costacctg13_sm_ch04

costacctg13_sm_ch04 - CHAPTER 4 JOB COSTING 4­1 Cost...

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Unformatted text preview: CHAPTER 4 JOB COSTING 4­1 Cost pool––a grouping of individual cost items. Cost tracing––the assigning of direct costs to the chosen cost object. Cost allocation––the assigning of indirect costs to the chosen cost object. Cost­allocation base––a factor that links in a syst emat ic way an indirect cost or group of indirect costs to a cost object. 4­2 In a job­costing system, costs are assigned to a distinct unit, batch, or lot of a product or service. In a process­costing system, the cost of a product or service is obtained by using broad averages to assign costs to masses of ident ical or similar units. 4­3 An advert ising 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 ident ified. 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. 4­4 The seven steps in jo b costing are: (1) ident ify the job that is the chosen cost object, (2) ident ify the direct costs of the job, (3) select the cost­allocation bases to use for allocat ing indirect costs to the job, (4) ident ify the indirect costs associated with each cost­allocation base, (5) compute the rate per unit of each cost­allocatio n base used to allocate indirect costs to the jo b, (6) compute the indirect costs allocated to the job, and (7) co mpute the total cost of the jo b by adding all direct and indirect costs assigned to the jo b. 4­5 Two major cost objects that managers focus on in co mpanies using jo b cost ing are (1) products or jobs, and (2) responsibilit y centers or departments. 4­6 Three major source documents used in jo b­costing systems are (1) job cost record or job cost sheet, a document that records and accumulates all costs assigned to a specific jo b, starting when work begins (2) materials requisit io n record, a document that contains informat ion about the cost of direct materials used on a specific jo b and in a specific department; and (3) labor­time record, a document that contains information about the labor time used on a specific jo b and in a specific depart ment. 4­7 The main concern wit h the source documents of jo b cost records is the accuracy o f the records. Problems occurring in this area include incorrect recording o f quant it y or dollar amounts, materials recorded on one job being “borrowed” and used on other jobs, and erroneous jo b numbers being assigned to materials or labor inputs. 4­8 a. b. Two reasons for using an annual budget period are The numerator reason––the longer the time period, the less the influence o f seasonal patterns, and The deno minator reason––the longer the t ime period, the less the effect of variat ions in output levels on the allocat ion of fixed costs. 4­1 4­9 Actual cost ing and normal costing differ in their use of actual or budgeted indirect cost rates: Actual Normal Costing Costing Direct­cost rates Actual rates Actual rates Indirect­cost rates Actual rates Budgeted rates Each costing method uses the actual quant it y of the direct­cost input and the actual quant it y of the cost­allocat ion base. 4­10 A house construction firm can use jo b cost informat ion (a) to determine the profitabilit y of individual jo bs, (b) to assist in bidding on future jobs, and (c) to evaluate professio nals who are in charge of managing individual jobs. 4­11 The statement is false. In a normal cost ing 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 quant it y of the cost­allocation base. Underallocat ion or overallocat ion o f indirect (overhead) costs can arise because o f (a) the Numerator reason––the actual overhead costs differ fro m the budgeted overhead costs, and (b) the Deno minator reason––the actual quant it y used of the allocat ion base differs fro m the budgeted quant it y. 4­12 Debit entries to Work­in­Process Control represent increases in work in process. Examples o f 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). 4­13 Alternat ive ways to make end­of­period adjust ments for underallocated or overallocated overhead are as fo llows: (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) Year­end write­off to Cost of Goods Sold. (iv) Restatement of all overhead entries using actual indirect cost rates rather than budgeted indirect cost rates. 4­14 A co mpany 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 co mpleted (for example, because bonuses are only known at the end of the year). 4­15 Modern techno logy such as electronic data interchange (EDI) is helpful to managers because it provides them wit h quick and accurate product­cost informat ion that facilitates the management and control of jo bs. 4­2 4­16 (10 min) Job order costing, process costing. a. b. c. d. e. f. g. h. i. j. k. Job costing Process costing Job costing Process costing Job costing Process costing Job costing Job costing (but some process costing) Process costing Process costing Job costing l. Job costing m. Process costing n. Job costing o. Job costing p. Job costing q. Job costing r. Process costing s. Job costing t. Process costing u. Job costing 4­17 (20 min.) Actual costing, normal costing, accounting for manufacturing overhead. Budgeted manufactur ng i overhead costs Budgeted manufacturing = overhead