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Chapter 02 - Systems Design: Job-Order Costing
Chapter 2
Systems Design: Job-Order Costing
Solutions to Questions
2-1 By definition, manufacturing overhead consists of costs that cannot be practically traced to jobs. Therefore, if these costs are to be assigned to jobs, they must be allocated rather than traced.
2-2 Job-order costing is used in situations where many different products or services are produced each period. Process costing is used in situations where a single, homogeneous product, such as cement, bricks, or gasoline, is produced for long periods.
2-3 The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials costs traced to the job, direct labor costs traced to the job, and manufacturing overhead costs applied to the job. When a job is completed, the job cost sheet is used to compute the unit product cost.
2-4 A predetermined overhead rate is used to apply overhead cost to jobs. It is computed before a period begins by dividing the period’s estimated total manufacturing overhead by the period’s estimated total amount of the allocation base. Thereafter, overhead cost is applied to jobs by multiplying the predetermined overhead rate by the actual amount of the allocation base that is recorded for each job.
2-5 A sales order is issued after an agreement has been reached with a customer on quantities, prices, and shipment dates for goods. The sales order forms the basis for the production order. The production order specifies what is to be produced and forms the basis for the job cost sheet. The job cost sheet, in turn, is used to summarize the various production costs incurred to complete the job. These costs are entered on the job cost sheet from materials requisition forms, direct labor time tickets, and by applying overhead.
2-6 Some production costs such as a factory manager’s salary cannot be traced to a particular product or job, but rather are incurred as a result of overall production activities. In addition, some production costs such as indirect materials cannot be easily traced to jobs. If these costs are to be assigned to products, they must be allocated to the products.
2-7 If actual manufacturing overhead cost is applied to jobs, the company must wait until the end of the accounting period to apply overhead and to cost jobs. If the company computes actual overhead rates more frequently to get around this problem, the rates may fluctuate widely due to seasonal factors or variations in output. For this reason, most companies use predetermined overhead rates to apply manufacturing overhead costs to jobs.
2-8 The measure of activity used as the allocation base should drive the overhead cost; that is, the allocation base should cause the overhead cost. If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and product costs will be distorted.
2-9 Assigning manufacturing overhead costs to jobs does not ensure a profit. The units produced may not be sold and if they are sold, they may not be sold at prices sufficient to cover all costs. It is a myth that assigning costs to products or jobs ensures that those costs will be recovered. Costs are recovered only by selling to customers—not by allocating costs.
2-10 The Manufacturing Overhead account is credited when overhead cost is applied to Work in Process. Generally, the amount of overhead applied will not be the same as the amount of actual cost incurred because the predetermined overhead rate is based on estimates.
2-11 Underapplied overhead occurs when the actual overhead cost exceeds the amount of overhead cost applied to Work in Process inventory during the period. Overapplied overhead occurs when the actual overhead cost is less than the amount of overhead cost applied to Work in Process inventory during the period. Underapplied or overapplied overhead is disposed of by closing out the amount to Cost of Goods Sold. The adjustment for underapplied overhead increases Cost of Goods Sold whereas the adjustment for overapplied overhead decreases Cost of Goods Sold.
2-12 Manufacturing overhead may be underapplied for several reasons. Control over overhead spending may be poor. Or, some of the overhead may be fixed and the actual amount of the allocation base may be less than estimated at the beginning of the period. In this situation, the amount of overhead applied to inventory will be less than the actual overhead cost incurred.
2-13 Underapplied overhead implies that not enough overhead was assigned to jobs during the period and therefore Cost of Goods Sold was understated. Therefore, underapplied overhead is added to Cost of Goods Sold. On the other hand, overapplied overhead is deducted from Cost of Goods Sold.
2-14 A plantwide overhead rate is a single overhead rate used throughout a plant. In a multiple overhead rate system, each production department may have its own predetermine overhead rate and its own allocation base. Some companies use multiple overhead rates rather than plantwide rates to more appropriately allocate overhead costs among products. Multiple overhead rates should be used, for example, in situations where one department is machine intensive and another department is labor intensive.
2-15 When automated equipment replaces direct labor, overhead increases and direct labor decreases. This results in an increase in the predetermined overhead rate—particularly if it is based on direct labor.
Brief Exercise 2-1 (10 minutes)
|
a. |
Process costing |
g. |
Job-order costing |
|
|
b. |
Job-order costing |
h. |
Process costing* |
|
|
c. |
Process costing |
i. |
Job-order costing |
|
|
d. |
Process costing |
j. |
Process costing* |
|
|
e. |
Process costing |
k. |
Job-order costing |
|
|
f. |
Job-order costing |
l. |
Job-order costing |
* Some of the listed companies might use either a process costing or a job-order costing system, depending on the nature of their operations and how homogeneous the final product is. For example, a chemical manufacturer would typically operate with a process costing system, but a job-order costing system might be used if products are manufactured in relatively small batches. The same thing might be true of the tire manufacturing plant in item j.
Brief Exercise 2-2 (15 minutes)
1. The direct materials and direct labor costs listed in the exercise would have been recorded on four different documents: the materials requisition form for Job W456, the time ticket for Jamie Unser, the time ticket for Melissa Chan, and the job cost sheet for Job W456.
