CHAPTER 4 JOB COSTING 4.16 a. b. c. d. e. f. g. h. i. j. k. (10 min) Job order costing, process costing. l. m. n. o. p. q. r. s. t. u.

Job costing Process costing Job costing Job costing Job costing Job costing Process costing Job costing Process costing Job costing

Job costing Process costing Job costing Process costing Job costing Process costing Job costing Job costing (but some process costing) Process costing Process costing Job costing

4- !

( 0 min.) Act"#$ costing, nor%#$ costing, #cco"nting &or %#n"&#ct"ring o'er(e#d. !udgeted manufacturing o"erhead rate
!udgeted manufacturing o"erhead costs !udgeted direct manufacturing labor costs

1.

$ % &00% 000 # 1.(0 or 1(') $1%'00% 000

*ctual manufacturing o"erhead costs *ctual direct manufacturing labor costs

*ctual manufacturing o"erhead rate

$ % &''% 000 # 1.+ or 1+0) $1% 4'0% 000 ,osts of Job 6 6 under actual and normal costing follo-. # Act"#$ Costing Nor%#$ Costing $ 40%000 00%000 '4%000 $1 4%000

/irect materials /irect manufacturing labor costs 1anufacturing o"erhead costs $00%000 1.+02 $00%000 1.(0 3otal manufacturing costs of Job 6 6

$ 40%000 00%000 '&%000 $1 &%000

441

0.

3otal manufacturing o"erhead allocated under normal costing #

*ctual manufacturing !udgeted o"erhead rate labor costs

# $1%4'0%000 1.(0 # $ %610%000 5nderallocated manufacturing # o"erhead *ctual manufacturing 1anufacturing 6 o"erhead allocated o"erhead costs

# $ %&''%000 $ %610%000 # $14'%000 3here is no under4 or o"erallocated o"erhead under actual costing because o"erhead is allocated under actual costing b7 multipl7ing actual manufacturing labor costs and the actual manufacturing o"erhead rate. 3his% of course equals the actual manufacturing o"erhead costs. *ll actual o"erhead costs are allocated to products. 8ence% there is no under4 or o"erallocatead o"erhead. 4- ) 1. ( 0 400 min.) Job costing, nor%#$ #nd #ct"#$ costing. !udgeted indirect4 cost rate # !udgeted indirect costs $(%000%000 # 160%000 hours !udgeted direct labor4hours

# $'0 per direct labor4hour *ctual indirect4 cost rate

$6%(((%000 *ctual indirect costs # 164%000 hours *ctual direct labor4hours # $4 per direct labor4hour

3hese rates differ because both the numerator and the denominator in the t-o calculations are different9one based on budgeted numbers and the other based on actual numbers. a. :ormal costing /irect costs /irect materials /irect labor ;ndirect costs *ssembl7 support ($'0 +002 $'0 1%010) 3otal costs *#g"n# +ode$ $106%4'0 06% &6 14 %& 6 4'%000 $1(&%& 6 +ission +ode$ $1 &%604 41%410 16+%014 '0%'00 $ 1+%'14

44

b.

*ctual costing /irect costs /irect materials /irect labor ;ndirect costs *ssembl7 support ($4 +002 $4 1%010) 3otal costs

$106%4'0 06% &6 14 %& 6 0&%(00 $1(0%' 6

$1 &%604 41%410 16+%014 4 %4 0 $ 11%404

0. :ormal costing enables *nderson to report a job cost as soon as the job is completed% assuming that both the direct materials and direct labor costs are kno-n at the time of use. <nce the +00 direct labor4hours are kno-n for the =aguna 1odel (June 00&)% *nderson can compute the $1(&%& 6 cost figure using normal costing. *nderson can use this information to manage the costs of the =aguna 1odel job as -ell as to bid on similar jobs later in the 7ear. ;n contrast% *nderson has to -ait until the /ecember 00& 7ear4end to compute the $1(0%' 6 cost of the =aguna 1odel using actual costing. *lthough not required% the follo-ing o"er"ie- diagram summari>es *nderson ,onstruction?s job4costing s7stem.

440

4- , 1.

(10 min.) B"dgeted %#n"&#ct"ring o'er(e#d r#te, #$$oc#ted %#n"&#ct"ring o'er(e#d. !udgeted manufacturing o"erhead rate # # !udgeted manufacturing o"erhead !udgeted machine hours $4% 000% 000 # $ 0 per machine4hour 00% 000 machine4hours

1anufacturing o"erhead allocated # *ctual machine4hours @ !udgeted manufacturing o"erhead rate # 1+'%000 @ $ 0 # $0%+00%000

0. Aince manufacturing o"erhead allocated is greater than the actual manufacturing o"erhead costs% Baheed o"erallocated manufacturing o"erhead. 1anufacturing o"erhead allocated *ctual manufacturing o"erhead costs <"erallocated manufacturing o"erhead $0%+00%000 0%(60%000 $ 40%000

444

4--. 1.

( 0400 min.) Job costing, #cco"nting &or %#n"&#ct"ring o'er(e#d, b"dgeted r#tes. *n o"er"ie- of the product costing s7stem is
IN D IR E C T C O S T P O O L

M a c h in in gD e p a rtm e n t A s s e m b lyD e p a rtm e n t M a n u fa c tu rin gO v e rh e a d M a n u fa c tu rin gO v e rh e a d

C O S T A L L O C A T IO N B A S E

} } }

M a c h in e -H o u rs

D ire c tM a n u f. L a b o rC o s t

C O S TO B J E C T : P R O D U C T

In d ire c tC o s ts D ire c tC o s ts

D IR E C T C O S T

D ire c t M a te ria ls

D ire c t M a n u fa c tu rin g L a b o r

!udgeted manufacturing o"erhead di"ided b7 allocation base. 1achining o"erhead *ssembl7 o"erhead. .
$1%(00%000 # $06 per machine4hour '0%000 $0%600%000 # 1(0) of direct manuf. labor costs $ %000%000

1achining department% %000 hours $06 *ssembl7 department% 1(0) $1'%000 3otal manufacturing o"erhead allocated to Job 4+4 *ctual manufacturing o"erhead 1anufacturing o"erhead allocated% ''%000 $06 1(0) $ % 00%000 5nderallocated (<"erallocated) +#c(ining $ %100%000 1%+(0%000 9 $ 1 0%000

$& %000 &%000 $++%000 Asse%b$/ $ 0%&00%000 9 0%+60%000 $ ( 60%000)

0.

44'

4-1.

( 0 ' min.) Job costing, cons"$ting &ir%. !udgeted indirect4cost rate # $10%000%000 C $'%000%000 # 60) of professional labor costs

;:/;FD,3 ,<A3 P<<=

} } } }

,lient ,onsulting ,onsulting Aupport Aupport Aupport

,<A3 *==<,*3;<: !*AD

Professional Professional =abor =abor,osts ,osts

,<A3 <!JD,3. J<! E<F ,<:A5=3;:G ,=;D:3

;ndirect ,osts /irect ,osts

/;FD,3 ,<A3A

Professional =abor

*t the budgeted re"enues of $ 0%000%000% 3a7lor?s operating income of $ %000%000 equals 10) of re"enues. 1arkup rate # $ 0%000%000 C $'%000%000 # 400) of direct professional labor costs

446

0.

!udgeted costs /irect costs. /irector% $ 00 0 $ 600 Partner% $100 16 1%600 *ssociate% $'0 40 %000 *ssistant% $00 160 4%(00 ;ndirect costs. ,onsulting support% 60) $+%000 3otal costs

$ +%000 0%400 $0 %400

*s calculated in requirement % the bid price to earn a 10) income4to4re"enue margin is 400) of direct professional costs. 3herefore% 3a7lor should bid 4 $+%000 # $06%000 for the Fed Fooster job. !id price to earn target operating income4to4re"enue margin of 10) can also be calculated as follo-s. =et F # re"enue to earn target income F 6 0.10F # $0 %400 0.+0F # $0 %400 F # $0 %400 C 0.+0 # $06%000 /irect costs $ +%000 ;ndirect costs 0%400 <perating income 0%600 !id price $06%000

or%

44&

4--1.

