Chapter 4: Product and Service Costing: Overhead ...
CHAPTER 4
product and service costing:
overhead application and job-order system
1 questions for writing and discussion
1. Cost measurement is the process of determining the dollar amounts of direct materials, direct labor, and overhead that should be assigned to production. Cost accumulation (or assignment) is the process of associating costs with the units produced. Essentially, cost measurement is concerned with whether actual or estimated costs should be used, and cost assignment is concerned with whether costs should be assigned to jobs or processes.
2. Actual overhead rates are rarely used because managers cannot wait until the end of the year to obtain product costs. Information on product costs is needed as the year unfolds for planning, control, and decision making.
3. Job-order costing accumulates costs by jobs, and process costing accumulates costs by processes. Job-order costing is suitable for operations that produce custom-made products that receive different doses of manufacturing costs. Process costing, on the other hand, is suitable for operations that produce homogeneous products that receive equal doses of manufacturing costs in each process.
4. The principal difference between a manual job-order costing system and an automated job-order costing system is the nature of the records. In an automated system, terminals can be used to input data directly to the job, thus eliminating the need for many source documents such as time tickets and materials requisition forms. Even if these forms are used and the data are entered on a batch basis, the job-order cost sheet has been replaced with an electronic record. Instead of cabinets with collections of job-order cost sheets, files are collections of job records located on disk or tape.
5. An overhead variance is the difference between actual overhead and applied overhead. Underapplied overhead means that the applied overhead is less than the actual
overhead. Overapplied overhead means that applied overhead is greater than the actual overhead.
6. Overhead variances are either closed to cost of goods sold or they are prorated among cost of goods sold, finished goods inventory, and work-in-process inventory. Since overhead variances are usually immaterial, they are normally closed to cost of goods sold.
7. Materials requisition forms serve as the source document for posting materials usage and costs to individual jobs. Time tickets serve a similar function for labor. Predetermined overhead rates are used to assign overhead costs to individual jobs.
8. Multiple overhead rates often produce a more accurate assignment of overhead costs to jobs. For example, if jobs do not pass through all departments, departmental overhead rates give a better picture of job cost.
9. Activity drivers are those factors that drive or cause the consumption of overhead. Knowing what drives overhead costs allows a more accurate assignment of overhead costs to products.
10. Expected actual activity is the level of production activity expected for the coming year. Normal activity is the long-run average activity level. Practical activity is the level of activity achievable under efficient operating conditions. Theoretical activity is the level of activity achievable under ideal operating conditions.
11. Assignment using normal activity produces less fluctuation in period-to-period overhead assignments. It also avoids assigning the costs of idle capacity to products when production is down.
12. Many firms have multiple products, and adding units of different products will not produce a meaningful measure of output.
13. The predetermined rate is multiplied by the actual measure of the cost driver on which the rate is based.
14. Applied overhead is the overhead assigned to production using the predetermined rate. Budgeted overhead is the overhead cost planned for the coming period. Applied and budgeted overhead are the same only if the actual level of activity is equal to the level of activity used to compute the predetermined rate. Applied overhead is the estimated overhead cost assignment and will equal actual overhead only if the estimate is on target. One way in which the applied overhead will equal actual overhead is when budgeted overhead equals actual overhead and when the actual level of activity equals the level used to compute the predetermined rate.
15. Unit cost:
DM $ 7,500
DL 10,000
OH ($5 ( 1,000) 5,000
Total $22,500
Unit cost = $22,500/500 = $45
16. More paperwork is required. Labor and materials are assigned to departments in a process costing system. In a job-order costing system, labor and materials must be tracked to each job, requiring time tickets and more use of materials requisitions. Additionally, a job-order costing system requires a separate job cost sheet for each job.
17. The normal cost of goods sold uses applied overhead only. Adjusted cost of goods sold is the normal cost of goods sold adjusted for an overhead variance (increased for underapplied and decreased for overapplied).
2
3 Exercises
4–1
a. Bicycle production is manufacturing. The product is tangible and fairly homogeneous. (One bicycle model is much the same as another.) Production is separate from consumption.
b. Pharmaceuticals are manufacturing. A drug is tangible, and consumption is separate from production. The product is not heterogeneous in that variation is minimized. (Drug companies must meet certain standards regulating allowable variation in the chemical composition of each tablet or dose.)
c. Income tax preparation is a service. It is heterogeneous in that the quality of work varies from preparer to preparer and also to various returns prepared by the same preparer. While the printed return is tangible, the knowledge required for it is not. In addition, the return cannot be prepared without the assistance of the taxpayer. Production and consumption are intertwined.
d. The application of artificial nails is a service. It is heterogeneous in that the quality of work varies from manicurist to manicurist. Additionally, the same manicurist may do a better job with some customers than with others. The production and consumption process are overlapping. While the nails are tangible, the application process is not and cannot be inventoried.
e. Glue production is manufacturing. The product is tangible and fairly homogeneous. (One bottle of glue is much the same as another produced by the same firm.) Production is separate from consumption.
f. Child care is a service. The services rendered are not tangible and cannot be inventoried. They are heterogeneous. One caregiver differs from another, and the same caregiver may vary in quality (e.g., patience, creativity) throughout the day and/or with different children. Production and consumption take place simultaneously.
