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CHAPTER 4

JOB COSTING

4-1 Cost poola grouping of individual indirect cost items.Cost tracingthe assigning of direct costs to the chosen cost object.Cost allocationthe assigning of indirect costs to the chosen cost object.Cost-allocation basea factor that links in a systematic way an indirect cost or group of

indirect costs to cost objects.

4-2 In ajob-costing system,costs are assigned to a distinct unit, batch, or lot of a product orservice. In aprocess-costing system, the cost of a product or service is obtained by using broadaverages to assign costs to masses of identical or similar units.

4-3 An advertising campaign for Pepsi is likely to be very specific to that individual client.Job costing enables all the specific aspects of each job to be identified. In contrast, theprocessing of checking account withdrawals is similar for many customers. ere, process costingcan be used to compute the cost of each checking account withdrawal.

4-4 !he seven steps in job costing are" #$% identify the job that is the chosen cost object, #&%identify the direct costs of the job, #'% select the cost(allocation bases to use for allocatingindirect costs to the job, #)% identify the indirect costs associated with each cost(allocation base,#*% compute the rate per unit of each cost(allocation base used to allocate indirect costs to thejob, #+% compute the indirect costs allocated to the job, and #% compute the total cost of the jobby adding all direct and indirect costs assigned to the job.

4-5 -ajor cost objects that managers focus on in companies using job costing are a productsuch as a specialied machine, a service such as a repair job, a project such as running the /0po,or a task such as an advertising campaign.

4-6 !hree major source documents used in job(costing systems are #$% job cost record or jobcost sheet, a document that records and accumulates all costs assigned to a specific job, startingwhen work begins #&% materials re1uisition record, a document that contains information aboutthe cost of direct materials used on a specific job and in a specific department2 and #'% labor(timesheet, a document that contains information about the amount of labor time used for a specificjob in a specific department.

4-7 !he main advantages of using computeried source documents for job cost records arethe accuracy of the records and the ability to provide managers with instantaneous feedback tohelp control job costs.

4-8 !wo reasons for using an annual budget period area. !he numerator reasonthe longer the time period, the less the influence of seasonal

patterns in overhead costs, andb. !he denominator reasonthe longer the time period, the less the effect of variations in

output levels or 1uantities of the cost(allocation bases on the allocation of fi0ed costs.

)($

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4-9 Actual costing and normal costing differ in their use of actual or budgeted indirect cost rates"

Actual

Cot!"#

No$%al

Cot!"#

3irect(cost ratesIndirect(cost rates

Actual ratesActual rates

Actual rates4udgeted rates

/ach costing method uses the actual 1uantity of the direct(cost input and the actual 1uantity ofthe cost(allocation base.

4-1& A house construction firm can use job cost information #a% to determine the profitabilityof individual jobs, #b% to assist in bidding on future jobs, and #c% to evaluate professionals whoare in charge of managing individual jobs.

4-11 !he statement is false. In a normal costing system, the -anufacturing 5verhead 6ontrolaccount will not, in general, e1ual the amounts in the -anufacturing 5verhead Allocatedaccount. !he -anufacturing 5verhead 6ontrol account aggregates the actual overhead costsincurred while -anufacturing 5verhead Allocated allocates overhead costs to jobs on the basis

of a budgeted ratetimes the actual 1uantity of the cost(allocation base.7nderallocation or overallocation of indirect #overhead% costs can arise because of #a% the8umerator reasonthe actual overhead costs differ from the budgeted overhead costs, and #b%the 3enominator reasonthe actual 1uantity used of the allocation base differs from thebudgeted 1uantity.

4-12 3ebit entries to 9ork(in(Process 6ontrol represent increases in work in process./0amples of debit entries under normal costing are #a% direct materials used #credit to -aterials6ontrol%, #b% direct manufacturing labor billed to job #credit to 9ages Payable 6ontrol%, and #c%manufacturing overhead allocated to job #credit to -anufacturing 5verhead Allocated%.

4-13 Alternative ways to make end(of(period adjustments to dispose of underallocated oroverallocated overhead are as follows"#i% Proration based on the total amount of indirect costs allocated #before proration% in

the ending balances of work in process, finished goods, and cost of goods sold.#ii% Proration based on total ending balances #before proration% in work in process,

finished goods, and cost of goods sold.#iii% :ear(end write(off to 6ost of ;oods

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a. Job costing l. Job costingb. Process costing m. Process costingc. Job costing n. Job costingd. Process costing o. Job costinge. Job costing p. Job costingf. Process costing 1. Job costingg. Job costing r. Process costingh. Job costing #but some process costing% s. Job costingi. Process costing t. Process costingj. Process costing u. Job costingk. Job costing

)('

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4-17 #&= min.% Actual cot!"#* "o$%al cot!"#* accou"t!"# o$ %a"uactu$!"# o.)$/)a(,

$.4udgeted manufacturing

overhead rate>

costslaboringmanufacturdirect4udgeted

costsoverhead

ingmanufactur4udgeted

>?&,==,===

?$,*==,===> $.@= or $@=

rateoverheadingmanufacturctualA

>

costslaboringmanufacturdirectActual

costsoverheadingmanufacturActual

>?&,**,===

?$,)*=,===> $.B or $B=

&. 6osts of Job +&+ under actual and normal costing follow"

Actual No$%al

Cot!"# Cot!"#

3irect materials ? )=,=== ? )=,===3irect manufacturing labor costs '=,=== '=,===-anufacturing overhead costs

?'=,=== $.B=2 ?'=,=== $.@= *,=== *),===

!otal manufacturing costs of Job +&+ ?$&,=== ?$&),===

'. !otal manufacturing overheadallocated under normal costing >Actual manufacturing

labor costs 4udgeted

overhead rate

> ?$,)*=,=== $.@=

> ?&,+$=,===

7nderallocated manufacturingoverhead

>Actual manufacturing

overhead costs

-anufacturingoverhead allocated

> ?&,**,=== ?&,+$=,=== > ?$)*,===

!here is no under( or overallocated overhead under actual costing because overhead isallocated under actual costing by multiplying actual manufacturing labor costs and the actualmanufacturing overhead rate. !his, of course e1uals the actual manufacturing overhead costs. Allactual overhead costs are allocated to products. ence, there is no under( or overallocatedoverhead.