2. The costs for Job W456 would have been recorded as follows:
Materials requisition form:
|
Quantity |
Unit Cost |
Total Cost |
|
|
Blanks |
20 |
$15.00 |
$300 |
|
Nibs |
480 |
$1.25 |
600 |
|
$900 |
Time ticket for Jamie Unser
|
Started |
Ended |
Time |
Rate |
Amount |
Job Number |
|
11:00 AM |
2:45 PM |
3.75 |
$9.60 |
$36.00 |
W456 |
Time ticket for Melissa Chan
|
Started |
Ended |
Time |
Rate |
Amount |
Job Number |
|
8:15 AM |
11:30 AM |
3.25 |
$12.20 |
$39.65 |
W456 |
Job Cost Sheet for Job W456
|
Direct materials |
$900.00 |
|
Direct labor: |
|
|
Jamie Unser |
36.00 |
|
Melissa Chan |
39.65 |
|
$975.65 |
Brief Exercise 2-3 (10 minutes)
The predetermined overhead rate is computed as follows:
|
Estimated total manufacturing overhead |
$134,000 |
|
|
÷ Estimated total direct labor hours (DLHs) |
20,000 |
DLHs |
|
= Predetermined overhead rate |
$6.70 |
per DLH |
Brief Exercise 2-4 (15 minutes)
|
a. |
Raw Materials |
80,000 |
|
|
Accounts Payable |
80,000 |
||
|
b. |
Work in Process |
62,000 |
|
|
Manufacturing Overhead |
9,000 |
||
|
Raw Materials |
71,000 |
||
|
c. |
Work in Process |
101,000 |
|
|
Manufacturing Overhead |
11,000 |
||
|
Wages Payable |
112,000 |
||
|
d. |
Manufacturing Overhead |
175,000 |
|
|
Various Accounts |
175,000 |
Brief Exercise 2-5 (10 minutes)
|
Actual direct labor-hours |
10,800 |
|
× Predetermined overhead rate |
$23.40 |
|
= Manufacturing overhead applied |
$252,720 |
Brief Exercise 2-6 (20 minutes)
|
1. |
Cost of Goods Manufactured |
||
|
Direct materials: |
|||
|
Raw materials inventory, beginning |
$12,000 |
||
|
Add: Purchases of raw materials |
30,000 |
||
|
Total raw materials available |
42,000 |
||
|
Deduct: Raw materials inventory, ending |
18,000 |
||
|
Raw materials used in production |
24,000 |
||
|
Less indirect materials included in manufacturing overhead |
5,000 |
$ 19,000 |
|
|
Direct labor |
58,000 |
||
|
Manufacturing overhead applied to work in process inventory |
87,000 |
||
|
Total manufacturing costs |
164,000 |
||
|
Add: Beginning work in process inventory |
56,000 |
||
|
|
220,000 |
||
|
Deduct: Ending work in process inventory |
65,000 |
||
|
Cost of goods manufactured |
$155,000 |
||
|
2. |
Cost of Goods Sold |
||
|
Finished goods inventory, beginning |
$ 35,000 |
||
|
Add: Cost of goods manufactured |
155,000 |
||
|
Goods available for sale |
190,000 |
||
|
Deduct: Finished goods inventory, ending |
42,000 |
||
|
Unadjusted cost of goods sold |
148,000 |
||
|
Add: Underapplied overhead |
4,000 |
||
|
Adjusted cost of goods sold |
$152,000 |
Brief Exercise 2-7 (20 minutes)
Parts 1 and 2.
|
Cash |
Raw Materials |
|||||||
|
(a) |
94,000 |
(a) |
94,000 |
(b) |
89,000 |
|||
|
(c) |
132,000 |
Bal. |
5,000 |
|||||
|
(d) |
143,000 |
|
Work in Process |
Finished Goods |
|||||||
|
(b) |
78,000 |
(f) |
342,000 |
(f) |
342,000 |
|||
|
(c) |
112,000 |
Bal. |
0 |
|||||
|
(e) |
152,000 |
(f) |
342,000 |
|||||
|
Bal. |
0 |
|
Manufacturing Overhead |
Cost of Goods Sold |
|||||||
|
(b) |
11,000 |
(e) |
152,000 |
(f) |
342,000 |
|||
|
(c) |
20,000 |
(g) |
22,000 |
|||||
|
(d) |
143,000 |
(g) |
22,000 |
Bal. |
364,000 |
|||
|
Bal. |
0 |
Brief Exercise 2-8 (10 minutes)
|
1. |
Actual direct labor-hours |
11,500 |
|
× Predetermined overhead rate |
$18.20 |
|
|
= Manufacturing overhead applied |
$209,300 |
|
|
Less: Manufacturing overhead incurred |
215,000 |
|
|
$ (5,700) |
||
|
Manufacturing overhead underapplied |
$5,700 |
2. Because manufacturing overhead is underapplied, the cost of goods sold would increase by $5,700 and the gross margin would decrease by $5,700.
Exercise 2-9 (10 minutes)
Yes, overhead should be applied to value the Work in Process inventory at year-end.
Because $6,000 of overhead was applied to Job V on the basis of $8,000 of direct labor cost, the company’s predetermined overhead rate must be 75% of direct labor cost.