4–2
1. Rainking Company should use job-order costing because each installation is unique and made-to-order. Materials may differ from office to office, as may direct labor.
2. Predetermined overhead rate = $65,000/5,000 = $13/DLH
Wage rate = $75,000/5,000 = $15/DLH
Direct materials $3,500
Direct labor ($15 ( 50) 750
Overhead ($13 ( 50) 650
Total cost $4,900
3. The company cannot use an actual costing system; it needs to know the cost of each installation as it is completed. Since overhead is incurred unevenly throughout the year, and certain overhead bills arrive after the need for unit costs occurs, overhead must be applied to production using a predetermined rate.
1 4–3
1. Overhead applied to production = $13 ( 5,040 = $65,520
2. Applied overhead $ 65,520
Actual overhead 64,150
Overapplied overhead $ 1,370
3. Cost of goods sold will decrease by $1,370.
4–4
1. Waterpro should use a process costing system because each watering system is like every other so the cost of direct materials, direct labor, and overhead stays constant from job to job.
2. If Waterpro uses an actual costing system, the average amounts for actual direct materials, actual direct labor, and actual overhead must be calculated for each month.
Average Amounts June July August
Direct materials $ 200 $200 $200
Direct labor 210 210 210
Overhead 600 120 84
Total unit cost $1,010 $530 $494
3. Predetermined overhead rate = $60,000/600 = $100 per system installed
Unit cost per system = $200 + $210 + $100 = $510
The cost of the basic system does not change from month to month.
2 4–5
1. $1,784,000/400,000 = $4.46 per direct labor hour
2. $4.46 ( 397,500 = $1,772,850
Work-in-Process Inventory 1,772,850
Overhead Control 1,772,850
3. Applied overhead $ 1,772,850
Actual overhead 1,770,050
Overapplied overhead $ 2,800
Overhead Control 2,800
Cost of Goods Sold 2,800
4–6
1. Predetermined overhead rate = $952,000/34,000 = $28.00 per DLH
2. Applied overhead = ($28 ( 33,100) = $926,800
3. Actual overhead $950,000
Applied overhead 926,800
Underapplied overhead $ 23,200
4. Prime cost $3,500,000
Applied overhead 926,800
Total cost $4,426,800
Divided by units ÷ 500,000
Unit cost $ 8.8536
3 4–7
1. Predetermined overhead rate = $952,000/140,000 = $6.80 per MHr
2. Applied overhead = ($6.80 ( 137,000) = $931,600
3. Actual overhead $950,000
Applied overhead 931,600
Underapplied overhead $ 18,400
4. Prime cost $3,500,000
Applied overhead 931,600
Total cost $4,431,600
Divided by units ÷ 500,000
Unit cost $ 8.8632
5. Clooney needed to determine what caused its overhead. Was it primarily labor driven (i.e., composed predominantly of fringe benefits, indirect labor, personnel costs) or was it machine oriented (i.e., composed of depreciation on machinery, utilities, maintenance)? It is impossible for us to decide on the basis of the numbers given in this exercise alone.
4–8
1. Bill predetermined overhead rate = $304,000/16,000 = $19 per MHr
Ted predetermined overhead rate = $220,000/$400,000 = 0.55 or
= 55% of materials cost
2. Bill:
Actual overhead $305,000
Applied overhead ($19 ( 15,990) 303,810
Underapplied overhead $ 1,190
Ted:
Actual overhead $216,000
Applied overhead (0.55 ( $395,000) 217,250
Overapplied overhead $ 1,250
4 4–9
1. a. Materials Inventory 23,175
Accounts Payable 23,175
b. Work-in-Process Inventory 19,000
Materials Inventory 19,000
c. Work-in-Process Inventory 17,850
Wages Payable 17,850
d. Overhead Control 15,500
Cash 15,500
e. Work-in-Process Inventory 14,700*
Overhead Control 14,700
f. Finished Goods Inventory 36,085
Work-in-Process Inventory 36,085
g. Cost of Goods Sold 30,000
Finished Goods Inventory 30,000
Accounts Receivable 36,000
Sales Revenue 36,000
*$17,850/$8.50 = 2,100 DLH; ($7 ( 2,100 DLH) = $14,700
4–9 Concluded
2. a. Materials Inventory:
Beginning inventory $ 5,170
Add: Purchases 23,175
Less: Requisitions (19,000)
Ending inventory $ 9,345
b. Work-in-Process Inventory:
Beginning inventory $11,200
Add: Direct Materials 19,000
Add: Direct Labor 17,850
