1 = 15 direct labour hours × $10 = $150
4. Overhead applied, Department 2 = 25 machine hours × $8

= $200
Job 214:
Total sales revenue
1. Price per unit =
Number of units
$4,375
=
350
= $12.50
Direct labour cost, Department 1

2. Direct labour hours, Department 1 =
$10
$700
=
$10
= 70
Overhead applied, Department 1 = Direct labour hours, Department 1 × $6

= 70 × $6
= $420

3. Materials used in production = Total manufacturing cost – Direct labour

cost, Department 1 – Direct labour cost, De-
partment 2 – Overhead applied, Department 1
– Overhead applied, Department 2
= $3,073 – $700 – $100 – $420 – $400
= $1,453

4. Unit cost =
Number of units
$3,073
=
350
= $8.78
Job 217:
1. Machine hours, Department 2 =
Overhead rate
$160
=
$8
= 20
2. Total manufacturing cost = Unit cost × Number of units

= $9.87 × 400
= $3,948
3. Direct labour cost, Department 2 = Total manufacturing cost – Materials

used in production – Direct labour cost,
Department 1 – Overhead applied, De-
partment 1 – Overhead applied, Depart-
ment 2
= $3,948 – $488 – $2,000 – $1,200 – $160

= $100

Job 225:
Total sales revenue
1. Number of units =
Price per unit
$1,150
= = 230
$5

2. Unit cost =
Number of units
$575
=
230
= $2.50

3. Machine hours, Department 2 =
$8
$0
=
$8
=0
Exercise 5–21
1. Direct materials ..................................................... $ 18,000

Direct labour:
Department A ................................................... $36,000
Department B ................................................... 6,000 42,000
Overhead ($12 × 7,000 DLH)................................. 84,000
Total manufacturing costs .............................. $144,000
$144,000
2. Unit cost = = $14.40
10,000
3. Direct materials ..................................................... $18,000

Direct labour:
Department A ................................................... $36,000
Department B ................................................... 6,000 42,000
Overhead:
Department A ($3 × 6,000)............................... 18,000
Department B ($7 × 1,200)............................... 8,400
Total manufacturing costs ................................... $86,400

$86,400
4. Unit cost = = $8.64
10,000
Exercise 5–22
1. Job 68 Job 69 Job 70 Job 71 Job 72

Balance, April 1 $ 540 $1,230 $ 990 $0 $0
Direct materials 700 560 75 3,500 2,750
Direct labour 500 600 90 2,500 2,000
Applied overhead 600 720 108 3,000 2,400
Total cost $2,340 $3,110 $1,263 $9,000 $7,150
2. Ending balance in Work in Process = Job 68 + Job 71

= $2,340 + $9,000
= $11,340
Cost of Goods Sold for April = Job 69 + Job 70 + Job 72
= $3,110 + $1,263 + $7,150
= $11,523
3.
Greenthumb Landscape Design
Income Statement
For the Month Ended April 30
Sales [$11,523 + 0.40($11,523)] ................................................. $16,132
Cost of goods sold .................................................................... 11,523
Gross margin ........................................................................ 4,609
Less: Operating expenses ........................................................ 3,670
Operating income ................................................................. $ 939
Exercise 5–23
1. a. Raw Materials........................................................ 27,800

Accounts Payable ........................................... 27,800
b. Work in Process ................................................... 21,000
Raw Materials .................................................. 21,000
c. Work in Process ................................................... 27,000
Wages Payable ................................................ 27,000
d. Overhead Control ................................................. 15,500
Various Payables ............................................ 15,500

e. Work in Process ................................................... 13,500

Overhead Control ............................................ 13,500
$27,000
Total direct labour hours = = 1,800
$15
Applied overhead = 1,800 × $7.50 = $13,500
f. Finished Goods .................................................... 47,700
Work in Process .............................................. 47,700
g. Cost of Goods Sold .............................................. 58,700
Finished Goods ............................................... 58,700
Accounts Receivable ........................................... 82,180
Sales Revenue ................................................. 82,180
2. Job 58 Job 59 Job 60

Direct materials $ 9,300 $ 6,900 $ 4,800
Direct labour 12,000 9,000 6,000
Applied overhead 6,000 4,500 3,000
Total cost $27,300 $20,400 $13,800
3. Raw Materials:
Purchases 27,800
Direct materials (21,000)
Ending balance $ 11,970
4. Work in Process:
Beginning balance ................................................ $ 0
Direct materials ..................................................... 21,000
Direct labour .......................................................... 27,000
Applied overhead .................................................. 13,500
Jobs completed:
Job 58 ............................................................... $27,300
Job 59 ............................................................... 20,400 (47,700)
Ending balance ..................................................... $ 13,800