rate Budgeted direct manufactur ng i labor costs = $2, 700, 000 = 1.80 or 185% $1, 500, 000 1. A ual manufactur ng ct i overhead rate Actual manufactur ng i overhead costs = Actual direct manufactur ng i labor costs = 2. $2, 755, 000 = 1.9 or 190% $1, 450, 000 Costs of Job 626 under actual and normal cost ing follow: Actual Costing Normal Costing $ 40,000 30,000 54,000 $124,000 Direct materials Direct manufacturing labor costs Manufacturing overhead costs $30,000 ´ 1.90; $30,000 ´ 1.80 Total manufacturing costs of Job 626 $ 40,000 30,000 57,000 $127,000 4­3 3. Total manufacturing overhead Actual manufacturing ´ Budgeted allocated under normal costing = labor costs overhead rate = $1,450,000 ´ 1.80 = $2,610,000 Underallocated manufacturing = Actual manufacturing – Manufacturing overhead overhead costs overhead allocated = $2,755,000 - $2,610,000 = $145,000 There is no under­ or overallocated overhead under actual costing because overhead is allocated under actual cost ing by mult iplying actual manufacturing labor costs and the actual manufacturing overhead rate. This, of course equals the actual manufacturing overhead costs. All actual overhead costs are allo cated to products. Hence, there is no under­ or overallocatead overhead. 4­18 (20 ­30 min.) Job costing, normal and actual costing. 1. Budgeted indirect costs $8,000,000 Bud geted indirect­ = = cost rate Budgeted direct labor­hours 160,000 hours = $50 per direct labor­hour Actual indirect­ cost rate = $6,888,000 Actual indirect costs = Actual direct labor­hours 164,000 hours = $42 per direct labor­hour These rates differ because both the numerator and the deno minator in the two calculations are different—one based on budgeted numbers and the other based on actual numbers. 2a. Normal cost ing Direct costs Direct materials Direct labor Laguna Model Mission Model $106,450 36,276 142,726 $127,604 41,410 169,014 50,500 $219,514 Indirect costs 45,000 Assembly support ($50 ´ 900; $50 ´ 1,010) $187,726 Total costs 4­4 2b. Actual costing Direct costs Direct materials Direct labor $106,450 36,276 142,726 $127,604 41,410 169,014 42,420 $211,434 Indirect costs 37,800 Assembly support ($42 ´ 900; $42 ´ 1,010) $180,526 Total costs 3. Normal cost ing enables Anderson to report a job cost as soon as the jo b is co mpleted, assuming that both the direct materials and direct labor costs are known at the time o f use. Once the 900 direct labor­hours are known for the Laguna Model (June 2007), Anderson can co mpute the $187,726 cost figure using normal cost ing. Anderson can use this informat ion to manage the costs of the Laguna Model job as well as to bid on similar jobs later in the year. In contrast, Anderson has to wait unt il the December 2007 year­end to compute the $180,526 cost of the Laguna Model using actual costing. Alt hough not required, the fo llowing overview diagram summarizes Anderson Construction’s jo b­costing system. INDIRECT COST POOL } } } } Assembly Support COST ALLOCATION BASE Direct Labor­Hours COST OBJECT: RESIDENTIAL H O M E Indirect Costs Direct Costs DIRECT COSTS D irect Materials D irect Manu facturin g L abor 4­5 4­19 (10 min.) Budgeted manufacturing overhead rate, allocated manufacturing overhead. 1. Budgeted manufacturing overhead rate = Budgeted manufacturing overhead Budgeted machine hours $4, 000, 000 = $20 per machine­hour 200, 000 machine­hours = 2. Manufacturing overhead allocated = Actual machine­hours × Budgeted manufacturing overhead rate = 195,000 × $20 = $3,900,000 3. Since manufacturing overhead allocated is greater than the actual manufacturing overhead costs, Waheed overallocated manufacturing overhead: Manufacturing overhead allocated Actual manufacturing overhead costs Overallocated manufacturing overhead $3,900,000 3,860,000 $ 40,000 4­6 4­20 (20­30 min.) Job costing, accounting for manufacturing overhead, budgeted rates. 1. An overview of the product costing system is INDIRECT COST POOL } Machining Department Assembly Department Manufacturing Overhead Manufacturing Overhead COST ALLOCATION BASE } } } Machine­Hours Direct Manuf. Labor Cost COST OBJECT: PRODUCT Indirect Costs Direct Costs DI RECT COST Direct Materials Direct Manufacturing Labor Budgeted manufacturing overhead divided by allo cation base: $ ,800 000 1 , = $36 per machine­hour 50 000 , $ ,600 000 3 , Assembly overhead: = 180% of direct manuf. labor costs $ ,000 000 2 , Machining overhead 2. Machining department, 2,000 hours ´ $36 Assembly department, 180% ´ $15,000 Total manufacturing overhead allocated to Job 494 Actual manufacturing overhead Manufacturing overhead allocated, 55,000 ´ $36 180% ´ $2,200,000 Underallocated (Overallo cated) Machining $2,100,000 1,980,000 — $ 120,000 $72,000 27,000 $99,000 Assembly $ 3,700,000 — 3,960,000 $ (260,000) 3. 