Add: Overhead applied 14,700
Less: Cost of Goods Manufactured (36,085)
Ending inventory $26,665
c. Overhead Control:
Actual overhead $ 15,500
Applied overhead 14,700
Underapplied overhead $ 800 (debit balance)
d. Finished Goods Inventory:
Beginning inventory $ 2,630
Add: Cost of Goods Manufactured 36,085
Less: Cost of Goods Sold (30,000)
Ending inventory $ 8,715
4–10
1. $3,800,000/250,000 = $15.20 per MHr
2. $3,876,000 Applied overhead ($15.20 ( 255,000)
3,820,000 Actual overhead
$ 56,000 Overapplied overhead
3. Overhead Control 56,000
Cost of Goods Sold 56,000
4. Work-in-Process Inventory $ 384,000 (19.2%: 384,000/2,000,000)
Finished Goods Inventory 416,000 (20.8%: 416,000/2,000,000)
Cost of Goods Sold 1,200,000 (60.0%: 1,200,000/2,000,000)
$2,000,000
Overhead Control 56,000
Work-in-Process Inventory 10,752 (19.2% ( $56,000)
Finished Goods Inventory 11,648 (20.8% ( $56,000)
Cost of Goods Sold 33,600 (60.0% ( $56,000)
5 4–11
1. a. Materials Inventory 92,500
Accounts Payable 92,500
b. Work-in-Process Inventory 72,500
Overhead Control 7,000
Materials Inventory 79,500
c. Work-in-Process Inventory 52,000
Overhead Control 15,750
Wages Payable 67,750
d. Overhead Control 49,000
Miscellaneous Payables 49,000
e. Work-in-Process Inventory 65,000
Overhead Control 65,000 (52,000 ( 125%)
4–11 Concluded
f. Finished Goods Inventory 160,000
Work-in-Process Inventory 160,000
g. Cost of Goods Sold 140,000
Finished Goods Inventory 140,000
Accounts Receivable 210,000
Sales Revenue 210,000 (140,000 ( 150%)
h. Cost of Goods Sold* 6,750
Overhead Control 6,750
*Actual overhead = $7,000 + $15,750 + $49,000 = $71,750
Actual overhead $ 71,750
Applied overhead 65,000
Underapplied overhead $ 6,750
2. After underapplied overhead is charged to Cost of Goods Sold:
|Overhead Control |
| 7,000 | 65,000 |
| 15,750 | |
| 49,000 | |
| 6,750 | 6,750 |
|Bal. 0 | |
3.
|Work-in-Process Inventory |
|Beg. Bal. 10,000 | 160,000 |
| 72,500 | |
| 52,000 | |
| 65,000* | |
|End. Bal. 39,500 | |
*No actual overhead costs were assigned to Work-in-Process Inventory as the company does not use an actual costing system. The amount assigned to Work-in-Process Inventory was the applied overhead of $65,000.
4–12
1. Applied overhead ($5.20 ( 25,000) $130,000
Actual overhead:
Indirect labor $35,000
Indirect materials 10,000
Depreciation 55,000
Maintenance 25,000
Miscellaneous 15,500 140,500
Underapplied overhead $ 10,500
2. Hamblin Products, Inc.
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 20XX
Direct materials:
Beginning materials inventory $ 25,000
Purchases of materials 200,000
Total materials available $225,000
Ending materials inventory 35,000
Direct materials used $190,000
Direct labor 175,000
Overhead:
Indirect labor $ 35,000
Indirect materials 10,000
Depreciation 55,000
Maintenance 25,000
Miscellaneous 15,500
$140,500
Less: Underapplied overhead 10,500
Overhead applied 130,000
Total manufacturing costs added $495,000
Add: Beginning work-in-process inventory 110,000
Less: Ending work-in-process inventory (80,250)
Cost of goods manufactured $524,750
Cost of goods manufactured includes applied overhead rather than actual overhead. This is consistent with a normal costing system.
4–13
1. OH rate = $75,000/15,000 = $5 per MHr
2. Dept. A: $60,000/10,000 = $6 per MHr
Dept. B: $15,000/5,000 = $3 per MHr
3. Job 15 Job 22
Plantwide:
70 ( $5 = $350 70 ( $5 = $350
Departmental:
20 ( $6 = $120 50 ( $6 = $300
50 ( $3 = 150 20 ( $3 = 60
$270 $360
If departmental machine hours better explain overhead consumption, then the departmental rates would provide more accuracy. Department A appears to be more overhead intensive, and it seems reasonable to argue that jobs spending more time in Department A ought to receive more overhead.
4. Plantwide rate: $90,000/15,000 = $6
Dept. B: $30,000/5,000 = $6
Job 15 Job 22
Plantwide:
70 ( $6 = $420 70 ( $6 = $420
Departmental:
20 ( $6 = $120 50 ( $6 = $300
50 ( $6 = 300 20 ( $6 = 120
$420 $420
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.
