2-32 (30–40 min.

) Cost of goods manufactured, income statement, manufacturing

company.

Consider the following account balances (in thousands) for the Peterson Company:

Beginning of End of
Peterson Company 2014 2014
Direct materials inventory 21,000 23,000
Work-in-process inventory 26,000 25,000
Finished goods inventory 13,000 20,000
Purchases of direct materials 74,000
Direct manufacturing labor 22,000
Indirect manufacturing labor 17,000
Plant insurance 7,000
Depreciation—plant, building, and equipment 11,000
Repairs and maintenance—plant 3,000
Marketing, distribution, and customer-service costs 91,000
General and administrative costs 24,000

Required:
1. Prepare a schedule for the cost of goods manufactured for 2014.
2. Revenues for 2014 were $310 million. Prepare the income statement for 2014.
SOLUTION

1. Peterson Company
Schedule of Cost of Goods Manufactured
Year Ended December 31, 2014
(in thousands)

Direct materials cost

Beginning inventory, January 1, 2014 $ 21,000
Purchases of direct materials 74,000
Cost of direct materials available for use 95,000
Ending inventory, December 31, 2014 23,000
Direct materials used $ 72,000
Direct manufacturing labor costs 22,000
Indirect manufacturing costs
Indirect manufacturing labor 17,000
Plant insurance 7,000
Depreciation—plant building & equipment 11,000
Repairs and maintenance—plant 3,000
Total indirect manufacturing costs 38,000
Manufacturing costs incurred during 2014 132,000
Add beginning work-in-process inventory, January 1, 2014 26,000
Total manufacturing costs to account for 158,000
Deduct ending work-in-process inventory, December 31, 2014 25,000
Cost of goods manufactured (to Income Statement) $133,000

2. Peterson Company
Income Statement
Year Ended December 31, 2014
(in thousands)

Revenues $310,000
Cost of goods sold:
Beginning finished goods, January 1, 2014 $ 13,000
Cost of goods manufactured 133,000
Cost of goods available for sale 146,000
Ending finished goods, December 31, 2014 20,000
Cost of goods sold 126,000
Gross margin 184,000
Operating costs:
Marketing, distribution, and customer-service costs 91,000
General and administrative costs 24,000
Total operating costs 115,000
Operating income $ 69,000
4-17 (20 min.) Actual costing, normal costing, accounting for manufacturing overhead.

Destin Products uses a job-costing system with two direct-cost categories (direct materials and
direct manufacturing labor) and one manufacturing overhead cost pool. Destin allocates
manufacturing overhead costs using direct manufacturing labor costs. Destin provides the
following information:

Budget for 2014 Actual Results for 2014

Direct material costs $2,000,000 $1,900,000
Direct manufacturing labor costs 1,500,000 1,450,000
Manufacturing overhead costs 2,700,000 2,755,000

Required:
1. Compute the actual and budgeted manufacturing overhead rates for 2014.
2. During March, the job-cost record for Job 626 contained the following information:
Direct materials used $40,000
Direct manufacturing labor costs $30,000
Compute the cost of Job 626 using (a) actual costing and (b) normal costing.
3. At the end of 2014, compute the under- or overallocated manufacturing overhead under normal
costing. Why is there no under- or overallocated overhead under actual costing?
4. Why might managers at Destin Products prefer to use normal costing?
SOLUTION

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

$2, 700, 000

= = 1.80 or 180%
$1,500, 000

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

$2, 755, 000

= = 1.9 or 190%
$1, 450, 000
2. Costs of Job 626 under actual and normal costing follow:

Actual Normal
Costing Costing
Direct materials $ 40,000 $ 40,000
Direct manufacturing labor costs 30,000 30,000
Manufacturing overhead costs
$30,000 × 1.90; $30,000 × 1.80 57,000 54,000
Total manufacturing costs of Job 626 $127,000 $124,000

