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Systems Design: Job-Order Costing: Solution To Discussion Case
Systems Design: Job-Order Costing: Solution To Discussion Case
Students will likely generate wide variety of products and related costs,
some of them will likely be similar to the following:
4. Job P’s unit product cost and Job Q’s assigned manufacturing costs are
computed as follows:
Total manufacturing cost assigned to Job P:
Work in Process.....................
21,000
Raw Materials............... 21,000
Beg. Bal. 0
(a) 21,000
(b) 28,500
(c) 11,400 (d) 42,400
b. Job-order costing
c. Job-order costing
d. Job-order costing
e. Process costing
f. Process costing
g. Job-order costing
h. Process costing
i. Job-order costing
j. Process costing
k. Job-order costing
l. Process costing
1.
Actual direct labour-hours......................... 12,600
× Predetermined overhead rate................ $23.10
= Manufacturing overhead applied............ $291,060
2. Direct materials:
Raw materials inventory, beginning............... $ 8,000
Add purchases of raw materials.................... 32,000
Raw materials available for use..................... 40,000
Deduct raw materials inventory, ending......... 7,000
Raw materials used in production.................. $ 33,000
Direct labour.................................................. 40,000
Manufacturing overhead cost applied to work
in process.................................................... 50,000
Total manufacturing cost................................. 123,000
Add: Work in process, beginning..................... 6,000
129,000
Deduct: Work in process, ending..................... 7,500
Cost of goods manufactured............................ $121,500
With this information, we can now complete the job cost sheet for the
Kareen Corporation Headquarters project:
3.
Eccles Company
Income Statement
For the year ended xxx
Sales............................................................... $643,000
Cost of goods sold ($460,000 + $10,000)......... 470,000
Gross margin................................................... 173,000
Selling and administrative expenses:
Selling expenses........................................... $100,000
Administrative expense.................................. 43,000 143,000
Net operating income...................................... $ 30,000
Jan’s Happy
1. Car City Flowers Daycare
Designer-hours............................ 60 80 20
Predetermined overhead rate........ × $20 × $20 × $20
Overhead applied......................... $1,200 $1,600 $400
Total overhead applied = $1,200+$1,600+$400 = $3,200
Jan’s
2. Car City Flowers
Direct labour cost......................... 1,500 2,000
Overhead applied......................... 1,200 1,600
Total cost.................................... $2,700 $3,600
Journal entry:
Completed Projects...................... 6,300*
Work in Process...................... 6,300*
* $2,700 + $3,600
3. The balance in the Work in Process account consists entirely of the costs
associated with the Happy Daycare project:
Overhead
Actual overhead costs 3,000 3,200 Applied overhead costs
200 Overapplied overhead
$840,000*
=
200,000 units
=$4.20 per unit.
* $228,000 + $204,000 + $192,000 + $216,000 = $840,000
The predetermined overhead rate could also be set on the basis of direct
labour cost or direct materials cost. The computations are:
= $840,000
$240,000* direct labour cost
$840,000**
=
$600,000* direct materials cost
=140% of direct materials cost.
* $240,000 + $120,000 + $60,000 + $180,000 = $600,000
** $228,000 + $204,000 + $192,000 + $216,000 = $840,000
Quarter
First Second Third Fourth
Direct materials................. $240,000 $120,000 $ 60,000 $180,000
Direct labour..................... 96,000 48,000 24,000 72,000
Manufacturing overhead:
Applied at $4.20 per
unit, 350% of direct
labour cost, or 140% of
direct materials cost........ 336,000 168,000 84,000 252,000
Total cost......................... $672,000 $336,000 $168,000 $504,000
Number of units produced. 80,000 40,000 20,000 60,000
Estimated unit product
cost............................... $8.40 $8.40 $8.40 $8.40
Note: Overhead is calculated using $4.20 per unit in the first quarter, 350% in the
second quarter, 140% in the third and fourth quarters to provide illustrations of the
possible answers.