4–14
1. Job 43:
Direct materials $ 744
Direct labor 1,980
Overhead 1,908 ($5.30 ( 360)
$4,632
Unit cost = $4,632/120 = $38.60
Job 44:
Direct materials $ 640
Direct labor 2,480
Overhead 2,120 ($5.30 ( 400)
$5,240
Unit cost = $5,240/200 = $26.20
2. Ending work-in-process inventory (Job 45):
Direct materials $ 600
Direct labor 1,240
Overhead 1,060 ($5.30 ( 200)
$2,900
3. Finished Goods Inventory 9,872*
Work-in-Process Inventory 9,872
*$4,632 + $5,240 = $9,872
Cost of Goods Sold 5,240
Finished Goods Inventory 5,240
Accounts Receivable 7,336**
Sales Revenue 7,336
**$5,240 ( 140% = $7,336
4–15
1. Applied overhead = Direct labor dollars ( Overhead rate
$120,000 = $80,000 ( Overhead rate
Overhead rate = 1.5, or 150% of direct labor dollars
2. $120,000 Applied overhead
128,500 Actual overhead
$ 8,500 Underapplied overhead
3. Direct labor $ 80,000
Direct materials 40,000
Overhead applied 120,000
$240,000
+ Beginning Work-in-Process Inventory 20,000
– Ending Work-in-Process Inventory (30,000)
Cost of goods manufactured $230,000
Note: The total credits to Work-in-Process Inventory (or debits to Finished Goods Inventory) for the quarter equal the cost of goods manufactured.
4. Cost of Goods Sold 8,500
Overhead Control 8,500
Adjusted cost of goods sold:
$200,000
8,500
$208,500
5. Direct labor $10,000 (1,000 ( $10)
Direct materials 5,000*
Overhead 15,000 ($10,000 ( 150%)
Ending work-in-process inventory $30,000
*Direct materials = $30,000 – $10,000 – $15,000
4 problems
4–16
1. Dept. 1: $410,000/100,000 = $4.10 per DLH
Dept. 2: $184,500/30,000 = $6.15 per MHr
2. Dept. 1 Dept. 2
Applied overhead $401,800a $196,800b
Actual overhead 404,000 195,000
$ 2,200 Underapplied $ 1,800 Overapplied
overhead overhead
a$4.10 ( 98,000
b$6.15 ( 32,000
Firm: $2,200 ( $1,800 = $400 Underapplied overhead
3. Cost of Goods Sold 400
Overhead Control 400
4. Costs for Job #713:
Dept. 1 Dept. 2
Direct materials $1,580.00 $2,650.00
Direct labor 937.00 400.00
Overhead* 512.50 1,291.50
$3,029.50 $4,341.50
*$4.10 ( 125 and $6.15 ( 210
Total cost: $3,029.50 + $4,341.50 = $7,371.00
Unit cost: $7,371/50 = $147.42
4–17
1.
JOB-ORDER COST SHEET
Job 33
DIRECT MATERIALS DIRECT LABOR OVERHEAD
Req. No. Amount Ticket Hrs. Rate Amount Cost Rate Amount
$ 2,000 $1,900 $1,330
12,500 250 20 5,000 $5,000 0.70* 3,500
COST SUMMARY
Direct materials $14,500
Direct labor 6,900
Overhead 4,830
Total cost $26,230
*$1,330/$1,900 = 0.70
JOB-ORDER COST SHEET
Job 34
DIRECT MATERIALS DIRECT LABOR OVERHEAD
Req. No. Amount Ticket Hrs. Rate Amount Cost Rate Amount
$ 1,410 $1,340 $ 938
11,200 275 15 4,125 $4,125 0.70* 2,888**
COST SUMMARY
Direct materials $12,610
Direct labor 5,465
Overhead 3,826
Total cost $21,901
*$938/$1,340 = 0.70
**Rounded
4–17 Continued
JOB-ORDER COST SHEET
Job 35
DIRECT MATERIALS DIRECT LABOR OVERHEAD
Req. No. Amount Ticket Hrs. Rate Amount Cost Rate Amount
$3,560 $4,000 $2,800
5,500 140 12 1,680 $1,680 0.70* 1,176
COST SUMMARY
Direct materials $ 9,060
Direct labor 5,680
Overhead 3,976
Total cost $18,716
*$2,800/$4,000 = 0.70
2. Journal entries:
a. Materials Inventory 27,000
Accounts Payable 27,000
b. Work-in-Process Inventory 29,200
Materials Inventory 29,200
c. Work-in-Process Inventory 10,805
Wages Payable 10,805
d. Work-in-Process Inventory 7,564*
Overhead Control 7,564
*$10,805 ( 0.70 = $7,564 (rounded)
e. Overhead Control 7,618
Miscellaneous Accounts 7,618
f. Finished Goods Inventory 21,901
Work-in-Process Inventory 21,901
4–17 Concluded
g. Cost of Goods Sold 21,901
Finished Goods Inventory 21,901
Accounts Receivable 35,042*
Sales Revenue 35,042
*($21,901 ( 160%)
3.