)()

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4-18 #&= ('= min.% Jo' cot!"#* "o$%al a"( actual cot!"#,

$.4udgeted indirect(

cost rate>

4udgeted indirect costs #assembly support%

4udgeted direct labor(hours>

?@,'==,===

$++,=== hours

> ?*= per direct labor(hour

Actual indirect(cost rate

> Actual indirect costs #assembly support%Actual direct labor(hours

> ?+,*&=,===$+',=== hours

> ?)= per direct labor(hour

!hese rates differ because both the numerator and the denominator in the two calculations aredifferentCone based on budgeted numbers and the other based on actual numbers.

&a. 0a#u"ao()l

!!o"

o()l

8ormal costing3irect costs

3irect materials3irect labor

Indirect costs

Assembly support #?*= B+=2 ?*= $,=*=%

!otal costs

?$=+,+= '+,B*=$)',$=

)@,===?$B$,$=

?$&,**= )$,'&=

$+@,@=

*&,*==?&&$,'=

&b. Actual costing3irect costs

3irect materials3irect labor

Indirect costs

Assembly support #?)= B+=2 ?)= $,=*=%

!otal costs

?$=+,+= '+,B*=

$)',$=

'@,)==?$@&,$$=

?$&,**= )$,'&=

$+@,@=

)&,===?&$=,@=

'. 8ormal costing enables Amesbury to report a job cost as soon as the job is completed,assuming that both the direct materials and direct labor costs are known at the time of use. 5ncethe B+= direct labor(hours are known for the Daguna -odel #June &=$$%, Amesbury can computethe ?$B$,$= cost figure using normal costing. Amesbury can use this information to manage thecosts of the Daguna -odel job as well as to bid on similar jobs later in the year. In contrast,Amesbury has to wait until the 3ecember &=$$ year(end to compute the ?$@&,$$= cost of the

Daguna -odel using actual costing.Although not re1uired, the following overview diagram summaries Amesbury6onstructionEs job(costing system.

)(*

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4-19 #$= min.% Bu(#)t)( %a"uactu$!"# o.)$/)a( $at)* allocat)( %a"uactu$!"#o.)$/)a(,

$. 4udgeted manufacturing overhead rate >4udgeted manufacturing overhead

4udgeted machine hours

>?),&==,===

$*,=== machine(hours

> ?&) per machine(hour

&. -anufacturingoverheadallocated

>Actual

machine(hours

4udgetedmanufacturingoverhead rate

> $=,=== F ?&) > ?),=@=,===

'.

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4-2& #&=('= min.% Jo' cot!"#* accou"t!"# o$ %a"uactu$!"# o.)$/)a(* 'u(#)t)( $at),

$. An overview of the product costing system is

COST OBJECT:PRODUCT

COSTALLOCATION

BASE

DIRECTCOST

}

}

Machining DepartmentManufacturing Overhead

Machine-Hours

DirectMaterials

INDIRECTCOSTPOOL}

DirectManufacturing

Labor

Indirect Costs

Direct Costs

}

Assembly DepartmentManufacturing Overhead

Direct Manuf.Labor Cost

4udgeted manufacturing overhead divided by allocation base"

-achining overhead"===,*=

===,@==,$?> ?'+ per machine(hour

Assembly overhead"===,===,&?

===,+==,'?> $@= of direct manuf. labor costs

&. -achining department, &,=== hours ?'+ ?&,===

Assembly department, $@= ?$*,=== &,===!otal manufacturing overhead allocated to Job )B) ?BB,===

'. ac/!"!"# A)%'lActual manufacturing overhead ?&,$==,=== ? ',==,===-anufacturing overhead allocated,

?'+ **,=== machine(hours $,B@=,=== C

$@= ?&,&==,=== C ',B+=,===

7nderallocated #5verallocated% ? $&=,=== ? #&+=,===%

)(

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4-21 #&=&* min.% Jo' cot!"#* co"ult!"# !$%,

$. 4udgeted indirect(cost rate for client support can be calculated as follows"

4udgeted indirect(cost rate > ?$',+==,=== G ?*,'$&,*== > &*+ of professional labor costs

&. At the budgeted revenues of ?&$,&*=,=== !aylorEs operating income of ?&,'',*== e1uals$$ of revenues.

-arkup rate > ?&$,&*=,=== G ?*,'$&,*== > )== of direct professional labor costs

)(@

65

ADD56A!I58

4A

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'. 4udgeted costs3irect costs"

3irector, ?$B@ ) ? B&

Partner, ?$=$ $ $,$

Associate, ?)B )& &,=*@

Assistant, ?'+

$*' *,*=@ ?$=,=*Indirect costs"

6onsulting support, &*+ ?$=,=* &*,B&

!otal costs ?'*,@+

As calculated in re1uirement &, the bid price to earn an $$ income(to(revenue margin is )==

of direct professional costs. !herefore, !aylor should bid ) ?$=,=* > ?)=,'== for the ed

ooster job.

4id price to earn target operating income(to(revenue margin of $$ can also becalculated as follows"

Det > revenue to earn target income =.$$ > ?'*,@+=.@B > ?'*,@+ > ?'*,@+ G =.@B > ?)=,'==

5r3irect costs ?$=,=*Indirect costs &*,B&

5perating income #=.$$ ?)=,'==% ),)''

4id price ?)=,'==

)(B

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4-22 #$*&= min.% T!%) +)$!o( u)( to co%+ut) !"(!$)ct cot $at),

$.ua$t)$

1 2 3 4 A""ual

#$% Pools sold == *== $*= $*= $,*==#&% 3irect manufacturing

labor hours #=.* ow $% '*= &*= * * *=#'% Hi0ed manufacturing

overhead costs ?$=,*== ?$=,*== ?$=,*== ?$=,*== ?)&,===#)% 4udgeted fi0ed

manufacturing overheadrate per directmanufacturing labor hour

#?$=,*== ow &% ?'= ?)& ?$)= ?$)= ?*+

Bu(#)t)( Cot Ba)( o"

ua$t)$l a"uactu$!"#

O.)$/)a( Rat)

2"(ua$t)$ 3$(ua$t)$

3irect material costs #?.*= *== pools2 $*= pools% ? ',*= ? $,$&*3irect manufacturing labor costs

#?$+ &*= hours2 * hours% ),=== $,&==ariable manufacturing overhead costs

#?$& &*= hours2 * hours% ',=== B==Hi0ed manufacturing overhead costs

#?)& &*= hours2 ?$)= F * hours% $=,*== $=,*==!otal manufacturing costs ?&$,&*= ?$',&*

3ivided by pools manufactured each 1uarter G *== G $*=-anufacturing cost per pool ? )& .*= ? B$ .*=

&.Bu(#)t)( Cot Ba)( o"

A""ual a"uactu$!"#

O.)$/)a( Rat)

2"(ua$t)$ 3$(ua$t)$

3irect material costs #?.*= *== pools2 $*= pools% ? ',*= ?$,$&*3irect manufacturing labor costs

#?$+ &*= hours2 * hours% ),=== $,&==ariable manufacturing overhead costs

#?$& &*= hours2 * hours% ',=== B==Hi0ed manufacturing overhead costs

#?*+ &*= hours2 * hours% $),=== ),&==!otal manufacturing costs ?&),*= ?,)&*

3ivided by pools manufactured each 1uarter *== $*=

-anufacturing cost per pool ? )B .*= ?)B .*=

)($=

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'.2"(ua$t)$ 3$(ua$t)$

Prices based on 1uarterly budgeted manufacturingoverhead rates calculated in re1uirement $

#?)&.*= $'=2 ?B$.*= $'=% ?**.&* ?$$@.B*Price based on annual budgeted manufacturing overhead

rates calculated in re1uirement &

#?)B.*= $'=2 ?)B.*= $'=% ?+).'* ?+).'*

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4-23 #$=$* min.% Accou"t!"# o$ %a"uactu$!"# o.)$/)a(,

$. 4udgeted manufacturing overhead rate >?,*==,===

&*=,=== machine(hours

> ?'= per machine(hour

&. 9ork(in(Process 6ontrol ,'*=,=== -anufacturing 5verhead Allocated ,'*=,===

#&)*,=== machine(hours ?'= per machine(hour > ?,'*=,===%

'. ?,'*=,=== ?,'==,=== > ?*=,=== overallocated,an insignificant amount of actual manufacturing overheadcosts ?*=,=== G ?,'==,=== > =.+@.

-anufacturing 5verhead Allocated ,'*=,=== -anufacturing 3epartment 5verhead 6ontrol ,'==,===

6ost of ;oods

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4-24 #'*)* min.% Jo' cot!"#* ou$"al )"t$!),

65

4A}

}

-anufacturing 5verhead

3irect -anufacturingDabor 6osts

3irect-aterials

I83I/6!65

3irect-anuf.Dabor

Indirect 6osts3irect 6osts

}

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'.-aterials 6ontrol

4al. $M$M&=$$#$% Accounts Payable

6ontrol #Purchases%

$==

@==

#&% 9ork(in(Process 6ontrol#-aterials used%

#'% -anufacturing 5verhead6ontrol #-aterials used%

$=

$==

4al. $&M'$M&=$$ B=

9ork(in(Process 6ontrol

4al. $M$M&=$$#&% -aterials 6ontrol

#3irect materials%#)% 9ages Payable

6ontrol #3irectmanuf. labor%

#% -anuf. 5verheadAllocated

+=

$=

$,'==

&,=@=

#@% Hinished ;oods 6ontrol#;oods completed% ),$&=

4al. $&M'$M&=$$ '=

Hinished ;oods 6ontrol

4al. $M$M&=$$#@% 9IP 6ontrol

#;oods completed%

*==

),$&=

#$=% 6ost of ;oods

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4-25 '* minutes% Jou$"al )"t$!)* T-accou"t* a"( ou$c) (ocu%)"t.

$.i. 3irect -aterials 6ontrol $&),===

Accounts Payable 6ontrol $&),===

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&. !(accounts

3irect -aterials 6ontrol

4al. $M$M&=$$#$% Accounts Payable 6ontrol

#Purchases%

B,===

$&),===

#&% 9ork(in(Process 6ontrol#-aterials used% $&&,===

4al. $&M'$M&=$$ $$,===

9ork(in(Process 6ontrol

4al. $M$M&=$$#&% -aterials 6ontrol

#3irect materials used%#'% 9ages Payable 6ontrol

#3irect manuf. labor%#*% -anuf. 5verhead

Allocated

+,===

$&&,===

@=,===

&==,===

#+% Hinished ;oods 6ontrol#6ost of goodsmanufactured% '@,===

4al. $&M'$M&=$$ &$,===

Hinished ;oods 6ontrol4al. $M$M&=$$#+% 9IP 6ontrol

#6ost of goods manuf.%

+B,===

'@,===

#% 6ost of ;oods

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4-26 #)* min.% Jo' cot!"#* ou$"al )"t$!),

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!he posting of entries to !(accounts is as follows"

-aterials 6ontrol 9ork(in(Process 6ontrol

4al $& #&% $)* 4al. &% $)*#)% B=

#@% +'

#B% &B)

#$% $*= #'% $=

4al.

4al. +

Hinished ;oods 6ontrol 6ost of ;oods

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4-27 #$* min.% Jo' cot!"#* u"!t cot* )"(!"# o$ !" +$o#$),

$.3irect manufacturing labor rate per hour ?&+-anufacturing overhead cost allocated per manufacturing labor(hour ?&=

Jo' 1 Jo' 23irect manufacturing labor costs ?&',=== ?&=@,===3irect manufacturing labor hours#?&',=== ?&+2 ?&=@,=== ?&+% $=,*== @,===-anufacturing overhead cost allocated#$=,*== ?&=2 @,=== ?&=% ?&$=,=== ?$+=,===

Jo' Cot a 2&11 Jo' 1 Jo' 2

3irect materials ? @,=== ? *$,===3irect manufacturing labor &',=== &=@,===-anufacturing overhead allocated &$=,=== $+=,===

!otal costs ?*+$,=== ?)$B,===

&.8umber of pipes produced for Job -$ $,$==6ost per pipe #?*+$,=== $,$==% ?*$=

'.Hinished ;oods 6ontrol *+$,===

9ork(in(Process 6ontrol *+$,===

). afael 6ompany began -ay &=$$ with no work(in(process inventory. 3uring -ay, it started

and finished -$. It also started -&, which is still in work(in(process inventory at the end of-ay. -&Es manufacturing costs up to this point, ?)$B,===, remain as a debit balance in the9ork(in(Process Inventory account at the end of -ay &=$$.

)(&$

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4-28 #&='= min.% Jo' cot!"# actual* "o$%al* a"( .a$!at!o" $o% "o$%al cot!"#,

$. Actual direct cost rate for professional labor > ?*B per professional labor(hour

Actual indirect cost rate >?'*,===

$,*== hours> ?)& per professional labor(

hour

4udgeted direct cost ratefor professional labor >

?BB=,===

$@,=== hours> ?** per professional labor(hour

4udgeted indirect cost rate >?),===

$@,=== hours> ?)' per professional labor(

hour

a

Actual

Cot!"#

'

No$%al

Cot!"#

c

:a$!at!o" o

No$%al Cot!"#

3irect(6ost ate ?*B#Actual rate% ?*B#Actual rate% ?**#4udgeted rate%Indirect(6ost ate ?)&

#Actual rate%?)'

#4udgeted rate%?)'

#4udgeted rate%

&. aActual

Cot!"#

'

No$%al

Cot!"#

c

:a$!at!o" o

No$%al Cot!"#

3irect 6ostsIndirect 6osts!otal Job 6osts

?*B $+= > ? B,))=

?)& $+= > +,&=

?$+,$+=

?*B $+= > ? B,))=

?)' $+= > +,@@=

?$+,'&=

?** $+= > ? @,@==

?)' $+= > +,@@=

?$*,+@=

All three costing systems use the actual professional labor time of $+= hours. !he budgeted $*=hours for the Pierre /nterprises audit job is not used in job costing. owever, 6hico may haveused the $*= hour number in bidding for the audit.

!he actual costing figure of ?$+,$+= is less than the normal costing figure of ?$+,'&=because the actual indirect(cost rate #?)&% is less than the budgeted indirect(cost rate #?)'%. !henormal costing figure of ?$+,'&= is more than the variation of normal costing #based on budgetedrates for direct costs% figure of ?$*,+@=, because the actual direct(cost rate #?*B% is more than thebudgeted direct(cost rate #?**%.

)(&&

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Although not re1uired, the following overview diagram summaries 6hicoEs job(costingsystem.

AuditSupport

ProfessionalLabor-Hours

Indirect Costs

Direct Costs

INDIRECTCOSTPOOL

COSTALLOCATION

BASE

COST OBJECT:JOB FOR

AUDITINGPIERRE

& CO.

