14
JOB CHAPTER COSTING
SOLUTIONS
14.2
A job-costing system accumulates and analyzes costs separately for each product or small batches of
products. Examples of firms that use job-costing systems include law firms and firms that build custom
houses.
14.3
A process-costing system accumulates and analyzes costs by each process (or a department) rather than
by each job. Examples of firms that use process-costing systems include steel mills and paper
companies.
14.4
Direct materials and direct labor are traced, and overhead is allocated.
14.5
Work in process inventory is the inventory of unfinished products at the start of a period. Cost of goods
manufactured is the cost of items finished and transferred from work in process inventory to finished
goods inventory. Cost of goods sold is the cost of products sold in a period. It is the cost of items
transferred from finished goods inventory to the income statement.
14.8
A normal-costing system is a job-costing system that uses a predetermined overhead rate.
14.26
We can use the inventory equation for the WIP account to answer the question.
Beginning WIP + (materials + labor + applied overhead) = COGM + Ending WIP.
We know the items on the left hand side. But, we need to calculate Ending WIP, which will be
the costs charged to job 232.
Direct materials
Direct labor
Mfg. overhead
Ending WIP
$4,250
$2,500
$3,750
$10,500
$2,500 $1.50 per labor $
(We use the total amounts charged to WIP to calculate the overhead rate as $36,000 applied
overhead /$24,000 labor $ = $1.50 per labor dollar.)
Thus, we have:
COGM = $22,500 + (25,000+24,000 + 36,000) - $10,500 = $97,000.
14.27
The expected fixed overhead is $500,000 out of a total overhead amount of $1,200,000. Thus,
the remaining $700,000 constitutes variable overhead. Given the expected activity of 10,000
machine hours, we have:
$700,000
= $70 per machine hour.
10,000
$500,000
Fixed overhead rate =
= $50 per machine hour.
10,000
Variable overhead rate =
Total overhead rate =
$1,200,000
= $120 per machine hour.
10,000
a.
We compute the inventoriable cost of the job as:
Job cost = Cost of direct materials + cost of direct labor + allocated overhead.
Referring to the solution from part [a], we calculated the total overhead rate to be $120 per
machine hour. Therefore, the cost of this job under the job-costing system is:
Job cost = $5,000 + $8,000 + ($120 per hour 40 hours) = $17,800.
Price = $22,250 = $17,800 1.25 (for the 25% mark up).
14.29
Since overhead was overapplied, then the products cost for the period should decrease.
Because Ace uses the proration method, we should allocate the overapplied overhead among
the WIP, FG and COGS accounts.
The WIP account will decrease by
$10,000 [$25,000 / ($25,000 + $75,000 + $100,000)]
= $10,000 0.125 = $1,250.
Thus, the adjusted balance is $25,000 - $1,250 = $23,750.
Alternatively, you could construct a table as follows:
Item
Amount
Cost of Goods Sold
Finished Goods Inventory
$100,000
$75,000
Percent
50.0%
37.5%
Allocated
Amount of
$10,000
$5,000
$3,750
Adjusted
Amount
$95,000
$71,250
Work-in-process inventory
Total
$25,000
200,000
12.5%
100.0%
$1,250
10,000
$23,750
190,000
14.30
We know that
Overhead rate = budgeted overhead / budgeted activity volume
$5 per machine hour = $25,000 / budgeted hours
Budgeted hours = 5,000.
Next, we know that
Applied overhead actual overhead = under/(overapplied overhead)
In this case, applied overhead is smaller than actual overhead because overhead is under
applied. Thus,
Applied overhead = $26,000 -$6,000 = $20,000.
Furthermore,
Applied overhead = actual # of machine hours rate per machine hour
Plugging in the relevant values, we have:
Actual number of machine hours = $20,000 / $5 per machine hour = 4,000 hours.
14.34
We know that adjusted COGS is larger than the unadjusted amount. Hence, overhead is
underapplied. Further, the adjustment is $757,500 - $720,000 = $37,500.