4­7 4­21 (20-25 min.) Job costing, consulting firm. 1. Budgeted indirect­cost rate = $13,000,000 ÷ $5,000,000 = 260% of professional labor costs INDIRECT COST POOL } } } } Coonieltinng nsu nt CCl sulti g Supportt Supppor Su po COST AL LOCAT ION BASE Proffessiona Pro essional l LaboorCoosts Lab r C sts COST OBJECT: JOB FOR CONSULTING CLIENT Indir ect Costs Direct Costs DIRE CT COSTS Professional Labor 2. At the budgeted revenues of $20,000,000, Taylor’s operating inco me o f $2,000,000 equals 10% of revenues. Markup rate = $20,000,000 ÷ $5,000,000 = 400% of direct professio nal labor costs 4­8 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: Consult ing support, 260% ´ $9,000 Total costs $ 9,000 23,400 $32,400 As calculated in requirement 2, the bid price to earn a 10% inco me­to­revenue margin is 400% of direct professio nal costs. Therefore, Taylor should bid 4 ´ $9,000 = $36,000 for the Red Rooster job. Bid price to earn target operating inco me­to­revenue margin of 10% can also be calculated as fo llows: Let R = revenue to earn target inco me 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 inco me 3,600 Bid price $36,000 or, 4­9 4­22 (15–20 min.) Service industry, time period used to compute indirect cost rates. 1. Direct labor costs Variable over head costs as a percentage of dir ect labor costs Variable over head costs (Percentage ´ dir ect labor costs) Fixed overhea d costs Total over head costs Total over head costs as a percentage of direct labor costs Jan–March $400,000 April–June $280,000 July–Sept $250,000 Oct–Dec $270,000 Total $1,200,000 90% 60% 60% 60% $360,000 300,000 $660,000 $168,000 300,000 $468,000 $150,000 300,000 $450,000 $162,000 300,000 $462,000 $ 840,000 1,200,000 $2,040,000 165% 167% 180% 171% 170% Job 332 Direct materials Direct labor costs Over head allocated (variable + fixed) (165%; 180%; 170% of $6,000) Full cost of Job 332 Budgeted Overhead Rate Used Jan–March July–Sept Average Rate Rate Yearly Rate $10,000 $10,000 $10,000 6,000 6,000 6,000 9,900 $25,900 10,800 $26,800 10,200 $26,200 (a) The full cost of Job 332, using the budgeted overhead rate of 165% for January–March, is $25,900. The full cost of Job 332, using the budgeted overhead rate of 180% for July–September, is $26,800. The full cost of Job 332, using the annual budgeted overhead rate of 170%, is $26,200. (b) (c) 2. Budgeted fixed overhea d rate based on annual fixed over head costs and annual direct labor costs = $1,200,000 ¸ $1,200,000 = 100% Budgeted Variable Overhead Rate Used January–March July–Sept rate rate $10,000 $10,000 6,000 6,000 5,400 6,000 $27,400 3,600 6,000 $25,600 Job 332 Direct materials Direct labor costs Variable over head allocated (90%; 60%; of $6,000) Fixed overhea d allocated (100% of $6,000) Full cost of Job 332 4­10 (a) The full cost of Job 332, using the budgeted variable overhead rate of 90% for January– March and an annual fixed overhead rate of 100%, is $27,400. (b) The full cost of Job 332, using the budgeted variable overhead rate of 60% for July– September and an annual fixed overhead rate of 100%, is $25,600. 3. If Pr inters, Inc. sets prices at a markup of costs, then prices based on costs calculated as in Requirement 2 (rather than as in Requirement 1) would be more effect ive in deterring clients fro m sending in last­minute, congestion­causing orders in the January–March time frame. In this calculat ion, more variable manufacturing overhead costs are allocated to jobs in the first quarter, reflect ing the larger costs of that quarter caused by higher overtime and facilit y and machine maintenance. This method better captures the cost of congest ion during the first quarter. 4­23 (10–15 min.) Accounting for manufacturing overhead. 1. Budgeted manufacturing overhead rate = $7, 500, 000 250,000 = $30 per machine­hour 2. Work­in­Process Control 7,350,000 Manufacturing Overhead Allocated 7,350,000 (245,000 machine­hours ´ $30 per machine­hour = $7,350,000) 3. $7,350,000– $7,300,000 = $50,000 overallo cated, an insignificant amount of actual manufacturing overhead costs $50,000 ÷ $7,300,000 = 0.66%. Manufacturing Overhead Allocated 7,350,000 Manufacturing Department Overhead Control Cost of Goods Sold 7,300,000 50,000 4­11 4­24 (35-45 min.) Job costing, journal entries. Some instructors may also want to assign Exercise 4­25. It demonstrates the relationships o f the general ledger to the underlying subsidiary ledgers and source documents. 1. An overview of the product costing system is: INDIRECT COST POOL } Manu facturing Overhead COST ALLOCATION BASE } } } Direct Manu facturing Labo r Costs COST OBJECT: PRINT JOB Indirect Costs Direct Costs DIRECT COST Direct Materials Direct Manu. f Labo r 4­12 2. & 3. This answer assumes COGS given of $4,020 does not include the writeoff of overallocated manufacturing overhead. 2. (1) Materials Control Accounts Payable Control (2) Work­in­Process Control Materials Control (3) Manufacturing Overhea d Control Materials Control (4) Work­in­Process Control Manufacturing Overhea d Control Wages Payable Control (5) Manufacturing Overhea d Control Accumulated Depr eciation––buildings and manufacturing equipment (6) Manufacturing Overhea d Control Miscellaneous accounts (7) Work­in­Process Control Manufacturing Over head Allocated (1.60 ´ $1,300 = $2,080) (8) Finished Goods Control Work­in­Process Control (9) Accounts Receivable Control (or Cash) Revenues (10) Cost of Goods Sold Finished Goods Control (11) Manufacturing Overhea d Allocated Manufacturing Over head Control Cost of Goods Sold 800 800 710 710 100 100 1,300 900 2,200 400 400 550 550 2,080 2,080 4,120 4,120 8,000 8,000 4,020 4,020 2,080 1,950 130 4­13 3. Bal. 12/31/2008 (1) Purchases Bal. 12/31/2009 Materials Control 100 (2) Issues 800 (3) Issues 90 Work­in­Process Control 60 (8)Goods completed 710 1,300 2,080 30 Finished Goods Control 500 (10) Goods sold 4,120 600 Cost of Goods Sold 4,020 (11) Adjust for overallocation 3,890 Manufacturing Overhea d Control 100 (11) To close 900 400 550 0 Manufacturing Overhea d Allocated 2,080 (7) Manuf. overhea d allocated Bal. 710 100 Bal. 12/31/2008 (2) Direct materials (4) Direct manuf. labor (7) Manuf. overhea d allocated Bal. 12/31/2009 4,120 Bal. 12/31/2008 (8) Goods completed Bal. 12/31/2009 4,020 (10) Goods sold Bal. 12/31/2009 130 (3) Indirect materials (4) Indirect manuf. labor (5) Depr eciation (6) Miscella neous Bal. 1,950 (11) To close 2,080 0 4­14 4­25 (35 minutes) Journal entries, T­accounts, and source documents. 