$2,550,000
= =$8.50 per machine-hour
300,000 machine-hours
Assembly Department:
= $4,000,000
$3,200,000 direct labour cost = 125% Direct labour cost
2. Overhead
Applied
Stamping Department: 450 MHs × $8.50 per
MH............................................................ $3,825
Assembly Department: $800 × 125%............. 1,000
Total overhead cost applied........................... $4,825
3. Yes; if some jobs require a large amount of machine time and little
labour cost, they would be charged substantially less overhead cost if a
plantwide rate based on direct labour cost were used. It appears, for
example, that this would be true of Job 407 which required considerable
machine time to complete, but required only a small amount of labour
cost.
© McGraw-Hill Education 2018. All rights reserved.
Solutions Manual, Chapter 5 31
Exercise 5-15 (30 minutes)
1. The predetermined overhead rate is computed as follows:
$170,000
= =$2.00 per machine-hour
85,000 machine-hours
2. The amount of overhead cost applied to Work in Process for the year
would be: 80,000 machine-hours × $2.00 per machine-hour =
$160,000. This amount is shown in entry (a) below:
Manufacturing Overhead
(Utilities) 14,000 (a) 160,000
(Insurance) 9,000
(Maintenance) 33,000
(Indirect 7,000
materials)
(Indirect labour) 65,000
(Depreciation) 40,000
Balance 8,000
Work in Process
(Direct materials) 530,000
(Direct labour) 85,000
(Overhead) (a) 160,000
*Tennis racquets: $11 per MH x 0.25; Golf Clubs: $11 per MH x 0.25
**Tennis racquets: $0.75 per DL$ x $6.00; Golf Clubs: $0.75 per DL$ x
$4.00
2.
Raw Materials Work in Process
Bal. 25,000 (b) 280,000 Bal. 10,000 (i) 675,000
(a) 275,000 (b) 220,000
(c) 180,000
(h) 297,000
Bal. 20,000 Bal. 32,000
4.
Gold Nest Company
Income Statement
For the Year Ended June 30
Sales............................................................... $1,250,000
Cost of goods sold ($700,000 - $40,000).......... 740,000
Gross Margin ………………………………………….. 510,000
Selling and administrative expenses:
Sales commissions........................................$63,000
Administrative salaries................................... 90,000
Rent expense................................................ 15,000
4.
Ravsten Company
Income Statement
For the Year Ended December 31
Sales............................................................ $700,000
4.
Durham Company
Income Statement
For the Year Ended December 31
Sales............................................................. $200,000
Cost of goods sold ($120,000 + $4,000).......... 124,000
Gross margin................................................. 76,000
© McGraw-Hill Education 2018. All rights reserved.
48 Managerial Accounting, 11th Canadian Edition
Selling and administrative expenses:
Depreciation expense................................... $ 7,000
Sales commissions expense.......................... 10,400
Administrative salaries expense.................... 25,000
Insurance expense....................................... 600
Miscellaneous expense................................. 18,000 61,000
Operating income........................................... $ 15,000
$80,000
* = 80% of direct labour cost; $120,000 × 0.80 = $96,000.
$100,000
Retained Earnings Capital Stock
Bal. 125,000 Bal. 250,000
4.
Sales............................................................. $450,000
Cost of goods sold ($300,000 – $2,394).......... 297,606
Gross margin................................................. 152,394
Selling and administrative expenses:
Salaries expense......................................... $75,000
Depreciation expense.................................. 5,000
Insurance expense...................................... 800
Shipping expense........................................ 40,000 120,800
Operating income.......................................... $ 31,594
$700,000
= =$35 per hour
20,000 hours
= $320,000
$800,000
= 40% of Direct lawyer cost
2.
Research & Documents overhead applied:
18 hours × $35 per hour..................................... $ 630
Litigation overhead applied: $2,100 × 40%............. 840
Total overhead cost............................................... $1,470
l. Cash................................................... 1,415,000
Accounts Receivable....................... 1,415,000
2.