(1'6 0 min.) Ser'ice ind"str/, ti%e period "sed to co%p"te indirect cost r#tes.
J#n0+#rc( $400%000 +0) $060%000 000%000 $660%000 16') Apri$0J"ne $ (0%000 60) $16(%000 000%000 $46(%000 16&) J"$/0Sept $ '0%000 60) $1'0%000 000%000 $4'0%000 1(0) Oct01ec $ &0%000 60) $16 %000 000%000 $46 %000 1&1) $ (40%000 1% 00%000 $ %040%000 1&0) Tot#$ $1% 00%000

/irect labor costs Hariable o"erhead costs as a percentage of direct labor costs Hariable o"erhead costs (Percentage direct labor costs) EiIed o"erhead costs 3otal o"erhead costs 3otal o"erhead costs as a percentage of direct labor costs

Job 33/irect materials /irect labor costs <"erhead allocated ("ariable J fiIed) (16')2 1(0)2 1&0) of $6%000) Eull cost of Job 00

B"dgeted O'er(e#d R#te 2sed J#n0+#rc( J"$/0Sept A'er#ge R#te R#te 4e#r$/ R#te $10%000 $10%000 $10%000 6%000 6%000 6%000 +%+00 $ '%+00 10%(00 $ 6%(00 10% 00 $ 6% 00

(a) (b) (c) .

3he full cost of Job 00 % using the budgeted o"erhead rate of 16') for Januar761arch% is $ '%+00. 3he full cost of Job 00 % using the budgeted o"erhead rate of 1(0) for Jul76Aeptember% is $ 6%(00. 3he full cost of Job 00 % using the annual budgeted o"erhead rate of 1&0)% is $ 6% 00.
!udgeted fiIed o"erhead rate based on annual fiIed o"erhead costs and annual direct labor costs # $1% 00%000 $1% 00%000 # 100) B"dgeted 5#ri#b$e O'er(e#d R#te 2sed J#n"#r/0+#rc( J"$/0Sept r#te r#te $10%000 $10%000 6%000 6%000 '%400 6%000 $ &%400 0%600 6%000 $ '%600

Job 33/irect materials /irect labor costs Hariable o"erhead allocated (+0)2 60)2 of $6%000) EiIed o"erhead allocated (100) of $6%000) Eull cost of Job 00

44(

(a) 3he full cost of Job 00 % using the budgeted "ariable o"erhead rate of +0) for Januar76 1arch and an annual fiIed o"erhead rate of 100)% is $ &%400. (b) 3he full cost of Job 00 % using the budgeted "ariable o"erhead rate of 60) for Jul76 Aeptember and an annual fiIed o"erhead rate of 100)% is $ '%600. 0. ;f Printers% ;nc. sets prices at a markup of costs% then prices based on costs calculated as in Fequirement (rather than as in Fequirement 1) -ould be more effecti"e in deterring clients from sending in last4minute% congestion4causing orders in the Januar761arch time frame. ;n this calculation% more "ariable manufacturing o"erhead costs are allocated to jobs in the first quarter% reflecting the larger costs of that quarter caused b7 higher o"ertime and facilit7 and machine maintenance. 3his method better captures the cost of congestion during the first quarter. 4--3 1. (1061' min.) Acco"nting &or %#n"&#ct"ring o'er(e#d. !udgeted manufacturing o"erhead rate # $&%'00% 000 '0%000

# $00 per machine4hour . Bork4in4Process ,ontrol &%0'0%000 1anufacturing <"erhead *llocated &%0'0%000 ( 4'%000 machine4hours $00 per machine4hour # $&%0'0%000)

0. $&%0'0%0006 $&%000%000 # $'0%000 o"erallocated% an insignificant amount of actual manufacturing o"erhead costs $'0%000 C $&%000%000 # 0.66). 1anufacturing <"erhead *llocated &%0'0%000 1anufacturing /epartment <"erhead ,ontrol ,ost of Goods Aold &%000%000 '0%000

44+

4--4

(0'4' min.) Job costing, 6o"rn#$ entries.

Aome instructors ma7 also -ant to assign DIercise 44 '. ;t demonstrates the relationships of the general ledger to the underl7ing subsidiar7 ledgers and source documents. 1. *n o"er"ie- of the product costing s7stem is.

;:/;FD,3 ,<A3 P<<=

1anufacturing <"erhead

,<A3 *==<,*3;<: !*AD

} } }

/irect 1anufacturing =abor ,osts

,<A3 <!JD,3. PF;:3 J<!

;ndirect ,osts /irect ,osts

/;FD,3 ,<A3

/irect 1aterials

/irect 1anuf . =abor

4410

. K 0. 3his ans-er assumes ,<GA gi"en of $4%0 0 does not include the -riteoff of o"erallocated manufacturing o"erhead. .
(1) ( ) (0) (4) (') (6) (&) (() (+) (10) (11) 1aterials ,ontrol *ccounts Pa7able ,ontrol Bork4in4Process ,ontrol 1aterials ,ontrol 1anufacturing <"erhead ,ontrol 1aterials ,ontrol Bork4in4Process ,ontrol 1anufacturing <"erhead ,ontrol Bages Pa7able ,ontrol 1anufacturing <"erhead ,ontrol *ccumulated /epreciation66buildings and manufacturing equipment 1anufacturing <"erhead ,ontrol 1iscellaneous accounts Bork4in4Process ,ontrol 1anufacturing <"erhead *llocated (1.60 $1%000 # $ %0(0) Einished Goods ,ontrol Bork4in4Process ,ontrol *ccounts Fecei"able ,ontrol (or ,ash) Fe"enues ,ost of Goods Aold Einished Goods ,ontrol 1anufacturing <"erhead *llocated 1anufacturing <"erhead ,ontrol ,ost of Goods Aold (00 (00 &10 &10 100 100 1%000 +00 % 00 400 400 ''0 ''0 %0(0 %0(0 4%1 0 4%1 0 (%000 (%000 4%0 0 4%0 0 %0(0 1%+'0 100

4411

0.
!al. 1 L01L 00( (1) Purchases !al. 1 L01L 00+ !al. 1 L01L 00( ( ) /irect materials (4) /irect manuf. labor (&) 1anuf. o"erhead allocated !al. 1 L01L 00+ !al. 1 L01L 00( (() Goods completed !al. 1 L01L 00+ (10) Goods sold !al. 1 L01L 00+ (0) (4) (') (6) !al. ;ndirect materials ;ndirect manuf. labor /epreciation 1iscellaneous 1aterials ,ontrol 100 ( ) ;ssues (00 (0) ;ssues +0 Bork4in4Process ,ontrol 60 (()Goods completed &10 1%000 %0(0 00 Einished Goods ,ontrol '00 (10) Goods sold 4%1 0 600 ,ost of Goods Aold 4%0 0 (11) *djust for o"erallocation 0%(+0 1anufacturing <"erhead ,ontrol 100 (11) 3o close +00 400 ''0 0 1anufacturing <"erhead *llocated %0(0 (&) 1anuf. o"erhead allocated !al. 1%+'0 4%0 0 &10 100