Total manufacturing overhead Actual manufacturing × Budgeted

3. allocated under normal costing = labor costs overhead rate

= $1,450,000 × 1.80

= $2,610,000

Underallocated manufacturing = Actual manufacturing – Manufacturing

overhead overhead costs overhead allocated

= $2,755,000 − $2,610,000 = $145,000

There is no under- or overallocated overhead under actual costing because overhead is

allocated under actual costing by multiplying actual manufacturing labor costs and the actual
manufacturing overhead rate. This, of course, equals the actual manufacturing overhead costs. All
actual overhead costs are allocated to products. Hence, there is no under- or overallocated
overhead.
4. Managers at Destin Products might prefer to use normal costing because it enables them to
use the budgeted manufacturing overhead rate determined at the beginning of the year to estimate
the cost of a job as soon as the job is completed. Managers want to know job costs for ongoing
uses, including pricing jobs, monitoring and managing costs, evaluating the success of the job,
learning about what did and did not work, bidding on new jobs, and preparing interim financial
statements. Under actual costing, managers would only determine the cost of a job at the end of
the year when they know actual manufacturing overhead costs.
4-21 (20−25 min.) Job costing, consulting firm.

Taylor & Associates, a consulting firm, has the following condensed budget for 2014:

Revenues $20,000,000
Total costs:
Direct costs
Professional Labor $ 5,000,000
Indirect costs
Client support 13,000,000 18,000,000
Operating income $2,000,000

Taylor has a single direct-cost category (professional labor) and a single indirect-cost pool (client
support). Indirect costs are allocated to jobs on the basis of professional labor costs.

Required:
1. Prepare an overview diagram of the job-costing system. Calculate the 2014 budgeted indirect-
cost rate for Taylor & Associates.
2. The markup rate for pricing jobs is intended to produce operating income equal to 10% of
revenues. Calculate the markup rate as a percentage of professional labor costs.
3. Taylor is bidding on a consulting job for Tasty Chicken, a fast food chain specializing in
poultry meats. The budgeted breakdown of professional labor on the job is as follows:

Professional Labor Category Budgeted Rate per Hour Budgeted Hours

Director $200 3
Partner 100 16
Associate 50 40
Assistant 30 160

Calculate the budgeted cost of the Tasty Chicken job. How much will Taylor bid for the job if it
is to earn its target operating income of 10% of revenues?
SOLUTION

1. Budgeted indirect-cost rate for client support can be calculated as follows:

Budgeted indirect-cost rate = $13,000,000 ÷ $5,000,000 = 260% of professional labor costs

INDIRECT
COST
POOL
} Client
Consulting
Consulting
Support
Support
Support

COST
ALLOCATION
BASE
} Professional
Professional
Labor
LaborCosts
Costs

}
COST OBJECT:
Indirect Costs
JOB FOR
CONSULTING Direct Costs
CLIENT

DIRECT
COSTS } Professional
Labor

2. At the budgeted revenues of $20,000,000 Taylor’s operating income of $2,000,000 equals

10% of revenues.

Markup rate = $20,000,000 ÷ $5,000,000 = 400% of direct professional labor costs

3. Budgeted costs
Direct costs:
Director, $200 × 3 $ 600
Partner, $100 × 16 1,600
Associate, $50 × 40 2,000
Assistant, $30 × 160 4,800 $ 9,000
Indirect costs:
Consulting support, 260% × $9,000 23,400
Total costs $32,400
As calculated in requirement 2, the bid price to earn a 10% income-to-revenue margin is 400% of
direct professional costs. Therefore, Taylor should bid 4 × $9,000 = $36,000 for the Tasty Chicken
job.
 Bid price to earn target operating income-to-revenue margin of 10% can also be calculated
as follows:

Let R = revenue to earn target income

R – 0.10R = $32,400
0.90R = $32,400
R = $32,400 ÷ 0.90 = $36,000
Or
Direct costs $ 9,000
Indirect costs 23,400
Operating income (0.10 × $36,000) 3,600
Bid price $36,000