5. Finished Goods:
Beginning balance ................................................ $ 31,400
Jobs transferred in:
Job 58 ............................................................... $27,300
Job 59 ............................................................... 20,400 47,700
Jobs sold:
Job 57 ............................................................... 31,400
Job 58 ............................................................... 27,300 (58,700)
Ending balance ..................................................... $ 20,400
Exercise 5–24
1. Allocation ratios for Power based on number of machine hours:

5,000
Battery = = 0.625
(5,000 + 3,000)
3,000
Small Motors = = 0.375
(5,000 + 3,000)
Allocation ratios for Human Resources based on number of employees:
20
Battery = = 0.25
(20 + 60)
60
(20 + 60)
2. Support Departments Producing Departments

Human Small
Power Resources Battery Motors
Direct costs $ 100,000 $ 205,000 $180,000 $ 93,500
Allocate:
Power (100,000) — 62,500 37,500
Human Resources — (205,000) 51,250 153,750
Total $ 0 $ 0 $293,750 $284,750
$293,750
3. Battery overhead rate = = $19.58
15,000
$284,750
Small Motors overhead rate = = $3.56
80,000

Exercise 5–25
1. Allocation ratios for Human Resources based on number of employees:

20
Power = = 0.20
(20 + 20 + 60)
20
Battery = = 0.20
(20 + 20 + 60)
60
(20 + 20 + 60)
Allocation ratios for Power based on number of machine hours:
5,000
Battery = = 0.625
(5,000 + 3,000)
3,000
(5,000 + 3,000)
2. Support Departments Producing Departments

Human Small
Power Resources Battery Motors
Direct costs $ 100,000 $ 205,000 $180,000 $ 93,500
Allocate:
Human Resources 41,000 (205,000) 41,000 123,000
Power (141,000) — 88,125 52,875
Total $ 0 $ 0 $309,125 $269,375
$309,125
3. Battery overhead rate = = $20.61
15,000
$269,375
Small Motors overhead rate = = $3.37
80,000

4. The difference between the direct method and the sequential method lies in the
manner in which support department costs are applied. In the direct method, the
costs of the support departments are applied to the producing departments with
no regard to allocating costs to other support departments. In other words, the
support department costs are applied directly to the producing departments.
The sequential method applies costs of the support departments to other support
departments and to the producing departments. However, once a support de-
partment has applied its costs, it is no longer considered for the application of
new costs. The decision is in which sequence will the support department costs
be applied. Often the support department with the highest cost will have its cost
applied first and the other support departments will be allocated in sequence,
based on their total costs.

PROBLEMS
Problem 5–26
$665,000
1. Overhead rate = = $6.65per DLH
100,000
2. Job 210 Job 211 Job 212 Job 213 Job 214
Balance, July 1 $ 32,780 $ 51,770 $ 29,600 $ 0 $ 0
Direct materials 25,500 39,800 24,450 13,600 18,420
Direct labour 60,000 28,500 41,500 23,000 21,300
Applied overhead 26,600 12,635 17,955 9,975 9,310
Total cost $144,880 $132,705 $113,505 $46,575 $49,030
3. Ending balance in Work in Process = Job 211 + Job 213 + Job 214
= $132,705 + $46,575 + $49,030
= $228,310

= $144,880 + $113,505 = $258,385
Problem 5–27
1. Cost of Alban job:

Professional time (85 hours @ $120) $10,200
Transportation (510 km @ $0.50) 255
Photographs 120
Total $10,575
2. Overhead is included in the rate for professional time. This is easier for profes-
sionals than to calculate a separate overhead rate and charge it to clients. In ef-
fect, Marlowe charges a conversion cost rate, not a labour rate, to its clients.