|Materials Inventory | |Work-in-Process Inventory |
|Beg. Bal. 12,000 |(b) 29,200 | |Beg. Bal. 19,278 |(f) 21,901 |
|(a) 27,000 | | |(b) 29,200 | |
|End. Bal. 9,800 | | |(c) 10,805 | |
| | | |(d) 7,564 | |
| | | |End. Bal. 44,946 | |
|Finished Goods Inventory | | | |
|Beg. Bal. 20,000 |(g) 21,901 | | | |
|(f) 21,901 | | | | |
|End. Bal. 20,000 | | | | |
4–18
1. a. Materials Inventory 50,100
Accounts Payable 50,100
b. Work-in-Process Inventory 30,000
Overhead Control 15,000
Materials Inventory 45,000
c. Work-in-Process Inventory 70,000
Overhead Control 32,000
Administrative Expenses 18,000
Selling Expenses 9,900
Wages Payable 129,900
d. Overhead Control 13,400
Accumulated Depreciation 13,400
e. Overhead Control 1,450
Property Taxes Payable 1,450
f. Overhead Control 6,200
Prepaid Insurance 6,200
g. Overhead Control 6,000
Utilities Payable 6,000
h. Selling Expenses 7,200
Advertising Payable 7,200
i. Administrative Expenses 1,500
Selling Expenses 650
Accumulated Depreciation 2,150
j. Administrative Expenses 750
Legal Fees Payable 750
k. Work-in-Process Inventory 72,000*
Overhead Control 72,000
($9 ( 8,000)
l. Finished Goods Inventory 158,000
Work-in-Process Inventory 158,000
4–18 Continued
2.
|Materials Inventory | |Work-in-Process Inventory |
|Beg. Bal. 5,000 |(b) 45,000 | |Beg. Bal. 30,000 |(l) 158,000 |
|(a) 50,100 | | |(b) 30,000 | |
|End. Bal. 10,100 | | |(c) 70,000 | |
| | | |(k) 72,000 | |
| | | |End. Bal. 44,000 | |
| | | | |
|Finished Goods Inventory | |Overhead Control |
|Beg. Bal. 60,000 | | |(b) 15,000 |(k) 72,000 |
|(l) 158,000 | | |(c) 32,000 | |
|End. Bal. 218,000 | | |(d) 13,400 | |
| | | |(e) 1,450 | |
| | | |(f) 6,200 | |
| | | |(g) 6,000 | |
| | | |Bal. 2,050* | |
*Underapplied overhead
4–18 Concluded
3. Perlmutter Products, Inc.
Statement of Cost of Goods Manufactured
For the Month Ended May 31, 20XX
Direct materials $ 30,000
Direct labor 70,000
Overhead:
Indirect materials $15,000
Indirect labor 32,000
Depreciation, plant, and equipment 13,400
Property taxes 1,450
Utilities, factory 6,200
Insurance 6,000
$74,050
Less: Underapplied overhead 2,050
Overhead applied 72,000
Total manufacturing costs added $172,000
Add: Beginning work-in-process inventory 30,000
Less: Ending work-in-process inventory (44,000)
Cost of goods manufactured $158,000
4. Cost of goods sold increases by $2,050.
4–19
1. Journal entries:
a. Materials Inventory 280,000
Accounts Payable 280,000
b. Work-in-Process Inventory 300,000
Materials Inventory 300,000
c. Overhead Control 82,000
Materials Inventory 82,000
d. Work-in-Process Inventory 110,000
Overhead Control 60,000
Selling and Admin. Expense 70,000
Wages Payable 240,000
e. Overhead Control 5,000
Prepaid Insurance 5,000
f. Selling Expenses 30,000
Advertising Payable 30,000
g. Overhead Control 24,000
Rent Payable 24,000
h. Administrative Expenses 10,000
Accumulated Depreciation 10,000
i. Overhead Control 7,850
Miscellaneous Accounts 7,850
j. Overhead Control 7,000
Administrative Expenses 3,000
Utilities Payable 10,000
k. Work-in-Process Inventory 165,000
Overhead Control 165,000*
*($110,000 ( 150%)
4–19 Continued
l. Accounts Receivable 983,000
Sales Revenue 983,000
Finished Goods Inventory 565,000
Work-in-Process Inventory 565,000**
Cost of Goods Sold 590,000
Finished Goods Inventory 590,000**
**See T-accounts for Work-in-Process Inventory and Finished Goods
Inventory.
2.
