4 Chapter Homework Horngren 13th edition
4-1
Cost poola grouping of individual cost items.
Cost tracingthe assigning of direct costs to the chosen cost object.
Cost allocationthe assigning of indirect costs to the chosen cost object.
Cost-allocation basea factor that links in a systematic way an indirect cost or
group of indirect costs to a cost object.
4-2
In a job-costing system, costs are assigned to a distinct unit, batch, or lot of a
product or service. In a process-costing system, the cost of a product or service is
obtained by using broad averages to assign costs to masses of identical or similar units.
4-3
An advertising campaign for Pepsi is likely to be very specific to that individual
client. Job costing enables all the specific aspects of each job to be identified. In contrast,
the processing of checking account withdrawals is similar for many customers. Here,
process costing can be used to compute the cost of each checking account withdrawal.
4-4
The seven steps in job costing are: (1) identify the job that is the chosen cost
object, (2) identify the direct costs of the job, (3) select the cost-allocation bases to use
for allocating indirect costs to the job, (4) identify the indirect costs associated with each
cost-allocation base, (5) compute the rate per unit of each cost-allocation base used to
allocate indirect costs to the job, (6) compute the indirect costs allocated to the job, and
(7) compute the total cost of the job by adding all direct and indirect costs assigned to the
job.
4-5
Two major cost objects that managers focus on in companies using job costing are
(1) products or jobs, and (2) responsibility centers or departments.
4-6
Three major source documents used in job-costing systems are (1) job cost record
or job cost sheet, a document that records and accumulates all costs assigned to a specific
job, starting when work begins (2) materials requisition record, a document that contains
information about the cost of direct materials used on a specific job and in a specific
department; and (3) labor-time record, a document that contains information about the
labor time used on a specific job and in a specific department.
4-7
The main concern with the source documents of job cost records is the accuracy
of the records. Problems occurring in this area include incorrect recording of quantity or
dollar amounts, materials recorded on one job being borrowed and used on other jobs,
and erroneous job numbers being assigned to materials or labor inputs.
4-8
a.
b.
Two reasons for using an annual budget period are
The numerator reasonthe longer the time period, the less the influence of
seasonal patterns, and
The denominator reasonthe longer the time period, the less the effect of
variations in output levels on the allocation of fixed costs.
4-9
Actual costing and normal costing differ in their use of actual or budgeted indirect cost rates:
Direct-cost rates
Indirect-cost rates
Actual
Costing
Actual rates
Actual rates
Normal
Costing
Actual rates
Budgeted rates
Each costing method uses the actual quantity of the direct-cost input and the actual
quantity of the cost-allocation base.
4-10 A house construction firm can use job cost information (a) to determine the
profitability of individual jobs, (b) to assist in bidding on future jobs, and (c) to evaluate
professionals who are in charge of managing individual jobs.
4-11 The statement is false. In a normal costing system, the Manufacturing Overhead
Control account will not, in general, equal the amounts in the Manufacturing Overhead
Allocated account. The Manufacturing Overhead Control account aggregates the actual
overhead costs incurred while Manufacturing Overhead Allocated allocates overhead
costs to jobs on the basis of a budgeted rate times the actual quantity of the costallocation base.
Underallocation or overallocation of indirect (overhead) costs can arise because of
(a) the Numerator reasonthe actual overhead costs differ from the budgeted overhead
costs, and (b) the Denominator reasonthe actual quantity used of the allocation base
differs from the budgeted quantity.
4-12 Debit entries to Work-in-Process Control represent increases in work in process.
Examples of debit entries under normal costing are (a) direct materials used (credit to
Materials Control), (b) direct manufacturing labor billed to job (credit to Wages Payable
Control), and (c) manufacturing overhead allocated to job (credit to Manufacturing
Overhead Allocated).
4-13 Alternative ways to make end-of-period adjustments for underallocated or
overallocated overhead are as follows:
(i) Proration based on the total amount of indirect costs allocated (before
proration) in the ending balances of work in process, finished goods, and cost
of goods sold.
(ii) Proration based on total ending balances (before proration) in work in
process, finished goods, and cost of goods sold.
(iii) Year-end write-off to Cost of Goods Sold.
(iv) Restatement of all overhead entries using actual indirect cost rates rather
than budgeted indirect cost rates.
4-14 A company might use budgeted costs rather than actual costs to compute direct
labor rates because it may be difficult to trace direct labor costs to jobs as they are
completed (for example, because bonuses are only known at the end of the year).
4-15 Modern technology such as electronic data interchange (EDI) is helpful to
managers because it provides them with quick and accurate product-cost information that
facilitates the management and control of jobs.
4-17
(20 min.) Actual costing, normal costing, accounting for manufacturing
overhead.
Actual manufacturing
overhead rate
=
Budgeted manufacturing
overhead costs
Budgeted direct manufacturing
labor costs
=
1.
Budgeted manufacturing
overhead rate
$2, 700, 000
= 1.80 or 185%
$1,500, 000
=
Actual manufacturing
overhead costs
Actual direct manufacturing
labor costs
$2, 755, 000
= 1.9 or 190%
$1, 450, 000
Costs of Job 626 under actual and normal costing follow:
=
2.