However, this is not the entire amount of the underapplied overhead. This is only the portion
allocated to COGS. Under proration, COGS would have received $720,000 / ($720,000 + $54,000
+ $90,000) = 83.33% of the total underapplied overhead.
Thus, the total underapplied overhead is $37,500/0.83333 = $45,000 underapplied.
14.39
a.
Manufacturing overhead rate = Budgeted overhead / Budgeted activity volume
= $275,000 / 20,000 Machine hours
= $13.75 per machine hour
b.
The ending balance of Finished Goods is Job no. 401:
Prior periods production costs
Current periods production costs:
Direct materials
Direct labor
Applied overhead
Total
$211,250
$33,000
$15,200
$34,375
$293,825
Applied overhead = 2,500 machine hours $13.75 per machine hour
c.
Actual overhead
= $50,000 + $53,000 + $26,250 + $168,000
= $297,250.
Applied overhead = Total machine hours $13.75 per machine hour
= (2,500 + 6,800 + 6,500 + 12,000) $13.75 per machine hour
= $382,250.
Thus, overhead is under- or overapplied by
= 297,250 - $382,250 = ($85,000) or $85,000 overapplied.
14.40
Lone Star Glassworks would apply factory overhead as:
Factory overhead applied =
Overhead rate per direct labor hour actual direct labor hours.
Thus,
Factory overhead applied = $8 50,000 = $400,000.
a.
We calculate underapplied (overapplied) overhead as:
Underapplied (overapplied) overhead = Actual overhead incurred Applied overhead
From part (a), we know factory overhead applied = $400,000.
Actual factory overhead for the year = $415,000
= $160,000 indirect labor + $75,000 depreciation on manufacturing equipment +
$60,000 factory fuel + $120,000 factory rent.
Note: We do not include sales commissions because, under GAAP, sales commissions are a
period cost and not an inventoriable product cost.
For Lone Star, overhead was underapplied by $15,000 = $415,000 $400,000 for the year.
14.42
a.
For the previous year, Serene has total overhead of ($500,000 + $600,000) = $1,100,000, and
10,000 budgeted machine hours. Thus, its total overhead rate is $110 per machine hour.
Repeating the exercise the for current year, we calculate the total overhead rate as $100 per
machine hour.
b.
The manufacturing cost for a product comprises the cost of materials, labor, and overhead.
Using the overhead rates from part (a), we calculate the allocated overhead per unit as ($110
.25 per unit) = $27.50, and ($100 .25 per unit) = $25.00 for the previous and current years,
respectively. Adding these costs to the cost of materials and labor yields:
Current Year
Previous Year
Materials + DL cost per unit
Allocated overhead per unit
Cost per unit
$45.00
$45.00
$27.50
$72.50
$25.00
$70.00
c.
The unit cost has come down by $2.50 per unit from the previous year to the current year.
However, this fact does not necessarily mean that the firm has reduced costs or increased
efficiency. In particular, each unit actually consumed 0.25 machine hours both last year and this
year. Thus, there is no gain in efficiency.
The decline in reported cost arises because the fixed overhead rate and, in turn, the total
overhead rate has changed.
The variable overhead rate has stayed the same because the total variable overhead has
increased in direct proportion to machine hours. In the prior year, Serene budgeted 10,000
machine hours and, in the current year, Serene budgeted 12,500 machine hours. At a variable
overhead rate of $60 per machine hour (=$750,000/12,500 hours), this increase of 2,500
machine hours corresponds exactly to an increase in variable overhead of $150,000.
On the other hand, the budgeted fixed overhead has stayed the same at $500,000. However,
because budgeted machine hours have increased from 10,000 to 12,500, the fixed overhead
rate has declined from $50 per machine hour to $40 per machine hour.
This decline in fixed overhead rates is the only reason for the apparent decline in costs. Stated
differently, the firm was able to utilize its capacity better, resulting in less money lost to idle
capacity. We are not comfortable, however, terming this higher utilization as reducing costs.