Problem 5–27 (Concluded)
3. Answers may vary. The following is one example.
Inspector Briant Travel Log

Beginning Ending Total
Date Client km km Destination km
7/8 Alban 56,780 56,815 Ofc. to claimant #1, 35
to Dr. Phony, to
claimant #2, to ofc.
to claimant #4, to ofc.
7/10 Alban 56,903 57,078 Ofc. to witness #3, 175
to client, to ofc.
to claimant #4, to ofc.
Note: Separate travel logs are kept by Inspectors Briant and Ackerman. Then, rel-
evant amounts are transferred to cost sheets (or folders) for each client.
Problem 5–28
$1,120
1. Overhead rate = = 0.80 times direct labour dollars
$1,400
(This rate was calculated using information from the Asher job; however, the
Bryson and Cooper jobs would give the same answer.)
2. Asher Bryson Cooper Davison Egberts

Beginning WIP $2,920 $6,400 $10,680 $ 0 $ 0
Direct materials 2,400 2,200 3,440 5,240 1,040
Direct labour 1,200 800 1,000 6,600 720
Applied overhead 960 640 800 5,280 576
Total $7,480 $10,040 $15,920 $17,120 $2,336
Note: This is just one way of setting up the job-order cost sheets. You might pre-
fer to retain the details of the materials, labour, and overhead that are in begin-
ning inventory costs.

3. Since the Cooper and Davison jobs were completed, the others must still be in
process. Therefore, the ending balance in Work in Process is the sum of the
costs of the Asher, Bryson, and Egberts jobs.
Asher $ 7,480
Bryson 10,040
Egberts 2,336
Ending WIP $19,856
Cost of Goods Sold = Cooper job + Davison job = $15,920 + $17,120 = $33,040
4. Kenno Prosthetics Company

Income Statement
For the Month Ended January 31
Sales (1.2 × $33,040) .................................................................. $39,648
Cost of goods sold .................................................................... 33,040
Gross margin ........................................................................ 6,608
Marketing and administrative expenses .................................. 3,400
Operating income ................................................................. $3,208
Problem 5–29
$432,000
1. OH rate = = $2 per machine hour
216,000
$300,000
2. Department A: = $2.50 per machine hour
120,000
$132,000
Department B: = $1.375 per machine hour
96,000

3. Job 73 Job 74
Plantwide:
70 × $2 = $140 70 × $2 = $140
Departmental:
20 × $2.50 $ 50.00 50 × $2.50 $125.00
50 × $1.375 68.75 20 × $1.375 27.50
$118.75 $152.50
Department A appears to be more overhead intensive, so jobs spending more
time in Department A ought to receive more overhead. Thus, departmental rates
provide more accuracy.
$540,000
4. Plantwide rate: = $2.50 per machine hour
216,000
$240,000
Department B: = $2.50 per machine hour
96,000
Job 73 Job 74
Plantwide:
70 × $2.50 = $175 70 × $2.50 = $175
Departmental:
20 × $2.50 $ 50 50 × $2.50 $125
50 × $2.50 125 20 × $2.50 50
$175 $175
Assuming that machine hours is a good cost driver, the departmental rates reveal
that overhead consumption is the same in each department. In this case, there is
no need for departmental rates, and a plantwide rate is sufficient.
5. In most instances, a departmental rate is preferable to a plantwide rate because

different products use the resources in different departments in a nonconsistent
way and departmental overhead rates adjust for this fact.

Problem 5–30
$472,000
1. Overhead rate = = $59 per machine hour
8,000
Job 1 Job 2
Direct materials .......................................................... $ 4,500 $ 8,600
Direct labour ............................................................... 1,000 2,000
Overhead ($59 × 200 machine hours) ...................... 11,800 11,800
Total manufacturing cost ..................................... 17,300 22,400
Plus 30% markup ....................................................... 5,190 6,720
Bid price ................................................................ $22,490 $29,120
$200,000
2. Welding overhead rate = = $40 per machine hour
5,000
$22,000
Assembly overhead rate = = $2.20 per DLH
10,000
$250,000
Finishing overhead rate = = $125 per machine hour
2,000
Job 1 Job 2
Direct materials .......................................................... $ 4,500 $ 8,600
Direct labour ............................................................... 1,000 2,000
Overhead:
Welding ($40 × 50); ($40 × 30).............................. 2,000 1,200
Assembly ($2.20 × 60); ($2.20 × 20)..................... 132 44
Finishing ($125 × 110); ($125 × 165).................... 13,750 20,625
Total manufacturing cost .......................................... 21,382 32,469
Plus 30% markup ....................................................... 6,415 9,741
Bid price ................................................................ $27,797 $42,210

Problem 5–31
Firm wide overhead= $360,000 + $180,000 + $120,000 + $206,250 = $866,250

