Ch05 Systems Design Job-Order Costing

Chapter 5
Systems Design: Job-Order Costing
Solution to Discussion Case
Students will likely generate wide variety of products and related costs,
some of them will likely be similar to the following:
Products Cost Types Direct or Cost driver

Indirect?
Audits Professional staff Indirect Hours worked by
Reviews salaries project
Compilations Office staff Indirect % of total
Personal Tax Returns salaries revenues
Corporate Tax Returns Equipment Lease Indirect These would
Consulting projects costs likely be
Valuations Utilities Indirect amalgamated into
Bankruptcy advice Supplies Indirect an overhead
IT costs Indirect charge out rate
Software Indirect applied to each
job in proportion
to hours worked
or % of total
revenues
It is important to note that when providing services rather than

manufacturing products, most costs will be indirect and management
needs to give careful thought to what drives each type of cost.
Understanding what drives costs is key to developing good cost estimates
which often serve as the basis for pricing in such industries.
Solutions Manual, Chapter 5 1

Solutions to Questions
5-1 By definition, manufacturing goods. The sales order forms the

overhead consists of product costs basis for the production order. The
that cannot be practically traced to production order specifies what is
products or jobs. Therefore, if to be produced and forms the basis
these costs are to be assigned to for the job cost sheet. The job cost
products or jobs, they must be sheet, in turn, is used to
allocated rather than traced. summarize the various production
costs incurred to complete the job.
5-2 Job-order costing is used in These costs are entered on the job
situations where many different cost sheet from materials
products or services that require requisition forms, labour time
separate costing are produced each tickets, and by applying overhead.
period. Process costing is used in
situations where a single, 5-6 The measure of activity used
homogeneous product, such as as the allocation base should drive
cement, bricks, or gasoline, is the overhead cost; that is, the
produced for long periods. allocation base should cause the
overhead cost. If the allocation
5-3 The job cost sheet is used to base does not really cause the
record all costs that are assigned to overhead, then costs will be
a particular job. These costs incorrectly attributed to products
include direct materials costs traced and jobs and product costs will be
to the job, direct labour costs distorted.
traced to the job, and
manufacturing overhead costs 5-7 A cost driver is a factor that
applied to the job. When a job is causes overhead costs. The
completed, the job cost sheet is measure of activity used as the
used to compute the unit product allocation base should drive the
cost. overhead cost; that is, the base
should cause the overhead cost.
5-4 A predetermined overhead Cost drivers are used to allocate
rate is the rate used to apply indirect costs to units of product in
overhead to jobs. It is computed a job-order costing system.
before a period begins by dividing
the period’s estimated total 5-8 Assigning manufacturing
manufacturing overhead by the overhead costs to jobs does not
period’s estimated total amount of ensure a profit. The units produced
the allocation base. Thereafter, may not be sold and if they are
overhead is applied to jobs by sold, they may not be sold at prices
multiplying the predetermined sufficient to cover all costs. It is a
overhead rate by the actual amount myth that assigning costs to
of the allocation base that is products or jobs ensures that those
incurred for each job. The most costs will be
common allocation base is direct recovered. Costs are recovered
labour-hours. only by selling to customers—not
by allocating costs.
5-5 A sales order is issued after
an agreement has been reached 5-9 The Manufacturing Overhead
with a customer on quantities, account is credited when overhead
prices, and shipment dates for cost is applied to Work in Process.
2 Managerial Accounting, 11th Edition

Generally, the amount of overhead was assigned to jobs during the
applied will not be the same as the period and therefore cost of goods
amount of actual cost incurred, sold was understated. Therefore,
since the predetermined overhead underapplied overhead is added to
rate is based on estimates. This is cost of goods sold. Likewise,
because the application of overapplied overhead is deducted
overhead involves estimates (of the from cost of goods sold.
costs and the base for allocation)
and the actual may vary from the 5-13 Yes, overhead should be
estimates. applied to value the Work in
Process inventory at year-end.
5-10 Underapplied overhead Since $7,500 of overhead was
occurs when the actual overhead applied to Job A on the basis of
cost exceeds the amount of $15,000 of direct labour cost, the
overhead cost applied to Work in company’s predetermined overhead
Process invento-ry during the rate must be 50% of direct labour
period. Overapplied overhead cost. Thus, $2,000 of overhead
occurs when the actual overhead should be applied to Job B at year-
cost is less than the amount of end: $4,000 direct labour cost ×
overhead cost applied to Work in 50% = $2,000 applied overhead
Process inventory during the cost.
period. Underapplied overhead is
disposed of by closing out the 5-14
amount to Cost of Goods Sold. Direct material................... $12,00
Overapplied overhead is disposed
of by allocating the amount among 0
Cost of Goods Sold and ending
inventories in proportion to the Direct labour..................... 16,000
applied overhead in each account.
The adjustment for underapplied Manufacturing overhead:
overhead increases Cost of Goods
Sold whereas the adjustment for $16,000 × 150%............ 24,00
overapplied overhead decreases
Cost of Goods Sold and inventories. 0
5-11 Manufacturing overhead may Total manufacturing cost. . . $52,00
be underapplied for several
reasons. For example, control over 0
overhead spending may be poor
and actual costs may exceed the Unit product cost:
estimates. Or, some of the $52,000  750 units........ $69.33
overhead may be fixed and the
actual amount of the allocation
base was less than estimated at the 5-15 A plantwide overhead rate is
beginning of the period. In this a single overhead rate used
situation, the amount of overhead throughout all production
applied to inventory will be less departments in a plant. Some
than the actual overhead cost companies use multiple overhead
incurred. If productions is less than rates rather than plantwide rates to
estimated this may also result in more appropriately allocate
overhead being underapplied. overhead costs among products.
Multiple overhead rates should be
5-12 Underapplied overhead used, for example, in situations
implies that not enough overhead

where one department is machine inventory variance, one for this
intensive and another department period and one for last period.
is labour intensive.
5-16 When automated equipment
replaces direct labour, overhead
increases and direct labour
decreases. This results in an
increase in the predetermined
overhead rate—particularly if it is
based on direct labour.
5-17 Yes, predetermined overhead
rates in general smooth product
costs when costs change during a
year or where production volume
varies. The predetermined
overhead rate is computed by using
the yearly estimated total overhead
divided by the estimated base for
the year. This rate is used to
calculate the product cost for each
period. The product cost becomes
an average cost rather than an
actual cost which would include the
fluctuations.
5-18 Since predetermined
overhead is supposed to average
out fluctuations during a year, it is
logical that when actual overhead
turns out to be less than estimated
(i.e., overhead is overapplied), this
amount should not all be charged
to income this period since
inventory will be undervalued on
the balance sheet Those actual
costs, if allocated to WIP and
Finished Goods inventory, will then
be charged against income with the
related goods are sold which better
satisfies the matching principle.
5-19 Opening inventories for work
in process and finished goods
contain overhead costs from
previous periods. These amounts
are contained in the cost of goods
sold for the current period. If cost
of goods sold for the current period
was not reduced by the opening
inventories then there would be a
double charge made for the
4 Managerial Accounting, 11th Edition

Foundational Exercises
1. The estimated total manufacturing overhead cost is computed as
follows:
Estimated fixed manufacturing overhead................... $10,000

Estimated variable manufacturing overhead:
$1.00 per DLH × 2,000 DLHs................................. 2,000
Estimated total manufacturing overhead cost............ $12,000
The predetermined overhead rate is computed as follows:
Estimated total manufacturing overhead (a).... $12,000

Estimated total direct labor hours (DLHs) (b). . 2,000 DLHs
Predetermined overhead rate (a) ÷ (b)........... $6.00 per DLH
2. The manufacturing overhead applied to Jobs P and Q is computed as

follows:
Job P Job Q
Actual direct labor hours worked (a)............... 1,400 500
Predetermined overhead rate per DLH (b)....... $6.00 $6.00
Manufacturing overhead applied (a) × (b)....... $8,400 $3,000
3. The direct labor hourly wage rate can be computed by focusing on

either Job P or Job Q as follows:
Job P Job Q
Direct labor cost (a)....................................... $21,000 $7,500
Actual direct labor hours worked (b)............... 1,400 500

Direct labor hourly wage rate (a) ÷ (b)........... $15.00 $15.00
6 Managerial Accounting, 11th edition

Foundational Exercises -continued
4. Job P’s unit product cost and Job Q’s assigned manufacturing costs are
computed as follows:
Total manufacturing cost assigned to Job P:
Direct materials................................ $13,000

Direct labor...................................... 21,000
Manufacturing overhead applied
($6 per DLH × 1,400 DLHs)............ 8,400
Total manufacturing cost.................. $42,400
Unit product cost for Job P:
Total manufacturing cost (a)............. $42,400

Number of units in the job (b)........... 20
Unit product cost (a) ÷ (b)................ $2,120
Total manufacturing cost assigned to Job Q:
Direct materials................................ $ 8,000

Direct labor...................................... 7,500
($6 per DLH × 500 DLHs)............... 3,000
Total manufacturing cost.................. $18,500
5. The journal entries are recorded as follows:

Raw Materials........................
22,000

Accounts Payable.......... 22,000
Work in Process.....................
21,000
Raw Materials............... 21,000
6. The journal entry is recorded as follows:

Work in Process.....................
28,500
Wages Payable............. 28,500


Work in Process......................................
11,400
Manufacturing Overhead....................... 11,400
8. The Schedule of Cost of Goods Manufactured is as follows:

Direct materials:
Raw materials inventory, beginning............... $ 0
Add: Purchases of raw materials.................... 22,000
Total raw materials available......................... 22,000
Deduct: Raw materials inventory, ending....... 1,000
Raw materials used in production.................. $21,000
Direct labor...................................................... 28,500
Manufacturing overhead applied to work in
process inventory............................................ 11,400
Total manufacturing costs................................. 60,900
Add: Beginning work in process inventory.......... 0
60,900
Deduct: Ending work in process inventory.......... 18,500
Cost of goods manufactured.............................. $42,400