Actual
Normal
Costing Costing
Direct materials
Direct manufacturing labor costs
Manufacturing overhead costs
$30,000 1.90; $30,000 1.80
Total manufacturing costs of Job 626
4-21 (2025 min.) Job costing, consulting firm.
1.
$ 40,000
30,000
$ 40,000
30,000
57,000
$127,000
54,000
$124,000
Budgeted indirect-cost rate = $13,000,000 $5,000,000 = 260% of professional
labor costs
INDIRECT
COST
POOL
}
Client
Consulting
Consulting
Support
Support
Support
COST
ALLOCATION
BASE
}
Professional
Professional
Labor Costs
Labor Costs
COST OBJECT:
JOB FOR
CONSULTING
CLIENT
DIRECT
COSTS
2.
}
}
Indirect Costs
Direct Costs
Professional
Labor
At the budgeted revenues of $20,000,000, Taylors operating income of $2,000,000
equals 10% of revenues.
Markup rate = $20,000,000 $5,000,000 = 400% of direct professional labor
costs
3.
Budgeted costs
Direct costs:
Director, $200 3
$ 600
Partner, $100 16
1,600
Associate, $50 40
2,000
Assistant, $30 160
4,800
Indirect costs:
Consulting support, 260% $9,000
Total costs
$ 9,000
23,400
$32,400
As calculated in requirement 2, the bid price to earn a 10% income-to-revenue margin is
400% of direct professional costs. Therefore, Taylor should bid 4 $9,000 = $36,000 for
the Red Rooster job.
Bid price to earn target operating income-to-revenue margin 10% of can also be
calculated as follows:
or,
4-26
Let R = revenue to earn target income
R 0.10R = $32,400
0.90R = $32,400
R = $32,400 0.90 = $36,000
Direct costs
$ 9,000
Indirect costs
23,400
Operating income
3,600
Bid price
$36,000
(45 min.) Job costing, journal entries.
Some instructors may wish to assign Problem 4-24. It demonstrates the relationships of
journal entries, general ledger, subsidiary ledgers, and source documents.
1.
An overview of the product-costing system is
INDIRECT
COST
POOL
}
Manufacturing
Overhead
COST
ALLOCATION
BASE
}
Machine-Hours
COST OBJECT
PRODUCT
}
DIRECT
COSTS
}
Indirect Costs
Direct Costs
Direct
Materials
Direct
Manuf. Labor
2.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10a)
(10b)
Amounts in millions.
Materials Control
Accounts Payable Control
Work-in-Process Control
Materials Control
Manufacturing Department Overhead Control
Materials Control
Work-in-Process Control
Wages Payable Control
Manufacturing Department Overhead Control
Wages Payable Control
Manufacturing Department Overhead Control
Accumulated Depreciation
Manufacturing Department Overhead Control
Various liabilities
Work-in-Process Control
Manufacturing Overhead Allocated
Finished Goods Control
Work-in-Process Control
Cost of Goods Sold
Finished Goods Control
Accounts Receivable Control (or Cash )
Revenues
150
150
145
145
10
10
90
90
30
30
19
19
9
9
63
63
294
294
292
292
400
400
The posting of entries to T-accounts is as follows:
Bal.
(1)
Materials Control
12 (2)
150 (3)
Bal.
(9)
Finished Goods Control
6 (10a)
294
(3)
(5)
(6)
(7)
Manufacturing Department
Overhead Control
10 (11)
30
19
9
145
10
Bal.
(2)
(4)
(8)
Bal.
Work-in-Process Control
2 (9)
145
90
63
6
292
(10a)
(11)
Cost of Goods Sold
292
5
68
Accounts Payable Control
(1)
(10b)
Manufacturing Overhead Allocated
(11)
63 (8)
63
150
Accumulated Depreciation
(6)
19
Accounts Receivable Control
400
Wages Payable Control
(4)
(5)
90
30
Various Liabilities
(7)
9
Revenues
(10b)
400
The ending balance of Work-in-Process Control is $6.
3.
294
(11) Manufacturing Overhead Allocated
Cost of Goods Sold
Manufacturing Department Overhead Control
Entry posted to T-accounts in Requirement 2.
63
5
68
4.30
(30 min.) Proration of overhead.
1. Budgeted manufacturing
overhead rate
=
=
Budgeted manufacturing overhead cost
Budgeted direct manufacturing labor cost
$100,000
= 50% of direct manufacturing labor cost
$200,000
2. Overhead allocated = 50% Actual direct manufacturing labor cost
= 50% $220,000 =$110,000
Overallocated plant overhead = Actual plant overhead costs Allocated plant overhead
costs
= $106,000 $110,000 = $4,000
Overallocated plant overhead = $4,000
3a. All overallocated plant overhead is written off to cost of goods sold.
Both work in process (WIP) and finished goods inventory remain unchanged.