1. i. Direct Materials Control 124,000 Accounts Payable Control 124,000 Source Document: Purchase I nvoice, Receiving Report Subsidiary Ledger: Direct Materials Record, Accounts Payable ii. Work in Process Control a 122,000 Direct Materials Control 122,000 Source Document: Material Requis it ion Records, Job Cost Record Subsidiary Ledger: Direct Materials Record, Work­in­Process Inventory, Records by Jobs iii. Work in Process Control 80,000 Manufacturing Overhead Control 54,500 Wages Payable Control 134,500 Source Document: Labor Time Records, Job Cost Records Subsidiary Ledger:, Manufacturing Overhead Records, Emplo yee Labor Records, Work­in­ Process Inventory Records by Jobs iv. Manufacturing Overhead Control 129,500 Salaries Payable Control 20,000 Accounts Payable Control 9,500 Accumulated Depreciat ion Control 30,000 Rent Payable Control 70,000 Source Document: Depreciat ion Schedule, Rent Schedule, Maintenance wages due, Invo ices for miscellaneous factory overhead items Subsidiary Ledger: Manufacturing Overhead Records v. Work in Process Control 200,000 Manufacturing Overhead Allocated ($80,000 ´ $2.50) Source Document: Labor Time Records, Job Cost Record Subsidiary Ledger: Work­in­Process Inventory Records by Jobs 200,000 vi. Finished Goods Control b 387,000 Work in Process Control 387,000 Source Document: Job Cost Record, Completed Job Cost Record Subsidiary Ledger: Work­in­Process Inventory Records by Jobs, Finished Goods Inventory Records by Jobs vii. Cost of Goods Sold c 432,000 Finished Goods Control Source Document: Sales Invoice, Completed Job Cost Record Subsidiary Ledger: Finished Goods Inventory Records by Jobs viii. Manufacturing Overhead Allocated Manufacturing Overhead Control Cost of Goods Sold 4­15 432,000 200,000 184,000 16,000 Source Document: Prior Journal Entries ix. Administrative Expenses 7,000 Marketing Expenses 120,000 Salaries Payable Control 30,000 Accounts Payable Control 90,000 Accumulated Depreciat ion, Office Equipment 7,000 Source Document: Depreciat ion Schedule, Marketing Payro ll Request, Invo ice for Advert ising, Sales Commissio n Schedule. Subsidiary Ledger: Emplo yee Salary Records, Administration Cost Records, Marketing Cost Records. a Materials used = Beginning direct materials inventory + Purchases - Ending direct materials inventory = $9,000 + $124,000 - $11,000 = $122,000 b Cost of goods manufactured = Beginning WIP inventory + Manufacturing cost - Ending WIP inventory = $6,000 + ($122,000 + $80,000 + $200,000) - $21,000 = 387,000 c Cost of Goods Sold = Beginning fin. goods inventory + Cost of goods manuf. - Ending fin. goods inventory = $69,000 + $387,0000 - $24,000 = $432,000 4­16 2. T­accounts Bal. 1/1/2008 (1) Purchases Bal. 12/31/2008 Direct Materials Control 9,000 (2) Materials used 124,000 11,000 Work­in­Process Control 6,000 (6) Cost of goods manufactured 122,000 80,000 200,000 21,000 Finished Goods Control 69,000 (7) Cost of goods sold 387,000 24,000 Cost of Goods Sold 432,000 (8) Adjust for overallocation 122,000 Bal. 1/1/2008 (2) Direct materials used (3) Direct manuf. labor (5) Manuf. overhead allocated Bal. 12/31/2008 387,000 Bal. 1/1/2008 (6) Cost of goods manuf. Bal. 12/31/2008 432,000 (7) Goods sold 16,000 (3)Indirect labor (4) Supplies (4) Miscellaneous (4 Depreciat ion (4) Rent Bal. Manufacturing Overhead Control 54,500 (8) To close 20,000 9,500 30,000 70,000 0 Manufacturing Overhead Allocated 200,000 (5) Manuf. overhead allocated Bal. 184,000 (8) To close 200,000 0 4­17 4­26 (45 min.) Job costing, journal entries. Some instructors may wish to assign Problem 4­24. It demonstrates the relat ionships o f journa l entries, general ledger, subsidiary ledgers, and source documents. 1. An overview of the product­costing system is INDIRECT COST POOL } } } } Manufacturing Overhead COST ALLOCATION BASE Machine­Hours COST OBJECT PRODUCT Indirect Costs Direct Costs DIRE CT COSTS Direct Materials Direct Manuf. Labor 2. (1) (2) (3) (4) (5) (6) (7) (8) (9) Amounts in millio ns. Materials Control Accounts Payable Control Work­in­Process Control Materials Control Manufacturing Department Overhead Control Materials Control Work­in­Process Control Wages Payable Control Manufacturing Department Overhead Control Wages Payable Control Manufacturing Department Overhead Control Accumulated Depreciat ion Manufacturing Department Overhead Control Various liabilit ies Work­in­Process Control Manufacturing Overhead Allocated Finished Goods Control Work­in­Process 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 (10a) (10b) 4­18 The posting o f entries to T­accounts is as fo llows: Materials Control 12 (2) 150 (3) Work­in­Process Control 2 (9) 145 90 63 6 Cost of Goods Sold 292 5 Bal. (1) 145 10 Bal. (2) (4) (8) Bal. 294 Bal. (9) Finished Goods Control 6 (10a) 294 Manufacturing Department Overhead Control 10 (11) 30 19 9 292 (10a) (11) (3) (5) (6) (7) 68 Manufacturing Overhead Allocated (11) 63 (8) 63 Accounts Payable Control (1) 150 Wages Payable Control (4) (5) Various Liabilit ies (7) 90 30 Accumulated Depreciat ion (6) 19 9 Accounts Receivable Control (10b) 400 The ending balance o f Work­in­Process Control is $6. 