|Materials Inventory | |Work-in-Process Inventory |
|Beg. Bal. 170,000 |(b) 300,000 | |Beg. Bal. 20,000 |(l) 565,000* |
|(a) 280,000 |(c) 82,000 | |(b) 300,000 | |
|End. Bal. 68,000 | | |(d) 110,000 | |
| | | |(k) 165,000 | |
| | | |End. Bal. 30,000 | |
| | | | |
|Finished Goods Inventory | |Overhead Control |
|Beg. Bal. 45,000 |(l) 590,000* | |(c) 82,000 |(k) 165,000 |
|(l) 565,000 | | |(d) 60,000 | |
|End. Bal. 20,000 | | |(e) 5,000 | |
| | | |(g) 24,000 | |
| | | |(i) 7,850 | |
|Cost of Good Sold | |(j) 7,000 | |
|(l) 590,000 | | |Bal. 20,850 | |
*Balancing figures
4–19 Continued
3. $165,000 Applied overhead
185,850 Actual overhead
$ 20,850 Underapplied overhead
Cost of Goods Sold 20,850
Overhead Control 20,850
Work-in-Process Inventory $ 30,000 (4.687% ( $20,850 = $977)
Finished Goods Inventory 20,000 (3.125% ( $20,850 = $652)
Cost of Goods Sold 590,000 (92.188% ( $20,850 = $19,221)
$640,000
Work-in-Process Inventory 977
Finished Goods Inventory 652
Cost of Goods Sold 19,221
Overhead Control 20,850
4. First assumption: Closing to cost of goods sold:
Polson Manufacturing Company
Income Statement
For the Year Ended December 31, 20XX
Sales revenue $983,000
Cost of goods sold:
Beginning finished goods inventory $ 45,000
Cost of goods manufactured 565,000
Goods available for sale $610,000
Ending finished goods inventory 20,000
Normal cost of goods sold $590,000
Plus underapplied overhead 20,850
Adjusted cost of goods sold 610,850
Gross margin $372,150
Selling and administrative expenses* 113,000
Operating income $259,150
*Selling & administrative expenses: $ 70,000
30,000
10,000
3,000
$113,000
4–19 Concluded
Second assumption: Prorating:
Polson Manufacturing Company
Income Statement
For the Year Ended December 31, 20XX
Sales revenue $983,000
Cost of goods sold:
Beginning finished goods inventory $ 45,000
Cost of goods manufactured 565,000
Goods available for sale $610,000
Ending finished goods inventory 20,000
Normal cost of goods sold $590,000
Plus underapplied overhead 19,221
Adjusted cost of goods sold 609,221
Gross margin $373,779
Selling and administrative expenses* 113,000
Operating income $260,779
*Selling and administrative expenses: $ 70,000
30,000
10,000
3,000
$ 113,000
The difference in operating income figures is $1,629, which is the sum allocated to Work-in-Process Inventory and Finished Goods Inventory. This figure is less than 1 percent of operating income which is probably not significant.
4–20
1. $35,000/5,000 = $7.00 per DLH
2. $85,000/5,000 = $17.00 per DLH
3. Cost of job on May 20:
Direct materials (100 ( $0.015) $1.50
Direct labor (0.2 ( $6) 1.20
Applied overhead (0.2 ( $7) 1.40
$4.10
Cost of job on June 20:
Direct materials (100 ( $0.015) $1.50
Direct labor (0.2 ( $6) 1.20
Applied overhead (0.2 ( $17) 3.40
$6.10
4. Photocopying overhead rate = $35,000/5,000 = $7.00/DLH
Computer-aided printing overhead rate = $50,000/2,000 = $25.00/MHr
The use of two rates more accurately costs the jobs in this shop as it shows a better cause-and-effect relationship between activity and overhead cost.
4–21
1. Plantwide overhead rate = $56,250/15,000
= $3.75 per DLH
Cost of Job 416:
Direct materials $ 57
Direct labor 45
Overhead (4 ( $3.75) 15
Total cost $117
2. Fabrication overhead rate = $20,000/10,000
= $2 per DLH
Painting overhead rate = $36,250/5,000
= $7.25 per DLH
Cost of Job 416:
Direct materials $ 57.00
Direct labor 45.00
Overhead (3 ( $2) 6.00
(1 ( $7.25) 7.25
Total cost $115.25
3. Because Chesbro manufactures custom products which may use departmental resources at different rates, it should use departmental overhead rates.
4–22
1. Single overhead rate = $100,000/10,000 = $10 per DLH
Cost of Hoboken job:
Direct materials $ 6,000
Direct labor:
Sewing (160 ( $8) 1,280
Beading (400 ( $12.50) 5,000
Overhead (560 ( $10) 5,600
Total cost $17,880
2. Design overhead rate = $55,000/2,000 = $27.50
Sewing overhead rate = $42,000/7,000 = $6.00
Beading overhead rate = $3,000/1,000 = $3.00
Cost of Hoboken job:
Direct materials $ 6,000
Direct labor:
Sewing (160 ( $8) 1,280
Beading (400 ( $12.50) 5,000
Overhead:
Sewing (160 ( $6) 960
Beading (400 ( $3) 1,200
Total cost $14,440
3. Clearly, much of the overhead cost is in the design department. However, not all jobs use the computer-assisted design services. Therefore, a single overhead rate (which averages in the costs of all three departments) will overcost those jobs which use relatively little of the expensive department’s services and will undercost those jobs which use relatively more of the expensive department’s services. Since price is based on cost, customers requiring just sewing and beading may take their business elsewhere.
4–23
Jurgens probably considers itself a service firm because each job is made to order. Especially the design portion of Jurgens’ services is intangible. Heterogeneity applies to the sewing and beading of the costumes. There is significant customer input in the design phase which implies inseparability. This is an example of a service which is not highly perishable.