Total billable hours = 1,750 x 3 = 5,250 hours
Overhead rate = $866,250 / 5,250 = $165.00
Applied overhead to each lawyer = $165 x 1,750 = $288,750
Since each lawyer would be responsible for his own specific costs, each one would
have to determine the amount he must bill to cover all his own expenses.
Morris
Costs for Morris = $250,000 + $75,000 + $45,000 + $15,000 + $288,750 = $673,750
Per hour charge for Morris = $673,750 / 1,750 = $385 per hour
Leibowitz
Costs for Liebowitz = $250,000 + $90,000 + $40,000 + $26,000 + $288,750 = $694,750
Per hour charge for Liebowitz = $694,750 / 1,750 = $397 per hour
Guliani
Costs for Guliani = $250,000 + $80,000 + $60,000 + $21,250 + $288,750 = $700,000
Per hour charge for Guliani = $700,000 / 1,750 = $400 per hour
Problem 5–32
1. Job 64:
Direct materials $ 1,240
Direct labour 6,150
Overhead ($12 × 410) 4,920
Total cost $12,310
$12,310
Unit cost = = $246.20
50
2. Ending Work in Process = Cost of Job 65

= $985 + $8,745 + ($12 × 583) = $16,726
3. Finished Goods .......................................................... 12,310

Work in Process ................................................... 12,310
Cost of Goods Sold ................................................... 12,310
Finished Goods .................................................... 12,310
Accounts Receivable ................................................. 19,696
Sales Revenue ...................................................... 19,696
(160% × $12,310 = $19,696)

Problem 5–33
1. a. Raw Materials........................................................ 3,000

b. Work in Process ................................................... 1,700
Raw Materials .................................................. 1,700
c. Work in Process [$8 × (50 + 100)]........................ 1,200
Wages Payable ................................................ 1,200
d. Work in Process ($7.50 × 150) ............................. 1,125
e. Overhead Control ................................................. 1,230
Cash ................................................................. 1,230
2. Job 443 Job 444

Direct materials $ 500 Direct materials $1,200
Direct labour 400 Direct labour 800
Applied overhead 375 Applied overhead 750
Total $1,275 Total $2,750
f. Finished Goods .................................................... 1,275
Work in Process .............................................. 1,275
g. Cost of Goods Sold .............................................. 2,000
Finished Goods ............................................... 2,000
Sales ................................................................. 2,500
3. Olakala Company
Schedule of Cost of Goods Manufactured
For the Month Ended April 30
Direct materials:
Beginning raw materials inventory ................ $1,400
Purchases of raw materials ............................ 3,000
Total raw materials available ..................... 4,400
Ending raw materials ...................................... 2,700
Raw materials used ......................................... $1,700
Direct labour .......................................................... 1,200
Overhead ............................................................... 1,230
Less: Underapplied overhead .............................. 105
Overhead applied .................................................. 1,125
Current manufacturing costs ......................... 4,025
Add: Beginning work in process ......................... 0
Total manufacturing costs .............................. 4,025
Less: Ending work in process ............................. 2,750
Cost of goods manufactured .......................... $1,275

Problem 5–34
1. Applied overhead = Direct labour cost × Overhead rate

$140,000 = $80,000 × Overhead rate
Overhead rate = 1.75, or 175% of direct labour cost
2. Applied overhead $140,000

Actual overhead 138,500
Overapplied overhead $ 1,500
3. Direct materials .......................................................................... $ 40,000

Direct labour ............................................................................... 80,000
Overhead applied ....................................................................... 140,000
260,000
Add: Beginning WIP .................................................................. 17,000
Less: Ending WIP....................................................................... (32,000)
Cost of goods manufactured ............................................... $245,000
4. Overhead Control....................................................... 1,500

Cost of Goods Sold .............................................. 1,500
Adjusted Cost of Goods Sold:
$210,000
(1,500)
$208,500
5. Direct materials ($32,000 – $10,000 – $17,500) ........................ $ 4,500

Direct labour (1,000 × $10) ........................................................ 10,000
Overhead applied (175% × $10,000) ......................................... 17,500
Ending work in process ....................................................... $32,000
Problem 5–35
$180,000
1. Overhead rate = = $12 per direct labour hour
15,000
2. Direct materials .......................................................................... $ 2,340

Direct labour ............................................................................... 3,600
Applied overhead ....................................................................... 4,320*
Total cost............................................................................... $10,260
$3,600
*$4,320 = $12 ×
$10