Note: In general, as the volume of activity increases but the fixed overhead stays the same, the
fixed overhead rate declines. However, the variable overhead rate stays the same as long as the
variable overhead increases in the same proportion. Thus, one way of distinguishing fixed and
variable overhead items is to look at the trend in the respective rates over time as the volume of
the allocation base fluctuates. Variable overhead rates would remain relative stable, whereas
fixed overhead rates would vary inversely with volume.
14.43
a.
Let us begin by first calculating the amount of under- or overapplied overhead.
Underapplied (overapplied) overhead = Actual overhead incurred Applied overhead.
For the labor-related pool, we have:
Underapplied overhead = $1,445,400 ($0.80 1,800,000) = $5,400.
For the machine-related pool, we have:
Overapplied overhead = $1,816,550 ($22 84,000) = ($31,450).
Thus, the total under- or overapplied overhead is ($31,450) + $5,400 = $26,050 overapplied.
When we write off under- or overapplied overhead to COGS, net income decreases or increases
by a like amount. Overapplied overhead reduces COGS and increases net income. Thus, the
year-end adjustment increases Malcolms net income to $471,330 = $445,280 + $26,050.
b.
In part (a), the adjustment resulted in net income increasing by the entire amount of the
overapplied overhead. However, by definition, when we prorate (or allocate) overapplied
overhead among COGS and the inventory accounts, we allocate less than $26,050 to COGS.
Thus, the amount of decrease in COGS, and the corresponding increase in net income, would be
lower than that in Part (a). Thus, Malcolms income would be lower than the answer computed
in part [a].
14.45
a.
Manufacturing OH rate = $1,728,000 / (24 persons * 2,000 artisan hours per person)
= $36 per artisan hour
b.
The unadjusted balance of Cost of Goods Sold is the cost of Job no. 101:
Prior periods production costs
Current periods production costs:
Direct materials
Direct labor (1,000 DLHs $50)
Overhead (1,000 DLHs $36)
Total
$200,000
$160,000
$ 50,000
$36,000
$446,000
c.
First, let us calculate the under- or overapplied overhead. We have:
Actual overhead = $187,500 + $50,000 + $30,000 + $108,500 = $376,000.
Applied overhead = $36 per artisan hour * (1,000 + 6,500 + 3,000) hours = $378,000.
Overapplied overhead = $378,000 - $376,000 = $2,000.
The adjusted cost of goods sold is therefore $446,000 - $2,000 = $444,000.
14.50
a.
Overhead rate for machine operations =
$600,000
= $80 per machine hour.
7,500
Overhead rate for assembly =
$300,000
= $15 per labor hour.
20,000
b.
Applied overhead in Machine operations = $80 12,000 = $960,000.
Actual overhead in Machine operations = $650,000.
Therefore, overhead was overapplied in machine operations by $310,000.
Applied overhead in Assembly = $15 22,000 = $330,000.
Actual overhead in Assembly = $275,000.
Therefore, overhead was overapplied in assembly by $55,000.
c.
Cost of Job #C252 in work-in-process = $2,000 + $6,000 + ($80 40) + ($15 250)
= $14,950.
The following table pro-rates the total overapplied overhead of $365,000 ($310,000 + $55,000)
to work-in-process, finished goods, and cost of goods sold accounts.
Unadjusted
balance
Proportion
Allocation of
$365,000
Adjusted
balance
Work-in-process
$14,950
1.63%
$5,950
$9,000
Finished Goods
$150,000
16.39%
$59,824
$90,176
Cost of Goods Sold
Total
$750,000
$914,950
81.98%
100%
$299,226
$365,000
$450,774
$549,950
Account
With pro-rating, income will rise by $299,226 for the year.
Clearly, in this case, McMaster has significantly over-estimated its overhead rate. In particular,
the actual volume of operations is much higher (12,000 versus 7,500). Although the overhead
costs also increased, the actual overhead rate of $650,000/12,000 = $54.16 for machining is
significantly lower than the budgeted rate of $80 per machine hour. This error is the reason for
the large overapplied overhead.