Cash Accounts Receivable
Bal. 9,000 (e) 38,000 Bal. 30,000 (l) 1,415,000
(l) 1,415,000 (m) 1,318,000 (k) 1,420,000
Bal. 68,000 Bal. 35,000
Manufacturing Overhead
(b) 13,000 (i) 156,000
(c) 60,000
(e) 39,400
(g) 28,000
(h) 12,600
Bal. 3,000
$1,113,000 100%
4.
Heavenly Displays, Inc.
Income Statement
For the Year Ended December 31
$416,000
= =$5.20 per machine-hour
80,000 machine-hours
$720,000
= =180% of materials cost
$400,000 materials cost
4. The cost of goods manufactured for the year was $810,000—the credits
to Work in Process.
= $248,000
40,000 MH
= $6.20 per MH
2.
Calgary Injection Molding
Schedule of Cost of Goods Manufactured
Direct materials:
Raw materials inventory, beginning................. $ 21,000
Add purchases of raw materials...................... 133,000
Total raw materials available........................... 154,000
2.
Accounts Receivable Raw Materials
(l) 1,200,000 Bal. 30,000 (b) 185,000
(a) 200,000
Bal. 45,000
Sales
(k) 1,200,000
3.
Oil Field Equipment Company
Schedule of Cost of Goods Manufactured
Direct materials:
Raw materials inventory, beginning.................... $ 30,000
Purchases of raw materials................................ 200,000
Materials available for use.................................. 230,000
Raw materials inventory, ending........................ 45,000
Materials used in production.............................. $185,000
Direct labour....................................................... 230,000
Manufacturing overhead applied to work in
process............................................................. 390,000
Total manufacturing cost...................................... 805,000
Add: Work in process, beginning.......................... 21,000
826,000
Deduct: Work in process, ending.......................... 56,000
Cost of goods manufactured................................. $770,000
Since we aren’t told how many units are in ending work in process,
finished goods or cost of goods sold, we will use the entire cost of
manufacturing in each account to determine how to allocate over-
applied overhead.
Sales........................................................... $1,200,000
Cost of goods sold....................................... 795,550
Gross margin............................................... 404,450
Selling and administrative expenses:
Salaries expense....................................... $110,000
Advertising expense.................................. 136,000
Depreciation expense................................ 19,000
Rent expense............................................ 18,000
Utilities expense........................................ 7,000 290,000
Operating income........................................ $ 114,450
6.
Direct materials............................................................. $ 8,000
Direct labour ................................................................ 9,200
Manufacturing overhead cost applied ($400 × 39)........... 15,600
Total manufacturing cost............................................... $32,800
Units produced ÷4
Cost per unit $8,200
= $1,440,000
$900,000 direct labour cost
= 160% Direct labour cost
2. a.
Cutting Machining Assembly
Department Department Department
Estimated manufacturing
overhead cost (a).......... $540,000 $800,000 $100,000
Estimated direct labour
cost (b)......................... $300,000 $200,000 $400,000
Predetermined overhead
rate (a) ÷ (b)................ 180% 400% 25%
b.
Cutting Department:
$6,500 × 180%................................... $11,700
Machining Department:
$1,700 × 400%................................... 6,800
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Solutions Manual, Chapter 5 91
Assembly Department:
$13,000 × 25%................................... 3,250
Total applied overhead........................... $21,750
3. The bulk of the labour cost on the Hastings job is in the Assembly
Department, which incurs very little overhead cost. The department has
an overhead rate of only 25% of direct labour cost as compared to
much higher rates in the other two departments. Therefore, as shown
above, use of departmental overhead rates results in a relatively small
amount of overhead cost charged to the job.
If departmental overhead rates had been used, the bid price would have
been:
Note that if departmental overhead rates had been used, Prime Products
would have been the low bidder on the Hastings job since the
competitor underbid Prime Products by only $10,000.
b.