Proration of $4,000
Dec. 31, 2009 Balance
Overallocated
(Before Proration)
Manuf. Overhead
Account
(1)
(2)
WIP
$ 50,000
$
0
Finished Goods
240,000
0
Cost of Goods Sold
560,000
4,000
Total
$850,000
$4,000
Dec. 31, 2009
Balance
(After Proration)
(3) = (1) (2)
$ 50,000
240,000
556,000
$846,000
3b. Overallocated plant overhead prorated based on ending balances:
Account
WIP
Finished Goods
Cost of Goods Sold
Total
Dec. 31, 2009
Balance
(Before Proration)
(1)
$ 50,000
240,000
560,000
$850,000
Balance as a
Percent of Total
(2) = (1) $850,000
0.0588
0.2824
0.6588
1.0000
Proration of $4,000
Overallocated
Manuf. Overhead
(3) = (2) $4,000
0.0588 $4,000 =$ 235
0.2824 $4,000 = 1,130
0.6588 $4,000 = 2,635
$4,000
Dec. 31, 2009
Balance
(After Proration)
(4) = (1) (3)
$ 49,765
238,870
557,365
$846,000
3c. Overallocated plant overhead prorated based on 2009 overhead in ending balances:
Account
WIP
Finished Goods
Dec. 31, 2009
Balance
(Before
Proration)
(1)
$ 50,000
240,000
Allocated
Manuf.
Overhead in
Dec. 31, 2009
Balance
(2)
$ 10,000a
30,000b
Allocated Manuf.
Overhead in Dec.
31, 2009 Balance
as a Percent of Total
(3) = (2) $110,000
0.0909
0.2727
Proration of $4,000
Overallocated
Manuf. Overhead
(4) = (3) $4,000
0.0909 $4,000=$ 364
0.2727 $4,000= 1,091
Dec. 31, 2009
Balance
(After
Proration)
(5) = (1) (4)
$ 49,636
238,909
Cost of Goods Sold
Total
560,000
$850,000
70,000c
$110,000
0.6364
1.0000
0.6364 $4,000=$2,545
$4,000
Overhead allocated = Direct manuf. labor cost 50% = $20,000; 60,000; 140,000
50%
a,b,c
4. Writing off all of the overallocated plant overhead to Cost of Goods Sold (CGS) is
usually warranted when CGS is large relative to Work-in-Process and Finished Goods
Inventory and the overallocated plant overhead is immaterial. Both these conditions
apply in this case. ROW should write off the $4,000 overallocated plant overhead to
Cost of Goods Sold Account.
4-38
(4055 min.) Overview of general ledger relationships.
1. & 3. An effective approach to this problem is to draw T-accounts and insert all the
known figures. Then, working with T-account relationships, solve for the unknown
figures (here coded by the letter X for beginning inventory figures and Y for ending
inventory figures).
Materials Control
15,000
(1)
85,000
100,000
30,000
X
Purchases
Y
X
(1) DM
(2) DL
(3) Overhead
(a)
(c)
Y
Work-in-Process Control
10,000
(4)
70,000
150,000
90,000
310,000
320,000
5,000
3,000
23,000
Y
Finished Goods Control
20,000
(5)
305,000
325,000
25,000
(5)
Cost of Goods Sold
300,000
(d)
X
(4)
Manufacturing Department Overhead Control
70,000
70,000
305,000
305,000
300,000
300,000
6,000
557,455
$846,000
85,000
1,000
1,000
(a)
(b)
(d)
87,000
Manufacturing Overhead Allocated
93,000
(3)
(c)
(d)
90,000
3,000
Manufacturing overhead cost rate = $90,000 $150,000 = 60%
Wages Payable Control
(a)
Various Accounts
(b)
2.
6,000
1,000
Adjusting and closing entries:
(a) Work-in-Process Control
Manufacturing Department Overhead Control
Wages Payable Control
To recognize payroll costs
5,000
1,000
(b) Manufacturing Department Overhead Control
Various accounts
To recognize miscellaneous manufacturing overhead
1,000
(c) Work-in-Process Control
Manufacturing Overhead Allocated
To allocate manufacturing overhead
3,000
6,000
1,000
3,000
Note: Students tend to forget entry (c) entirely. Stress that a budgeted overhead
allocation rate is used consistently throughout the year. This point is a major
feature of this problem.
(d) Manufacturing Overhead Allocated
93,000
Manufacturing Department Overhead Control
87,000
Cost of Goods Sold
6,000
To close manufacturing overhead accounts and overallocated overhead to cost
of goods sold
An overview of the product-costing system is
3.
See the answer to 1.
3.
Total manufacturing overhead
allocated under normal costing =
Actual manufacturing
Budgeted
overhead rate
labor costs
= $1,450,000 1.80
= $2,610,000
Underallocated manufacturing
=
overhead
Actual manufacturing
Manufacturing
overhead allocated
overhead costs
= $2,755,000 $2,610,000 = $145,000
There is no under- or overallocated overhead under actual costing because
overhead is allocated under actual costing by multiplying actual manufacturing labor
costs and the actual manufacturing overhead rate. This, of course equals the actual
manufacturing overhead costs. All actual overhead costs are allocated to products. Hence,
there is no under- or overallocatead overhead.