4%1 0

100

(11) 3o close

%0(0 0

441

4--7 80' minutes) Jo"rn#$ entries, T-#cco"nts, #nd so"rce doc"%ents. 1. i. /irect 1aterials ,ontrol 1 4%000 *ccounts Pa7able ,ontrol 1 4%000 Aource /ocument. Purchase ;n"oice% Fecei"ing Feport Aubsidiar7 =edger. /irect 1aterials Fecord% *ccounts Pa7able ii. Bork in Process ,ontrol a 1 %000 /irect 1aterials ,ontrol 1 %000 Aource /ocument. 1aterial Fequisition Fecords% Job ,ost Fecord Aubsidiar7 =edger. /irect 1aterials Fecord% Bork4in4Process ;n"entor7% Fecords b7 Jobs iii. Bork in Process ,ontrol (0%000 1anufacturing <"erhead ,ontrol '4%'00 Bages Pa7able ,ontrol 104%'00 Aource /ocument. =abor 3ime Fecords% Job ,ost Fecords Aubsidiar7 =edger.% 1anufacturing <"erhead Fecords% Dmplo7ee =abor Fecords% Bork4in4 Process ;n"entor7 Fecords b7 Jobs i". 1anufacturing <"erhead ,ontrol 1 +%'00 Aalaries Pa7able ,ontrol 0%000 *ccounts Pa7able ,ontrol +%'00 *ccumulated /epreciation ,ontrol 00%000 Fent Pa7able ,ontrol &0%000 Aource /ocument. /epreciation Achedule% Fent Achedule% 1aintenance -ages due% ;n"oices for miscellaneous factor7 o"erhead items Aubsidiar7 =edger. 1anufacturing <"erhead Fecords ". Bork in Process ,ontrol 00%000 1anufacturing <"erhead *llocated ($(0%000 $ .'0) Aource /ocument. =abor 3ime Fecords% Job ,ost Fecord Aubsidiar7 =edger. Bork4in4Process ;n"entor7 Fecords b7 Jobs 00%000

"i. Einished Goods ,ontrol b 0(&%000 Bork in Process ,ontrol 0(&%000 Aource /ocument. Job ,ost Fecord% ,ompleted Job ,ost Fecord Aubsidiar7 =edger. Bork4in4Process ;n"entor7 Fecords b7 Jobs% Einished Goods ;n"entor7 Fecords b7 Jobs "ii. ,ost of Goods Aold c 40 %000 Einished Goods ,ontrol Aource /ocument. Aales ;n"oice% ,ompleted Job ,ost Fecord Aubsidiar7 =edger. Einished Goods ;n"entor7 Fecords b7 Jobs "iii. 1anufacturing <"erhead *llocated 1anufacturing <"erhead ,ontrol ,ost of Goods Aold 4410 40 %000

00%000 1(4%000 16%000

Aource /ocument. Prior Journal Dntries iI. *dministrati"e DIpenses &%000 1arketing DIpenses 1 0%000 Aalaries Pa7able ,ontrol 00%000 *ccounts Pa7able ,ontrol +0%000 *ccumulated /epreciation% <ffice Dquipment &%000 Aource /ocument. /epreciation Achedule% 1arketing Pa7roll Fequest% ;n"oice for *d"ertising% Aales ,ommission Achedule. Aubsidiar7 =edger. Dmplo7ee Aalar7 Fecords% *dministration ,ost Fecords% 1arketing ,ost Fecords. a 1aterials used # !eginning direct materials in"entor7 J Purchases Dnding direct materials in"entor7 # $+%000 J $1 4%000 $11%000 # $1 %000 b ,ost of goods manufactured # !eginning B;P in"entor7 J 1anufacturing cost Dnding B;P in"entor7 # $6%000 J ($1 %000 J $(0%000 J $ 00%000) $ 1%000 # 0(&%000 c ,ost of Goods Aold # !eginning fin. goods in"entor7 J ,ost of goods manuf. Dnding fin. goods in"entor7 # $6+%000 J $0(&%0000 $ 4%000 # $40 %000

4414

34accounts /irect 1aterials ,ontrol +%000 ( ) 1aterials used 1 4%000 11%000

!al. 1L1L 00( (1) Purchases !al. 1 L01L 00( !al. 1L1L 00( ( ) /irect materials used (0) /irect manuf. labor (') 1anuf. o"erhead allocated !al. 1 L01L 00( !al. 1L1L 00( (6) ,ost of goods manuf. !al. 1 L01L 00( (&) Goods sold

;ssues

%000

Bork4in4Process ,ontrol 6%000 (6) ,ost of goods manufactured 1 %000 (0%000 00%000 1%000 Einished Goods ,ontrol 6+%000 (&) ,ost of goods sold 0(&%000 4%000 ,ost of Goods Aold 40 %000 (() *djust for o"erallocation

0(&%000

40 %000

16%000

(0);ndirect labor (4) Aupplies (4) 1iscellaneous (4 /epreciation (4) Fent !al. (() 3o close

1anufacturing <"erhead ,ontrol '4%'00 (() 3o close 0%000 +%'00 00%000 &0%000 0 1anufacturing <"erhead *llocated 00%000 (') 1anuf. o"erhead allocated !al.

1(4%000

00%000 0

441'

4--9

(4' min.) Job costing, 6o"rn#$ entries.

Aome instructors ma7 -ish to assign Problem 44 4. ;t demonstrates the relationships of journal entries% general ledger% subsidiar7 ledgers% and source documents. 1. *n o"er"ie- of the product4costing s7stem is
;:/;FD,3 ,<A3 P<<=

} } } }

1anufacturing <"erhead

,<A3 *==<,*3;<: !*AD

1achine48ours

,<A3 <!JD,3 PF</5,3

;ndirect ,osts /irect ,osts

/;FD,3 ,<A3A

/irect 1aterials

/irect 1anuf. =abor

. (1) ( ) (0) (4) (') (6) (&) (() (+) (10a) (10b)

*mounts in millions. 1aterials ,ontrol *ccounts Pa7able ,ontrol Bork4in4Process ,ontrol 1aterials ,ontrol 1anufacturing /epartment <"erhead ,ontrol 1aterials ,ontrol Bork4in4Process ,ontrol Bages Pa7able ,ontrol 1anufacturing /epartment <"erhead ,ontrol Bages Pa7able ,ontrol 1anufacturing /epartment <"erhead ,ontrol *ccumulated /epreciation 1anufacturing /epartment <"erhead ,ontrol Harious liabilities Bork4in4Process ,ontrol 1anufacturing <"erhead *llocated Einished Goods ,ontrol Bork4in4Process ,ontrol ,ost of Goods Aold Einished Goods ,ontrol *ccounts Fecei"able ,ontrol (or ,ash ) Fe"enues 1'0 1'0 14' 14' 10 10 +0 +0 00 00 1+ 1+ + + 60 60 +4 +4 + + 400 400

4416

3he posting of entries to 34accounts is as follo-s. !al. (1) 1aterials ,ontrol 1 ( ) 1'0 (0) 14' 10 !al. ( ) (4) (() !al. (10a) (11) Bork4in4Process ,ontrol (+) 14' +0 60 6 ,ost of Goods Aold + ' +4

!al. (+)

Einished Goods ,ontrol 6 (10a) +4 1anufacturing /epartment <"erhead ,ontrol 10 (11) 00 1+ + *ccounts Pa7able ,ontrol (1) *ccumulated /epreciation (6) *ccounts Fecei"able ,ontrol 400

(0) (') (6) (&)

6(

1anufacturing <"erhead *llocated (11) 60 (() 60

1'0

Bages Pa7able ,ontrol (4) (') Harious =iabilities (&) Fe"enues (10b)

+0 00 +

1+

(10b)

400

3he ending balance of Bork4in4Process ,ontrol is $6. 0. (11) 1anufacturing <"erhead *llocated ,ost of Goods Aold 1anufacturing /epartment <"erhead ,ontrol Dntr7 posted to 34accounts in Fequirement . 60 ' 6(

441&

4--!

(1' min.) Job costing, "nit cost, ending :or; in progress. $ ' $ 0 Job + $ &'%000 11%000 $ 0%000 Job +$ 00%000 (%000 $160%000 Job +$ '0%000 00%000 160%000 $410%000

1. /irect manufacturing labor rate per hour 1anufacturing o"erhead cost allocated per manufacturing labor4hour /irect manufacturing labor costs /irect manufacturing labor hours ($ &'%000 $ '2 $ 00%000 $ ') 1anufacturing o"erhead cost allocated (11%000 $ 02 (%000 $ 0) Job Costs +#/ -.., /irect materials /irect manufacturing labor 1anufacturing o"erhead allocated 3otal costs . :umber of pipes produced for Job 11 ,ost per pipe ($'&0%000 1%'00) 0. Einished Goods ,ontrol Bork4in4Process ,ontrol

Job + $ &'%000 &'%000 0%000 $'&0%000 1%'00 $0(0 '&0%000

'&0%000

4. Fa7mond ,ompan7 began 1a7 00+ -ith no -ork4in4process in"entor7. /uring 1a7% it started and finished 11. ;t also started 1 % -hich is still in -ork4in4process in"entor7 at the end of 1a7. 1 ?s manufacturing costs up to this point% $410%000% remain as a debit balance in the Bork4in4Process ;n"entor7 account at the end of 1a7 00+.