|
Job W direct labor cost |
$4,000 |
|
× Predetermined overhead rate |
× 0.75 |
|
= Manufacturing overhead applied to Job W at year-end |
$3,000 |
Exercise 2-10 (15 minutes)
1. Predetermined overhead rates:
Company X:
Company Y:
Company Z:
|
2. |
Actual overhead costs incurred |
$530,000 |
|
Overhead cost applied to Work in Process: |
||
|
$6.70 per hour × 78,000* actual hours |
522,600 |
|
|
Underapplied overhead cost |
$7,400 |
*12,000 hours + 36,000 hours + 30,000 hours = 78,000 hours
Exercise 2-11 (15 minutes)
|
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. |
Cost of Goods Sold |
70,000 |
|||
|
Manufacturing Overhead |
70,000 |
Exercise 2-12 (30 minutes)
1. The predetermined overhead rate is computed as follows:
2. The amount of overhead cost applied to Work in Process for the year would be: 75,000 machine-hours × $2.40 per machine-hour = $180,000. This amount is shown in entry (a) below:
|
Manufacturing Overhead |
|||||||
|
(Maintenance) |
21,000 |
(a) |
180,000 |
||||
|
(Indirect materials) |
8,000 |
||||||
|
(Indirect labor) |
60,000 |
||||||
|
(Utilities) |
32,000 |
||||||
|
(Insurance) |
7,000 |
||||||
|
(Depreciation) |
56,000 |
||||||
|
Balance |
4,000 |
||||||
|
Work in Process |
|||||||
|
(Direct materials) |
710,000 |
||||||
|
(Direct labor) |
90,000 |
||||||
|
(Overhead) (a) |
180,000 |
3. Overhead is underapplied by $4,000 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 |
4,000 |
|||
|
Manufacturing Overhead |
4,000 |
Exercise 2-12 (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 machine-hours turn out to be 75,000, the costing system assumes that the overhead will be 75,000 machine-hours × $2.40 per machine-hour, or $180,000. This is a drop of $12,000 from the initial estimated manufacturing overhead cost of $192,000. However, the actual manufacturing overhead did not drop by this much. The actual manufacturing overhead was $184,000—a drop of $8,000 from the estimate. The manufacturing overhead did not decline by the full $12,000 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.
Exercise 2-13 (10 minutes)
|
Direct material |
$10,000 |
|
Direct labor |
12,000 |
|
Manufacturing overhead: |
|
|
$12,000 × 125% |
15,000 |
|
Total manufacturing cost |
$37,000 |
|
Unit product cost: |
$37 |
Exercise 2-14 (30 minutes)
|
1. |
a. |
Raw Materials Inventory |
210,000 |
|||
|
Accounts Payable |
210,000 |
|||||
|
b. |
Work in Process |
178,000 |
||||
|
Manufacturing Overhead |
12,000 |
|||||
|
Raw Materials Inventory |
190,000 |
|||||
|
c. |
Work in Process |
90,000 |
||||
|
Manufacturing Overhead |
110,000 |
|||||
|
Salaries and Wages Payable |
200,000 |
|||||
|
d. |
Manufacturing Overhead |
40,000 |
||||
|
Accumulated Depreciation |
40,000 |
|||||
|
e. |
Manufacturing Overhead |
70,000 |
||||
|
Accounts Payable |
70,000 |
|||||
|
f. |
Work in Process |
240,000 |
||||
|
Manufacturing Overhead |
240,000 |
|||||
|
30,000 MH × $8 per MH = $240,000. |
||||||
|
g. |
Finished Goods |
520,000 |
||||
|
Work in Process |
520,000 |
|||||
|
h. |
Cost of Goods Sold |
480,000 |
||||
|
Finished Goods |
480,000 |
|||||
|
Accounts Receivable |
600,000 |
|||||
|
Sales |
600,000 |
|||||
|
$480,000 × 1.25 = $600,000. |
Exercise 2-14 (continued)
2.
|
Manufacturing Overhead |
Work in Process |
|||||||
|
(b) |
12,000 |
(f) |
240,000 |
Bal. |
42,000 |
(g) |
520,000 |
|
|
(c) |
110,000 |
(b) |
178,000 |
|||||
|
(d) |
40,000 |
(c) |
90,000 |
|||||
|
(e) |
70,000 |
(f) |
240,000 |
|||||
|
8,000 |
Bal. |
30,000 |
||||||
|
(Overapplied overhead) |
Exercise 2-15 (30 minutes)
1. Because $120,000 of studio overhead was applied to Work in Process on the basis of $75,000 of direct staff costs, the predetermined overhead rate was 160%:
2. The Lexington Gardens Project is the only job remaining in Work in Process at the end of the month; therefore, the entire $35,000 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:
|
Total cost in the Lexington Gardens Project |
$35,000 |
||
|
Less: |
Direct staff costs |
$ 6,500 |
|
|
Studio overhead cost ($6,500 × 160%) |
10,400 |
16,900 |
|
|
Costs of subcontracted work |
$18,100 |
With this information, we can now complete the job cost sheet for the Lexington Gardens Project:
|
Costs of subcontracted work |
$18,100 |
|
Direct staff costs |
6,500 |
|
Studio overhead |
10,400 |
|
Total cost to January 31 |
$35,000 |
Exercise 2-16 (30 minutes)
|
1. |
a. |
Raw Materials |
325,000 |
|
|
Accounts Payable |
325,000 |
|||
|
b. |
Work in Process |
232,000 |
||
|
Manufacturing Overhead |
58,000 |
|||
|
Raw Materials |
290,000 |
|||
|
c. |
Work in Process |
60,000 |
||
|
Manufacturing Overhead |
120,000 |
|||
|
Wages and Salaries Payable |
180,000 |
|||
|
d. |
Manufacturing Overhead |
75,000 |
||
|
Accumulated Depreciation |
75,000 |
|||
|
e. |
Manufacturing Overhead |
62,000 |
||
|
Accounts Payable |
62,000 |
|||
|
f. |
Work in Process |
300,000 |
||
|
Manufacturing Overhead |
300,000 |
15,000 MH × $20 per MH = $300,000
|
2. |
Manufacturing Overhead |
Work in Process |
|||||||||||||
|
(b) |
58,000 |
(f) |
300,000 |
(b) |
232,000 |
||||||||||
|
(c) |
120,000 |
(c) |
60,000 |
||||||||||||
|
(d) |
75,000 |
(f) |
300,000 |
||||||||||||
|
(e) |
62,000 |
3. The cost of the completed job is $592,000 as shown in the Work in Process T-account above. The journal entry is:
|
Finished Goods |
592,000 |
|
|
Work in Process |
592,000 |