Finished Goods.......................................
42,400
Work in Process................................... 42,400
10. The completed T-account is as follows:

Work in Process
Beg. Bal. 0
(a) 21,000
(b) 28,500
(c) 11,400 (d) 42,400
End. Bal. 18,500
(a) Raw material used in production = $21,000

(b) Direct labor cost = $28,500
(c) Manufacturing overhead applied = $11,400
(d) Cost of goods manufactured = $42,400

11. The Schedule of Cost of Goods Sold is as follows:

Finished goods inventory, beginning.................. $ 0
Add: Cost of goods manufactured...................... 42,400
Cost of goods available for sale......................... 42,400
Deduct: Finished goods inventory, ending.......... 0
Unadjusted cost of goods sold........................... $42,400

Cost of Goods Sold..................................
42,400
Finished Goods..................................... 42,400
13. The amount of underapplied overhead is computed as follows:
Actual direct labor-hours (a)....................... 1,900

Predetermined overhead rate (b)................ $6.00
Manufacturing overhead applied (a) × (b)... $11,400
Actual manufacturing overhead.................. $12,500

Deduct: Manufacturing overhead applied..... 11,400
Underapplied overhead.............................. $ 1,100

1,100

Exercise 5-1 (10 minutes)
a. Job-order costing
b. Job-order costing
c. Job-order costing
d. Job-order costing
e. Process costing
f. Process costing
g. Job-order costing
h. Process costing
i. Job-order costing
j. Process costing
k. Job-order costing
l. Process costing

1. Total direct labor-hours required for Job A-200:
Direct labor cost............................... $120

÷ Direct labor wage rate per hour..... $12
= Total direct labor hours................. 10
Total manufacturing cost assigned to Job A-200:
Direct materials................................ $200

Direct labor...................................... 120
($18 per DLH × 10 DLHs)............... 180
Total manufacturing cost.................. $500
2. Unit product cost for Job A-200:
Total manufacturing cost................. $500

÷ Number of units in the job............ 50
= Unit product cost......................... $10
14 Managerial Accounting, 11th Canadian Edition

The predetermined overhead rate is computed as follows:
Estimated total manufacturing overhead........ $348,000

÷ Estimated total direct labour hours (DLHs). 20,000 MHs
= Predetermined overhead rate.................... $17.40 per MH
Actual Overhead $336,400
Overhead Applied (19,500 x $17.40) $339,300
Therefore, overhead is overapplied by $2,900

a. Raw Materials........................ 45,000

Accounts Payable.......... 45,000
b Work in Process..................... 70,000

.
Manufacturing Overhead........ 55,000
Raw Materials............... 125,000
c. Work in Process..................... 183,00

0
Manufacturing Overhead........ 29,000
Wages Payable............. 212,000
d Manufacturing Overhead........ 189,00

. 0
Various Accounts........... 189,000

1.
Actual direct labour-hours......................... 12,600
× Predetermined overhead rate................ $23.10
= Manufacturing overhead applied............ $291,060
Overhead is under applied by $4,940 ($291,060 applied versus $296,000

actual)
2. The journal entry to dispose of under applied overhead is recorded as
follows:

4,940

1. Actual manufacturing overhead costs............... $ 48,000
Manufacturing overhead applied:
10,000 MH × $5 per MH............................... 50,000
Overapplied overhead cost.............................. $ 2,000
2. Direct materials:
Raw materials inventory, beginning............... $ 8,000
Add purchases of raw materials.................... 32,000
Raw materials available for use..................... 40,000
Deduct raw materials inventory, ending......... 7,000
Raw materials used in production.................. $ 33,000
Direct labour.................................................. 40,000
Manufacturing overhead cost applied to work
in process.................................................... 50,000
Total manufacturing cost................................. 123,000
Add: Work in process, beginning..................... 6,000
129,000
Deduct: Work in process, ending..................... 7,500
Cost of goods manufactured............................ $121,500

Parts 1 and 2.
Cash Raw Materials
(a) 75,000 (a) 75,000 (b) 73,000

(c) 152,000
(d) 126,000
Work in Process Finished Goods
(b) 67,000 (f) 379,000
(c) 134,000 379,000 (f) 379,000

(e) 178,000
379,000 (f) 379,000
Manufacturing Overhead Cost of Goods Sold
(b) 6,000 (e) 178,000 (f) 379,000 (g) 28,000
(c) 18,000 351,000

(d) 126,000
(g)* 28,000 28,000
* The company had no beginning or ending inventories, so overapplied

overhead was written off completely to cost of goods sold since the
balance related completely to current period's costs. This entry corrects the
cost of goods sold to actual.

1. Actual direct labour-hours........................ 15,500

× Predetermined overhead rate............... $7.50
= Manufacturing overhead applied........... $116,250
Less: Manufacturing overhead incurred..... 114,750
Manufacturing overhead overapplied $ 1,500
2. Because manufacturing overhead is overapplied and there were no

beginning or ending inventories, the cost of goods sold would decrease
by $1,500 and the gross margin would increase by $1,500.

1. Since $320,000 of studio overhead cost was applied to Work in Process
on the basis of $200,000 of direct staff costs, the apparent
predetermined overhead rate was 160%:
Studio overhead applied $320,000

=
Total amount of the allocation base $200,000 direct staff costs
=160% of direct staff costs
2. The Kareen Corporation Headquarters project is the only job remaining

in Work in Process at the end of the month; therefore, the entire
$40,000* balance in the Work in Process account at that point must
apply to it. Recognizing that the predetermined overhead rate is 160%
of direct staff costs, the following computation can be made:
* $90,000 + $200,000 + $320,000 - $570,000 = $40,000
Total cost added to the Kareen

Corporation Headquarters project...... $40,000
Less: Direct staff costs.................................
$13,500
Studio overhead cost
($13,500 × 160%)...........................
21,600 35,100
Costs of subcontracted work................ $ 4,900
With this information, we can now complete the job cost sheet for the
Kareen Corporation Headquarters project:
Costs of subcontracted work............ $ 4,900

Direct staff costs............................. 13,500
Studio overhead............................. 21,600
Total cost to January 31.................. $40,000

1 Cost of Goods Manufactured
.
Direct materials:
Raw materials inventory, beginning............... $ 8,000
Add: Purchases of raw materials.................... 132,000
Total raw materials available......................... 140,000
Deduct: Raw materials inventory, ending....... 10,000
Raw materials used in production.................. 130,000
Direct labor...................................................... 90,000
process inventory............................................ 210,000
Total manufacturing costs................................. 430,000
Add: Beginning work in process inventory.......... 5,000
435,000
Deduct: Ending work in process inventory.......... 20,000
2 Cost of Goods Sold

.
Finished goods inventory, beginning.................. $ 70,000
Add: Cost of goods manufactured...................... 415,000
Cost of goods available for sale......................... 485,000
Deduct: Finished goods inventory, ending.......... 25,000
Unadjusted cost of goods sold........................... 460,000
Add: Underapplied overhead............................. 10,000

Adjusted cost of goods sold............................... $470,00
0
3.
Eccles Company
Income Statement
For the year ended xxx
Sales............................................................... $643,000
Cost of goods sold ($460,000 + $10,000)......... 470,000
Gross margin................................................... 173,000
Selling and administrative expenses:
Selling expenses........................................... $100,000
Administrative expense.................................. 43,000 143,000
Net operating income...................................... $ 30,000

Jan’s Happy
1. Car City Flowers Daycare
Designer-hours............................ 60 80 20
Predetermined overhead rate........ × $20 × $20 × $20
Overhead applied......................... $1,200 $1,600 $400
Total overhead applied = $1,200+$1,600+$400 = $3,200
Jan’s
2. Car City Flowers
Direct labour cost......................... 1,500 2,000
Overhead applied......................... 1,200 1,600
Total cost.................................... $2,700 $3,600
Journal entry:
Completed Projects...................... 6,300*
Work in Process...................... 6,300*
* $2,700 + $3,600
3. The balance in the Work in Process account consists entirely of the costs
associated with the Happy Daycare project:
Direct labour cost.................................... 500

Overhead applied.................................... 400
Total cost in work in process.................... $900

4. The balance in the Overhead account is determined as follows:
Overhead
Actual overhead costs 3,000 3,200 Applied overhead costs
200 Overapplied overhead
As indicated above, the credit balance in the Overhead account is called

overapplied overhead.

Note to the instructor: This exercise is a good vehicle for introducing the
concept of predetermined overhead rates. This exercise can also be
used as a launching pad for a discussion of the appendix to the chapter.
1. As suggested, the costing problem does indeed lie with manufacturing

overhead cost. Since manufacturing overhead is mostly fixed, the cost
per unit increases as the level of production decreases. The problem can
be “solved” by using a predetermined overhead rate, which should be
based on expected activity for the entire year. Many students will use
units of product in computing the predetermined overhead rate, as
follows:
Predetermined = Estimated total manufacturing overhead cost

overhead rate Estimated total amount of the allocation base
$840,000*
=
200,000 units
=$4.20 per unit.
* $228,000 + $204,000 + $192,000 + $216,000 = $840,000
The predetermined overhead rate could also be set on the basis of direct
labour cost or direct materials cost. The computations are:

Overhead rate Estimated total amount of the allocation base
= $840,000
$240,000* direct labour cost
= 350% of direct labour cost

* $96,000 + $48,000 + $24,000 + $72,000 = $240,000

Exercise 5-12 (continued)

$840,000**
=
$600,000* direct materials cost
=140% of direct materials cost.
* $240,000 + $120,000 + $60,000 + $180,000 = $600,000
** $228,000 + $204,000 + $192,000 + $216,000 = $840,000
2. Using a predetermined overhead rate, the unit costs would be:
Quarter
First Second Third Fourth
Direct materials................. $240,000 $120,000 $ 60,000 $180,000
Direct labour..................... 96,000 48,000 24,000 72,000
Manufacturing overhead:
Applied at $4.20 per
unit, 350% of direct
labour cost, or 140% of
direct materials cost........ 336,000 168,000 84,000 252,000
Total cost......................... $672,000 $336,000 $168,000 $504,000
Number of units produced. 80,000 40,000 20,000 60,000
Estimated unit product
cost............................... $8.40 $8.40 $8.40 $8.40
Note: Overhead is calculated using $4.20 per unit in the first quarter, 350% in the
second quarter, 140% in the third and fourth quarters to provide illustrations of the
possible answers.