3. Revenues (10b) 400 (11) Manufacturing Overhead Allocated Cost of Goods Sold Manufacturing Department Overhead Control Entry posted to T­accounts in Requirement 2. 63 5 68 4­19 4­27 (15 min.) Job costing, unit cost, ending work in progress. 1. Direct manufacturing labor rate per hour Manufacturing overhead cost allocated per manufacturing labor­hour Direct manufacturing labor costs Direct manufacturing labor hours ($275,000 ¸ $25; $200,000 ¸ $25) Manufacturing overhead cost allocated (11,000 ´ $20; 8,000 ´ $20) Job Costs May 2009 Direct materials Direct manufacturing labor Manufacturing overhead allocated Total costs 2. Number of pipes produced for Job M1 Cost per pipe ($570,000 ¸ 1,500) 3. Finished Goods Control Work­in­Process Control 570,000 570,000 $25 $20 Job M1 $275,000 11,000 $220,000 Job M1 $ 75,000 275,000 220,000 $570,000 Job M2 $200,000 8,000 $160,000 Job M2 $ 50,000 200,000 160,000 $410,000 1,500 $380 4. Raymo nd Co mpany began May 2009 wit h no work­in­process inventory. During May, it started and finished M1. It also started M2, which is still in work­in­process inventory at the end of May. M2’s manufacturing costs up to this point, $410,000, remain as a debit balance in the Work­in­Process Inventory account at the end of May 2009. 4­20 4­28 (20-30 min.) Job costing; actual, normal, and variation from normal costing. 1. Actual direct cost rate for professio nal labor = $58 per professio nal labor­hour Actual indirect cost rate = $744,000 = $48 per professio nal labor­hour 15,500 hours $960,000 Budgeted direct cost rate = = $60 per professio nal labor­hour for professional labor 16,000 hours Budgeted indirect cost rate = $720,000 16,000 hours = $45 per professio nal labor­hour Direct­Cost Rate Indirect­Cost Rate (a) (b) (c) Actual Normal Variation of Costing Costing Normal Costing $58 $58 $60 (Actual rate) (Actual rate) (Budgeted rate) $48 $45 $45 (Actual rate) (Budgeted rate) (Budgeted rate) 2. (a) (b) (c) Actual Normal Variation of Costing Costing Normal Costing Direct Costs $58 ´ 120 = $ 6,960 $58 ´ 120 = $ 6,960 $60 ´ 120 = $ 7,200 Indirect Costs 48 ´ 120 = 5,760 45 ´ 120 = 5,400 45 ´ 120 = 5,400 Total Job Costs $12,720 $12,360 $12,600 All three costing systems use the actual professional labor time of 120 hours. The budgeted 110 hours for the Pierre Enterprises audit jo b is not used in jo b costing. However, Chirac may have used the 110 hour number in bidding for the audit. The actual costing figure of $12,720 exceeds the normal costing figure of $12,360 because the actual indirect­cost rate ($48) exceeds the budgeted indirect­cost rate ($45). The normal costing figure of $12,360 is less than the variat ion o f normal costing (based on budgeted rates for direct costs) figure o f $12,600, because the actual direct­cost rate ($58) is less than the budgeted direct­cost rate ($60). 4­21 Alt hough not required, the fo llowing overview diagram summarizes Chirac’s jo b­costing system. INDIRECT COST POOL Audit Sup port COST ALLOCATION BASE Professional Labor­Hours COST OBJECT: JOB FOR AUDITING PIERRE & CO. Indirect Costs Direct Costs DIRECT COST Professional Labor 4­22 4­29 (30 min.) Job order costing: actual, normal, and variation from normal costing. 1a. Actual costing Direct cost rate = Actual professio nal labor costs ÷ Actual professional labor­hours = $1,320,000 ÷ 22,000 hours = $60 per professio nal­hour Indirect cost rate = Actual support costs ÷ Actual professio nal labor­hours = $2,400,000 ÷ 22,000 hours = $109.09 per professio nal­hour 1b. Normal cost ing Budgeted professio nal hours = Budgeted hours per lawyer ´ Number of lawyers = 2500 ´ 8 = 20,000 hours Direct cost rate = Actual professio nal labor costs ÷ Actual professional labor­hours = $1,320,000 ÷ 22,000 hours = $60 per professio nal­hour Indirect cost rate = Budgeted support costs ÷ Budgeted professio nal labor­hours = $2,000,000 ÷ 20,000 hours = $100 per professio nal­hour 1c. Variat ion fro m normal cost ing that uses budgeted rates for direct costs Direct cost rate = Budgeted professional labor costs ¸ Budgeted professional labor­hours = $1,100,000 ÷ 20,000 hours = $55 per professio nal­hour Indirect cost rate = Budgeted support costs ÷ Budgeted professio nal labor­hours = $2,000,000 ÷ 20,000 hours = $100 per professio nal­hour 2. The costs of Ari Apostolus’ will under each method follow: a. Actual Costing Direct costs 4,000 hours ´ $60 per hour $240,000 Indirect costs 4,000 hours ´ $109.09 per hour 436,360 Total costs $676,360 b. Normal Costing Direct costs 4,000 hours ´ $60 per hour Indirect costs 4,000 hours ´ $100 per hour Total costs c. Variat ion from normal costing