4. The unit product cost on the job cost sheet would be:
$592,000 ÷ 16,000 units = $37 per unit
Exercise 2-17 (15 minutes)
|
1. |
Actual manufacturing overhead costs |
$473,000 |
|
|
Manufacturing overhead cost applied: 19,400 MH × $25 per MH |
485,000 |
||
|
Overapplied overhead cost |
$12,000 |
|
2. |
Chang Company |
||
|
Direct materials: |
|||
|
Raw materials inventory, beginning |
$20,000 |
||
|
Add purchases of raw materials |
400,000 |
||
|
Raw materials available for use |
420,000 |
||
|
Deduct raw materials inventory, ending |
30,000 |
||
|
Raw materials used in production |
390,000 |
||
|
Less indirect materials |
15,000 |
$375,000 |
|
|
Direct labor |
60,000 |
||
|
Manufacturing overhead cost applied to work in process |
485,000 |
||
|
Total manufacturing costs |
920,000 |
||
|
Add: Work in process, beginning |
40,000 |
||
|
960,000 |
|||
|
Deduct: Work in process, ending |
70,000 |
||
|
Cost of goods manufactured |
$890,000 |
Exercise 2-18 (30 minutes)
1. As suggested, the costing problem does indeed lie with manufacturing overhead cost. Because manufacturing overhead is mostly fixed, the cost per unit increases as the level of production decreases. This apparent problem can be “solved” by using a predetermined overhead rate, which should be based on expected activity for the entire year. Some students will use units of product in computing the predetermined overhead rate, as follows:
The predetermined overhead rate could also be set on the basis of either direct labor cost or direct materials cost. The computations are:
Exercise 2-18 (continued)
2. Using a predetermined overhead rate, the unit product costs would be:
|
Quarter |
|||||
|
First |
Second |
Third |
Fourth |
||
|
Direct materials |
$240,000 |
$120,000 |
$60,000 |
$180,000 |
|
|
Direct labor |
128,000 |
64,000 |
32,000 |
96,000 |
|
|
Manufacturing overhead: |
384,000 |
192,000 |
96,000 |
288,000 |
|
|
Total cost |
$752,000 |
$376,000 |
$188,000 |
$564,000 |
|
|
Number of units produced |
80,000 |
40,000 |
20,000 |
60,000 |
|
|
Unit product cost |
$9.40 |
$9.40 |
$9.40 |
$9.40 |
Problem 2-19A (30 minutes)
|
1. |
Harris |
Chan |
James |
|
|
Designer-hours |
120 |
100 |
90 |
|
|
Predetermined overhead rate |
× $90 |
× $90 |
× $90 |
|
|
Manufacturing overhead applied |
$10,800 |
$9,000 |
$8,100 |
|
2. |
Harris |
Chan |
||
|
Direct materials |
$4,500 |
$ 3,700 |
||
|
Direct labor |
9,600 |
8,000 |
||
|
Overhead applied |
10,800 |
9,000 |
||
|
Total cost |
$24,900 |
$20,700 |
|
Completed Projects |
45,600* |
||
|
Work in Process |
45,600* |
* $24,900 + $20,700 = $45,600
3. The balance in the Work in Process account consists entirely of the costs associated with the James project:
|
Direct materials |
$1,400 |
|
Direct labor |
7,200 |
|
Overhead applied |
8,100 |
|
Total cost in work in process |
$16,700 |
4. The balance in the Overhead account can be determined as follows:
|
Overhead |
|||||
|
Actual overhead costs |
30,000 |
27,900 |
Applied overhead costs |
||
|
Underapplied overhead |
2,100 |
As indicated above, the debit balance in the Overhead account is called underapplied overhead.
Problem 2-20A (15 minutes)
1. Cutting Department:
Finishing Department:
|
2. |
Overhead Applied |
|
|
Cutting Department: 80 MHs × $7.50 per MH |
$600 |
|
|
Finishing Department: $150 × 180% |
270 |
|
|
Total overhead cost applied |
$870 |
3. Yes; if some jobs require a large amount of machine time and little labor cost, they would be charged substantially less overhead cost if a plantwide rate based on direct labor cost were used. It appears, for example, that this would be true of Job 203 which required considerable machine time to complete, but required only a small amount of labor cost.
Problem 2-21A (60 minutes)
|
1. |
a. |
Raw Materials |
275,000 |
|
|
Cash |
275,000 |
|||
|
b. |
Work in Process |
220,000 |
||
|
Manufacturing Overhead |
60,000 |
|||
|
Raw Materials |
280,000 |
|||
|
c. |
Work in Process |
180,000 |
||
|
Manufacturing Overhead |
72,000 |
|||
|
Sales Commissions Expense |
63,000 |
|||
|
Salaries Expense |
90,000 |
|||
|
Cash |
405,000 |
|||
|
d. |
Manufacturing Overhead |
13,000 |
||
|
Rent Expense |
5,000 |
|||
|
Cash |
18,000 |
|||
|
e. |
Manufacturing Overhead |
57,000 |
||
|
Cash |
57,000 |
|||
|
f. |
Advertising Expense |
140,000 |
||
|
Cash |
140,000 |
|||
|
g. |
Manufacturing Overhead |
88,000 |
||
|
Depreciation Expense |
12,000 |
|||
|
Accumulated Depreciation |
100,000 |
|||
|
h. |
Work in Process |
297,000 |
||
|
Manufacturing Overhead |
297,000 |
Rmb180,000 actual direct labor cost × 165% = Rmb297,000
Problem 2-21A (continued)
|
|
i. |
Finished Goods |
675,000 |
|
|
Work in Process |
675,000 |
|||
|
j. |
Cash |
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 |
|||||
|
Bal. |
20,000 |
(c) |
180,000 |
|||||
|
(h) |
297,000 |
|||||||
|
Bal. |
32,000 |
|||||||
|
Finished Goods |
Manufacturing Overhead |
|||||||
|
Bal. |
40,000 |
(j) |
700,000 |
(b) |
60,000 |
(h) |
297,000 |
|
|
(i) |
675,000 |
(c) |
72,000 |
|||||
|
Bal. |
15,000 |
(d) |
13,000 |
|||||
|
(e) |
57,000 |
|||||||
|
(g) |
88,000 |
|||||||
|
Bal. |
7,000 |
|||||||
|
Cost of Goods Sold |
||||||||
|
(j) |
700,000 |
|||||||
3. Manufacturing overhead is overapplied by Rmb7,000 for the year. The entry to close this balance to Cost of Goods Sold would be:
|
Manufacturing Overhead |
7,000 |
|
|
Cost of Goods Sold |
7,000 |
Problem 2-21A (continued)
4.