1. Item (a): Actual manufacturing overhead costs for the year.
Item (b): Overhead cost applied to work in process for the year.
Item (c): Cost of goods manufactured for the year.
Item (d): Cost of goods sold for the year.
2. The overapplied overhead will be allocated to the other accounts on the

basis of the amount of overhead applied during the year in the ending
balance of each account:
Work in process................................ $ 32,800 8%

Finished goods.................................. 41,000 10
Cost of goods sold............................. 336,200 82
Total cost.......................................... $410,000 100 %
Using these percentages, the journal entry would be as follows:
Manufacturing Overhead............................ 30,000

Work in Process (8% × $30,000).......... 2,400
Finished Goods (10% × $30,000).......... 3,000
Cost of Goods Sold (82% × $30,000).... 24,600

1. Stamping Department:

$2,550,000
= =$8.50 per machine-hour
300,000 machine-hours
Assembly Department:

= $4,000,000
$3,200,000 direct labour cost = 125% Direct labour cost
2. Overhead
Applied
Stamping Department: 450 MHs × $8.50 per
MH............................................................ $3,825
Assembly Department: $800 × 125%............. 1,000
Total overhead cost applied........................... $4,825
3. Yes; if some jobs require a large amount of machine time and little
labour cost, they would be charged substantially less overhead cost if a
plantwide rate based on direct labour cost were used. It appears, for
example, that this would be true of Job 407 which required considerable
machine time to complete, but required only a small amount of labour
cost.

1. The predetermined overhead rate is computed as follows:

$170,000
2. The amount of overhead cost applied to Work in Process for the year
would be: 80,000 machine-hours × $2.00 per machine-hour =
$160,000. This amount is shown in entry (a) below:
Manufacturing Overhead
(Utilities) 14,000 (a) 160,000
(Insurance) 9,000
(Maintenance) 33,000
(Indirect 7,000
materials)
(Indirect labour) 65,000
(Depreciation) 40,000
Balance 8,000
Work in Process
(Direct materials) 530,000
(Direct labour) 85,000
(Overhead) (a) 160,000

3. Overhead is underapplied by $8,000 for the year, as shown in the
Manufacturing Overhead account above. The entry to close out this
balance to Cost of Goods Sold would be:
Cost of Goods Sold...................................... 8,000

Manufacturing Overhead........................... 8,000

Exercise 5-15 (continued)
4. When overhead is applied using a predetermined rate based on
machine-hours, it is assumed that overhead cost is proportional to
machine-hours. When the actual level of activity turns out to be 80,000
machine-hours, the costing system assumes that the overhead will be
80,000 machine-hours × $2.00 per machine-hour, or $160,000. This is a
drop of $10,000 from the initial estimated total manufacturing overhead
cost of $170,000. However, the actual total manufacturing overhead did
not drop by this much. The actual total manufacturing overhead was
$168,000—a drop of only $2,000 from the estimate. The manufacturing
overhead did not decline by the full $10,000 because of the existence of
fixed costs and/or because overhead spending was not under control.
These issues will be covered in more detail in later chapters.

1. Overhead application rate for each department:

Forming $35,750/(.25 x 5,000+.25 x 8,000)MH = $11 per MH
Finishing $46,500/($6 x 5,000+$4 x 8,000)DL$ = $0.75 per DL$
2. Total cost per unit of each product

Golf
Tennis Racquets Clubs
Direct material $4.50 $3.50
Direct labour 9.00 6.50
Overhead applied
Forming (based on MH)* 2.75 2.75
Finishing (based on DL$)** 4.50 3.00
Total cost per unit $20.75 $15.75
*Tennis racquets: $11 per MH x 0.25; Golf Clubs: $11 per MH x 0.25
**Tennis racquets: $0.75 per DL$ x $6.00; Golf Clubs: $0.75 per DL$ x
$4.00

Problem 5-17 (45 minutes)
1. a. Raw Materials......................................... 275,000
Accounts Payable.............................. 275,000
b. Work in Process...................................... 220,000

Manufacturing Overhead......................... 60,000
Raw Materials.................................... 280,000
c. Work in Process...................................... 180,000

Sales Commissions Expense.................... 63,000
Salaries Expense..................................... 90,000
Salaries and Wages Payable............... 405,000
d. Manufacturing Overhead......................... 60,000

Rent Expense......................................... 15,000
e. Manufacturing Overhead......................... 57,000

f. Advertising Expense................................ 14,000

g. Manufacturing Overhead......................... 88,000

Depreciation Expense.............................. 12,000
Accumulated Depreciation.................. 100,000

h. Work in Process...................................... 297,000
Manufacturing Overhead*.................. 297,000
*Predetermined OH rate = $330,000 budget overhead cost/$200,000 DL$

= $1.65 per DL$ (can also be expressed as 165% of
direct labour cost)
$180,000 DL × $1.65 per DL$ = $297,000 overhead applied.

Problem 5-17 (continued)
i. Finished Goods................................... 675,000
Work in Process............................. 675,000
j. Accounts Receivable........................... 1,250,000

Sales............................................ 1,250,000
Cost of Goods Sold............................. 700,000
Finished Goods.............................. 700,000
2.
Raw Materials Work in Process
Bal. 25,000 (b) 280,000 Bal. 10,000 (i) 675,000
(a) 275,000 (b) 220,000
(c) 180,000
(h) 297,000
Bal. 20,000 Bal. 32,000
Finished Goods Manufacturing Overhead

Bal. 42,000 (j) 700,000 (b) 60,000 (h) 297,000
(i) 675,000 (c) 72,000
(d) 60,000
(e) 10,000
(g) 20,000
Bal. 15,000 Bal. 75,000

Cost of Goods Sold
(j) 700,000
3. Manufacturing overhead is overapplied by $75,000 for the year.

To dispose of overapplied inventory, we need to allocate this amount
between Work-in-Process, Finished Goods and Cost of Goods Sold based
on the total cost of manufacturing in each account as follows:
Problem 5-17(continued)
Work in Process inventory, June 30 $32,000 5%

Finished goods Inventory, June 30 $15,000 2%
Cost of Goods Sold $700,000
Less: Work in process inventory, July 1 10,000
Less: Finished goods inventory, July 1 42,000 648,000 93%
Total $695,00 100%
0

The entry to dispose of this balance would be:
Manufacturing Overhead……………………… 75,000

Work in Process Inventory (5% x $75,000) 3,750
Finished Goods Inventory (2% x $75,000) 1,500
Cost of Goods Sold (93% x $75,000) 69,750
4.
Gold Nest Company
Income Statement
For the Year Ended June 30
Sales............................................................... $1,250,000
Cost of goods sold ($700,000 - $69,750............ 630,250
Gross Margin ………………………………………….. 619,750
Sales commissions........................................$63,000
Administrative salaries................................... 90,000
Rent expense................................................ 15,000
Advertising expenses..................................... 14,000
Depreciation expense.................................... 12,000 194,000
Operating income............................................ $425,750
Additional Notes:
You may wish to have the student prepare a statement of Cost of Goods
manufactured as follows:

Raw Materials, B.I. $ 25,000
Purchase of RM 275,000
R.M. Available 300,000
Less: Raw Material, E.I. 20,000
Raw Materials Used 280,000
Less: Indirect Material 60,000
Direct Material Used $ 220,000
Direct Labour 180,000
Manufacturing Overhead Applied 297,000
Manufacturing Costs for the year 697,000
Add: WIP B.I. 10,000
Less: WIP E.I. 32,000
Cost of Goods Manufactured $675,000
Remind the student that this statement is just a detailed

explanation of what is in the WIP t-account.

1. a. Raw Materials........................................ 200,000

b. Work in Process..................................... 152,000

Manufacturing Overhead........................ 38,000
Raw Materials................................... 190,000
c. Work in Process..................................... 160,000

Sales Commissions Expense................... 36,000
Administrative Salaries Expense.............. 80,000
Salaries and Wages Payable.............. 303,000
d. Manufacturing Overhead........................ 42,000

e. Manufacturing Overhead........................ 9,000

Insurance Expense................................. 1,000
Prepaid Insurance............................. 10,000
f. Advertising Expense............................... 50,000

g. Manufacturing Overhead........................ 51,000

Depreciation Expense............................. 9,000
Accumulated Depreciation................. 60,000

h. Work in Process..................................... 170,000
Manufacturing Overhead................... 170,000
$153,000
=$4.25 per MH; 40,000 MHs×$4.25 per MH=$170,000.
36,000 MHs

i. Finished Goods..................................... 480,000
Work in Process............................... 480,000
j. Accounts Receivable.............................. 700,000

Sales............................................... 700,000
Cost of Goods Sold................................ 475,000
Finished Goods................................ 475,000
2. Raw Materials Manufacturing Overhead

Bal. 16,000 (b) 190,000 (b) 38,000 (h) 170,000
(a) 200,000 (c) 27,000
Bal. 26,000 (d) 42,000
(e) 9,000
(g) 51,000
Bal. 3,000
Work in Process Cost of Goods Sold

Bal. 10,000 (i) 480,000 (j) 475,000
(b) 152,000
(c) 160,000
(h) 170,000
Bal. 12,000

Finished Goods
Bal. 30,000 (j) 475,000
(i) 480,000
Bal. 35,000
3. Manufacturing overhead is overapplied by $3,000. The journal entry to

dispose of this balance is:
Manufacturing Overhead.............................. 3,000