Direct costs 4,000 hours ´ $55 per hour Indirect costs 4,000 hours ´ $100 per hour Total costs 4­23 $240,000 400,000 $640,000 $220,000 400,000 $620,000 4­30 (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 Overallo cated plant overhead = Actual plant overhead costs – Allo cated plant overhead costs = $106,000 – $110,000 = –$4,000 Overallo cated plant overhead = $4,000 3a. All overallo cated 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 Dec. 31, 2009 Balance Overallocated Balance (Before Proration) Manuf. Overhead (After Proration) Account (1) (3) = (1) – (2) (2) WIP $ 50,000 $ 0 $ 50,000 Finished Goods 240,000 0 240,000 Cost of Goods Sold 560,000 4,000 556,000 Total $850,000 $4,000 $846,000 3b. Overallocated plant overhead prorated based on ending balances: 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 Account WIP Finished Goods Cost of Goods Sold Total 3c. Overallocated plant overhead prorated based on 2009 overhead in ending balances: Dec. 31, 2009 Balance (Before Proration) (1) $ 50,000 240,000 560,000 $850,000 Allocated Manuf. Overhead in Dec. 31, 2009 Balance (2) a $ 10,000 b 30,000 c 70,000 $110,000 Allocated Manuf. Overhead in Dec. Proration of $4,000 31, 2009 Balance Overallocated as a Percent of Total Manuf. Overhead (3) = (2) ÷ $110,000 (4) = (3) ´ $4,000 0.0909 0.0909 ´ $4,000=$ 364 0.2727 0.2727 ´ $4,000= 1,091 0.6364 0.6364 ´ $4,000=$2,545 1.0000 $4,000 Dec. 31, 2009 Balance (After Proration) (5) = (1) – (4) $ 49,636 238,909 557,455 $846,000 Account WIP Finished Goods Cost of Goods Sold Total 4­24 a,b,c Overhead allocated = Direct manuf. labor cost ´ 50% = $20,000; 60,000; 140,000 ´ 50% 4. Writing o ff all o f the overallocated plant overhead to Cost of Goods Sold (CGS) is usually warranted when CGS is large relat ive to Work­in­Process and Finished Goods Inventory and the overallocated plant overhead is immaterial. Both these condit ions apply in this case. ROW should write off the $4,000 overallocated plant overhead to Cost of Goods Sold Account. 4­31 (20-30 min) 1. Job costing, accounting for manufacturing overhead, budgeted rates. An overview of the job­costing system is: INDIRECT COST POOL } Machining Departm ent Manufacturing Overhead Finishing Departm ent Manufacturing Overhead COST ALLOCATION BASE } } } Machine­Hours in Machining Dept. Direct Manufacturing Labor Costs in Finishing Dept. COST OBJJECT COST OB ECT:: PRODUCT JOB Indirect Costs Direct Costs DIRECT COST Direct Materials Direct Manufacturing Labor 2. Budgeted manufacturing overhead divided by allo cation base: a. Machining Department: $10,000,000 = $50 per machine­hour 200,000 b. Finishing Department: $8,000,000 $4,000,000 = 200% of direct manufacturing labor costs 4­25 3. Machining Department overhead, $50 ´ 130 hours Finishing Department overhead, 200% of $1,250 Total manufacturing overhead allocated Total costs of Job 431: Direct costs: Direct materials––Machining Depart ment ––Finishing Department Direct manufacturing labor —Machining Department —Finishing Department Indirect costs: Machining Department overhead, $50 ´ 130 Finishing Department overhead, 200% of $1,250 Total costs $6,500 2,500 $9,000 4. $14,000 3,000 600 1,250 $6,500 2,500 $18,850 9,000 $27,850 The per­unit product cost of Job 431 is $27,850 ÷ 200 units = $139.25 per unit The po int of this part is (a) to get the definit ions straight and (b) to underscore that overhead is allocated by mult iplying the actual amount of the allo cation base by the budgeted rate. 5. Machining Manufacturing overhead incurred (actual) $11,200,000 Manufacturing overhead allocated 220,000 hours ´ $50 11,000,000 200% of $4,100,000 Underallocated manufacturing overhead $ 200,000 Overallocated manufacturing overhead Total overallocated overhead = $300,000 – $200,000 = $100,000 Finishing $7,900,000 8,200,000 $ 300,000 6. A homogeneous cost pool is one where all costs have the same or a similar cause­and­ effect or benefits­received relat ionship with the cost­allocation base. Solo mon likely assumes that all its manufacturing overhead cost items are not homogeneous. Specifically, those in the Machining Depart ment have a cause­and­effect relat ionship wit h machine­hours, while those in the Finishing Depart ment have a cause­and­effect relat ionship wit h direct manufacturing labor costs. Solo mon believes that the benefits of using two cost pools (more accurate product costs and better abilit y to manage costs) exceeds the costs of implement ing a more complex system. 