|
Gold Nest Company Income Statement |
||
|
Sales |
Rmb1,250,000 |
|
|
Cost of goods sold |
693,000 |
|
|
Gross margin |
557,000 |
|
|
Selling and administrative expenses: |
||
|
Sales commissions |
Rmb63,000 |
|
|
Administrative salaries |
90,000 |
|
|
Rent expense |
5,000 |
|
|
Advertising expense |
140,000 |
|
|
Depreciation expense |
12,000 |
310,000 |
|
Net operating income |
Rmb 247,000 |
Problem 2-22A (60 minutes)
|
1. |
a. |
Raw Materials |
170,000 |
|||
|
Accounts Payable |
170,000 |
|||||
|
b. |
Work in Process |
144,000 |
||||
|
Manufacturing Overhead |
36,000 |
|||||
|
Raw Materials |
180,000 |
|||||
|
c. |
Work in Process |
200,000 |
||||
|
Manufacturing Overhead |
82,000 |
|||||
|
Salaries Expense |
90,000 |
|||||
|
Salaries and Wages Payable |
372,000 |
|||||
|
d. |
Manufacturing Overhead |
65,000 |
||||
|
Accounts Payable |
65,000 |
|||||
|
e. |
Advertising Expense |
100,000 |
||||
|
Accounts Payable |
100,000 |
|||||
|
f. |
Manufacturing Overhead |
18,000 |
||||
|
Insurance Expense |
2,000 |
|||||
|
Prepaid Insurance |
20,000 |
|||||
|
g. |
Manufacturing Overhead |
153,000 |
||||
|
Depreciation Expense |
27,000 |
|||||
|
Accumulated Depreciation |
180,000 |
|||||
|
h. |
Work in Process |
350,000 |
||||
|
Manufacturing Overhead |
350,000 |
$200,000 actual direct labor cost × 175% = $350,000 overhead applied
|
i. |
Finished Goods |
700,000 |
||||
|
Work in Process |
700,000 |
|||||
|
j. |
Accounts Receivable |
1,000,000 |
||||
|
Sales |
1,000,000 |
|||||
|
Cost of Goods Sold |
720,000 |
|||||
|
Finished Goods |
720,000 |
Problem 2-22A (continued)
2.
|
Raw Materials |
Finished Goods |
|||||||
|
Bal. |
32,000 |
(b) |
180,000 |
Bal. |
48,000 |
(j) |
720,000 |
|
|
(a) |
170,000 |
(i) |
700,000 |
|||||
|
Bal. |
22,000 |
Bal. |
28,000 |
|||||
|
Work in Process |
Manufacturing Overhead |
|||||||
|
Bal. |
20,000 |
(i) |
700,000 |
(b) |
36,000 |
(h) |
350,000 |
|
|
(b) |
144,000 |
(c) |
82,000 |
|||||
|
(c) |
200,000 |
(d) |
65,000 |
|||||
|
(h) |
350,000 |
(f) |
18,000 |
|||||
|
Bal. |
14,000 |
(g) |
153,000 |
|||||
|
Bal. |
4,000 |
|||||||
|
Cost of Goods Sold |
||||||||
|
(j) |
720,000 |
3. Overhead is underapplied by $4,000 for the year. The entry to close this balance to Cost of Goods Sold would be:
|
Cost of Goods Sold |
4,000 |
|
|
Manufacturing Overhead |
4,000 |
4.
|
Almeda Products, Inc. Income Statement For the Year Ended March 31 |
||
|
Sales |
$1,000,000 |
|
|
Cost of goods sold ($720,000 + $4,000) |
724,000 |
|
|
Gross margin |
276,000 |
|
|
Selling and administrative expenses: |
||
|
Salary expense |
$ 90,000 |
|
|
Advertising expense |
100,000 |
|
|
Insurance expense |
2,000 |
|
|
Depreciation expense |
27,000 |
219,000 |
|
Net operating income |
$ 57,000 |
Problem 2-23A (60 minutes)
1. a.
b. Before the underapplied or overapplied overhead can be computed, we must determine the amount of direct materials used in production for the year.