Department
Cutting Machining Assembly Total Plant
Actual overhead cost............ $560,000 $830,000 $92,000 $1,482,000
Applied overhead cost:
$320,000 × 180%............. 576,000
$210,000 × 400%............. 840,000
$340,000 × 25%............... 85,000 1,501,000
Underapplied (overapplied)
overhead cost................... $(16,000) $(10,000) $ 7,000 $ (19,000)
2.
Accounts Receivable Raw Materials
(j) 48,300 Bal. 15,000 (b) 35,000
(a) 30,000
Bal. 10,000
Bal. 8,100
3.
Direct materials:
Raw materials inventory, beginning.................... $ 15,000
4.
*We know that the only sales during January were for Job A so the same
finished goods costing $10,000 that were in Finished Goods inventory at
the beginning of the month are still there at the end of the month. No
overhead costs for January were applied to those units.
= $32,718
** Instructors may wish to clarify with the students that this journal entry
to correct the manufacturing overhead balance is not typically made until
the end of the fiscal year, but adding this required in a problem that deals
with manufacturing during one month allows them to practice the
calculations to allocate overapplied inventory in a relatively simple setting.
5.
Mountain Manufacturing Company
Income Statement
For the Month ended January 31
Sales............................................................. $48,300
Cost of goods sold ........................................ 32,718
Gross margin................................................. 15,582
Selling and administrative expenses:
Salaries expense......................................... $30,000
Depreciation expense.................................. 10,000
Selling expense........................................... 6,000
($30,418)
Operating loss...............................................
There are two morals to this tale. First, predetermined overhead rates
should not be misinterpreted as variable costs. They are not. Second, a
reduction in direct labour requirements does not necessarily lead to a
reduction in direct labour hours paid. It is often very difficult to actually
reduce the direct labour force and may be virtually impossible in some
countries except through natural attrition.
3 b. Price of Job 1246 using separate rates for simple and complex
repairs:
Price for Job 1246 using complex and simple shop rates:
Direct materials cost $115.00
Support costs for complex work (2 hrs x $56.27) 112.54
Support costs for simple work (4 hrs x $30.30) 121.20
Total cost $348.74
Price after mark up of 10% $383.61
4. For jobs with more simple than complex elements like Job 1246, Foster
can charge a lower overall price (e.g., $383.61 versus $412.15 using the
single shop-wide rate). Given there is a new competing shop in the
neighbourhood, setting a more accurate price becomes even more
important.
The decision to use two different rates comes down to the issue of costs
versus benefits. While it is more costly to gather and analyze
information using two different overhead application rates, Foster may
derive significant benefits due to more accurate pricing. In addition, by
using a shop-wide average rate, Foster may actually be under-pricing
more complex repairs which would also have a negative effect on
company profitability. Improved decision making resulting from more
accurate information can justify the additional costs of gathering
separate information for each type of repair.
2. If the actual overhead cost and the actual professional hours charged
turn out to be exactly as estimated there would be no underapplied or
overapplied overhead.
2013 2014
Predetermined overhead rate (see above).......... $60 $64
Actual professional staff hours charged to × 2,400 × 2,250
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110 Managerial Accounting, 11th Canadian Edition
clients’ accounts (by assumption)....................
Overhead applied............................................. $144,000 $144,000
Actual overhead cost incurred (by assumption). . 144,000 144,000
Under- or overapplied overhead........................ $ 0 $ 0
2013 2014
Estimated overhead cost (a)............................... $144,000 $144,000
Professional staff hours available (b)................... 3,000 3,000
Predetermined overhead rate (a) ÷ (b)............... $48 $48
Professional staff hours charged to Ms. Miyami’s
account........................................................... ×5 ×5
Overhead applied to Ms. Miyami’s account........... $240 $240
4. If the actual overhead cost and the actual professional staff hours
charged to clients’ accounts turn out to be exactly as estimated
overhead would be underapplied as shown below.