Work in process (3,000 x 3%)* 90
Finished goods (3,000 x 7%) 210
Cost of Goods Sold (3,000 x 90%).......... 2,700
* see next page
Problem 5-18 - continued
Work in process, Dec 31 $12,000 (3%)

Finished Goods, Dec 31 $35,000 (7%)
Less Work in process, Jan 1 (10,000)
Less Finished goods, Jan 1 (30,000) $435,000 (90%)
Total $482,000
4.
Ravsten Company
Income Statement
For the Year Ended December 31
Sales............................................................ $700,000

Cost of goods sold ($475,000 – $2,700)......... 472,300
Gross margin................................................ 227,700
Sales commissions...................................... $36,000
Administrative salaries................................ 80,000
Insurance................................................... 1,000
Advertising................................................. 50,000
Depreciation............................................... 9,000 176,000
Operating income.......................................... $ 51,700

1. and 2.
Cash Accounts Receivable

Bal. 8,000 (l) 190,000 Bal. 13,000 (k) 197,000
(k) 197,000 (j) 200,000
Bal. 15,000 Bal. 16,000

Bal. 7,000 (b) 40,000 Bal. 18,000 (i) 130,000
(a) 45,000 (b) 32,000
Bal. 12,000 (e) 40,000
(h) 60,000
Bal. 20,000
Finished Goods Prepaid Insurance

Bal. 20,000 (j) 120,000 Bal. 4,000 (f) 3,000
(i) 130,000
Bal. 30,000 Bal. 1,000
Plant and Equipment Accumulated Depreciation

Bal. 230,000 Bal. 42,000
(d) 28,000
Bal. 70,000

Manufacturing Overhead Accounts Payable
(b) 8,000 (h)* 60,000 (l) 100,000 Bal. 30,000
(c) 14,600 (a) 45,000
(d) 21,000 (c) 14,600
(e) 18,000 (g) 18,000
(f) 2,400
Bal. 4,000 (m) 4,000 Bal. 7,600
*$40,000 × 150% = $60,000.
Salaries & Wages Payable Retained Earnings

(l) 90,000 (e) 93,400 Bal. 78,000
Bal. 3,400

Capital Stock Sales Commissions Expense
Bal. 150,000 (e) 10,400
Administrative Salaries Expense Depreciation Expense

(e) 25,000 (d) 7,000
Insurance Expense Miscellaneous Selling and

Administrative Expense
(f) 600 (g) 18,000
Cost of Goods Sold Sales

(j) 120,000 (j) 200,000
(m) 4,000
3. Overhead is underapplied by $4,000. Entry (m) above records the

closing of this underapplied overhead balance to Cost of Goods Sold.
4.
Durham Company
Income Statement
Sales............................................................. $200,000
Cost of goods sold ($120,000 + $4,000).......... 124,000
Gross margin................................................. 76,000

Depreciation expense................................... $ 7,000
Sales commissions expense.......................... 10,400
Administrative salaries expense.................... 25,000
Insurance expense....................................... 600
Miscellaneous expense................................. 18,000 61,000
Operating income........................................... $ 15,000

1. and 2.

Bal. 15,000 (c) 225,000 Bal. 40,000 (l) 445,000
(l) 445,000 (m) 150,000 (k) 450,000
Bal. 85,000 Bal. 45,000

Bal. 25,000 (b) 90,000 Bal. 30,000 (j) 310,000
(a) 80,000 (b) 85,000
(c) 120,000
(i) 96,000
Bal. 15,000 Bal. 21,000

Bal. 45,000 (k) 300,000 Bal. 5,000 (f) 4,800
(j) 310,000
Bal. 55,000 Bal. 200
Buildings & Equipment Accumulated Depreciation

Bal. 500,000 Bal. 210,000
(e) 30,000
Bal. 240,000

(b) 5,000 (i)* 96,000 (m) 150,000 Bal. 75,000
(c) 30,000 (a) 80,000
(d) 12,000 (d) 12,000
(e) 25,000 (g) 40,000
(f) 4,000 (h) 17,000
(h) 17,000
Bal. 3,000 Bal. 74,000
$80,000
* = 80% of direct labour cost; $120,000 × 0.80 = $96,000.
$100,000
Retained Earnings Capital Stock
Bal. 125,000 Bal. 250,000

Salaries Expense Depreciation Expense
(c) 75,000 (e) 5,000
Insurance Expense Shipping Expense

(f) 800 (g) 40,000

(k) 300,000 (k) 450,000
3. Manufacturing overhead was overapplied by $3,000 for the year. This

balance would be allocated between Work in Process, Finished Goods,
and Cost of Goods Sold in proportion to the ending balances in these
accounts. The allocation would be:
Work in Process, 12/31................ $ 21,000 5.6 %

Finished Goods, 12/31.................. 55,000 14.6
Cost of Goods Sold, 12/31............ 300,000 79.8
$376,000 100.0 %
Manufacturing Overhead.............................. 3,000

Work in Process (5.6% × $3,000)............ 168
Finished Goods (14.6% × $3,000)........... 438
Cost of Goods Sold (79.8% × $3,000)...... 2,394
4.

PQB Inc.
Income Statement
Sales............................................................. $450,000
Cost of goods sold ($300,000 – $2,394).......... 297,606
Gross margin................................................. 152,394
Salaries expense......................................... $75,000
Depreciation expense.................................. 5,000
Insurance expense...................................... 800
Shipping expense........................................ 40,000 120,800

1.
Bal. 40,000 (a) 33,500 Bal. 77,800* (e) 60,700
(a) 29,500
(b) 20,000
(d) 32,000
Bal. 98,600
Finished Goods Manufacturing Overhead

Bal. 85,000 (a) 4,000 (d) 32,000
(e) 60,700 (b) 8,000
(c) 19,000
Salaries & Wages Payable Accounts Payable

(b) 28,000 (c) 19,000
* Job 105 materials, labour, and overhead at November 30. $50,300

Job 106 materials, labour, and overhead at November 30. 27,500
Total Work in Process inventory at November 30.............. $77,800
2. a. Work in Process........................................ 29,500 *

Raw Materials...................................... 33,500
*$8,200 + $21,300 = $29,500.

This entry is posted to the T-accounts as entry (a) above.
b. Work in Process........................................ 20,000 *

Salaries and Wages Payable................. 28,000
*$4,000 + $6,000 + $10,000 = $20,000.
This entry is posted to the T-accounts as entry (b) above.
c. Manufacturing Overhead.......................... 19,000

Accounts Payable................................ 19,000
This entry is posted to the T-accounts as entry (c) above.

3. Apparently, the company uses a predetermined overhead rate of
160% of direct labour cost. This figure can be determined by relating
the November applied overhead cost on the job cost sheets to the
November direct labour cost shown on these sheets. For example, in
the case of Job 105:
November overhead cost = $20,800 = 160% of direct labour cost

November direct labour cost $13,000
The overhead cost applied to each job during December was:
Job 105: $4,000 × 160%............ $ 6,400

Job 106: $6,000 × 160%............ 9,600
Job 107: $10,000 × 160%.......... 16,000
Total applied overhead............... $32,000
The entry to record the application of overhead cost to jobs would be as

follows:
Work in Process............................... 32,000

Manufacturing Overhead............. 32,000
The entry is posted to the T-accounts as entry (d) above.
4. The total cost of Job 105 was:
Direct materials............................................................. $16,500

Direct labour ($13,000 + $4,000)................................... 17,000

Manufacturing overhead applied ($17,000 × 160%)........ 27,200
Total cost...................................................................... $60,700
The entry to record the transfer of the completed job would be as

follows:
Finished Goods............................................ 60,700

Work in Process...................................... 60,700
This entry is posted to the T-accounts as entry (e) above.

5. As shown in the above T-accounts, the balance in Work in Process at
December 31 was $98,600. The breakdown of this amount between
Jobs 106 and 107 is:
Job 106 Job 107 Total

Direct materials.......................... $17,500 $21,300 $38,800
Direct labour.............................. 13,000 10,000 23,000
Manufacturing overhead............. 20,800 16,000 36,800
Total cost................................... $51,300 $47,300 $98,600

1. Research & Documents predetermined overhead rate:
Predetermined = Estimated total overhead cost

$700,000
= =$35 per hour
20,000 hours
Litigation predetermined overhead rate:

= $320,000
$800,000
= 40% of Direct lawyer cost
2.
Research & Documents overhead applied:
18 hours × $35 per hour..................................... $ 630
Litigation overhead applied: $2,100 × 40%............. 840
Total overhead cost............................................... $1,470
3. Total cost of Case 618–3:

Departments
Research &

Documents Litigation Total
Materials and supplies............. $ 50 $ 30 $ 80
Direct attorney cost................ 410 2,100 2,510
Overhead cost applied............ 630 840 1,470
Total cost............................... $1,090 $2,970 $4,060

4.
Department
Research &
Documents Litigation
Departmental overhead cost incurred......... $770,000 $300,000
Departmental overhead cost applied:
23,000 hours × $35 per hour.................. 805,000
$725,000 × 40%.................................... 290,000
Underapplied (or overapplied) overhead..... $ (35,000) $ 10,000

1. a. Raw Materials........................................ 820,000
Accounts Payable............................. 820,000
b. Work in Process..................................... 817,000

Raw Materials................................... 830,000
c. Work in Process..................................... 140,000

d. Salaries Expense.................................... 150,000

e. Prepaid Insurance.................................. 38,000

Cash................................................ 38,000
Insurance Expense................................ 600
Prepaid Insurance............................ 40,000
f. Marketing Expense................................ 100,000

g. Manufacturing Overhead........................ 28,000

Depreciation Expense............................. 12,000
Accumulated Depreciation................. 40,000

h. Manufacturing Overhead........................ 12,600
i. Work in Process..................................... 156,000