|
Raw materials inventory, beginning |
$20,000 |
|
|
Add, Purchases of raw materials |
510,000 |
|
|
Raw materials available |
530,000 |
|
|
Deduct: Raw materials inventory, ending |
80,000 |
|
|
Raw materials used in production |
$450,000 |
|
Actual manufacturing overhead costs: |
||
|
Indirect labor |
$170,000 |
|
|
Property taxes |
48,000 |
|
|
Depreciation of equipment |
260,000 |
|
|
Maintenance |
95,000 |
|
|
Insurance |
7,000 |
|
|
Rent, building |
180,000 |
|
|
Total actual costs |
760,000 |
|
|
Applied manufacturing overhead costs: $450,000 × 160% |
720,000 |
|
|
Underapplied overhead |
$ 40,000 |
Problem 2-23A (continued)
|
2. |
Gitano Products Schedule of Cost of Goods Manufactured |
||
|
Direct materials: |
|||
|
Raw materials inventory, beginning |
$20,000 |
||
|
Add purchases of raw materials |
510,000 |
||
|
Total raw materials available |
530,000 |
||
|
Deduct raw materials inventory, ending |
80,000 |
||
|
Raw materials used in production |
$ 450,000 |
||
|
Direct labor |
90,000 |
||
|
Manufacturing overhead applied to work in process |
720,000 |
||
|
Total manufacturing costs |
1,260,000 |
||
|
Add: Work in process, beginning |
150,000 |
||
|
1,410,000 |
|||
|
Deduct: Work in process, ending |
70,000 |
||
|
Cost of goods manufactured |
$1,340,000 |
|
|
Cost of goods sold: |
|
|
Finished goods inventory, beginning |
$ 260,000 |
|
|
Add: Cost of goods manufactured |
1,340,000 |
|
|
Goods available for sale |
1,600,000 |
|
|
Deduct: Finished goods inventory, ending |
400,000 |
|
|
Cost of goods sold |
$1,200,000 |
The underapplied overhead can either be closed out to Cost of Goods Sold or allocated between Work in Process, Finished Goods, and Cost of Goods Sold based on the overhead applied during the year in the ending balance in each of these accounts.
|
4. |
Direct materials |
$8,500 |
|
Direct labor |
2,700 |
|
|
Overhead applied ($8,500 × 160%) |
13,600 |
|
|
Total manufacturing cost |
$24,800 |
$24,800 × 125% = $31,000 price to the customer
Problem 2-23A (continued)
5. The amount of overhead cost in Work in Process was:
$24,000 direct materials cost × 160% = $38,400
The amount of direct labor cost in Work in Process is:
|
Total ending work in process |
$70,000 |
|
|
Deduct: Direct materials |
$24,000 |
|
|
Manufacturing overhead |
38,400 |
62,400 |
|
Direct labor cost |
$ 7,600 |
The completed schedule of costs in Work in Process was:
|
Direct materials |
$24,000 |
|
Direct labor |
7,600 |
|
Manufacturing overhead |
38,400 |
|
Work in process inventory |
$70,000 |
Problem 2-24A (45 minutes)
1. Molding Department predetermined overhead rate:
Painting Department predetermined overhead rate:
|
2. |
Molding Department overhead applied: |
$ 946 |
|
Painting Department overhead applied: |
1,190 |
|
|
Total overhead cost |
$2,136 |
3. Total cost of Job 205:
|
Molding Dept. |
Painting Dept. |
Total |
|
|
Direct materials |
$ 470 |
$ 332 |
$ 802 |
|
Direct labor |
290 |
680 |
970 |
|
Manufacturing overhead applied |
946 |
1,190 |
2,136 |
|
Total cost |
$1,706 |
$2,202 |
$3,908 |
Unit product cost for Job 205:
Problem 2-24A (continued)
|
4. |
Molding Dept. |
Painting Dept. |
|
|
Manufacturing overhead incurred |
$570,000 |
$750,000 |
|
|
Manufacturing overhead applied: |
559,000 |
||
|
$436,000 direct labor cost × 175% |
763,000 |
||
|
Underapplied (or overapplied) overhead |
$11,000 |
($ 13,000) |
Problem 2-25A (45 minutes)
1. The cost of raw materials put into production was:
|
Raw materials inventory, 1/1 |
$15,000 |
|
Debits (purchases of materials) |
120,000 |
|
Materials available for use |
135,000 |
|
Raw materials inventory, 12/31 |
25,000 |
|
Materials requisitioned for production |
$110,000 |
2. Of the $110,000 in materials requisitioned for production, $90,000 was debited to Work in Process as direct materials. Therefore, the difference of $20,000 was debited to Manufacturing Overhead as indirect materials.
|
3. |
Total factory wages accrued during the year (credits to the Factory Wages Payable account) |
$180,000 |
|
Less direct labor cost (from Work in Process) |
150,000 |
|
|
Indirect labor cost |
$30,000 |
4. The cost of goods manufactured was $470,000—the credits to the Work in Process account.
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 Process) |
470,000 |
|
Goods available for sale |
510,000 |
|
Finished goods inventory, 12/31 |
60,000 |
|
Cost of goods sold |
$450,000 |
6. The predetermined overhead rate was:
Problem 2-25A (continued)
7. Manufacturing overhead was overapplied by $10,000, computed as follows:
|
Actual manufacturing overhead cost for the year (debits) |
$230,000 |
|
Applied manufacturing overhead cost (from Work in Process—this would have been the credits to the |
240,000 |
|
Overapplied overhead |
$(10,000) |
8. The ending balance in Work in Process is $30,000. Direct materials make up $9,200 of this balance, and manufacturing overhead makes up $12,800. The computations are:
|
Balance, Work in Process, 12/31 |
$30,000 |
|
Less: Direct labor cost (given) |
(8,000) |
|
Manufacturing overhead cost ($8,000 × 160%) |
(12,800) |
|
Direct materials cost (remainder) |
$ 9,200 |
Ethics Challenge (45 minutes)
1. Shaving 5% off the estimated direct labor-hours in the predetermined overhead rate will result in an artificially high overhead rate. The artificially high predetermined overhead rate is likely to result in overapplied overhead for the year. The cumulative effect of overapplying the overhead throughout the year is all recognized in December when the balance in the Manufacturing Overhead account is closed out to Cost of Goods Sold. If the balance were closed out every month or every quarter, this effect would be dissipated over the course of the year.