441(

4--) 1.

( 000 min.) Job costing< #ct"#$, nor%#$, #nd '#ri#tion &ro% nor%#$ costing. *ctual direct cost rate for professional labor # $'( per professional labor4hour *ctual indirect cost rate hour
!udgeted direct cost rate for professional labor

$&44%000 1'%'00 hours

$4( per professional labor4

$+60%000 16%000 hours #

# $60 per professional labor4hour # $4' per professional labor4

!udgeted indirect cost rate hour

$& 0%000 16%000 hours

/irect4,ost Fate ;ndirect4,ost Fate . /irect ,osts ;ndirect ,osts 3otal Job ,osts

8#= 8b= Act"#$ Nor%#$ Costing Costing $'( $'( (*ctual rate) (*ctual rate) $4( $4' (*ctual rate) (!udgeted rate)

8c= 5#ri#tion o& Nor%#$ Costing $60 (!udgeted rate) $4' (!udgeted rate)

8#= 8b= 8c= Act"#$ Nor%#$ 5#ri#tion o& Costing Costing Nor%#$ Costing $'( 1 0 # $ 6%+60 $'( 1 0 # $ 6%+60 $60 1 0 # $ &% 00 4( 1 0 # '%&60 4' 1 0 # '%400 4' 1 0 # '%400 $1 %& 0 $1 %060 $1 %600

*ll three costing s7stems use the actual professional labor time of 1 0 hours. 3he budgeted 110 hours for the Pierre Dnterprises audit job is not used in job costing. 8o-e"er% ,hirac ma7 ha"e used the 110 hour number in bidding for the audit. 3he actual costing figure of $1 %& 0 eIceeds the normal costing figure of $1 %060 because the actual indirect4cost rate ($4() eIceeds the budgeted indirect4cost rate ($4'). 3he normal costing figure of $1 %060 is less than the "ariation of normal costing (based on budgeted rates for direct costs) figure of $1 %600% because the actual direct4cost rate ($'() is less than the budgeted direct4cost rate ($60).

441+

*lthough not required% the follo-ing o"er"ie- diagram summari>es ,hirac?s job4costing s7stem.
INDIRECT COST POOL Audit Support

COST ALLOCATION BASE

Professional Labor-Hours

COST OBJECT: JOB FOR AUDITING PIERRE & CO.

Indirect Costs Direct Costs

DIRECT COST Professional Labor

44 0

4--, (00 min.) Job order costing> #ct"#$, nor%#$, #nd '#ri#tion &ro% nor%#$ costing. 1a. *ctual costing /irect cost rate # *ctual professional labor costs C *ctual professional labor4hours # $1%0 0%000 C %000 hours # $60 per professional4hour ;ndirect cost rate # *ctual support costs C *ctual professional labor4hours # $ %400%000 C %000 hours # $10+.0+ per professional4hour 1b. :ormal costing !udgeted professional hours # !udgeted hours per la-7er :umber of la-7ers # '00 ( # 0%000 hours /irect cost rate # *ctual professional labor costs C *ctual professional labor4hours # $1%0 0%000 C %000 hours # $60 per professional4hour

;ndirect cost rate # !udgeted support costs C !udgeted professional labor4hours # $ %000%000 C 0%000 hours # $100 per professional4hour 1c. Hariation from normal costing that uses budgeted rates for direct costs /irect cost rate = !udgeted professional labor costs !udgeted professional labor4hours # $1%100%000 C 0%000 hours # $'' per professional4hour ;ndirect cost rate # !udgeted support costs C !udgeted professional labor4hours # $ %000%000 C 0%000 hours # $100 per professional4hour . 3he costs of *ri *postolus? -ill under each method follo-. a. *ctual ,osting /irect costs 4%000 hours $60 per hour $ 40%000 ;ndirect costs 4%000 hours $10+.0+ per hour 406%060 3otal costs $6&6%060 b. :ormal ,osting /irect costs 4%000 hours $60 per hour ;ndirect costs 4%000 hours $100 per hour 3otal costs c. Hariation from normal costing /irect costs 4%000 hours $'' per hour ;ndirect costs 4%000 hours $100 per hour 3otal costs 44 1 $ 40%000 400%000 $640%000 $ 0%000 400%000 $6 0%000

4.3. (00 min.) Pror#tion o& o'er(e#d. 1. !udgeted manufacturing

o"erhead rate

!udgeted manufacturing o"erhead cost !udgeted direct manufacturing labor cost $100%000 = '0) of direct manufacturing labor cost $ 00%000

. <"erhead allocated # '0) *ctual direct manufacturing labor cost # '0) $ 0%000 #$110%000 <"erallocated plant o"erhead # *ctual plant o"erhead costs 6 *llocated plant o"erhead costs # $106%000 6 $110%000 # 6$4%000 <"erallocated plant o"erhead # $4%000 0a. *ll o"erallocated plant o"erhead is -ritten off to cost of goods sold. !oth -ork in process (B;P) and finished goods in"entor7 remain unchanged. Pror#tion o& ?4,... 1ec. 3 , -.., 1ec. 3 , -.., B#$#nce O'er#$$oc#ted B#$#nce 8Be&ore Pror#tion= +#n"&. O'er(e#d 8A&ter Pror#tion= Acco"nt 8 = 8-= 83= @ 8 = 6 8-= B;P $ '0%000 $ 0 $ '0%000 Einished Goods 40%000 0 40%000 ,ost of Goods Aold '60%000 4%000 ''6%000 3otal $('0%000 $4%000 $(46%000 0b. <"erallocated plant o"erhead prorated based on ending balances.
1ec. 3 , -.., B#$#nce 8Be&ore Pror#tion= 8 = $ '0%000 40%000 '60%000 $('0%000 B#$#nce #s # Percent o& Tot#$ 8-= @ 8 = A ?)7.,... 0.0'(( 0. ( 4 0.6'(( 1.0000 Pror#tion o& ?4,... O'er#$$oc#ted +#n"&. O'er(e#d 83= @ 8-= ?4,... 0.0'(( $4%000 #$ 0' 0. ( 4 $4%000 # 1%100 0.6'(( $4%000 # %60' $4%000 1ec. 3 , -.., B#$#nce 8A&ter Pror#tion= 84= @ 8 = 6 83= $ 4+%&6' 0(%(&0 ''&%06' $(46%000

Acco"nt B;P Einished Goods ,ost of Goods Aold 3otal

0c. <"erallocated plant o"erhead prorated based on 00+ o"erhead in ending balances.
1ec. 3 , -.., B#$#nce 8Be&ore Pror#tion= 8 = $ '0%000 40%000 '60%000 $('0%000 A$$oc#ted +#n"&. O'er(e#d in 1ec. 3 , -.., B#$#nce 8-= $ 10%000a 00%000b &0%000c $110%000 A$$oc#ted +#n"&. O'er(e#d in 1ec. 3 , -.., B#$#nce #s # Percent o& Tot#$ 83= @ 8-= A ? .,... 0.0+0+ 0. & & 0.6064 1.0000 Pror#tion o& ?4,... O'er#$$oc#ted +#n"&. O'er(e#d 84= @ 83= ?4,... 0.0+0+ $4%000#$ 064 0. & & $4%000# 1%0+1 0.6064 $4%000#$ %'4' $4%000 1ec. 3 , -.., B#$#nce 8A&ter Pror#tion= 87= @ 8 = 6 84= $ 4+%606 0(%+0+ ''&%4'' $(46%000

Acco"nt B;P Einished Goods ,ost of Goods Aold 3otal

44

a%b%c

<"erhead allocated # /irect manuf. labor cost '0) # $ 0%0002 60%0002 140%000 '0)

4. Briting off all of the o"erallocated plant o"erhead to ,ost of Goods Aold (,GA) is usuall7 -arranted -hen ,GA is large relati"e to Bork4in4Process and Einished Goods ;n"entor7 and the o"erallocated plant o"erhead is immaterial. !oth these conditions appl7 in this case. F<B should -rite off the $4%000 o"erallocated plant o"erhead to ,ost of Goods Aold *ccount. 4-3 1. . ( 000 min) Job costing, #cco"nting &or %#n"&#ct"ring o'er(e#d, b"dgeted r#tes.