3. Overhead Control....................................................... 185,000

Lease Payable ....................................................... 5,000
Accumulated Depreciation .................................. 20,000
Wages Payable ..................................................... 100,000
Utilities Payable .................................................... 15,000
Other Payables ..................................................... 45,000
Work in Process ($12 × 15,400) ................................ 184,800
Overhead Control ................................................. 184,800
4. Actual overhead ......................................................................... $185,000

Applied overhead ....................................................................... 184,800
Underapplied overhead ........................................................ $ 200
5. Normal cost of goods sold ........................................................ $700,000

Add: Underapplied overhead .................................................... 200
Adjusted cost of goods sold ............................................... $700,200
Problem 5–36
1. a. Raw Materials........................................................ 42,630

b. Work in Process ................................................... 27,000
Raw Materials .................................................. 27,000
c. Work in Process ................................................... 26,320
Wages Payable ................................................ 26,320
d. Overhead Control ................................................. 19,950
Cash ................................................................. 19,950
e. Work in Process ................................................... 18,800

2. Job 703:
Beginning balance, WIP $10,000
Direct materials 12,500
Direct labour 10,920
Overhead applied 7,800
Total $41,220
Job 704:
Direct materials $14,500
Total $40,900
3. f. Finished Goods .................................................... 41,220

Work in Process .............................................. 41,220
h. Cost of Goods Sold .............................................. 6,240
Finished Goods ............................................... 6,240
Sales ................................................................. 8,112
4. a. Raw Materials:
Add: Purchases 42,630
Less: Materials requisitioned (27,000)
b. Work in Process:
Add: Materials requisitioned 27,000
Less: Jobs completed (41,220)
c. Finished Goods:
Add: Jobs completed 41,220
Less: Jobs sold (6,240)

Problem 5–37
1. Direct method:
Proportion of: Laboratory Tissue Pathology
Number of samples 0.60 0.40
Transactions processed 0.65 0.35
Direct costs $862,500 $1,140,000
Delivery:
(0.60 × $600,000) 360,000
(0.40 × $600,000) 240,000
Accounting:
(0.65 × $675,000) 438,750
(0.35 × $675,000) 236,250
Total $1,661,250 $1,616,250
2. Sequential method:
Tissue
Delivery Accounting Laboratory Pathology
Transactions 0.0500 — 0.6175 0.3325
Number of samples — — 0.6000 0.4000
Direct costs $ 600,000 $ 675,000 $862,500 $1,140,000
Accounting:
(0.0500 × $675,000) 33,750 (33,750)
(0.6175 × $675,000) (416,813) 416,813
(0.3325 × $675,000) (224,437) 224,437
Delivery:
(0.6000 × $633,750) (380,250) 380,250
(0.4000 × $633,750) (253,500) 253,500
Total $ 0 $ 0 $1,659,563 $1,617,937

Problem 5–38
1. a. Direct method:
Drilling Assembly
Machine hours 0.80 0.20
Kilowatt-hours 0.10 0.90
Maintenance:
(0.80 × $320,000) $256,000
(0.20 × $320,000) $ 64,000
Power:
(0.10 × $400,000) 40,000
(0.90 × $400,000) 360,000
Direct costs 163,000 90,000
Total $459,000 $514,000
$459,000
Drilling: = $15.30/machine hour
30,000
$514,000
Assembly: = $12.85/direct labour hour
40,000
Prime costs $1,817.00
Drilling ($15.30 × 2) 30.60
Assembly ($12.85 × 50) 642.50
Total cost 2,490.10
Markup (15%) 373.52
Bid price $2,863.62

b. Sequential method: Allocate Power first, then Maintenance

Maintenance Power Drilling Assembly
Machine hours — — 0.80 0.20
Kilowatt-hours 0.10 — 0.09 0.81
Direct costs $ 320,000 $ 400,000 $163,000 $ 90,000
Power:
(0.10 × $400,000) 40,000 (40,000)
(0.09 × $400,000) (36,000) 36,000
(0.81 × $400,000) (324,000) 324,000
Maintenance:
(0.80 × $360,000) (288,000) — 288,000
(0.20 × $360,000) (72,000) 72,000
Total $ 0 $ 0 $487,000 $486,000
$487,000
Drilling: = $16.23/machine hour
30,000
$486,000
Assembly: = $12.15/direct labour hour
40,000
Prime costs $1,817.00

Drilling ($16.23 × 2) 32.46
Assembly ($12.15 × 50) 607.50
Total cost 2,456.96
Markup (15%) 368.54
Bid price $2,825.50
2. The sequential method is the more accurate because it considers some of the
support department interactions.