2. This question may generate lively debate. Where should Terri Ronsin’s loyalties lie? Is she working for the general manager of the division or for the corporate controller? Is there anything wrong with the “Christmas bonus”? How far should Terri go in bucking her boss on a new job?
While individuals can certainly disagree about what Terri should do, some of the facts are indisputable. First, understating direct labor-hours artificially inflates the overhead rate. This has the effect of inflating the Cost of Goods Sold in all months prior to December and overstating the costs of inventories. In December, the huge adjustment for overapplied overhead provides a big boost to net operating income. Therefore, the practice results in distortions in the pattern of net operating income over the year. In addition, because all of the adjustment is taken to Cost of Goods Sold, inventories are still overstated at year-end. This means, of course, that the net operating income for the entire year is also overstated.
While Terri is in an extremely difficult position, her responsibilities under the IMA’s Statement of Ethical Professional Practice seem to be clear. The Credibility Standard states that management accountants have a responsibility to “disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses or recommendations.” In our opinion, Terri should discuss this situation with her immediate supervisor in the controller’s office at corporate headquarters. This step may bring her into direct conflict with the general manager of the division, so it would be a very difficult decision for her to make.
Ethics Challenge (continued)
In the actual situation that this case is based on, the corporate controller’s staff were aware of the general manager’s accounting tricks, but top management of the company supported the general manager because “he comes through with the results” and could be relied on to hit the annual profit targets for his division. Personally, we would be very uncomfortable supporting a manager who will resort to deliberate distortions to achieve “results.” If the manager will pull tricks in this area, what else might he be doing that is questionable or even perhaps illegal?
Analytical Thinking (75 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 labor-hours |
63,000 |
|
Less: Estimated reduction in direct labor-hours |
6,000 |
|
Estimated total direct labor-hours |
57,000 |
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 labor-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 labor-hours. Such products will now appear to be less profitable 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.
Analytical Thinking (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 labor-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 labor 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: labor 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 labor-hours had happened, 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 labor requirements does not necessarily lead to a reduction in direct labor hours paid. It is often very difficult to actually reduce the direct labor force and may be virtually impossible except through natural attrition in some countries.
Teamwork in Action
1. The types of transactions that are posted to the accounts may be summarized in T-account form as follows:
|
Raw Materials |
|
|
Beginning balance |
|
|
Purchases |
Direct materials used (to Work in Process) |
|
Accounts Payable |
|
|
Beginning balance |
|
|
Payments to suppliers |
Purchases of raw materials |
|
Work in Process |
|
|
Beginning balance |
|
|
Direct materials used (from Raw Materials) |
Cost of goods manufactured (to Finished Goods) |
|
Direct labor |
|
|
Manufacturing overhead applied |
|
Manufacturing Overhead |
|
|
Actual manufacturing costs |
Manufacturing overhead applied |
|
Overhead overapplied (to COGS) |
Overhead underapplied (to COGS) |
|
Finished Goods |
|
|
Beginning balance |
|
|
Cost of goods manufactured (from WIP) |
Cost of goods sold |
|
Cost of Goods Sold |
|
|
Cost of goods sold |
|
|
Overhead underapplied (from Manufacturing Overhead) |
Overhead overapplied (from Manufacturing Overhead) |
Teamwork in Action (continued)
2. The predetermined overhead rate and overhead applied amounts are:
Predetermined overhead rate:
$180,000 ÷ 60,000 DLHs = $3 per DLH.
Overhead applied:
5,200 DLHs × $3 per DLH = $15,600
3. The balance in the work in process account is determined as follows:
|
Direct materials (given) |
$2,600 |
|
Direct labor (300 DLHs × $6 per DLH) |
1,800 |
|
Overhead applied (300 DLHs × $3 per DLH) |
900 |
|
Total |
$5,300 |
4. The completed T-accounts follow:
|
Accounts Payable |
||||||
|
(c) |
Payments |
40,000 |
(c) |
Balance 4/1 |
6,000 |
|
|
(plug) |
Purchases |
42,000 |
||||
|
(given) |
Balance 4/30 |
8,000 |
|
Work in Process |
||||||
|
(given) |
Balance 4/1 |
4,500 |
(f) |
Cost of goods manufactured |
89,000 |
|
|
(b,d) |
Direct labor* |
31,200 |
||||
|
(above) |
Overhead applied |
15,600 |
||||
|
(plug) |
Direct materials |
43,000 |
||||
|
(above) |
Balance 4/30 |
5,300 |
* 5,200 DLHs × $6 per DLH = $31,200
|
Raw Materials |
||||||
|
(given) |
Balance 4/1 |
12,000 |
(above) |
Direct materials |
43,000 |
|
|
(above) |
Purchases |
42,000 |
||||
|
Balance 4/30 |
11,000 |
Teamwork in Action (continued)
|
Manufacturing Overhead |
||||||
|
(given) |
Actual costs for April |
14,800 |
(above) |
Overhead applied |
15,600 |
|
|
To cost of goods sold |
800 |
Overapplied overhead |
800 |
|
Finished Goods |
||||||
|
(e) |
Balance 4/1 |
11,000 |
(plug) |
Cost of goods sold |
84,000 |
|
|
(f) |
Cost of goods manufactured |
89,000 |
||||
|
(given) |
Balance 4/30 |
16,000 |
|
Cost of Goods Sold |
||||||
|
(above) |
Cost of goods sold |
84,000 |
(above) |
Overapplied overhead |
800 |
|
|
83,200 |
Communicating in Practice
Date: Current date
To: Instructor
From: Student’s Name
Subject: Talk with a Controller
The student’s memorandum should address the following:
Research and Application
1. Toll Brothers succeeds first and foremost because of its product leadership customer value proposition. The annual report mentions in numerous places that Toll Brothers focuses on Luxury Homes and Communities and high quality construction. Page 8 of the 10-K says ‘We believe our marketing strategy, which emphasizes our more expensive “Estate” and “Executive” lines of homes, has enhanced our reputation as a builder-developer of high-quality upscale housing.” Page 2 of the 10-K says “We are the only publicly traded national home builder to have won all three of the industry’s highest honors: America’s Best Builder (1996), the National Housing Quality Award (1995), and Builder of the Year (1988).” Toll Brothers seeks to realize manufacturing efficiencies for the benefit of its shareholders, but its customers choose Toll Brothers for its leadership position in the luxury home market.
2. Toll Brothers faces numerous business risks as described in pages 10-11 of the 10-K. Students may mention other risks beyond those specifically mentioned in the 10-K. Here are four risks faced by Toll Brothers with suggested control activities:
Research and Application (continued)
3. Toll Brothers would use job-order costing because its homes are unique rather than homogeneous. Each home being built would be a considered a job. Toll Brothers’ standard floor plans differ from one another particularly across its main product lines such as Move-Up, Empty Nester, Active Adult, Urban In-Fill, High-Density Suburban, and Second Homes (see pages 5 and 9 of the annual report). In 2004, Toll Brothers introduced 87 new home models (see page 4 of the 10-K).
Beyond the fact that Toll Brothers offers a wide variety of floor plans, homes are further distinguished from one another by customer upgrades that add an average of $103,000 to the price of a home (see page 1 of the annual report). Upgrades include items such as additional garages, guest suites, extra fireplaces, and finished lofts (see page 4 of 10-K).
4. Examples of direct materials used in Toll Brothers’ manufacturing facilities include lumber and plywood for wall panels, roofs, and floor trusses, as well as other items such as windows and doors (see page 12 of the 10-K). Examples of direct materials used at the home sites include shingles, exterior finishes such as stone, stucco, siding, or brick, kitchen cabinets, cement for the foundation, bathroom fixtures, etc.
The standard bill of materials (e.g., prior to considering a specific customer’s upgrade requests) for each home would differ. For example, differences in the square footage of homes would drive numerous differences in their bills of materials. Bigger homes would require more lumber, sheet rock, electrical wiring, etc. Bills of materials are also likely to differ across geographic regions of the country. For example, homes in Florida typically do not have basements whereas homes in New England are likely to have basements. Front porches may be more prevalent in South Carolina than in Ohio. Different grades of windows and insulation may be used in homes in the North than in the South.
Research and Application (continued)
5. Toll Brothers incurs two types of direct labor costs. The company employs its own direct laborers in its manufacturing facilities in Morrisville, Pa. and Emporia, Va. The costs of these workers can be traced to specific items such as roof trusses that can in turn be traced to particular houses. Work at the home sites is performed by subcontractors. The labor cost embedded in a subcontractor’s fixed price contract is directly traceable to the home being built. However, the direct laborers are not employed by Toll Brothers. Toll Brothers would not use employee time tickets at its home sites because the subcontractors are not employees of Toll Brothers, Inc. and they are paid a fixed price that is unaffected by the amount of hours worked.
6. There are numerous examples of overhead costs mentioned in the annual report and 10-K. Some examples are: land acquisition costs, land development costs (e.g., grading and clearing), road construction costs, underground utility installation costs, swimming pools, golf courses, tennis courts, marinas, community entrances, model home costs (including construction, furnishing and staffing), and project manager salaries. These costs are incurred to create housing communities but they cannot be easily and conveniently traced to specific homes.
7. It appears that Toll Brothers does not use cost-plus pricing to establish selling prices for its base models. Page 8 of the 10-K says “In determining the prices for our homes, we utilize, in addition to management’s extensive experience, an internally developed value analysis program that compares our homes with homes offered by other builders in each local marketing area.” In other words, the value to the customer and competitive conditions determine prices—not the cost of building a particular home.
Page 5 of the annual report says “When there is strong demand, we benefit from exceptional pricing power because we have greater ability to raise prices than those builders who target buyers on tight budgets: it’s easier to hit doubles, triples and home runs selling to luxury buyers.” This quote implies that pricing is driven by the customers’ willingness and ability to pay and not by the cost of building a particular house.
Research and Application (continued)
8. Based on information contained in the 10-K, it appears that Toll Brothers assigns overhead to cost objects in two ways. First, page 16 of the 10-K says “Land, land development and related costs (both incurred and estimated to be incurred in the future) are amortized to the cost of homes closed based upon the total number of homes to be constructed in each community.” In other words, each home is assigned an equal share of overhead costs. Page 16 also says, “The estimated land, common area development and related costs of master planned communities (including the cost of golf courses, net of their estimated residual value) are allocated to individual communities within a master planned community on a relative sales value basis.” In other words, higher priced communities within a master planned community are assigned a greater portion of master planned community overhead costs.
In master planned communities, the allocation of overhead appears to take place in two stages. First, the overhead costs common to all communities contained with the master planned community are assigned to communities based on relative sales value. Then, all overhead costs related to a particular community within the master planned community are assigned equally to each home site.
The company needs to assign overhead costs to homes so that it can derive a cost of sales number for the income statement and an inventory number for the balance sheet. Page 29 of the annual report shows the components of the company’s ending inventory balance of $3.878 billion. Inventoriable costs include land and land development costs ($1.242 billion), construction in progress ($2.178 billion), sample homes and sales offices ($208 million), land deposits and costs of future development ($237 million), and other ($12 million). Construction in progress is similar to work in process for a manufacturing company. Overhead costs (as well as direct costs) flow through the construction in progress account and hit cost of home sales when a customer has a closing and takes possession of the home.