Manufacturing Overhead................... 156,000

$135,000
=$7.50 per DLH; 20,800 DLH × $7.50 per DLH = $156,000.
18,000 DLH Pr
oblem 5-23 (continued)
j. Finished Goods................................... 1,106,000
Work in Process............................. 1,106,000
k. Accounts Receivable............................ 1,420,000

Sales............................................. 1,420,000
Cost of Goods Sold.............................. 1,120,000
Finished Goods.............................. 1,120,000
l. Cash................................................... 1,415,000
Accounts Receivable....................... 1,415,000
m. Accounts Payable................................ 970,000

Salaries and Wages Payable................. 348,000
Cash............................................. 1,318,000
2.
Bal. 9,000 (e) 38,000 Bal. 30,000 (l) 1,415,000
(l) 1,415,000 (m) 1,318,000 (k) 1,420,000
Bal. 68,000 Bal. 35,000

Bal. 16,000 (b) 830,000 Bal. 21,000 (j) 1,106,000

(a) 820,000 (b) 817,000
(c) 140,000
(i) 156,000
Bal. 6,000 Bal. 28,000

Bal. 38,000 (k) 1,120,000 Bal. 7,000 (e) 40,000
(j) 1,106,000 (e) 38,000
Bal. 24,000 Bal. 5,000
Buildings and Equipment Accumulated Depreciation

Bal. 300,000 Bal. 128,000
(g) 40,000
Bal. 168,000

Manufacturing Overhead
(b) 13,000 (i) 156,000
(c) 60,000
(e) 39,400
(g) 28,000
(h) 12,600
Bal. 3,000
Salaries & Wages Payable Accounts Payable

(m) 348,000 Bal. 3,000 (m) 970,000 Bal. 60,000
(c) 200,000 (a) 820,000
(d) 150,000 (f) 100,000
(h) 12,600
Bal. 5,000 Bal. 22,600
Retained Earnings Capital Stock

Bal. 30,000 Bal. 200,000
Marketing Expense Depreciation Expense

(f) 100,000 (g) 12,000
Insurance Expense Salaries Expense

(e) 600 (d) 150,000

(k) 1,120,000 (k) 1,420,000

3. Manufacturing overhead is overapplied by $3,000 for the year. The
entry to dispose of this balance would be:

Work in Process (3,000 x 3%) 90
Finished goods (3,000 x 2%) 60
Cost of Goods Sold (3,000 x 95%).... 2,850
Work in Process Inventory,

Dec 31
$28,000 3%
Finished Goods Inventory, $24,000 2%
Dec 31
Unadjusted Cost of Goods
Sold
$1,120,000
Less Work in Process
Inventory, Jan 1
Less Finished Goods ($21,000)
Inventory, Jan 1 ($38,000) $1,061,000 95%
Total
$1,113,000 100%
4.
Heavenly Displays, Inc.
Income Statement

Sales.............................................................. $1,420,000
Cost of goods sold ($1,120,000 – $2,850)........ 1,117,150
Gross margin.................................................. 302,850
Salaries expense.......................................... $150,000
Insurance expense....................................... 600
Marketing expense....................................... 100,000
Depreciation expense................................... 12,000 262,600
Operating income........................................... $ 40,250

1. Preparation Department predetermined overhead rate:

$416,000
Fabrication Department predetermined overhead rate:

$720,000
= =180% of materials cost
$400,000 materials cost
2. Preparation Department overhead applied:

350 machine-hours × $5.20 per machine-hour...... $1,820
Fabrication Department overhead applied:
$1,200 direct materials cost × 180%.................... 2,160
Total overhead cost............................................... $3,980
3. Total cost of Job 127:
Preparation Fabrication Total

Direct materials................ $ 940 $1,200 $2,140
Direct labour.................... 710 980 1,690
Manufacturing overhead.. . 1,820 2,160 3,980
Total cost......................... $3,470 $4,340 $7,810

Unit product cost for Job 127:
$7,810
Average cost per unit = = $312.40 per unit
25 units

4.
Preparation Fabrication
Manufacturing overhead cost incurred...... $390,000 $740,000
Manufacturing overhead cost applied:
73,000 machine-hours × $5.20 per
machine-hour.................................... 379,600
$420,000 direct materials cost ×
180%................................................ 756,000
Underapplied (or overapplied) overhead... $ 10,400 $(16,000)

1. The cost of raw materials put into production was:
Raw materials inventory, 1/1......................... $ 30,000

Debits (purchases of materials)..................... 420,000
Materials available for use............................. 450,000
Raw materials inventory, 12/31..................... 60,000
Materials requisitioned for production............ $390,000
2. Of the $390,000 in materials requisitioned for production, $320,000 was

debited to Work in Process as direct materials. Therefore, the difference
of $70,000 ($390,000 – $320,000 = $70,000) would have been debited
to Manufacturing Overhead as indirect materials.
3. Total factory wages accrued during the year

(credits to the Factory Wages Payable account).... $175,000
Less direct labour cost (from Work in Process)........ 110,000
Indirect labour cost................................................ $ 65,000
4. The cost of goods manufactured for the year was $810,000—the credits
to Work in Process.
5. The Cost of Goods Sold for the year was:
Finished goods inventory, 1/1................................. $ 40,000

Add: Cost of goods manufactured (from Work in 810,000

Process).............................................................
Goods available for sale......................................... 850,000
Finished goods inventory, 12/31............................. 130,000
Cost of goods sold................................................. $720,000
6. The predetermined overhead rate was:
Predetermined = Manufacturing overhead cost applied

overhead rate Direct materials cost
$400,000
= =125% of direct materials cost
$320,000

7. Manufacturing overhead was overapplied by $15,000, computed as
follows:
Actual manufacturing overhead cost for the year

(debits)....................................................................... $385,000
Applied manufacturing overhead cost (from Work in
Process—this would be the credits to the
Manufacturing Overhead account)................................. 400,000
Overapplied overhead..................................................... $(15,000)
8. The ending balance in Work in Process is $90,000. Direct labour makes

up $18,000 of this balance, and manufacturing overhead makes up
$40,000. The computations are:
Balance, Work in Process, 12/31.................................. $90,000

Less: Direct materials cost (given)............................... (32,000)
Manufacturing overhead cost ($32,000 ×
125%)............................................................ (40,000)
Direct labour cost (remainder)..................................... $18,000

1. a.

= $248,000
40,000 MH
= $6.20 per MH
b. Actual manufacturing overhead costs: 264,000

Applied manufacturing overhead costs:
42,000 MH × $6.20.................................... 260,400
Underapplied overhead................................. $ 3,600
Underapplied overhead would be closed directly to Cost of Goods Sold.
2.
Calgary Injection Molding
Schedule of Cost of Goods Manufactured
Direct materials:
Raw materials inventory, beginning................. $ 21,000
Add purchases of raw materials...................... 133,000
Total raw materials available........................... 154,000
Deduct raw materials inventory, ending........... 16,000

Raw materials used in production.................... $138,000
Direct labour.................................................... 80,000
process.......................................................... 260,400
Total manufacturing cost................................... 478,400
Add: Work in process, beginning....................... 44,000
522,400
Deduct: Work in process, ending....................... 40,000

3. Cost of goods sold:
Finished good inventory, beginning...................... $ 68,000
Add: Cost of goods manufactured........................ 482,400
Goods available for sale....................................... 550,400
Deduct: Finished goods inventory, ending............. 60,000
Cost of goods sold............................................... $490,400
4. Direct materials..................................................... $ 3,200

Direct labour......................................................... 4,200
Overhead applied ($6.20 × 350 MH)....................... 2,170
Total manufacturing cost........................................ $9,570
$9,570 job cost × 140% = $13,398 price to customer.
5. The amount of overhead cost in Work in Process was:
2,050 MH × $6.20 =$12,710
The amount of direct materials cost in Work in Process was:
Total ending work in process...................... $40,000

Deduct:
Direct labour........................................... $ 8,000
Manufacturing overhead.......................... 12,710 20,710

Direct materials......................................... $19,290
The completed schedule of costs in Work in Process was:
Direct materials......................................... $19,290

Direct labour............................................. 8,000
Manufacturing overhead............................ 12,710
Work in process inventory.......................... $40,000

1. The predetermined overhead rate was calculated as follows:
Predetermined rate = $230,000/4,000 machine hours = $57.50 per hr
2. Actual manufacturing overhead cost....................... $228,000

Manufacturing overhead cost applied to Work in
Process during the year: 3,150 actual
machinehours × $57.50 per hour......................... 181,125
Underapplied overhead cost................................... $ 46,875
3. Cost of Goods Sold...................................... 46,875

4. The unexpected economic recession means that the forecasted machine

time is well above the time actually used. At the same time, most of the
manufacturing overhead cost is fixed so the forecasted dollars of
manufacturing overhead stay roughly the same even though the
amount of actual machine time has gone down. Thus, the
predetermined overhead rate is not accurate and manufacturing
overhead is underapplied by a significant amount during the year. Once
the Cost of Goods Sold is adjusted for underapplied overhead, profit will
be much lower than forecasted as well.