PROFESSIONAL EXAMINATION PROBLEMS*
Professional Examination Problem 5–39 JOB-ORDER COSTING—SCALEDOWN INC.
1. A job-order cost system is appropriate for manufacturing, merchandis-

ing, and service companies that provide individual products or ser-
vices or products or services in unique batches. The process charac-
teristic that makes a job-order costing desirable is the ability to trace
materials and labour directly to the unit or batch.
2. Predetermined overhead rate = $4,500,000/ 600,000 direct labour hours

= $7.50 per DLH
The only job in process at May 31, 2015 is Job DRS114:
Costs in opening WIP $250,000

Direct materials added in May 124,000
Purchased parts added in May 87,000
Direct labour added in May 200,500
Manufacturing overhead applied: 19,500 hours × $7.50 146,250
$807,750
3. Cost
/Unit Units Total
Beginning inventory, finished goods $35 19,400 $679,000
Playpens manufactured in May

WIP – opening 420,000
Direct materials added in May 3,000
Purchased parts added in May 10,800
Direct labour added in May 43,200
Manufacturing overhead applied:
4,400 hours × $7.50 33,000
34 15,000 510,000
Less: sales
Beginning inventory 35 19,400 (679,000)
Manufactured in May 34 1,600 (54,400)
Ending inventory, finished goods $34 13,400 $455,600
*
© 2010 CMA Ontario. Reproduced with Permission.

Professional Examination Problem 5–39 (Concluded)
4. If the overhead balance at the end of the year is significant, it should

be prorated over COGS and the balances in WIP, FG, and COGS. If it is
insignificant, the ending balance can be closed to COGS.
Professional Examination Problem 5–40 (APPENDIX 5B) DEPARTMENTAL

COSTING AND COST ALLOCATION—CORINTH LTD.
a) Use the appropriate cost drivers as follows on which to base the cost allocation:
Department Cost Driver

Personnel # of employees
Purchasing Purchase requisitions
Machining Machine hours
Painting Direct labour costs
Personnel department cost is allocated first because it has the highest cost
among the service departments.
Personnel Purchasing Machining Painting
Overhead $40,000 $35,000 $128,000 $48,000
Personnel (number of (40,000) 3,371 1 5,618 2 31,011 3
employees)
0 38,371
Purchasing (number of (38,371) 32,801 4 5,570 5
requisitions)
0
Total overhead cost $166,419 $84,581
1 (15/178) × $40,000
2 (25/178) × $40,000
3 (138/178) × $40,000
4 (2,650/3,100) × $38,371
5 (450/3,100) × $38,371
Overhead rates:
Machining = $166,419 ÷ 23,500 machine hours = $7.0817 per machine hour
Painting = $84,581 ÷ $147,000 direct labour dollars = $0.5754 per direct labour
dollar

Professional Examination Problem 5–40 (Concluded)
b)
Actual overhead ($173,000 + $78,540) $251,540
Applied overhead:
Machining (24,150 hrs × $7.0817) $171,023
Painting ($139,750 direct labour × $0.5754) 80,412 251,435
Underapplied overhead $ 105
Journal Entry
Applied overhead account (s) 251,435
Cost of Goods Sold 105
Actual overhead control account 251,540
c) Reasons for allocating service department costs include:

1) Economic – to provide information for economic decisions (e.g., how to allo-
cate available capacity among products)
2) Motivation – to motivate managers and employees (e.g., to discourage using
shared services unwisely)
3) Income and asset measurement for external parties – to cost products for
financial reporting purposes
4) Cost justification – to establish a “fair” price