4­26 4­32 (15-20 min.) Service industry, job costing, law firm. 1. INDIRECT COST POOL COST ALLOCATION BASE } } } } Legal Support Prof essional Labor­Hours COST OBJECT: JOB FOR CLIENT Indirect Costs Direct Costs DIRECT COST Prof essional Labor 2. Budgeted professional = Budgeted direct labor compensation per professional labor­hour direct cost rate Budgeted direct labor­hours per professional $104,000 1,600 hours = $65 per professio nal labor­hour = Note that the budgeted professio nal labor­hour direct­cost rate can also be calculated by dividing total budgeted professio nal labor costs of $2,600,000 ($104,000 per professio nal ´ 25 professio nals) by total budgeted professional labor­hours of 40,000 (1,600 hours per professio na l ´ 25 professio nals), $2,600,000 ¸ 40,000 = $65 per professional labor­hour. 3. Budgeted indirect = Budgeted total costs in indirect cost pool cost rate Budgeted total professional labor­hours $2,200,000 = 1,600 hours ´ 25 $2,200,000 = 40,000 hours = $55 per professio nal labor­hour 4. Direct costs: Professio nal labor, $65 ´ 100; $65 ´ 150 Indirect costs: Legal support, $55 ´ 100; $55 ´ 150 Richardson $ 6,500 5,500 $12,000 Punch $ 9,750 8,250 $18,000 4­27 4­33 (25–30 min.) Service industry, job costing, two direct­ and indirect­cost categories, law firm (continuation of 4­32). Alt hough not required, the fo llowing overview diagram is helpful to understand Keat ing’s jo b­ costing system. INDIRECT COST PO OL COST ALLOCATION BASE } } } } General Support Secretarial Support Professional Labor­Hours Partner Labor­Hours COST OBJECT: JOB FOR CLIEN T Indirect Costs Direct Costs DIRECT COST Professional Partner Labor Professional Associate Labor 1. Budgeted compensat ion per professio nal Divided by budgeted hours of billable time per professional Budgeted direct­cost rate *Can also be calculated as † Professional Professional Partner Labor Associate Labor $ 200,000 $80,000 ÷1,600 $125 per hour* ÷1,600 $50 per hour† = $125 = $ 50 Total budgeted partner labor costs $200,000 ´ 5 $1,000,000 = = Total budgeted partner labor ­ hours 1,600 ´ 5 8, 00 0 Can also be calculated as Total budgeted associate labor costs $80,000 ´ 20 $1,600,000 = = Total budgeted associate labor ­ hours 1,600 ´ 20 32,000 2. General Secretarial Support Support Budgeted total costs $1,800,000 $400,000 Divided by budgeted quant it y of allocation base ÷ 40,000 hours ÷ 8,000 hours Budgeted indirect cost rate $45 per hour $50 per hour 4­28 3. Direct costs: Professiona l partners, $125 ´ 60; $125 ´ 30 Professional associates, $50 ´ 40; $50 ´ 120 Richardson $7,500 2,000 $ 9,500 4,500 3,000 7,500 $17,000 Richardson Single direct ­ Single indirect (from Problem 4­32) Mult iple direct – Mult iple indirect (from requirement 3 of Problem 4­33) Difference $12,000 17,000 $ 5,000 undercosted Punch $3,750 6,000 $ 9,750 6,750 1,500 8,250 $18,000 Punch $18,000 18,000 $ 0 no change Direct costs Indirect costs: General support, $45 ´ 100; $45 ´ 150 Secretarial support, $50 ´ 60; $50 ´ 30 Indirect costs Total costs 4. The Richardson and Punch jo bs differ in their use of resources. The Richardson jo b has a mix o f 60% partners and 40% associates, while Punch has a mix o f 20% partners and 80% associates. Thus, the Richardson jo b is a relat ively high user o f the more costly partner­related resources (both direct partner costs and indirect partner secretarial support). The refined­costing system in Problem 4­32 increases the reported cost in Problem 4­32 for the Richardson jo b by 41.7% (from $12,000 to $17,000). 4­29 4­34 (20-25 min.) Proration of overhead. 1. Budgeted manufacturing overhead rate is $4,800,000 ÷ 80,000 hours = $60 per machine­hour. 2. Manufacturing overhead = Manufacturing overhead – Manufacturing overhead underallocated incurred allocated = $4,900,000 – $4,500,000* = $400,000 *$60 ´ 75,000 actual machine­hours = $4,500,000 a. Write­off to Cost of Goods Sold Account Balance (Before Proration) (2) $ 750,000 1,250,000 8,000,000 $10,000,000 Write­off of $400,000 Underallocated Manufacturing Overhead (3) $ 0 0 400,000 $400,000 Account Balance (After Proration) (4) = (2) + (3) $ 750,000 1,250,000 8,400,000 $10,400,000 Account (1) Work in Process Finished Goods Cost of Goods Sold Total b. Proration based on ending balances (before proration) in Work in Process, Finished Goods and Cost of Goods Sold. Account Account Balance Balance (Before Proration) (After Proration) (2) (4) = (2) + (3) $ 750,000 ( 7.5%) 0.075 ´ $400,000 = $ 30,000 $ 780,000 1,250,000 (12.5%) 0.125 ´ $400,000 = 50,000 1,300,000 8,000,000 (80.0%) 0.800 ´ $400,000 = 320,000 8,320,000 $10,000,000 100.0% $10,400,000 $400,000 Proration of $400,000 Underallocated Manufacturing Overhead (3) Account (1) Work in Process Finished Goods Cost of Goods Sold Total c. Proration based on the allocated overhead amount (before proration) in the ending balances of Work in Process, Finished Goods, and Cost of Goods Sold. Account Allocated Overhead Account Balance Included in Proration of $400,000 Balance Underallocated (Before the Account Balance (After Account Proration) (Before Proration) Manufacturing Overhead Proration) (5) (1) (2) (3) (4) (6) = (2) + (5) a Work in Process $ 750,000 $ 240,000 ( 5.33%) 0.0533 ´ $400,000 = $ 21,320 $ 771,320 Finished Goods Cost of Goods Sold Total a 1,250,000 660,000 b c (14.67%) 0.1467 ´ $400,000 = 58,680 (80.00%) 0.8000 ´ $400,000 = 320,000 $400,000 1,308,680 8,320,000 $10,400,000 8,000,000 3,600,000 $10,000,000 $4,500,000 100.00% b c ; $60 ´ 4,000 machine­hours $60 ´ 11,000 machine­hours; $60 ´ 60,000 machine­hours 4­30 3. Alternat ive (c) is theoretically preferred over (a) and (b). Alternat ive (c) yields the same ending balances in work in process, finished goods, and cost of goods sold that would have bee n reported had actual indirect cost rates been used. Chapter 4 also discusses an adjusted allo cat ion rate approach that results in the same ending balances as does alternat ive (c). This approach operates via a restatement of the indirect costs allocated to all the individual jo bs worked on during the year using the actual indirect cost rate. 4­35 (15 min.) Normal costing, overhead allocation, working backward. 