1. a. Raw Materials...................................... 200,000
Accounts Payable............................ 200,000
b. Work in Process................................... 185,000

Raw Materials................................. 185,000
c. Manufacturing Overhead....................... 63,000

Utilities expense 7,000
d. Work in Process................................... 230,000

Salaries Expense.................................. 110,000
Salaries and Wages Payable............. 430,000
e. Manufacturing Overhead....................... 54,000

f. Advertising Expense............................. 136,000

g. Manufacturing Overhead....................... 76,000

Depreciation Expense........................... 19,000
Accumulated Depreciation............... 95,000
h. Manufacturing Overhead....................... 102,000

Rent Expense....................................... 18,000

i. Work in Process................................... 390,000

Manufacturing Overhead................. 390,000
*Estimated total manufacturing overhead cost = $360,000
Estimated direct labour hours = 900 hours
Predetermined overhead rate = $360,000/900 hrs = $400 per DLH
Actual direct labour hours = 975
Manufacturing overhead applied = $400 x 975 DLH = $390,000

Finished Goods.................................... 770,000
Work in Process.............................. 770,000
k. Accounts Receivable............................. 1,200,000

Sales.............................................. 1,200,000
Cost of Goods Sold............................... 800,000
Finished Goods............................... 800,000
2.
Accounts Receivable Raw Materials
(l) 1,200,000 Bal. 30,000 (b) 185,000
(a) 200,000
Bal. 45,000

Bal. 21,000 (j) 770,000 Bal. 60,000 (k) 800,000
(b) 185,000 (j) 770,000
(d) 230,000
(i) 390,000
Bal. 56,000 Bal. 30,000

(c) 63,000 (i) 390,000 (a) 200,000
(d) 90,000 (c) 70,000

(e) 54,000 (e) 54,000
(g) 76,000 (f) 136,000
(h) 102,000 (h) 120,000
Bal. 5,000
Accumulated Depreciation Depreciation Expense

(g) 95,000 (g) 19,000
Salaries & Wages Payable Salaries Expense

(d) 430,000 (d) 110,000
Utilities Expense Advertising Expense

(c) 7,000 (f) 136,000

Rent Expense Cost of Goods Sold
(h) 18,000 (k) 800,000
Sales
(k) 1,200,000
3.
Oil Field Equipment Company
Direct materials:
Raw materials inventory, beginning.................... $ 30,000
Purchases of raw materials................................ 200,000
Materials available for use.................................. 230,000
Raw materials inventory, ending........................ 45,000
Materials used in production.............................. $185,000
Direct labour....................................................... 230,000
process............................................................. 390,000
Total manufacturing cost...................................... 805,000
Add: Work in process, beginning.......................... 21,000
826,000
Deduct: Work in process, ending.......................... 56,000
Cost of goods manufactured................................. $770,000

4.
The t-account analysis indicates manufacturing overhead was over-
applied by $5,000
Since we aren’t told how many units are in ending work in process,
finished goods or cost of goods sold, we will use the entire cost of
manufacturing in each account to determine how to allocate over-
applied overhead.

Work in Process inventory at year end $56,000 7%

Finished goods inventory at year end $30,000 4%
Less: Work in process inventory, beg. 21,000
Less: Finished goods inventory, beg. 60,000 719,000 89%
Total $805,00 100%
0
The entry to dispose of this balance would be:
Manufacturing Overhead……………………… 5,000

Work in Process Inventory (7% x $5,000) 350
Finished Goods Inventory (4% x $5,000) 200
Cost of Goods Sold (89% x $5,000) 4,450
Schedule of cost of goods sold:

Finished goods inventory, beginning.............. $ 60,000
Add: Cost of goods manufactured.................. 770,000
Goods available for sale................................ 830,000
Finished goods inventory, ending................... 30,000

Unadjusted cost of goods sold....................... 800,000
Deduct allocated overapplied overhead.......... 4,450
Adjusted cost of goods sold........................... $795,550

5.
Oil Field Equipment Company
Income Statement
For the year ended xxx
Sales........................................................... $1,200,000
Cost of goods sold....................................... 795,550
Gross margin............................................... 404,450
Salaries expense....................................... $110,000
Advertising expense.................................. 136,000
Depreciation expense................................ 19,000
Rent expense............................................ 18,000
Utilities expense........................................ 7,000 290,000
Operating income........................................ $ 114,450
6.
Direct materials............................................................. $ 8,000
Direct labour ................................................................ 9,200
Manufacturing overhead cost applied ($400 × 39)........... 15,600
Total manufacturing cost............................................... $32,800
Units produced ÷4
Cost per unit $8,200
Price is 60% above unit product cost

Price = 160% x $8,200 = $13,120 per unit

1. a.
= $1,440,000
$900,000 direct labour cost
= 160% Direct labour cost
b. $21,200 × 160% = $33,920
2. a.
Cutting Machining Assembly
Department Department Department
Estimated manufacturing
overhead cost (a).......... $540,000 $800,000 $100,000
Estimated direct labour
cost (b)......................... $300,000 $200,000 $400,000
Predetermined overhead
rate (a) ÷ (b)................ 180% 400% 25%
b.
Cutting Department:
$6,500 × 180%................................... $11,700
Machining Department:
$1,700 × 400%................................... 6,800

Assembly Department:
$13,000 × 25%................................... 3,250
Total applied overhead........................... $21,750
3. The bulk of the labour cost on the Hastings job is in the Assembly
Department, which incurs very little overhead cost. The department has
an overhead rate of only 25% of direct labour cost as compared to
much higher rates in the other two departments. Therefore, as shown
above, use of departmental overhead rates results in a relatively small
amount of overhead cost charged to the job.

However, use of a plantwide overhead rate in effect redistributes
overhead costs proportionately between the three departments (at
160% of direct labour cost) and results in a large amount of overhead
cost being charged to the Hastings job, as shown in Part 1. This may
explain why the company bid too high and lost the job. Too much
overhead cost was assigned to the job for the kind of work being done
on the job in the plant.
If a plantwide overhead rate is being used, the company will tend to

charge too little overhead cost to jobs that require a large amount of
labour in the Cutting or Machining Departments. The reason is that the
plantwide overhead rate (160%) is much lower than the rates if these
departments were considered separately.
4. The company’s bid price was:
Direct materials.............................................. $ 18,500

Direct labour.................................................. 21,200
Manufacturing overhead applied (above)......... 33,920
Total manufacturing cost................................ 73,620
Bidding rate................................................... × 1.5
Total bid price................................................ $110,430
If departmental overhead rates had been used, the bid price would have
been:
Direct materials.............................................. $ 18,500

Direct labour.................................................. 21,200
Manufacturing overhead applied (above)......... 21,750

Total manufacturing cost................................ 61,450
Bidding rate................................................... × 1.5
Total bid price................................................ $ 92,175
Note that if departmental overhead rates had been used, Prime Products
would have been the low bidder on the Hastings job since the
competitor underbid Prime Products by only $10,000.

5. a.
Actual overhead cost....................................... $1,482,000
Applied overhead cost ($870,000 × 160%)....... 1,392,000
Underapplied overhead cost............................. $ 90,000
b.
Department
Cutting Machining Assembly Total Plant
Actual overhead cost............ $560,000 $830,000 $92,000 $1,482,000
Applied overhead cost:
$320,000 × 180%............. 576,000
$210,000 × 400%............. 840,000
$340,000 × 25%............... 85,000 1,501,000
Underapplied (overapplied)
overhead cost................... $(16,000) $(10,000) $ 7,000 $ (19,000)

1. a. Raw Materials......................................... 30,000
b. Work in Process...................................... 25,000

Raw Materials.................................... 35,000
c. Work in Process...................................... 32,000

Salaries and Wages Payable............... 34,000
d. Manufacturing Overhead......................... 17,900

e. Manufacturing Overhead......................... 10,000

Accumulated Depreciation.................. 10,000
h. Work in Process...................................... 48,000

Manufacturing Overhead*.................. 48,000
g. Salaries expense………………………………… 30,000

Salaries and wages payable……………. 30,000
h. Selling expenses………………………………… 6,000

Accounts payable………………………….. 6,000

i. Finished Goods ……………………………….. 34,500
Work in Process ………………………… 34,500
j. Accounts Receivable……………………………. 48,300

Sales ………………………………………… 48,300
Cost of Goods Sold ………………………… 34,500
Finished Goods ……………………….. 34,500
*Predetermined OH rate = $576,000 budget overhead cost/19,200 DLH

= $30 per DLH
1,600 DLH × $30 per DLH = $48,000 overhead applied.

2.
Accounts Receivable Raw Materials
(j) 48,300 Bal. 15,000 (b) 35,000
(a) 30,000
Bal. 10,000

Bal. 12,000 (i) 34,500 Bal. 10,000 (j) 34,500
(b) 25,000 (i) 34,500
(c) 32,000
(f) 48,000
Bal. 82,500 Bal. 10,000

(b) 10,000 (f) 48,000 (a) 30,000
(c) 2,000 (c) 34,000
(d) 17,900 (d) 17,900
(e) 10,000 (h) 6,000
Bal. 8,100
Salaries & Wages Payable Salaries Expense

(c) 34,000 (g) 30,000
(g) 30,000
Sales Cost of Goods Sold

(j) 48,300 (j) 34,500
Accumulated Depreciation Selling Expenses

(e) 10,000 (h) 6,000
3.
Mountain Manufacturing Company

Direct materials:
Raw materials inventory, beginning.................... $ 15,000

Purchases of raw materials................................ 30,000
Materials available for use.................................. 45,000
Raw materials inventory, ending........................ 10,000
Materials used in production.............................. 35,000
Less: Indirect materials included in
manufacturing
overhead…………………………………………… 10,000 $25,000
Direct labour....................................................... 32,000
process............................................................. 48,000
Total manufacturing cost...................................... 105,000
Add: Work in process, beginning.......................... 12,000
117,000
Deduct: Work in process, ending.......................... 82,500
Cost of goods manufactured................................. $34,500
Cost of Goods Sold

Finished goods inventory, beginning………………… $10,000
Add: Cost of Goods Manufactured……………………. 34,500
Goods available for Sale…………………………………. 44,500
Deduct Finished Goods Inventory, ending………… 10,000
Unadjusted Cost of Goods Sold 34,500
4.

The t-account for Manufacturing Overhead indicates that overhead was
overapplied by $8,100. We first need to determine how much overhead is
included in each of the inventory accounts and in Cost of Goods Sold for
the month of January as follows:
Overhead applied to Finished goods in January............... $0 *
Overhead applied to Work in Process Inventory,

January Job B DLH of 1,250 x $30 per DLH ……. $37,500 78%
Overhead included in Cost of Goods Sold, January

Job A 350 DLH x $30 per DLH………………………… 10,500 22%
Total Overhead applied..................................................
$48,000 100%
*We know that the only sales during January were for Job A so the same
finished goods costing $10,000 that were in Finished Goods inventory at
the beginning of the month are still there at the end of the month. No
overhead costs for January were applied to those units.
Using the percentages calculated above, the journal entry to dispose of

$8,100 of overapplied inventory is as follows:**

Work in Process Inventory ($8,100 x .78) 6,318

Cost of Good Sold ($8,100 x .22) 1,782
Therefore, the adjusted Cost of Goods Sold = $34,500 – 1,782
= $32,718
** Instructors may wish to clarify with the students that this journal entry
to correct the manufacturing overhead balance is not typically made until
the end of the fiscal year, but adding this required in a problem that deals
with manufacturing during one month allows them to practice the
calculations to allocate overapplied inventory in a relatively simple setting.

5.
Mountain Manufacturing Company
Income Statement
For the Month ended January 31
Sales............................................................. $48,300
Cost of goods sold ........................................ 32,718
Gross margin................................................. 15,582
Salaries expense......................................... $30,000
Depreciation expense.................................. 10,000
Selling expense........................................... 6,000
($30,418)
Operating loss...............................................

Case 5-31 (45 minutes)
1. The revised predetermined overhead rate is determined as follows:
Original estimated total manufacturing overhead.... $3,402,000

Plus: Lease cost of the new machine..................... 348,000
Plus: Cost of new technician/programmer.............. 50,000
Estimated total manufacturing overhead................ $3,800,000
Original estimated total direct labour-hours............ 63,000

Less: Estimated reduction in direct labour-hours.... 6,000
Estimated total direct labour-hours........................ 57,000
Predetetermined = Estimated total manufacturing overhead

$3,800,000
=
57,000 DLHs
=$66.67 per DLH
The revised predetermined overhead rate is higher than the original rate
because the automated milling machine will increase the overhead for
the year (the numerator in the rate) and will decrease the direct labour-
hours (the denominator in the rate). This double-whammy effect
increases the predetermined overhead rate.
2. Acquisition of the automated milling machine will increase the apparent

costs of all jobs—not just those that use the new facility. This is because
the company uses a plantwide overhead rate. If there were a different
overhead rate for each department, this would not happen.
3. The predetermined overhead rate is now considerably higher than it

was. This will penalize products that continue to use the same amount
of direct labour-hours. Such products will now appear to be less profita-
ble and the managers of these products will appear to be doing a poorer
job. There may be pressure to increase the prices of these products
even though there has in fact been no increase in their real costs.

Case 5-31 (continued)
4. While it may have been a good idea to acquire the new equipment
because of its greater capabilities, the calculations of the cost savings
were in error. The original calculations implicitly assumed that overhead
would decrease because of the reduction in direct labour-hours. In
reality, the overhead increased because of the additional costs of the
new equipment. A differential cost analysis would reveal that the
automated equipment would increase total cost by about $316,000 a
year if the labour reduction is only 2,000 hours.
Cost consequences of leasing the automated equipment:

Increase in manufacturing overhead cost:
Lease cost of the new machine................................... $348,000
Cost of new technician/programmer........................... 50,000
398,000
Less: labour cost savings (2,000 hours × $41 per
hour)........................................................................ 82,000
Net increase in annual costs......................................... $316,000
Even if the entire 6,000-hour reduction in direct labour-hours occurred,

that would have added only $164,000 (4,000 hours × $41 per hour) in
cost savings. The net increase in annual costs would have been
$152,000 and the machine would still be an unattractive proposal. The
entire 6,000-hour reduction may ultimately be realized as workers retire
or quit. However, this is by no means automatic.
There are two morals to this tale. First, predetermined overhead rates
should not be misinterpreted as variable costs. They are not. Second, a
reduction in direct labour requirements does not necessarily lead to a
reduction in direct labour hours paid. It is often very difficult to actually
reduce the direct labour force and may be virtually impossible in some
countries except through natural attrition.

Case 5-32 (30 minutes)
1. Calculation of shop-wide overhead application rate
Salaries of skilled repairmen (4 x $50,000) $200,000

Salaries of repair technicians (2 x $38,000) 76,000
Other budgeted indirect support costs 178,450
Total indirect costs $454,450
Total estimated hours worked (6 x 1,750) 10,500
Shop rate (Total indirect costs/ estimated total $43.28

hours)
2. Calculation of shop rates for simple and complex work
Total indirect costs $454,450.00

65% due to complex repairs $295,392.50
Time spent on complex repairs (50% of 10,500) 5,250
Shop rate for complex repairs $56.27
35% of indirect cost due to simple repairs $159,057.50

Time spent on simple repairs (50% of 10,500) 5,250.00
Shop rate for simple repairs $ 30.30
3. a. Price of Job 1246 using shop-wide rate

Price for Job 1246 using shop wide rate:
Direct materials cost $115.00
6 hours x $43.28 for support costs 259.68
Total cost $374.68
Price to customer after mark up of 10% $412.15

Case 5-32 (continued)
3 b. Price of Job 1246 using separate rates for simple and complex
repairs:
Price for Job 1246 using complex and simple shop rates:
Direct materials cost $115.00
Support costs for complex work (2 hrs x $56.27) 112.54
Support costs for simple work (4 hrs x $30.30) 121.20
Total cost $348.74
Price after mark up of 10% $383.61
4. For jobs with more simple than complex elements like Job 1246, Foster
can charge a lower overall price (e.g., $383.61 versus $412.15 using the
single shop-wide rate). Given there is a new competing shop in the
neighbourhood, setting a more accurate price becomes even more
important.
The decision to use two different rates comes down to the issue of costs
versus benefits. While it is more costly to gather and analyze
information using two different overhead application rates, Foster may
derive significant benefits due to more accurate pricing. In addition, by
using a shop-wide average rate, Foster may actually be under-pricing
more complex repairs which would also have a negative effect on
company profitability. Improved decision making resulting from more
accurate information can justify the additional costs of gathering
separate information for each type of repair.

Appendix 5A
Question 5A-1 When the predetermined overhead rate is based on the

amount of the allocation base at capacity and the plant is operated at less
than capacity, overhead will ordinarily be underapplied. This occurs
because actual activity is less than the activity the predetermined overhead
rate is based on.
Question 5A-2 Critics of current practice advocate disclosing

underapplied overhead on the income statement as Cost of Unused
Capacity—a period expense. This would highlight the amount rather than
burying it in other accounts.
Exercise 5A-1 (30 minutes)

1. The overhead applied to Ms. Miyami’s account would be computed as
follows:
2013 2014
Estimated overhead cost (a).............................. $144,000 $144,000
Estimated professional staff hours (b)................ 2,400 2,250
Predetermined overhead rate (a) ÷ (b).............. $60 $64
Professional staff hours charged to
Ms. Miyami’s account..................................... ×5 ×5
Overhead applied to Ms. Miyami’s account......... $300 $320
2. If the actual overhead cost and the actual professional hours charged
turn out to be exactly as estimated there would be no underapplied or
overapplied overhead.
2013 2014
Predetermined overhead rate (see above).......... $60 $64

Actual professional staff hours charged to
clients’ accounts (by assumption).................... × 2,400 × 2,250
Overhead applied............................................. $144,000 $144,000
Actual overhead cost incurred (by assumption). . 144,000 144,000
Under- or overapplied overhead........................ $ 0 $ 0

Exercise 5A-1 (continued)
3. If the predetermined overhead rate is based on the professional staff

hours available, the computations would be:
2013 2014
Estimated overhead cost (a)............................... $144,000 $144,000
Professional staff hours available (b)................... 3,000 3,000
Predetermined overhead rate (a) ÷ (b)............... $48 $48
Professional staff hours charged to Ms. Miyami’s
account........................................................... ×5 ×5
Overhead applied to Ms. Miyami’s account........... $240 $240
4. If the actual overhead cost and the actual professional staff hours
charged to clients’ accounts turn out to be exactly as estimated
overhead would be underapplied as shown below.
2013 2014
Predetermined overhead rate (see 3 above) (a)... $48 $48
Actual professional staff hours charged to
clients’ accounts (by assumption) (b)................ × 2,400 × 2,250
Overhead applied (a) × (b)................................. $115,200 $108,000
Actual overhead cost incurred (by assumption).... 144,000 144,000
Underapplied overhead...................................... $ 28,800 $ 36,000
The underapplied overhead is best interpreted in this situation as the

cost of idle capacity. Proponents of this method of computing

predetermined overhead rates suggest that the underapplied overhead
be treated as a period expense that would be separately disclosed on
the income statement as Cost of Unused Capacity.