CASES
Case 5–41
1. Mrs. Lucky won’t like being charged more for two of the jobs when the same
number and type of announcements were produced in each job.
$20,000
2. May: Actual rate = = $40 per hour
500
Overhead assigned: $40 × 5 = $200
$20,000
June and July: Actual rate = = $80 per hour
250
Overhead assigned: $80 × 5 = $400
$240,000
3. Predetermined rate = = $40 per hour
(500 × 12)
Cost and price of each job:
Direct materials $250.00
Direct labour 25.00
Overhead (5 × $40) 200.00
Total cost 475.00
Plus 25% markup 118.75
Price $593.75
Using a predetermined rate will avoid the nonuniform production problem re-
vealed in the first two requirements and result in a more accurate application of
overhead and fairer costing of the summer jobs.
Case 5–42
1. The solution Franz proposes is not ethical. Although maintaining the current
plantwide rate is probably not illegal, its continuation has one purpose: to extract
extra profits from government business. Franz knows the plantwide rate is not
accurately assigning overhead costs to the various jobs and is willing to alter the
assignments on an “unofficial basis” for purposes of bidding on private-sector
jobs. Fundamentally, ethical behaviour is concerned with choosing right over
wrong. To knowingly overcharge government for future business certainly seems
wrong. To continue overpricing knowing the new overhead rates would more than
make up for any lost profits from the government sector (through more competitive
bidding in the private sector) is a clear indication of greed. While managers have
an obligation to maximize profits, this obligation must be within ethical boundaries.
2. Miroslav should first determine whether or not Matthaus has a corporate code of
conduct. He can pursue the avenues suggested by the code. For example, if
Miroslav cannot persuade Franz to refrain from implementing the scheme, he
could present his objections to Franz’s immediate supervisor. If a resolution
cannot be realized at this level, then Miroslav should go to the next higher
management level. If no resolution is possible after appealing to all higher levels,
then Miroslav’s resignation may be the only remaining option.

Case 5–43
Student answers will vary.
The problem is that the overhead application rate has been set too low on a
consistent basis. The low rate can be due to an over estimation of the activity rate
for the overhead application base driver or an underestimation of the costs to be
incurred for overhead items. In either case, the rate will be set at a rate that will
not result in all overheads being absorbed into production.
A study should be made of the activity levels over the past five years and compare
this to the estimates that were used in determining the expected activity levels for
the year. If we determine that the estimates have been severely off, resulting in
the underapplied overhead at year end, then we should revise our rate
accordingly.
If it turns out that the level of expected activity was accurate, we should study the
costs over the same period and compare the expected costs to the actual costs.
We should determine why the costs have been inaccurately measured and take
steps to improve our budgeting process to catch seriously underestimated costs.
In the meantime, we should take steps to ensure that we do not incur such a serious
adjustment at the end of the year. We can review the overhead control account on
a monthly basis and if the unapplied overhead is greater than a certain
percentage (say 5%), then we should adjust cost of goods sold at month end
rather than at year end. Otherwise, if spo the magnitude of the adjustment will be
relatively small and will not cause a major concern by taking it then the
adjustment can be taken all at once at year end.
Case 5–44
Student responses will vary.
We have been gathering information on departmental operations to develop
overhead allocation rates by department. The reason for doing this is that the
various departments that we have are very different in how they operate and the
costs associated with each department. As an example, the Stamping department
has three very expensive machines that do most of the work in that department.
These machines each cost $5 million and are operated by fairly low level, semi-
skilled employees. The machines are the critical ingredient in how the products
are produced in this department.
The Grinding department, on the other hand, has a number of less expensive
machines, with an average cost of about $100,000 each, but they are operated by
highly skilled employees. These employees are relatively well paid and are the
difference between a good job and a bad job. These employees are the critical
difference in how the products are produced in this department.

Case 5–44 (Concluded)
In the Finishing department, the highly skilled labourers are the key ingredient to
maintaining a high quality finished product. They are the key to production in this
department.
In allocating costs, we must be certain that the costs are allocated properly because
many of the strategic decisions made by this company are based on the cost of
individual products. Allocating overhead by the key component in the
manufacturing cycle, be it the operation of the machine or the work of the
labourers, is crucial to maintaining the most appropriate strategy. Pricing is
impacted by the final cost assigned to our products and we must ensure that
these costs are appropriate.
Using machine hours to allocate overhead in the Stamping department and direct
labour in the other two departments will give us the most accurate costs of our
products and ensure that we make the best decisions possible from this
information.