2013 2014
Predetermined overhead rate (see 3 above) (a)... $48 $48
Actual professional staff hours charged to
clients’ accounts (by assumption) (b)................ × 2,400 × 2,250
Overhead applied (a) × (b)................................. $115,200 $108,000
Actual overhead cost incurred (by assumption).... 144,000 144,000
Underapplied overhead...................................... $ 28,800 $ 36,000
2013 2014
Predetermined overhead rate (see above) (a).... $90 $120
Actual hours of studio service provided (b)......... 900 600
Overhead applied (a) × (b)............................... $81,000 $72,000
Actual studio cost incurred................................ 90,000 90,000
Underapplied overhead..................................... $ 9,000 $18,000
2013 2014
Estimated studio overhead cost (a).................... $90,000 $90,000
Hours of studio service at capacity (b)............... 1,800 1,800
Predetermined overhead rate (a) ÷ (b).............. $50 $50
2013 2014
Predetermined overhead rate (see above) (a)....... $50 $50
Actual hours of studio service provided (b)............ 900 600
Overhead applied (a) × (b).................................. $45,000 $30,000
Actual studio cost incurred................................... 90,000 90,000
Underapplied overhead........................................ $45,000 $60,000
Under the alternative approach, the overhead cost of the Fire job is
stable at $1,500 and lower than the costs reported under the
conventional method. Under the conventional method, managers may
be
misled into thinking that they are actually losing money on the Fire
job and they might refuse such jobs in the future—another sure road to
disaster. This is much less likely to happen if the lower cost of $1,500 is
reported. It is true that the underapplied overhead under the alternative
approach is much larger than under the conventional approach and is
growing. However, if it is properly labeled as the cost of idle capacity,
management is much more likely to draw the appropriate conclusion
that the real problem is the loss of business (and therefore more idle
capacity) rather than an increase in costs.
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116 Managerial Accounting, 11th Canadian Edition
While basing the predetermined rate on capacity rather than on
estimated activity will not solve the company’s basic problems, at least
this method will be less likely to send managers misleading signals.
PowerDrives, Inc.
Income Statement: Traditional Approach
New approach:
PowerDrives, Inc.
Income Statement: New Approach
PowerDrives, Inc.
Income Statement: Traditional Approach
$5,250,00
Revenue (75,000 units × $70 per unit)........... 0
Cost of goods sold:
Variable manufacturing
$1,350,00
(75,000 units × $18 per unit)................... 0
Manufacturing overhead applied
(75,000 units × $25 per unit)................... 1,875,000
New approach:
Under the new approach, the reported operating income can be increased
by increasing the production level which then results in less of a deduction
on the income statement for the Cost of Unused Capacity.
PowerDrives, Inc.
Income Statement: New Approach
3. Operating income is more volatile under the new method than under the
old method. The reason for this is that the reported profit per unit sold
is higher under the new method by $5, the difference in the
predetermined overhead rates. As a consequence, swings in sales in
either direction will have a more dramatic impact on reported profits
under the new method.
5. One can argue that whether the “hat trick” is unethical depends on the
level of sophistication of the owners of the company and others who
read the financial statements. If they understand the effects of excess
production on operating income and are not misled, it can be argued
that the hat trick is ethical. However, if that were the case, there does
not seem to be any reason to use the hat trick. Why would the owners
want to tie up working capital in inventories just to artificially attain a
target operating income for the period? Also increasing the rate of
production toward the end of the year is likely to increase overhead
costs due to overtime and other costs. Building up inventories all at
once is very likely to be much more expensive than increasing the rate
of production uniformly throughout the year. In the case, we assumed
that there would not be an increase in overhead costs due to the
additional production, but that is likely not to be true.
In our opinion the hat trick is unethical unless there is a good reason for
increasing production other than to artificially boost the current period’s
operating income. It is certainly unethical if the purpose is to fool users
of financial reports such as owners and creditors or if the purpose is to
meet targets so that bonuses will be paid to top managers.