*n o"er"ie- of the job4costing s7stem is. !udgeted manufacturing o"erhead di"ided b7 allocation base. a. 1achining /epartment. $10%000%000 # $'0 per machine4hour 00%000 b. Einishing /epartment. $(%000%000 $4%000%000 # 00) of direct manufacturing labor costs
COST OBJECT: JOB

44 0

0.

1achining /epartment o"erhead% $'0 100 hours Einishing /epartment o"erhead% 00) of $1% '0 3otal manufacturing o"erhead allocated 3otal costs of Job 401. /irect costs. /irect materials661achining /epartment 66Einishing /epartment /irect manufacturing labor 91achining /epartment 9Einishing /epartment ;ndirect costs. 1achining /epartment o"erhead% $'0 100 Einishing /epartment o"erhead% 00) of $1% '0 3otal costs

$6%'00 %'00 $+%000

4.

$14%000 0%000 600 1% '0 $6%'00 %'00

$1(%('0 +%000 $ &%('0

3he per4unit product cost of Job 401 is $ &%('0 C 00 units # $10+. ' per unit 3he point of this part is (a) to get the definitions straight and (b) to underscore that o"erhead is allocated b7 multipl7ing the actual amount of the allocation base b7 the budgeted rate. '. 1anufacturing o"erhead incurred (actual) 1anufacturing o"erhead allocated 0%000 hours $'0 11%000%000 00) of $4%100%000 5nderallocated manufacturing o"erhead $ 00%000 <"erallocated manufacturing o"erhead 3otal o"erallocated o"erhead # $000%000 6 $ 00%000 # $100%000 +#c(ining $11% 00%000 Binis(ing $&%+00%000

(% 00%000 $ 000%000

6. * homogeneous cost pool is one -here all costs ha"e the same or a similar cause4and4 effect or benefits4recei"ed relationship -ith the cost4allocation base. Aolomon likel7 assumes that all its manufacturing o"erhead cost items are not homogeneous. Apecificall7% those in the 1achining /epartment ha"e a cause4and4effect relationship -ith machine4hours% -hile those in the Einishing /epartment ha"e a cause4and4effect relationship -ith direct manufacturing labor costs. Aolomon belie"es that the benefits of using t-o cost pools (more accurate product costs and better abilit7 to manage costs) eIceeds the costs of implementing a more compleI s7stem.

44 4

4-31.

(1' 0 min.) Ser'ice ind"str/, 6ob costing, $#: &ir%.

!udgeted direct labor compensation per professional !udgeted professional # labor4hour direct cost rate !udgeted direct labor4hours per professional $104%000 # 1%600 hours # $6' per professional labor4hour

:ote that the budgeted professional labor4hour direct4cost rate can also be calculated b7 di"iding total budgeted professional labor costs of $ %600%000 ($104%000 per professional ' professionals) b7 total budgeted professional labor4hours of 40%000 (1%600 hours per professional ' professionals)% $ %600%000 40%000 # $6' per professional labor4hour. 0. !udgeted indirect cost rate # # # !udgeted total costs in indirect cost pool !udgeted total professional labor4hours
$ % 00%000 1%600 hours '

$ % 00%000 40%000 hours # $'' per professional labor4hour 4. /irect costs. Professional labor% $6' 1002 $6' 1'0 ;ndirect costs. =egal support% $'' 1002 $'' 1'0 Ric(#rdson $ 6%'00 '%'00 $1 %000 P"nc( $ +%&'0 (% '0 $1(%000

44 '

4-33

( '600 min.) Ser'ice ind"str/, 6ob costing, t:o direct- #nd indirect-cost c#tegories, $#: &ir% 8contin"#tion o& 4-3-=.

*lthough not required% the follo-ing o"er"ie- diagram is helpful to understand Meating?s job4 costing s7stem.
;:/;FD,3 ,<A3 P<<= ,<A3 *==<,*3;<: !*AD ,<A3 <!JD,3. J<! E<F ,=;D:3

} } } P

General Aupport

Aecretarial Aupport

Professional =abor48ours

Partner =abor48ours

;ndirect ,osts /irect ,osts

/;FD,3 ,<A3

Professional Partner =abor

Professional *ssociate =abor

1. !udgeted compensation per professional /i"ided b7 budgeted hours of billable time per professional !udgeted direct4cost rate

Pro&ession#$ P#rtner *#bor $ 00%000 C1%600 $1 ' per hourN

Pro&ession#$ Associ#te *#bor $(0%000 C1%600 $'0 per hourO

@ $1 ' @ $ '0

C,an also be calculated as 3otal budgeted partner labor 4 hours

$ 00%000 ' @ 1%600 '
O

3otal budgeted partner labor costs

$1%000%000 (%000

3otal budgeted associate labor costs 3otal budgeted associate labor 4 hours $(0%000 0 $1%600%000 @ @ 1%600 0 0 %000

,an also be calculated as

. !udgeted total costs /i"ided b7 budgeted quantit7 of allocation base !udgeted indirect cost rate

Gener#$ Secret#ri#$ S"pport S"pport $1%(00%000 $400%000 C 40%000 hours C (%000 hours $4' per hour $'0 per hour

44 6

0. /irect costs.
Professional partners% $1 ' 602 $1 ' 00 Professional associates% $'0 402 $'0 1 0

Ric(#rdson $&%'00 %000 $ +%'00 4%'00 0%000 &%'00 $1&%000 Ric(#rdson Aingle direct 4 Aingle indirect (from Problem 440 ) 1ultiple direct 6 1ultiple indirect (from requirement 0 of Problem 4400) /ifference $1 %000 1&%000 $ '%000 undercosted

P"nc( $0%&'0 6%000 $ +%&'0 6%&'0 1%'00 (% '0 $1(%000 P"nc( $1(%000 1(%000 $ 0 no change

/irect costs ;ndirect costs. General support% $4' 1002 $4' 1'0 Aecretarial support% $'0 602 $'0 00 ;ndirect costs 3otal costs 4.

3he Fichardson and Punch jobs differ in their use of resources. 3he Fichardson job has a miI of 60) partners and 40) associates% -hile Punch has a miI of 0) partners and (0) associates. 3hus% the Fichardson job is a relati"el7 high user of the more costl7 partner4related resources (both direct partner costs and indirect partner secretarial support). 3he refined4costing s7stem in Problem 440 increases the reported cost in Problem 440 for the Fichardson job b7 41.&) (from $1 %000 to $1&%000).

44 &

4-34

( 0 ' min.) Pror#tion o& o'er(e#d.

1. !udgeted manufacturing o"erhead rate is $4%(00%000 C (0%000 hours # $60 per machine4hour. . 1anufacturing o"erhead 1anufacturing o"erhead 1anufacturing o"erhead # 6 underallocated incurred allocated # $4%+00%000 6 $4%'00%000N # $400%000 Brite4off to ,ost of Goods Aold
Acco"nt B#$#nce 8Be&ore Pror#tion= 8-= $ &'0%000 1% '0%000 (%000%000 $10%000%000 Drite-o&& o& ?4..,... 2nder#$$oc#ted +#n"&#ct"ring O'er(e#d 83= $ 0 0 400%000 $400%000 Acco"nt B#$#nce 8A&ter Pror#tion= 84= @ 8-= E 83= $ &'0%000 1% '0%000 (%400%000 $10%400%000

N$60 &'%000 actual machine4hours # $4%'00%000

a.

