Characteristics of

Production Process,
Cost Measurement
Exercise 5-8

Page 243
Refer to the data in Exercise 5-7

Vince Kim, owner of EcoScape, noticed that the watering systems for
many houses in a local subdivision had the same layout and required
virtually identical amounts of prime cost. Vince met with the subdivision
builders and offered to install a basic watering system in each house. The
idea was accepted enthusiastically, so Vince created a new company,
Irrigation Specialties, to handle the subdivision business. In its first three
months in business, Irrigation Specialties experienced the following:
June July August
Number of systems installed 60 80 120
Direct materials used $ 18,000 $ 24,000 $ 36,000
Direct labor incurred $ 12,000 $ 16,000 $ 24,000
Overhead $ 10,900 $ 12,340 $ 14,500
 1. Should Irrigation Specialties use process costing or job-order
costing? Explain.

Process Costing
 Because the watering systems of the houses in local
subdivision uses the same layout and identical amounts of
prime cost.
 2. If Irrigation Specialties uses an actual costing system, what is
the cost of a single system installed in June? In July? In August?

June $ 682 per system

Cost of a single system: July $ 654 per system
August $ 621 per system

Particulars June July August

Direct Materials $ 18,000 $ 24,000 $ 36,000
Direct Labor 12,000 16,000 24,000
Overhead Cost 10,900 12,340 14,500
Total Cost 40,900 52,340 74,500
/ Number of systems
60 80 120
installed
Cost per single system $ 682 $ 654 $ 621
 3. Now assume that Irrigation Specialties uses a normal costing system.
Estimated overhead for the year is $54,000, and estimated production is 600
watering systems. What is the predetermined overhead rate per system? What
is the cost of a single system installed in June? In July? In August?

Predetermined overhead rate per system = Total overhead cost / Number of watering system
$ 54,000 / 600
$ 90 per system installed

Particulars June July August

Direct Materials $ 18,000 $ 24,000 $ 36,000
Direct Labor 12,000 16,000 24,000
Overhead Cost 5,400 7,200 10,800
(60 x $90) (80 x $90) (120 x $90)

Total Cost 35,400 47,200 70,800

/ Number of systems
60 80 120
installed
Cost per single system $ 590 $ 590 $ 590
Source Documents,
Job Cost Flow
Exercise 5-10

Page 244
1. What source documents will Reggie need to account for costs
in his new business?

For Reggie's new business, he will need the "Job-Order Cost

Sheet". Since he just started this small business, a folder
prepared for each job will suffice. Reggie would file all receipts of
materials purchased in a folder. He then would require a perfect
system for accumulating cost and track the progress of a job. He
may also refer to the folders to calculate the quantity of direct
materials, direct labor and overhead used by each job. So in the
job-order cost sheet, all costs associated with the job are
entered.
2. Suppose Reggie's business grows, and he expands his
workshop and hires three additional carpenters to help him.
What source documents will he need now?

If Reggie's business now grows and hires three additional

carpenters on expansion, then what he needs now as a source
document is the job "Time Ticket". This will help workers to keep
track of the time spent on the jobs, although on the first question
requires a manual system but since the business grows now it
needs an automated system for the data to enter in the
computer. A more formal Job-Order Cost Sheet would be
required and time to time entries should be made to assign costs
to the jobs.
3. Which of the data analytic types - descriptive, diagnostic,
predictive, or prescriptive - is Reggie using to develop the
new source documents? Explain.

Predictive
 Reggie start his business by his own without having any
workers (carpenters) besides him. What he do is
forecasting, he analyses customer demand to help the
business more effectively synchronized on product
manufacturing capabilities.
Thanks