DIRECTCOST

ProfessionalLabor

)(&'

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4-29 #&='= min.% Jo' cot!"# actual* "o$%al* a"( .a$!at!o" $o% "o$%al cot!"#,

$. Actual direct cost rate for architectural labor > ?B& per architectural labor(hour

Actual indirect cost rate >?$,&B,*==

'),*B=> ?*= per architectural labor(

hour

4udgeted direct cost ratefor professional labor >

$2,880,00

32,000> ?B= per architectural labor(hour

4udgeted indirect cost rate >$1,728,00

32,000> ?*) per architectural labor(

hour

a

Actual

Cot!"#

'

No$%al

Cot!"#

c

:a$!at!o" o

No$%al Cot!"#

3irect(6ost ate ?B&

#Actual rate%

?B&

#Actual rate%

?B=

#4udgeted rate%Indirect(6ost ate ?*=

#Actual rate%?*)

#4udgeted rate%?*)

#4udgeted rate%

&. aActual

Cot!"#

'

No$%al

Cot!"#

c

:a$!at!o" o

No$%al Cot!"#

3irect 6ostsIndirect 6osts!otal Job 6osts

?B& &*= > ?&',===

?*= &*= > $&,*==

?'*,*==

?B& &*= > ?&',===

?*) &*= > $',*==

?'+,*==

?B= &*= > ?&&,*==

?*) &*= > $',*==

?'+,===

All three costing systems use the actual architectural labor time of &*= hours. !he budgeted &*hours for the 6hamp !ower job is not used in job costing. owever, 4raden 4rothers may haveused the budgeted number of hours in bidding for the job.

)(&)

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4,3& #'= min.% P$o$at!o" o o.)$/)a(.

overhead rate

$. 4udgeted manufacturing>

4udgeted manufacturing overhead cost

4udgeted direct manufacturing labor cost

?$&*,===

*= of direct manufacturing labor cost

?&*=,===

= =

&. 5verhead allocated > *= Actual direct manufacturing labor cost> *= ?&&@,=== > ?$$),===

7nderallocatedmanufacturing

overhead>

Actualmanufacturingoverhead costs

Allocated plantoverhead costs

> ?$$,=== ?$$),=== > ?',===

7nderallocated manufacturing overhead > ?',===

'a. All underallocated manufacturing overhead is written off to cost of goods sold.

4oth work in process #9IP% and finished goods inventory remain unchanged.

Accou"t

;)c, 31* 2&11

Bala"c)

B)o$) P$o$at!o"

1

P$o$at!o" o 1 N2

9IP ? *=,== ? = ? *=,==Hinished ;oods &)*,=*= = &)*,=*=6ost of ;oods ? $@= ? *=,@@=Hinished ;oods &)*,=*= =.&B =.&B ?',=== > @= &)*,B&=6ost of ;oods

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'c. 7nderallocated manufacturing overhead prorated based on &=$$ overhead in endingbalances"

Accou"t

;)c, 31* 2&11

Accou"t

Bala"c)

B)o$)

P$o$at!o"

1

Allocat)(

a"u,

O.)$/)a( !"

;)c, 31* 2&11

Bala"c)

B)o$)

P$o$at!o"

2

Allocat)( a"u,

O.)$/)a( !"

;)c, 31* 2&11

Bala"c) a a

P)$c)"t o Total

3 > 2 ? 1 N 4

9IP ? *=,== ? $=,&+=a =.=B =.=B ?',=== > ? &= ? *=,B=Hinished ;oods &)*,=*= &B,+)=b =.&+ =.&+ ?',=== > @= &)*,@'=6ost of ;oods 3irect manuf. labor cost *= > ?&=,*&=2 ?*B,&@=2 ?$)@,&== *=

). 9riting off all of the underallocated manufacturing overhead to 6ost of ;oods

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4-31 #&='= min% Jo' cot!"#* accou"t!"# o$ %a"uactu$!"# o.)$/)a(* 'u(#)t)( $at),

$. An overview of the job(costing system is"

&. 4udgeted manufacturing overhead divided by allocation base"

a. -achining 3epartment"

?$=,++=,===

&=*,=== machine(hours> ?*& per machine(hour

b. Hinishing 3epartment"

?,'&,===

?',@==,===> $B) of direct manufacturing labor costs

'. -achining 3epartment overhead, ?*& $'= machine(hours ?+,+=Hinishing 3epartment overhead, $B) of ?$,$== &,$')!otal manufacturing overhead allocated ?@,@B)

)(&

COST OBJECT:

JOB

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). !otal costs of Job )'$"3irect costs"

3irect materials-achining 3epartment ?$*,*==Hinishing 3epartment *,===

3irect manufacturing labor C-achining 3epartment )==CHinishing 3epartment $,$== ?&&,===

Indirect costs"-achining 3epartment overhead, ?*& $'= ? +,+=

Hinishing 3epartment overhead, $B) of ?$,$== &,$') @,@B)!otal costs ?'=,@B)

!he per(unit product cost of Job )'$ is ?'=,@B) G )== units > ?.&'* per unit

!he point of this part is #a% to get the definitions straight and #b% to underscore thatoverhead is allocated by multiplying the actual amount of the allocation base by the budgetedrate.

*.ac/!"!"# @!"!/!"#

-anufacturing overhead incurred #actual% ?$$,==,=== ?@,&'+,===-anufacturing overhead allocated

&$=,=== hours ?*& $=,B&=,===

$B) of ?),)==,=== @,*'+,===7nderallocated manufacturing overhead ? $*=,===5verallocated manufacturing overhead ? '==,===!otal overallocated overhead > ?'==,=== ?$*=,=== > ?$*=,===

+. A homogeneous cost pool is one where all costs have the same or a similar cause(and(

effect or benefits(received relationship with the cost(allocation base. Hasano likely assumes thatall its manufacturing overhead cost items are not homogeneous.

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4-32 #$*&= min.% S)$.!c) !"(ut$* o' cot!"#* la !$%,

$.

&.4udgeted professional

labor(hour direct cost rate>

4udgeted direct labor compensation per professional

4udgeted direct labor(hours per professional

>?$=),===

$,+== hours

> ?+* per professional labor(hour

8ote that the budgeted professional labor(hour direct(cost rate can also be calculated by

dividing total budgeted professional labor costs of ?&,+==,=== #?$=),=== per professional &*

professionals% by total budgeted professional labor(hours of )=,=== #$,+== hours per professional

&* professionals%, ?&,+==,=== )=,=== > ?+* per professional labor(hour.

4udgeted indirectcost rate

> 4udgeted total costs in indirect cost pool4udgeted total professional labor(hours

>?&,&==,===

$,+== hours per professional &* professionals

>?&,&==,===

)=,=== hours

> ?** per professional labor(hour

). R!c/a$(o" Pu"c/

3irect costs"

Professional labor, ?+* $==2 ?+* $*=Indirect costs"

Degal support, ?** $==2 ?** $*=

? +,*==

*,*==?$&,===

? B,*=

@,&*=?$@,===

)(&B

'.

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4-33 #&*'= min.% S)$.!c) !"(ut$* o' cot!"#* to (!$)ct- a"( !"(!$)ct-cot cat)#o$!)*la !$% co"t!"uat!o" o 4-32,

Although not re1uired, the following overview diagram is helpful to understand OeatingEs job(costing system.

ProfessionalDabor(ours

;eneral

Aoc!at) 0a'o$

4udgeted compensation per professional3ivided by budgeted hours of billable

time per professional4udgeted direct(cost rate

? &==,===

G$,+==?$&* per hourQ

?@=,===

G$,+==?*= per hourR

6an also be calculated as!otal budgeted partner labor costs

!otal budgeted partner labor ( hours>

?&==,=== *

$,+== *

>

===,@

?$,===,===> ?$&*

R6an also be calculated as!otal budgeted associate labor costs

!otal budgeted associate labor ( hours>

?@=,=== &=

$,+== &=

>

?$,+==,===

'& ===,> ? *=

&. G)")$alSu++o$t

S)c$)ta$!al

Su++o$t

4udgeted total costs3ivided by budgeted 1uantity of allocation base4udgeted indirect cost rate

?$,@==,===G )=,=== hours?)* per hour

?)==,===G @,=== hours?*= per hour

)('=

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'. R!c/a$(o" Pu"c/

3irect costs"Professional partners,

?$&* += hr.2 ?$&* '= hr.

Professional associates,

?*= )= hr.2 ?*= $&= hr.

3irect costsIndirect costs"

;eneral support,

?)* $== hr.2 ?)* $*= hr.

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4-34 #&=&* min.% P$o$at!o" o o.)$/)a(,

$. 4udgeted manufacturing overhead rate is ?),@==,=== G @=,=== hours > ?+= per machine(hour.

&.-anufacturing overhead

underallocated>

-anufacturing overheadincurred

-anufacturing overhead

allocated

> ?),B==,=== ?),*==,===Q> ?)==,===Q?+= *,=== actual machine(hours > ?),*==,===

a. 9rite(off to 6ost of ;oods 2 3

9ork in ProcessHinished ;oods6ost of ;oods

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'. Alternative #c% is theoretically preferred over #a% and #b% because the underallocatedamount and the balances in work(in(process and finished goods inventories are material.Alternative #c% yields the same ending balances in work in process, finished goods, and cost ofgoods sold that would have been reported had actual indirect cost rates been used.

6hapter ) also discusses an adjusted allocation rate approach that results in the sameending balances as does alternative #c%. !his approach operates via a restatement of the indirectcosts allocated to all the individual jobs worked on during the year using the actual indirect costrate.

4-35 #$* min.% No$%al cot!"#* o.)$/)a( allocat!o"* o$!"# 'aca$(,

$a. -anufacturing overhead allocated > &== F 3irect manufacturing labor cost

?',+==,=== > & F 3irect manufacturing labor cost

3irect manufacturing labor cost >&

?',+==,===> ?$,@==,===

b.!otal manufacturing

cost>

3irect materialused

N3irect manufacturing

labor costN

-anufacturingoverhead allocated

?@,===,=== > 3irect material used N ?$,@==,=== N ?',+==,===

3irect material used > ?&,+==,===

&.9ork in process

$M$M&=$$N

!otalmanufacturing cost >

6ost of goodsmanufactured

N9ork in process $&M'$M&=$$

3enote 9ork in process on $&M'$M&=$$ by S

?'&=,=== N ?@,===,=== > ?,B&=,=== N S

S > ?)==,===

9ork(in(process inventory, $&M'$M$$ > ?)==,===.

)(''

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).'+ #)= min.% P$o$at!o" o o.)$/)a( !t/ to !"(!$)ct cot +ool,

$.a. -olding department"

5verhead allocated > ?),+=& N ?B* N ?$&,)@B > ?$@,=)@

5verallocated overhead > Actual overhead costs 5verhead allocated > ?$,&)@ ?$@,=)@ > ?@== overallocated

$.b. Painting department"

5verhead allocated > ?&,'=+ N ?$,@B N ?&),B@& > ?&B,$@*

7nderallocated overhead > Actual overhead costs 5verhead allocated > ?'$,)@* ?&B,$@* > ?&,'== underallocated

&a. All underMoverallocated overhead is written off to cost of goods sold.

4oth 9ork in Process and Hinished goods inventory remain unchanged.

Accou"t

Accou"t Bala"c)

B)o$) P$o$at!o"

1

P$o$at!o" o 1 2

9IP ? &,&=.== = ? &,&=.==Hinished ;oods $*,*&'.&= = $*,*&'.&=6ost of ;oods $).== $*,+=.&=6ost of ;oods $,=B=.*= $$+,&) .'=!otal ?$*@,)== .== $ .=== ?$,*== .== ?$*B,B== .==

&c. 7nderMoverallocated overhead prorated based on overhead in ending balances. #8ote"overhead must be allocated separately from each department. !his can be done using the numberof machine hoursMdirect labor hours as a surrogate for overhead in ending balances.%

)(')

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Hor -olding department"

Accou"t

Allocat)( O.)$/)a(

!" Accou"t Bala"c)

1

Allocat)( O.)$/)a( !"

Accou"t Bala"c)

a a P)$c)"t o Total

2 > 1 ? 4 ? 5 ? $@$.=Hinished ;oods $,@B =.=+* =.=+* ?&,'== > $)B.*=6ost of ;oods 7 8

9IP ?&,&=.== ?&=) N ?$@$.= > ? #&&.'=% ? &,+B.=Hinished ;oods $*,*&'.&= ?)&.)= N ?$)B.*= > $=.$= $*,+'=.'=6ost of ;oods

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4-37 #'* min.% G)")$al l)(#)$ $)lat!o"/!+* u"()$- a"( o.)$allocat!o",

!he solution assumes all materials used are direct materials. A summary of the !(accounts for8eedham 6ompany before adjusting for under( or overallocation of overhead follows"

3irect -aterials 6ontrol 9ork(in(Process 6ontrol$($(&=$$ '=,===

Purchases )==,===

-aterial used for

manufacturing '@=,===

$($(&=$$ &=,===

3irect materials '@=,===

!ransferred to

finished goods B)=,===

$&('$(&=$$ *=,=== 3irect manuf. Dabor '+=,===-anuf. overhead allocated )@=,===

$&('$(&=$$ '==,===

Hinished ;oods 6ontrol 6ost of ;oods 3irect manufacturing labor costs3irect manufacturing wage rate per hour

>?'+=,

?$* per ho

===

ur> &),=== hours

-anufacturing overheadallocated >

3irect manufacturinglabor hours

-anufacturingoverhead rate

> &),=== hours ?&= per hour > ?)@=,===

'. Hrom the debit entry to Hinished ;oods !(account,6ost of jobs completed and transferred from 9IP > ?B)=,===

). Hrom 9ork(in(Process !(account,9ork in process inventory

on $&M'$M&=$$ > ?&=,=== N ?'@=,=== N ?'+=,=== N ?)@=,=== ?B)=,===

> ?'==,===

*. Hrom the credit entry to Hinished ;oods 6ontrol !(account, 6ost of goods sold #beforeproration% > ?B==,===

)('+

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+.-anufacturing overhead

underallocated >3ebits to -anufacturing

5verhead 6ontrol 6redit to -anufacturing

5verhead Allocated

> ?*)=,=== ?)@=,===> ?+=,=== underallocated

. a. 9rite(off to 6ost of ;oods 23

9ork in Process ? '==,=== #&)% =.&) ?+=,=== > ?$),)== ? '$),)==

Hinished ;oods *=,=== # )% =.=) ?+=,=== > &,)== *&,)==

6ost of ;oods )',&== B)',&==?$,&*=,=== $== ?+=,=== ?$,'$=,===

@. 8eedhamEs operating income using write(off to 6ost of ;oods

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4-38 #)=** min.% O.)$.!) o #)")$al l)(#)$ $)lat!o"/!+,

$. Adjusting entry for $&M'$ payroll.

#a% 9ork(in(Process 6ontrol ',@*=-anufacturing 3epartment 5verhead 6ontrol B*=

9ages Payable 6ontrol ),@==!o recognie payroll costs

#b% 9ork(in(Process 6ontrol ),+&=-anufacturing 5verhead Allocated ),+&=

!o allocate manufacturing overhead at $&=

?',@*= > ?),+&= on ?',@*= of direct manufacturinglabor incurred on $&M'$

Note" 3irectmanufacturing labor up to $&M'= payroll, then manufacturing overhead allocated up to $&M'=payroll > $.&=x

)('@

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7se the !(account e1uation and solve forx"?*,@== N ?*B,=== NxN $.&=x ?&&*,=== > ?@,$==&.&=x> ?@,$== ?*,@== ?*B,=== N ?&&*,=== > ?$+@,'==

x>?$+@,'==

?+,*==&.&

=

3irect manufacturing labor up to $&M'= payroll > ?+,*==

-anufacturing overhead allocated up to $&M'= > $.&=xF ?+,*== > ?B$,@==!otal direct manufacturing labor for 3ecember > ?+,*== N ?',@*= #direct manufacturing laborfor $&M'$ calculated in re1uirement $% > ?@=,'*=

!otal manufacturing overhead allocated for 3ecember > ?B$,@== N ?),+&=c> ?B+,)&=

c?',@*= $&= > ?),+&=, manufacturing overhead allocated on ?',@*= of direct manufacturing

labor incurred on $&M'$.

#b% !otal direct manufacturing labor for 3ecember > ?@=,'*=.#c% !otal manufacturing overhead allocated #recorded% in work in process e1uals ?B+,)&=.#d% /nding balance in work(in(process inventory on 3ecember '$ e1uals ?@,$== N ?',@*=

#direct manufacturing labor added on $&M'$, re1uirement $% N ?),+&= #manufacturingoverhead allocated on $&M'$, re1uirement $% > ?$+,*=.

An alternative approach to solving re1uirements &b, &c, and &d is to calculate the work(in(process inventory on 3ecember '$, recogniing that because no new units were started orcompleted, no direct materials were added and the direct manufacturing labor and manufacturingoverhead allocated on 3ecember '$ were added to the work(in(process inventory balance of3ecember '=.

9ork(in(processinventory

on $&M'$

>9ork(in(process

inventory on

$&M'=

N

3irectmanufacturinglabor incurred

on $&M'$

N

-anufacturingoverhead

allocated on

$&M'$> ?@,$== N ?',@*= N ?),+&=> ?$+,*=

9e can now use the !(account e1uation for work(in(process inventory account from $&M$ to$&M'$, as follows.

Detx> 3irect manufacturing labor for 3ecember!hen $.&=x> -anufacturing overhead allocated for 3ecember

9ork(in(

processinventoryon $&M$

N

3irect

materialsadded in

3ecember

N

3irect

manufacturinglabor added in

3ecember

N

-anufacturing

overheadallocated in3ecember

6ost of goodsmanufacturedin 3ecember

>

9ork(in(

processinventory on

$&M'$

?*,@== N ?*B,=== NxN $.&=x ?&&*,=== > ?$+,*=&.&=x> ?$+,*= ?*,@== ?*B,=== N ?&&*,===&.&=x > ?$+,==

x>?$+,==

?@=,'*=&.&=

=

)('B

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!otal direct manufacturing labor for 3ecember > ?@=,'*=

!otal manufacturing overhead allocated in 3ecember > $.&= ?@=,'*= > ?B+,)&=

Hinished ;oods 6ontrol

4eginning balance $&M$

6ost of goods manufactured

',*==

&&*,=== &$=,===

c

6ost of goods sold4alance $&M'= $@,*==c?',*== N ?&&*,=== ?$@,*== > ?&$=,===

#e% 6ost of goods sold for 3ecember before adjustments for under( or overallocated overheade1uals ?&$=,==="

6ost of ;oods

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4-39 #'= min.% Allocat!o" a"( +$o$at!o" o o.)$/)a(.

$. 4udgeted overhead rate > 4udgeted overhead costs G 4udgeted labor costs > ?$@=,=== G ?$*=,=== > $&= of labor cost

&. /nding work in process

Jo' 1 Jo' 2 Total

3irect material costs ? ',+&= ? +,@'= ?$=,)*=3irect labor costs ),*== ,&*= $$,*=5verhead#$.&= F 3irect labor costs% *,)== @,== $),$==!otal costs ?$',*&= ?&&,@= ?'+,'==

6ost of goods sold > 4eginning 9IP N -anufacturing costs #Actual direct materials NActual direct labor N Allocated overhead% /nding 9IP

> ?= N #?$&+,*== N ?$)@,*= N $)@,*= $.&=% ?'+,'== > ?)$,)*=

'. 5verhead allocated > $.&= ?$)@,*= > ?$@,*==

5verallocated overhead > Actual overhead Allocated overhead > ?$+,=== ?$@,*== > ?&,*== overallocated

).a. All overallocated overhead is written off to cost of goods sold.

9IP inventory remains unchanged.

Accou"t1

;)c, 31* 2&1&

Accou"t Bala"c)

B)o$) P$o$at!o"2

$!t)-o o 2 ? 2 4

9ork in Process ? '+,'== =.=@ ? #&==% ? '+,$==

6ost of ;oods

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4-4& #&= min.% Jo' cot!"#* co"t$act!"#* )t/!c,

$. 3irect manufacturing costs"3irect materials #?@,=== 0 $*= huts%3irect manufacturing labor #?+== $*= huts%

-anufacturing overhead #?' B=,===%

!otal costs-arkup #$* ?$,*+=,===%

!otal bid price

?$,&==,=== B=,===

&=,===?$,*+=,===

&'),===?$,B),===

&. 3irect manufacturing costs"3irect materials3irect manufacturing labor

Production labor Inspection labor production labor N inspection labor N setup laborProduction labor > &@ hours $*= ?&= > ?@),===

Inspection labor > ) hours 0 $*= ?$* > ?B,===

+ hours 0 $*= ?$& > ?$=,@==

Alternatively, 3irect manufacturing labor?$'@,)==

$*= huts > ?$=',@==&== huts

=

-anufacturing overhead > #' ?$=',@==% > ?'$$,)==

'. !he main discrepancies in costs #before the mark up% in re1uirements $ and & are as follows"

a. -aterials are marked up by $* in the

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c. 6redibility disclose all relevant information.

I would go to my boss with the bid in re1uirement $ after checking

#a% If any direct material savings is possible and#b% If direct manufacturing labor can be reduced to &@ hours from '= hours.

Assuming that only the latter is the case, then the bid I would propose is"

3irect materials ?@== $*= ?$,&==,===

3irect manufacturing labor &@ hours ?&= $*= @),===-anufacturing overhead &*&,===!otal costs $,*'+,===-ark up at $* of total costs &'=,)==

?$,++,)==

)()'

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4-41 #'* min.% Jo' cot!"#-)$.!c) !"(ut$.

$. 8&F 2

Total

4

sher #?)&* N ?B=2 ?*= N ?&&*% ? *$* ? B* ? @= ?&,&="ro#n #?&== N ?'&=2 ?**= N ?)*=% *&= $,=== @== &,'&=Sherman $*= &== $+= *$=!otal ?$,$@* ?&,$* ?$,)= ?*,$==

&. 6ost of 6ompleted =.@= $,'*=a> ?$,=@=7nderallocated overhead > Actual overhead Allocated overhead

> ?$,B@= $,=@= > ?B== underallocated

a!otal direct labor in April > ?&&* N ?* N ?)*= N ?)== N ?&== > ?$,'*=

)a. 7nderallocated overhead is written off to 66 2 ? 3