1 4–24
1. Land $ 7,813a
Direct materials 8,000
Direct labor 6,000
Subcontractor 14,000
$35,813
a$250,000/8 = $31,250 per acre; $31,250 ( 0.25 = $7,813*
*Rounded
General conditions costs and finance costs can be classified as production costs and would correspond to overhead in a manufacturing firm. Most (if not all) of the marketing costs are traceable to each job (advertising may be for the subdivision and thus common to all units). Some may argue that finance costs are not production costs, and they would classify these separately.
4–24 Concluded
2.
JOB-ORDER COST SHEET
Job 3
DIRECT MATERIALS DIRECT LABOR OVERHEAD
Req. No. Amount Hrs. Rate Amount Hrs. Rate Amount
Materials $8,000 $ 6,000 General $6,000*
Land 7,813 Finance 4,765
Subctr. 14,000
COST SUMMARY
Direct materials $15,813
Direct labor 20,000
Overhead 10,765
Total cost $46,578
*$120,000/20 = $6,000 per unit
General conditions costs are prorated to the 20 units. Finance costs are included as they are a cost of building the home. However, marketing costs are a selling expense and are not inventoriable. The cost of the land was determined in Part 1.
3. Overhead is equivalent to general conditions and finance costs. Finance costs are traceable to each job; therefore, no allocation problem exists. Allocating general conditions costs evenly among the housing units may create unit-cost distortions. It could be argued that larger homes, for example, would place greater demands on site utilities, insurance, architect’s fees, and decorating. Allocating these costs on the basis of square footage would likely provide more accurate cost assignments.
4. Production costs $46,578
Marketing costs 800
Total cost $47,378
Selling price = $47,378 ( 140% = $66,329*
*Rounded
Profit: $66,329
47,378
$18,951
4–25
1. Bid prices with plantwide rate:
Plantwide rate = $2,500,000/250,000 = $10 per DLH
Job 97-28 Job 97-35
Prime costs $120,000 $50,000
Overhead 60,000* 10,000**
Total costs $180,000 $60,000
Markup (50%) 90,000 30,000
Total bid revenues $270,000 $90,000
Units ÷ 14,400 ÷ 1,500
Unit bid price $ 18.75 $ 60.00
*($10 ( 6,000)
**($10 ( 1,000)
2. Bid prices with departmental rates:
Rates: Department A: $500,000/200,000 = $2.50/DLH
Department B: $2,000,000/120,000 = $16.67*/MHr
Job 97-28 Job 97-35
Prime costs $120,000 $ 50,000
Overhead 20,835a 51,010b
Total costs $140,835 $101,010
Markup (50%) 70,418 50,505
Total bid revenues $211,253 $151,515
Units ÷ 14,400 ÷ 1,500
Unit bid price $ 14.67* $ 101.01
a($2.50 ( 5,000) + ($16.67 ( 500)
b($2.50 ( 400) + ($16.67 ( 3,000)
*Rounded
4–25 Concluded
3. Plantwide Departmental Differences
Revenues $90,000 $362,768 $272,768
Cost of goods sold 60,000 241,845 181,845
Gross profit $30,000 $120,923 $ 90,923
If plantwide overhead is used, only Job 97-35 would have been won. Therefore, the revenues and cost of goods sold pertain only to that job. If departmental rates had been used, the bids on both jobs would have been won. Therefore, the revenues and cost of goods sold pertain to both jobs, and gross profit would have gone up by $90,923.
4. The departments differ significantly in their overhead intensity, with Department B being much more automated. Jobs spending more time in Department B ought to receive more overhead costs. Use of departmental rates provides this outcome.
4–26
JOB-ORDER COST SHEET
Job 267
DIRECT MATERIALS DIRECT LABOR OVERHEAD
Kind Amount Emply. Hrs. Rate Amount Hrs. Rate Amount
Novcne. $1 Dntst. 0.25 $36 $9 0.5 $20 $10
Amlgm. 3 Asst. 0.50 6 3
COST SUMMARY
Direct materials $ 4
Direct labor 12
Overhead 10
Total cost $26
Gross profit computation:
Charge $45
Cost 26
Gross profit $19
The X-ray is a direct cost of a job assuming that an X-ray is taken for each job. If X-rays are used for more than one treatment (as they often are), then it becomes a common cost. X-rays could be included in overhead and services could be priced to cover the cost of X-rays. Apparently, this practice treats X-rays as a profit-making activity, and they are therefore costed and priced separately.
4–26 Concluded
2. Type DL-Ast.* DL-Dnt.** Nov. Amg. OH***a Total Cost
1 $2 $ 6 $1 $2 $ 6.67 $17.67
2 3 9 1 3 10.00 26.00
3 4 12 1 4 13.33 34.33
4 5 15 1 5 16.67 42.67
*(20/60) ( $6; **(20/60) ( 0.5 ( $36; ***(20/60) ( $20
(30/60) ( $6; (30/60) ( 0.5 ( $36; (30/60) ( $20
(40/60) ( $6; (40/60) ( 0.5 ( $36; (40/60) ( $20
(50/60) ( $6; (50/60) ( 0.5 ( $36; (50/60) ( $20
aRounded
1-surface 2-surface 3-surface 4-surface
Unit revenue $35.00 $45.00 $55.00 $65.00
Unit cost 17.67 26.00 34.33 42.67
Gross profit $17.33 $19.00 $20.67 $22.33
Profit/revenue 49.5% 42.2% 37.6% 34.4%
The gross profit per unit increases as the surfaces increase, but the profit percentage decreases. Whether this increase is fair (to either the patient or the corporation) depends on what is considered a normal rate of return for these services.
4–27
1.
JOB-ORDER COST SHEET
POTASSIUM ASPARTATE
DIRECT MATERIALS DIRECT LABOR OVERHEAD
Type Quantity Cost Hrs. Rate Amount Cost Rate Amount
Aspartic 195.0ky $1,121 16 $12.50 $200 $200 110% $220
Citric 15.0 30
K2CO3 121.5 564
Rice 30.0 13
COST SUMMARY
Direct materials $1,728
Direct labor 200
Overhead 220
Total cost $2,148
( 300
Unit cost $ 7.16
Price charged: $7.16 ( 130% = $9.31*
*Rounded
If overhead is allocated accurately, the company should not sell at $8.80 as the job earns less than the markup.
2. Revenues ($2,148 ( 130%) $2,792
Cost of goods sold 2,148
Gross profit $ 644
3. Total actual costs:
Direct materials $1,790.00
Direct labor 225.00
Applied overhead 247.50
Total $2,262.50
Actual unit cost: $2,262.50/300 = $7.54*
*Rounded
4–27 Concluded
Unexpected loss:
Bid based on actual cost ($2,262.50 ( 1.30) $2,941.25
Actual revenue 2,792.00
Loss $ 149.25
Possible reasons for loss:
1. Workers may have been wasteful with the materials.
2. Workers may have been inefficient.
3. Overhead costs may not have been controlled properly.
4. Expected costs were too optimistic.
4. Total billing:
Materials $1,790.00
Labor 225.00
Applied overhead 247.50
Underapplied overhead 30.00
Total cost $2,292.50
Markup (30%) 687.75
Total price $2,980.25
You could explain that Nutratask uses a predetermined overhead rate to assign overhead to jobs and that adding underapplied overhead is an adjustment required to assign actual overhead to the job. Adding underapplied overhead to the job does not necessarily imply inefficient use of overhead costs. It does imply that the estimated overhead cost of the job was not equal to the actual cost. The customer could then be reminded that the agreement was actual cost plus 30 percent. If the customer is still not satisfied, good relations may require deletion of the $30.00 charge. In the future, problems like this could be avoided by not showing two separate overhead charges.
4–28
1. Dept. 1: $300,000/100,000 = $3.00 per DLH
Dept. 2: $196,000/35,000 = $5.60 per MHr
2. Dept. 1 Dept. 2
Applied overhead $294,000a $201,600b
Actual overhead 301,000 200,600
$ 7,000 Underapplied $ 1,000 Overapplied
overhead overhead
a$3.00 ( 98,000
b$5.60 ( 36,000
Firm: $7,000 – $1,000 = $6,000 Underapplied overhead
3. Cost of Goods Sold 6,000
Overhead Control 6,000
4. Dept. 1 Dept. 2
Direct materials $1,610 $3,000
Direct labor 1,125 400
Overhead* 375 1,148
$3,110 $4,548
*$3.00 ( 125 and $5.60 ( 205
Total cost of Job 689: $3,110 + $4,548 = $7,658
Unit cost of Job 689: $7,658/50 = $153.16
4–29
1. Direct materials ($0.40* ( 100) $40
Direct labor ($0.04* ( 100) 4
Overhead (1.5* ( $4) 6
Total spoilage cost $50
This spoilage is abnormal and should be added to overhead control.
*$0.40 = $200/500
$0.04 = $20/500
1.5 = $30/$20
2. Price = $250 ( 1.5 = $375 (Spoilage is not attributable to this job and should not be added to job cost.)
3. The spoilage cost is identical to that computed in Requirement 1. However, in this case, the spoilage is attributable to demanding requirements of the job, and the cost is added to job cost.
4. Price = ($250 + $50) ( 1.5 = $450
2 4–30
1. Direct materials (67 ( $0.15) $10.05
Direct labor (1 ( $8) 8.00
Overhead (1 ( $4) 4.00
Total cost $22.05
2. Direct materials (67 ( $0.15) $10.05
Direct labor (1.25 ( $8) 10.00
Overhead (1.25 ( $4) 5.00
Total cost $25.05
The rework cost is not attributable to the job, and is not normal, so it should be assigned to overhead.
3. The price charged is 67 letters ( $0.50 for a total of $33.50. Note that the rework is not included in the job cost, so it is not included in the price.
5 collaborative learning exercise
Answers will vary.
6 Cyber Research Case
Answers will vary.
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