Case 5–45
(All dollar values in 000s, except for rate per patient day)
Pharmacy Cafeteria Admin Maint. Surgery Oncology Internal Total
Medicine
Beds 150 200 650 1,000
Patient Days 48,600 64,800 210,600 324,000
Occupancy 1.00% 4.00% 3.00% 10.00% 18.00% 10.00% 46.00%
Beds Space 8.10% 10.80% 35.10% 54.00%
Nurses 1,200 1,000 1,950 4,150
Nurses Costs (000s) 99,000 82,500 160,875 342,375

Case 5–45 (Concluded)
Department
Costs (000s)
Internal
Pharmacy Cafeteria Admin Maint. Surgery Oncology Medicine Total
Direct Costs 12,500 60,000 62,500 22,500 23,500 26,500 53,500 261,000
Nursing
Costs 99,000 82,500 160,875 342,375
Maintenance 225 900 675 -(22,500) 4,073 6,480 10,147 0
Depreciation 275 1,100 825 0 4,978 7,920 12,402 27,500
Sub total 13,000 62,000 64,000 0 131,551 123,400 236,924 630,875
Allocate Phar-
macy (13,000) 1,950 2,600 8,450 0
Allocate Cafete-
ria (62,000) 17,928 14,940 29,132 0
Allocate Admin -(64,000) 9,600 12,800 41,600 0
Total Patient Care Costs 161,028 153,740 316,107 630,875
Patient Days 48,600 64,800 210,600 324,000
Rate Per Patient Day 3,313 2,373 1,501
Allocation of
Costs
Maintenance 225 900 675 0 4,073 6,480 10,147 22,500
Depreciation* 275 1,100 825 0 4,978 7,920 12,402 27,500*
*Based on $825 million over 30 years

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CHAPTER 5

Copyright © 2015 by Nelson Education Ltd. 5-1

5-2 Copyright © 2015 by Nelson Education Ltd.

Cornerstone Exercise 5–1

2. Overhead applied to December production = 0.75 × $77,800 = $58,350

Cornerstone Exercise 5–2

1. Applied overhead = Overhead rate × Actual direct labour cost

2. Unadjusted COGS $1,780,000

Cornerstone Exercise 5-3

2. Overhead applied in June = $2.50 × 27,800 = $69,500

3. Overhead variance = Applied overhead – Actual overhead

Copyright © 2015 by Nelson Education Ltd. 5-3

2. Overhead applied to cutting in June = $1.80 × 17,840 = $32,112

3. Cutting Department Sewing Department

Cornerstone Exercise 5–5

5-4 Copyright © 2015 by Nelson Education Ltd.

4. One job, Job 45, was sold during June.

Copyright © 2015 by Nelson Education Ltd. 5-5

Direct Allocation Method

Cafeteria Maintenance Pencils Pens Total

Overhead Costs $1,050,000 $875,000 $1,800,000 $2,225,000 $5,950,000

Employees 15 25 60 100 200

Direct Allocation Method

Department Costs $1,050,000 $875,000 $1,800,000 $2,225,000 $5,950,000

Maintenance Costs -$875,000 $388,889 $486,111 $0

5-6 Copyright © 2015 by Nelson Education Ltd.

Sequential Allocation Method (Smallest First)

Cafeteria Maintenance Pencils Pens Total

Overhead Costs $1,050,000 $875,000 $1,800,000 $2,225,000 $5,950,000

Employees 15 25 60 100 200

Square Metres Cov-

Direct Labour Hours 0 0 108,000 135,000 243,000

Department Costs $1,050,000 $875,000 $1,800,000 $2,225,000 $5,950,000

Copyright © 2015 by Nelson Education Ltd. 5-7

Reciprocal Allocation Method

Cafeteria Maintenance Pencils Pens Total

Overhead Costs $1,050,000 $875,000 $1,800,000 $2,225,000 $5,950,000

Employees 15 25 60 100 200

Square Metres Cov-

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Solving for A A = $1,050,000 + .0625(875,000 + 0.1351A)

Solving for B B = $875,000 + 0.1351A

Department Costs $1,050,000 $875,000 $1,800,000 $2,225,000 $5,950,000

*Note: Differences are due to rounding errors.

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5-10 Copyright © 2015 by Nelson Education Ltd.

2. Applied overhead = $12 × 7,400 = $88,800

2. Applied overhead = $2.70 × 7,950 = $21,465

3. Applied overhead = $2.70 × 330,400

4. Adjusted Cost of Goods Sold = $942,680 + $11,920 = $954,600

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2. Assembly department applied overhead = $4 × 13,000 = $52,000

3. Assembly Department Testing Department

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1. Materials requisition form

2. August applied overhead for:

3. Job 730 Job 731 Job 732 Job 733

4. Work in Process, August 31, consists of unfinished jobs:

Job 731 $25,000

5. Price of Job 730 = $15,380 + 0.40($15,380) = $21,532

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1. Job 877 Job 878 Job 879 Job 880

2. Applied overhead in October for: