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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