Acco"nt 8 = Bork in Process Einished Goods ,ost of Goods Aold 3otal

b. Proration based on ending balances (before proration) in Bork in Process% Einished Goods and ,ost of Goods Aold.
Acco"nt B#$#nce 8Be&ore Pror#tion= 8-= $ &'0%000 ( &.')) 0.0&' $400%000 # $ 00%000 1% '0%000 (1 .')) 0.1 ' $400%000 # '0%000 (%000%000 ((0.0)) 0.(00 $400%000 # 0 0%000 $10%000%000 100.0) $400%000 Pror#tion o& ?4..,... 2nder#$$oc#ted +#n"&#ct"ring O'er(e#d 83= Acco"nt B#$#nce 8A&ter Pror#tion= 84= @ 8-= E 83= $ &(0%000 1%000%000 (%0 0%000 $10%400%000

Acco"nt 8 = Bork in Process Einished Goods ,ost of Goods Aold 3otal

c. Proration based on the allocated o"erhead amount (before proration) in the ending balances of Bork in Process% Einished Goods% and ,ost of Goods Aold. Acco"nt A$$oc#ted O'er(e#d Acco"nt B#$#nce Inc$"ded in Pror#tion o& ?4..,... B#$#nce 8Be&ore t(e Acco"nt B#$#nce 2nder#$$oc#ted 8A&ter Acco"nt Pror#tion= 8Be&ore Pror#tion= +#n"&#ct"ring O'er(e#d Pror#tion= 8 = 8-= 83= 84= 87= 89= @ 8-= E 87= Bork in Process $ &'0%000 $ 40%000a ( '.00)) 0.0'00 $400%000 # $ 1%0 0 $ &&1%0 0
Einished Goods ,ost of Goods Aold 3otal
a

660%000b 1% '0%000 (%000%000 0%600%000c $10%000%000 $4%'00%000

(14.6&)) 0.146& $400%000 # '(%6(0 ((0.00)) 0.(000 $400%000 # 0 0%000

1%00(%6(0 (%0 0%000 $10%400%000

100.00)

$400%000

$60 4%000 machine4hours2 b$60 11%000 machine4hours2 c$60 60%000 machine4hours

44 (

0. *lternati"e (c) is theoreticall7 preferred o"er (a) and (b). *lternati"e (c) 7ields the same ending balances in -ork in process% finished goods% and cost of goods sold that -ould ha"e been reported had actual indirect cost rates been used. ,hapter 4 also discusses an adjusted allocation rate approach that results in the same ending balances as does alternati"e (c). 3his approach operates "ia a restatement of the indirect costs allocated to all the indi"idual jobs -orked on during the 7ear using the actual indirect cost rate. 4-37 1a. (1' min.) Nor%#$ costing, o'er(e#d #$$oc#tion, :or;ing b#c;:#rd. 1anufacturing o"erhead allocated # 00) @ /irect manufacturing labor cost $0%600%000 # /irect manufacturing labor cost # b. @ /irect manufacturing labor cost
$0%600%000

# $1%(00%000

3otal manufacturing /irect material /irect manufacturing 1anufacturing # J J o"erhead allocated cost used labor cost $(%000%000 /irect material used # /irect material used J $1%(00%000 J $0%600%000 # $ %600%000

Bork in Process Bork in Process J 3otal manufacturing cost # ,ost of goods manufactured J 1 L01L 00+ 1L1L 00+ /enote Bork4in4process on 1 L01L 00+ b7 Q $0 0%000 J $(%000%000 # $&%+ 0%000 J Q Q # $400%000 Bork4in4process in"entor7% 1 L01L0+ # $400%000.

44 +

4.06 (40 min.) Pror#tion o& o'er(e#d :it( t:o indirect cost poo$s. 1.a. , K * department. <"erhead allocated # $40 4%000 1achine hours # $160%000 5nderallocated o"erhead # *ctual o"erhead costs 6 <"erhead allocated # $160%000 6 160%000 # $0%000 underallocated 1.b. Einishing department. <"erhead allocated # $'0 per direct labor4hour %000 direct labor4hours # $100%000 <"erallocated o"erhead # *ctual o"erhead costs 6 <"erhead allocated # $(&%000 6 100%000 # $10%000 o"erallocated a. *ll o"erallocated o"erhead is -ritten off to cost of goods sold. !oth Bork in Process and Einished goods in"entor7 remain unchanged. 1ec. 3 , -..) B#$#nce 8Be&ore Pror#tion= 8 = $ 1'0%000 '0%000 1%600%000 $ %000%000 Pror#tion o& ? .,... O'er#$$oc#ted O'er(e#d 8-= 0 0 J$0%000 6$10%000 $ 10%000 1ec. 3 , -..) B#$#nce 8A&ter Pror#tion= 83= @ 8 = E 8-= $ 1'0%000 '0%000 1%'+0%000 $1%++0%000

Acco"nt B;P Einished Goods ,ost of Goods Aold 3otal

b. <"erallocated o"erhead prorated based on ending balances

1ec. 3 , -..) B#$#nce 8Be&ore Pror#tion= 8 = $ 1'0%000 '0%000 1%600%000 $ %000%000 B#$#nce #s # Percent o& Tot#$ 8-= @ 8 = A ?-,...,... 0.0&' 0.1 ' 0.(00 1.000 Pror#tion o& ? .,... O'er#$$oc#ted O'er(e#d 83= @ 8-= .,... 0.0&' @ $10%000 # $ &'0 0.1 ' @ $10%000 # 1% '0 0.(00 @ $10%000 # (%000 $10%000 1ec. 3 , -..) B#$#nce 8A&ter Pror#tion= 84= @ 8 = 0 83= $ 14+% '0 4(%&'0 1%'+ %000 $1%++0%000

Acco"nt
B;P Einished Goods ,ost of Goods Aold 3otal

c. <"erallocated o"erhead prorated based on o"erhead in ending balances. (:ote. o"erhead must be allocated separatel7 from each department. 3his can be done using the number of machine hoursLdirect labor hours as a surrogate for o"erhead in ending balances.)

4400

Eor , K * department.
A$$oc#ted O'er(e#d in 1ec. 3 , -..) B#$#nce 8 = 00 $40 # $ (%000 600 $40 # 4%000 0% 00 $40 # 1 (%000 $160%000 A$$oc#ted O'er(e#d in 1ec. 3 , -..) B#$#nce #s # Percent o& Tot#$ 8-= @ 8 = A ? 9.,... 0.0' 0.1' 0.(0 1.00 Pror#tion o& ?3,... 2nder#$$oc#ted O'er(e#d 83= @ 8-= ?3... 0.0' $0%000 # $ 1'0 0.1' $0%000 # 4'0 0.(0 $0%000 # %400 $0%000

Acco"nt B;P Einished Goods ,ost of Goods Aold 3otal

Eor finishing department.

A$$oc#ted O'er(e#d in 1ec. 3 , -..) B#$#nce #s # Percent o& Tot#$ 87= @ 84= A ? ..,... 0.0' 0. 0 0.&' 1.00

Acco"nt B;P Einished Goods ,ost of Goods Aold 3otal

A$$oc#ted O'er(e#d in 1ec. 3 , -..) B#$#nce 84= 100 $'0 # $ '%000 400 $'0 # 0%000 1%'00 $'0 # &'%000 $100%000 1ec. 3 , -..) B#$#nce 8Be&ore Pror#tion= 8!= $ 1'0%000 '0%000 1%600%000 $ %000%000

Pror#tion o& ? 3,... 2nder#$$oc#ted O'er(e#d 89= @ 87= ? 3,... 0.0' $10%000 # $ 6'0 0. 0 $10%000 # %600 0.&' $10%000 # +%&'0 $10%000 1ec. 3 , -.., B#$#nce 8A&ter Pror#tion= 8,= @ 8!= E 8)= $ 14+%'00 4&%('0 1%'+ %6'0 $1%++0%000

Acco"nt B;P Einished Goods ,ost of Goods Aold 3otal

2nder#$$oc#tedF O'er#$$oc#ted O'er(e#d 8)= @ 83= 0 89= $1'0 0 $6'0 # $ ('00) $4'0 6 $ %600 # 8 %1'0) $ %400 6 $+%&'0 # (&%0'0) $(10%000)

0. 3he first method is simple and ,ost of Goods Aold accounts for (0) of the three account amounts. 3he amount of o"erallocated and underallocated o"erhead is also immaterial. *llocation to the other t-o accounts is minimal. 3herefore% -rite4off to cost of goods sold is the most cost effecti"e alternati"e.