Problem 5A-2 (60 minutes)
1. The overhead applied to the Fire job would be computed as follows:
2013 2014
Estimated studio overhead cost (a).................... $90,000 $90,000
Estimated hours of studio service (b)................. 1,000 750
Fire job’s studio hours ...................................... × 30 × 30
Overhead applied to the Fire job ...................... $2,700 $3,600
Overhead is underapplied for both years as computed below:
2013 2014
Predetermined overhead rate (see above) (a).... $90 $120
Actual hours of studio service provided (b)......... 900 600
Overhead applied (a) × (b)............................... $81,000 $72,000
Actual studio cost incurred................................ 90,000 90,000
Underapplied overhead..................................... $ 9,000 $18,000
2. If the predetermined overhead rate is based on the hours of studio

service at capacity, the computations would be:
2013 2014
Estimated studio overhead cost (a).................... $90,000 $90,000
Hours of studio service at capacity (b)............... 1,800 1,800

Fire job’s studio hours ...................................... × 30 × 30
Overhead applied to the Fire job ...................... $1,500 $1,500
Overhead is underapplied for both years under this method as well:
2013 2014
Predetermined overhead rate (see above) (a)....... $50 $50
Actual hours of studio service provided (b)............ 900 600
Overhead applied (a) × (b).................................. $45,000 $30,000
Actual studio cost incurred................................... 90,000 90,000
Underapplied overhead........................................ $45,000 $60,000

Problem 5A-2 (continued)
3. When the predetermined overhead rate is based on capacity,
underapplied overhead is interpreted as the cost of idle capacity.
Indeed, proponents of this method suggest that underapplied overhead
be treated as a period expense that would be separately disclosed on
the income statement as Cost of Unused Capacity.
4. Alderberry Recording’s fundamental problem is the competition that is

drawing customers away. The competition is able to offer the latest
equipment, excellent service, and attractive prices. The company must
do something to counter this threat or it will ultimately face failure.
Under the conventional approach in which the predetermined overhead

rate is based on the estimated studio hours, the apparent cost of the
Fire job has increased between 2013 and 2014. That happens because
the company is losing business to competitors and therefore the
company’s fixed overhead costs are being spread over a smaller base.
This results in costs that seem to increase as the volume declines.
Alderberry Recording’s managers may be misled into thinking that the
problem is rising costs and they may be tempted to raise prices to
recover their apparently increasing costs. This would almost surely
accelerate the company’s decline.
Under the alternative approach, the overhead cost of the Fire job is
stable at $1,500 and lower than the costs reported under the
conventional method. Under the conventional method, managers may
be
misled into thinking that they are actually losing money on the Fire
job and they might refuse such jobs in the future—another sure road to
disaster. This is much less likely to happen if the lower cost of $1,500 is
reported. It is true that the underapplied overhead under the alternative
approach is much larger than under the conventional approach and is
growing. However, if it is properly labeled as the cost of idle capacity,
management is much more likely to draw the appropriate conclusion
that the real problem is the loss of business (and therefore more idle
capacity) rather than an increase in costs.

While basing the predetermined rate on capacity rather than on
estimated activity will not solve the company’s basic problems, at least
this method will be less likely to send managers misleading signals.

Case 5A-3 (120 minutes)
1. Traditional approach:
Actual total manufacturing overhead cost incurred
(assumed to equal the original estimate).................... $2,000,000
(80,000 units × $25 per unit).................................... 2,000,000
Overhead underapplied or overapplied......................... $ 0
PowerDrives, Inc.
Income Statement: Traditional Approach
Revenue (75,000 units × $70 per unit)........... $5,250,000

Cost of goods sold:
Variable manufacturing
(75,000 units × $18 per unit).................... $1,350,000
(75,000 units × $25 per unit).................... 1,875,000 3,225,000
Gross margin................................................. 2,025,000
Selling and administrative expenses................ 1,950,000
New approach:
PowerDrives, Inc.
Income Statement: New Approach
Revenue (75,000 units × $70 per unit)........... $5,250,00

0
Cost of goods sold:
$1,350,00
(75,000 units × $18 per unit)................... 0
2,850,00
(75,000 units × $20 per unit)................... 1,500,000 0
Gross margin................................................ 2,400,000
Cost of unused capacity [(100,000 units 
80,000 units) × $20 per unit]...................... 400,000
1,950,00
Selling and administrative expenses............... 0
$ 50,00
Operating income.......................................... 0

Case 5A-3 (continued)
2. Traditional approach:
Under the traditional approach, the reported operating income can be
increased by increasing the production level, which then results in
overapplied overhead that is deducted from Cost of Goods Sold.
Additional operating income required to attain

target operating income ($210,000 - $75,000) (a)........ $135,000
Overhead applied per unit of output (b).......................... $25 per unit
Additional output required to attain target
operating income (a) ÷ (b)......................................... 5,400 units
Actual total manufacturing overhead cost incurred.......... $2,000,000
[(80,000 units + 5,400 units) × $25 per unit]............... 2,135,000
Overhead overapplied.................................................... $ 135,000
PowerDrives, Inc.
Income Statement: Traditional Approach
$5,250,00
Revenue (75,000 units × $70 per unit)........... 0
Cost of goods sold:
$1,350,00
(75,000 units × $18 per unit)................... 0
(75,000 units × $25 per unit)................... 1,875,000

Less: Manufacturing overhead 135,00 3,090,00
overapplied.............................................. 0 0
Gross margin................................................ 2,160,000
1,950,00
Selling and administrative expenses............... 0
$ 210,00
Operating income.......................................... 0
Note: If the overapplied manufacturing overhead were prorated

between ending inventories and Cost of Goods Sold, more units would
have to be produced to attain the target operating income of $210,000.

New approach:
Under the new approach, the reported operating income can be increased
by increasing the production level which then results in less of a deduction
on the income statement for the Cost of Unused Capacity.
Additional operating income required to attain target

operating income ($210,000 - $50,000) (a)................. $160,000
Overhead applied per unit of output (b)........................ $20 per unit
Additional output required to attain target operating
income (a) ÷ (b)....................................................... 8,000 units
Estimated number of units produced............................. 80,000 units
Actual number of units to be produced.......................... 88,000 units
PowerDrives, Inc.
Income Statement: New Approach
Revenue (75,000 units × $70 per unit).................. $5,250,000

Cost of goods sold:
(75,000 units × $18 per unit).......................... $1,350,000
(75,000 units × $20 per unit).......................... 1,500,000 2,850,000
Gross margin....................................................... 2,400,000
Cost of unused capacity

[(100,000 units - 88,000 units) × $20 per unit]... 240,000
Selling and administrative expenses...................... 1,950,000
Operating income................................................. $ 210,000
3. Operating income is more volatile under the new method than under the
old method. The reason for this is that the reported profit per unit sold
is higher under the new method by $5, the difference in the
predetermined overhead rates. As a consequence, swings in sales in
either direction will have a more dramatic impact on reported profits
under the new method.

4. As the computations in part (2) above show, the “hat trick” is a bit
harder to perform under the new method. Under the old method, the
target operating income can be attained by producing an additional
5,400 units. Under the new method, the production would have to be
increased by 8,000 units. This is a consequence of the difference in
predetermined overhead rates. The drop in sales has had a more
dramatic effect on operating income under the new method as noted
above in part (3). In addition, since the predetermined overhead rate is
lower under the new method, producing excess inventories has less of
an effect per unit on operating income than under the traditional
method and hence more excess production is required.
5. One can argue that whether the “hat trick” is unethical depends on the
level of sophistication of the owners of the company and others who
read the financial statements. If they understand the effects of excess
production on operating income and are not misled, it can be argued
that the hat trick is ethical. However, if that were the case, there does
not seem to be any reason to use the hat trick. Why would the owners
want to tie up working capital in inventories just to artificially attain a
target operating income for the period? Also increasing the rate of
production toward the end of the year is likely to increase overhead
costs due to overtime and other costs. Building up inventories all at
once is very likely to be much more expensive than increasing the rate
of production uniformly throughout the year. In the case, we assumed
that there would not be an increase in overhead costs due to the
additional production, but that is likely not to be true.
In our opinion the hat trick is unethical unless there is a good reason for
increasing production other than to artificially boost the current period’s
operating income. It is certainly unethical if the purpose is to fool users
of financial reports such as owners and creditors or if the purpose is to
meet targets so that bonuses will be paid to top managers.

Ch05 Systems Design Job-Order Costing

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Chapter 5

Systems Design: Job-Order Costing

Solution to Discussion Case

Products Cost Types Direct or Cost driver

It is important to note that when providing services rather than

Solutions Manual, Chapter 5 1

5-1 By definition, manufacturing goods. The sales order forms the

2 Managerial Accounting, 11th Edition

Solutions Manual, Chapter 5 3

4 Managerial Accounting, 11th Edition

Estimated fixed manufacturing overhead................... $10,000

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead (a).... $12,000

2. The manufacturing overhead applied to Jobs P and Q is computed as

3. The direct labor hourly wage rate can be computed by focusing on

Solutions Manual, Chapter 5 5

6 Managerial Accounting, 11th edition

Direct materials................................ $13,000

Unit product cost for Job P:

Total manufacturing cost (a)............. $42,400

Total manufacturing cost assigned to Job Q:

Direct materials................................ $ 8,000

5. The journal entries are recorded as follows:

Solutions Manual, Chapter 5 7

6. The journal entry is recorded as follows:

8 Managerial Accounting, 11th edition

7. The journal entry is recorded as follows:

8. The Schedule of Cost of Goods Manufactured is as follows:

9. The journal entry is recorded as follows:

10. The completed T-account is as follows:

Solutions Manual, Chapter 5 9

End. Bal. 18,500

(a) Raw material used in production = $21,000

10 Managerial Accounting, 11th edition

11. The Schedule of Cost of Goods Sold is as follows:

12. The journal entry is recorded as follows:

13. The amount of underapplied overhead is computed as follows:

Actual direct labor-hours (a)....................... 1,900

Actual manufacturing overhead.................. $12,500

14. The journal entry is recorded as follows:

Cost of Goods Sold..................................

Solutions Manual, Chapter 5 11

Solutions Manual, Chapter 5 13

1. Total direct labor-hours required for Job A-200:

Direct labor cost............................... $120

Total manufacturing cost assigned to Job A-200:

Direct materials................................ $200

2. Unit product cost for Job A-200:

Total manufacturing cost................. $500

14 Managerial Accounting, 11th Canadian Edition

Estimated total manufacturing overhead........ $348,000

Actual Overhead $336,400

Overhead Applied (19,500 x $17.40) $339,300

Therefore, overhead is overapplied by $2,900

Solutions Manual, Chapter 5 15

a. Raw Materials........................ 45,000

b Work in Process..................... 70,000

c. Work in Process..................... 183,00

d Manufacturing Overhead........ 189,00

16 Managerial Accounting, 11th Canadian Edition

Overhead is under applied by $4,940 ($291,060 applied versus $296,000

Cost of Goods Sold..................................

Solutions Manual, Chapter 5 17

18 Managerial Accounting, 11th Canadian Edition