4401

4-3!

(0' min.) Gener#$ $edger re$#tions(ips, "nder- #nd o'er#$$oc#tion.

3he solution assumes all materials used are direct materials. * summar7 of the 34accounts for :eedham ,ompan7 before adjusting for under4 or o"erallocation of o"erhead follo-s. /irect 1aterials ,ontrol
1414 00( Purchases 1 4014 00(

Bork4in4Process ,ontrol
0%000 3ransferred to 0(0%000 finished goods +40%000 060%000 4(0%000 000%000

00%000 1aterial used for 1414 00( 400%000 manufacturing 0(0%000 /irect materials '0%000 /irect manuf. =abor 1anuf. o"erhead allocated 1 4014 00(

Einished Goods ,ontrol

1414 00( 10%000 ,ost of goods 3ransferred in sold from B;P +40%000 1 4014 00( '0%000 Einished goods +00%000 sold

,ost of Goods Aold

+00%000

1anufacturing <"erhead ,ontrol

1anufacturing o"erhead costs '40%000

1anufacturing <"erhead *llocated

1anufacturing o"erhead allocated to -ork in process

4(0%000

1.

Erom /irect 1aterials ,ontrol 34account% /irect materials issued to production # $0(0%000 that appears as a credit.
/irect manufacturing labor costs /irect manufacturing -age rate per hour $060%000 # 4%000 hours $1' per hour

/irect manufacturing labor4hours

# #

1anufacturing o"erhead # allocated

# 0. 4.

1anufacturing /irect manufacturing o"erhead rate labor hours 4%000 hours $ 0 per hour # $4(0%000

Erom the debit entr7 to Einished Goods 34account% ,ost of jobs completed and transferred from B;P # $+40%000 Erom Bork4in4Process 34account% Bork in process in"entor7 # $ 0%000 J $0(0%000 J $060%000 J $4(0%000 6 $+40%000 on 1 L01L 00( # $000%000

'. Erom the credit entr7 to Einished Goods ,ontrol 34account% ,ost of goods sold (before proration) # $+00%000

440

6.

1anufacturing o"erhead underallocated

/ebits to 1anufacturing ,redit to 1anufacturing 6 <"erhead *llocated <"erhead ,ontrol

@ $'40%000 6 $4(0%000 # $60%000 underallocated &. a. b. Brite4off to ,ost of Goods Aold -ill increase (debit) ,ost of Goods Aold b7 $60%000. 8ence% ,ost of Goods Aold # $+00%000 J $60%000 # $+60%000. Proration based on ending balances (before proration) in Bork in Process% Einished Goods% and ,ost of Goods Aold.

*ccount balances in each account after proration follo-s.

Pror#tion o& ?9.,... Acco"nt B#$#nce 2nder#$$oc#ted 8Be&ore Pror#tion= +#n"&#ct"ring O'er(e#d 8-= 83= $ 000%000 ( 4)) 0. 4 $60%000 # $14%400 '0%000 ( 4)) 0.04 $60%000 # %400 +00%000 (& )) 0.& $60%000 # 40% 00 $1% '0%000 100) $60%000 Acco"nt B#$#nce 8A&ter Pror#tion= 84=@8-=E83= $ 014%400 ' %400 +40% 00 $1%010%000

Acco"nt 8 = Bork in Process Einished Goods ,ost of Goods Aold

(. :eedham?s operating income using -rite4off to ,ost of Goods Aold and Proration based on ending balances (before proration) follo-s.
Drite-o&& to Cost o& Goods So$d Fe"enues ,ost of goods sold Gross margin 1arketing and distribution costs <perating incomeL(loss) $1%0+0%000 +60%000 100%000 140%000 $ (10%000) Pror#tion B#sed on Ending B#$#nces $1%0+0%000 +40% 00 146%(00 140%000 $ 6%(00

+. ;f the purpose is to report the most accurate in"entor7 and cost of goods sold figures% the preferred method is to prorate based on the manufacturing o"erhead allocated component in the in"entor7 and cost of goods sold accounts. Proration based on the balances in Bork in Process% Einished Goods% and ,ost of Goods Aold -ill equal the proration based on the manufacturing o"erhead allocated component if the proportions of direct costs to manufacturing o"erhead costs are constant in the Bork in Process% Einished Goods and ,ost of Goods Aold accounts. D"en if this is not the case% the prorations based on Bork in Process% Einished Goods% and ,ost of Goods Aold -ill better approIimate the results if actual cost rates had been used rather than the -rite4off to ,ost of Goods Aold method. *nother consideration in :eedham?s decision about ho- to dispose of underallocated manufacturing o"erhead is the effects on operating income. 3he -rite4off to ,ost of Goods Aold -ill lead to an operating loss. Proration based on the balances in Bork in Process% Einished Goods% and ,ost of Goods Aold -ill help :eedham a"oid the loss and sho- an operating income. 3he main merit of the -rite4off to ,ost of Goods Aold method is its simplicit7. 8o-e"er% accurac7 and the effect on operating income fa"or the preferred and recommended proration approach.

4400

4-3)

(40'' min.) O'er'ie: o& gener#$ $edger re$#tions(ips.

1. K 0. *n effecti"e approach to this problem is to dra- 34accounts and insert all the kno-n figures. 3hen% -orking -ith 34account relationships% sol"e for the unkno-n figures (here coded b7 the letter Q for beginning in"entor7 figures and R for ending in"entor7 figures). Q Purchases R Q (1) /1 ( ) /= (0) <"erhead (a) (c) R Q (4) R (') 1aterials ,ontrol 1'%000 (1) ('%000 100%000 00%000 Bork4in4Process ,ontrol 10%000 (4) &0%000 1'0%000 +0%000 010%000 0 0%000 '%000 0%000 0%000 Einished Goods ,ontrol 0%000 (') 00'%000 0 '%000 '%000 ,ost of Goods Aold 000%000 (d) 1anufacturing /epartment <"erhead ,ontrol ('%000 (d) 1%000 1%000 1anufacturing <"erhead *llocated +0%000 (0) (c) &0%000 &0%000

00'%000

00'%000

000%000 000%000

6%000 (&%000

(a) (b) (d)

+0%000 0%000

1anufacturing o"erhead cost rate # $+0%000 C $1'0%000 # 60) Bages Pa7able ,ontrol (a) Harious *ccounts (b) 6%000 1%000

4404

*djusting and closing entries. (a) Bork4in4Process ,ontrol 1anufacturing /epartment <"erhead ,ontrol Bages Pa7able ,ontrol 3o recogni>e pa7roll costs (b) 1anufacturing /epartment <"erhead ,ontrol Harious accounts 3o recogni>e miscellaneous manufacturing o"erhead (c) Bork4in4Process ,ontrol 1anufacturing <"erhead *llocated 3o allocate manufacturing o"erhead '%000 1%000 6%000 1%000 1%000 0%000 0%000

Note. Atudents tend to forget entr7 (c) entirel7. Atress that a budgeted o"erhead allocation rate is used consistentl7 throughout the 7ear. 3his point is a major feature of this problem. (d) 1anufacturing <"erhead *llocated +0%000 1anufacturing /epartment <"erhead ,ontrol (&%000 ,ost of Goods Aold 6%000 3o close manufacturing o"erhead accounts and o"erallocated o"erhead to cost of goods sold *n o"er"ie- of the product4costing s7stem is

0.

Aee the ans-er to 1.

440'

4-3, (00 min.) A$$oc#tion #nd pror#tion o& o'er(e#d. 1. !udgeted o"erhead rate # !udgeted o"erhead costs C !udgeted labor costs # S1%'00 C S %000 # &') of labor cost . Dnding -ork in process /irect material costs /irect labor costs <"erhead (0.&' @ /irect labor costs) 3otal costs Job S ' 0 1' S60 Job S1' 0 4 S&1 Tot#$ S 40 ' 0 + S101

,ost of goods sold # !eginning B;P J 1anufacturing costs 6 Dnding B;P # S0 J (S+00 J S1%(00 J S1%(00 @ 0.&') 6 S101 # S0%+1+ 0. <"erhead allocated # 0.&' @ S1%(00 # S1%0'0 <"erallocated o"erhead # *ctual o"erhead 6 *llocated o"erhead # S1% '0 6 S1%0'0 # S100 o"erallocated 4.a. *ll o"erallocated o"erhead is -ritten off to cost of goods sold. B;P in"entor7 remains unchanged. 1ec. 3 , !9Acco"nt B#$#nce Acco"nt 8Be&ore Pror#tion= 8 = 8-= Bork4in4Process S 101 ,ost of goods sold 0%+1+ S4%0'0 4b.
1ec. 3 , !9B#$#nce 8Be&ore Pror#tion= 8-= S 101 0%+1+ S4%0'0

Drite-o&& o& G .. O'er#$$oc#ted o'er(e#d 83= S 0 (100) S(100)

1ec. 3 , !9Acco"nt B#$#nce 8A&ter Pror#tion= 84= @ 8-= E 83= S 101 0%(1+ S0%+'0
1ec. 3 , !9B#$#nce 8A&ter Pror#tion= 87= @ 8-= E 84= S 1 ( 0%( S0%+'0

<"erallocated o"erhead prorated based on ending balances

B#$#nce #s # Percent o& Tot#$ 83= @ 8-= A G4,.7. 0.00 0.+& 1.00 Pror#tion o& G .. O'er#$$oc#ted O'er(e#d 84= @ 83= G .. S (0) (+&) S(100)

Acco"nt 8 = Bork4in4Process ,ost of Goods Aold

'. Briting off all of the o"erallocated o"erhead to ,ost of Goods Aold (,GA) is -arranted -hen ,GA is large relati"e to Bork4in4Process ;n"entor7 and Einished Goods ;n"entor7 and the o"erallocated o"erhead is immaterial. !oth these conditions appl7 in this case. Eranklin K Aon Printing should -rite off the S100 o"erallocated o"erhead to ,ost of Goods Aold account.

4406

4-4. 1.

( 0 min.) Job costing, contr#cting, et(ics. /irect manufacturing costs. /irect materials /irect manufacturing labor ;ndirect manufacturing costs% 1'0) $6%000 3otal manufacturing costs $ '%000 6%000

$01%000 +%000 $40%000

*erospace bills the :a"7 $' %000 ($40%000 100)) for 100 Q& seats or $' 0 ($' %000 100) per Q& seat. . /irect manufacturing costs. /irect materials /irect manufacturing labora ;ndirect manufacturing costs% 1'0) $'%000 3otal manufacturing costs $ '%000 '%000

$00%000 &%'00 $0&%'00

$6%000 6 $400 ($ ' 16) setup 6 $600 ($'0 1 ) design

*erospace should ha"e billed the :a"7 $4(%&'0 ($0&%'00 100)) for 100 Q& seats or $4(&.'0 ($4(%&'0 100) per Q& seat. 0. 3he problems the letter highlights (assuming it is correct) include the follo-ing. a. ,osts included that should be eIcluded (design costs) b. ,osts double4counted (setup included as both a direct cost and in an indirect cost pool) c. Possible conflict of interest in *erospace ,omfort purchasing materials from a famil74related compan7 Ateps the :a"7 could undertake include the follo-ing. (i) 5se onl7 contractors -ith a reputation for ethical beha"ior as -ell as qualit7 products or ser"ices. (ii) ;ssue guidelines detailing acceptable and unacceptable billing practices b7 contractors. Eor eIample% prohibiting the use of double4counting cost allocation methods b7 contractors. (iii) ;ssue guidelines detailing acceptable and unacceptable procurement practices b7 contractors. Eor eIample% if a contractor purchases from a famil74related compan7% require that the contractor obtain quotes from at least t-o other bidders. (i")Dmplo7 auditors -ho aggressi"el7 monitor the bills submitted b7 contractors. (") *sk contractors for details regarding determination of costs.

440&

4-4 1.

(0' min.) Job costing-ser'ice ind"str/. 3ours in Process (3;P) June 00% 00+ +#teri#$s *#bor B#nd 8 = 8-= As I Lay Dieing $ '0 $400 Ask Me Later 0'0 00 3otal $600 $600 ,ost of ,ompleted 3ours (,,3) in June 00+ B#nd Grunge Express Different Strokes Maybe Tomorrow 3otal $1%1'0 +#teri#$s 8 = $ 400 4&' &' *#bor 8-= $ &00 &00 40 0 $1%(0 0 O'er(e#d 83= @ 7.H I 8-= $600 000 $+00 Tot#$ 84= $1% '0 ('0 $ %100 Tot#$ 84= $ %1'0 % ' 1% &' $'%6'0

O'er(e#d 83= @ 7.H I 8-= $1%0'0 1%0'0 600 $ %&00

0. <"erhead allocated # 1.'0 I 1%400a # $ %100 5nderallocated o"erhead # *ctual o"erhead 6 *llocated o"erhead # $ %'00 6 %100 # $400 underallocated
a

3otal labor in June # $100J$000J$400J$ 00J$400 # $1%400

4a. 5nderallocated o"erhead is -ritten off to ,,3 ,;P in"entor7 remains unchanged. J"ne 3., -.., B#$#nce 8Be&ore Pror#tion= 8 = $ %100 '%6'0 $&%&'0
J"ne 3., -.., B#$#nce 8Be&ore Pror#tion= 8 = $ %100 '%6'0 $&%&'0

Acco"nt ,;P ,,3 4b.

Pror#tion o& ?4.. 2nder#$$oc#ted O'er(e#d 8-= $ 0 400 $400

J"ne 3., -.., B#$#nce 8A&ter Pror#tion= 83= @ 8 = J 8-= $ %100 6%0'0 $(%1'0
Pror#tion o& ?4.. 2nder#$$oc#ted O'er(e#d 83= @ 8-= ?4.. 0. &1 $400 #$10( 0.& + $400 # + $400 J"ne 3., -.., B#$#nce 8A&ter Pror#tion= 84= @ 8 = J 83= $ % 0( '%+4 $(%1'0

5nderallocated o"erhead prorated based on ending balances

B#$#nce #s # Percent o& Tot#$ 8-= @ 8 = A ?!,!7. 0. &1 0.& + 1.000

Acco"nt 3;P ,,3

440(

4c.

5nderallocated o"erhead prorated based on June o"erhead in ending balances

J"ne 3., -.., B#$#nce 8Be&ore Pror#tion= 8 = $ %100 '%6'0 $&%&'0 O'er(e#d #$$oc#ted in J"ne Inc$"ded in J"ne 3., -.., B#$#nce 8-= $ +00a 1% 00b $ %100 O'er(e#d #$$oc#ted in J"ne Inc$"ded in J"ne 3., -.., #s # Percent o& Tot#$ 83= @ 8-= A ?-, .. 0.40 0.'& 1.00 Pror#tion o& ?4.. 2nder#$$oc#ted O'er(e#d 84= @ 83= ?4.. 0.40 $400 #$1& 0.'& $400 # ( $400 J"ne 3., -.., B#$#nce 8A&ter Pror#tion= 87= @ 8 = J 84= $ % & '%(&( $(%1'0

Acco"nt 3;P ,,3

June labor for *s ; =a7 /ieing and *sk 1e =ater @ 1'0) # ($400 J $ 00) @ 1'0) # $600 @ 1'0) # $+00 June labor for Grunge DIpress% /ifferent Atrokes and 1a7be 3omorro- @ 1'0) # ($100 J $000 J $400) @ 1'0) # $(00 @ $1'0 # $1% 00

'. ; -ould choose the method in 4c because this method results in account balances based on actual o"erhead allocation rates. 3he account balances before proration in 3;P and ,,3 are significant and underallocated o"erhead is material. Eurthermore% the ratio of ending balances in 3;P and ,,3 is different from the ratio of o"erhead allocated to each of these accounts in June.

440+