1a. Manufacturing overhead allocated = 200% × Direct manufacturing labor cost $3,600,000 = 2 × Direct manufacturing labor cost Direct manufacturing labor cost = $3, 600, 000 = $1,800,000 2 b. Total manufacturing = Direct material + Direct manufacturing + Manufacturing cost used labor cost overhead allocated $8,000,000 = Direct material used + $1,800,000 + $3,600,000 Direct material used = $2,600,000 2. Work in Process + Total manufacturing cost = Cost of goods manufactured + Work in Process 1 2 /3 1 / 2 0 0 9 1 / 1 /2 0 0 9 Denote Work­in­process on 12/31/2009 by X $320,000 + $8,000,000 = $7,920,000 + X X = $400,000 Work­in­process inventory, 12/31/09 = $400,000. 4­31 4­36 (40 min.) Proration of overhead with two indirect cost pools. 1.a. C & A department: Overhead allocated = $40 ´ 4,000 Machine hours = $160,000 Underallocated overhead = Actual overhead costs – Overhead allocated = $163,000 – 160,000 = $3,000 underallocated 1.b. Finishing department: Overhead allocated = $50 per direct labor­hour ´ 2,000 direct labor­hours = $100,000 Overallocated overhead = Actual overhead costs – Overhead allocated = $87,000 – 100,000 = $13,000 overallocated 2a. All overallo cated overhead is written off to cost of goods sold. Both Work in Process and Finished goods inventory remain unchanged. Proration of $10,000 Overallocated Overhead (2) 0 0 +$3,000 –$13,000 $ 10,000 Dec. 31, 2008 Balance (After Proration) (3) = (1) + (2) $ 150,000 250,000 1,590,000 $1,990,000 Account WIP Finished Goods Cost of Goods Sold Total Dec. 31, 2008 Balance (Before Proration) (1) $ 150,000 250,000 1,600,000 $2,000,000 2b. Overallocated overhead prorated based on ending balances Dec. 31, 2008 Balance (Before Proration) Account (1) WIP $ 150,000 Finished Goods 250,000 Cost of Goods Sold 1,600,000 Total $2,000,000 Balance as a Percent of Total (2) = (1) ÷ $2,000,000 0.075 0.125 0.800 1.000 Proration of $10,000 Dec. 31, 2008 Balance Overallocated Overhead (After Proration) (3) = (2) ´ 10,000 (4) = (1) – (3) 0.075 × $10,000 = $ 750 $ 149,250 0.125 × $10,000 = 1,250 248,750 0.800 × $10,000 = 8,000 1,592,000 $10,000 $1,990,000 2c. Overallocated overhead prorated based on overhead in ending balances. (Note: overhead must be allo cated separately fro m each department. This can be done using the number of machine hours/direct labor hours as a surrogate for overhead in ending balances.) 4­32 For C & A department: Allocated Overhead in Dec. 31, 2008 Balance (1) 200 ´ $40 = $ 8,000 600 ´ $40 = 24,000 3,200 ´ $40 = 128,000 $160,000 Allocated Overhead in Dec. 31, 2008 Balance as a Percent of Total (2) = (1) ÷ $160,000 0.05 0.15 0.80 1.00 Proration of $3,000 Underallocated Overhead (3) = (2) ´ $3000 0.05 ´ $3,000 = $ 150 0.15 ´ $3,000 = 450 0.80 ´ $3,000 = 2,400 $3,000 Account WIP Finished Goods Cost of Goods Sold Total For finishing department: Allocated Overhead in Dec. 31, 2008 Balance as a Percent of Total (5) = (4) ÷ $100,000 0.05 0.20 0.75 1.00 Account WIP Finished Goods Cost of Goods Sold Total Allocated Overhead in Dec. 31, 2008 Balance (4) 100 ´ $50 = $ 5,000 400 ´ $50 = 20,000 1,500 ´ $50 = 75,000 $100,000 Proration of $13,000 Underallocated Overhead (6) = (5) ´ $13,000 0.05 ´ $13,000 = $ 650 0.20 ´ $13,000 = 2,600 0.75 ´ $13,000 = 9,750 $13,000 Account WIP Finished Goods Cost of Goods Sold Total Dec. 31, 2008 Balance (Before Proration) (7) $ 150,000 250,000 1,600,000 $2,000,000 Underallocated/ Overallocated Overhead (8) = (3) – (6) $150 – $650 = $ (500) $450 – $2,600 = (2,150) $2,400 – $9,750 = (7,350) $(10,000) Dec. 31, 2009 Balance (After Proration) (9) = (7) + (8) $ 149,500 247,850 1,592,650 $1,990,000 3. The first method is simple and Cost of Goods Sold accounts for 80% of the three account amounts. The amount of overallo cated and underallocated overhead is also immaterial. Allocat ion to the other two accounts is minimal. Therefore, write­off to cost of goods sold is the most cost effective alternat ive. 4­33 4­37 (35 min.) General ledger relationships, under­ and overallocation. The so lution assumes all materials used are direct materials. A summary o f the T­accounts for Needham Co mpany before adjusting for under­ or overallocat ion of overhead fo llows: Direct Materials Control Work­in­Process Control 1­1­2008 30,000 Material used for 1­1­2008 20,000 Transferred to Purchases 400,000 manufacturing 380,000 Direct materials 380,000 finished goods 940,000 12­31­2008 50,000 Direct manuf. Labor 360,000 Manuf. overhead allocated 480,000 12­31­2008 300,000 Finished Goods Control Cost of Goods Sold 1­1­2008 10,000 Cost of goods Finished goods Transferred in sold 900,000 sold 900,000 from WIP 940,000 12­31­2008 50,000 Manufacturing Overhead Control Manufacturing overhead costs 540,000 Manufacturing Overhead Allocated Manufacturing overhead allocated to work in process 480,000 1. From Direct Materials Control T­account, Direct materials issued to production = $380,000 that appears as a credit. Direct manufacturing labor costs Direct manufacturing wage rate per hour $360,000 = = 24,000 hours $15 per ho ur Manufacturing = Direct manufacturing ´ overhead rate labor hours = 24,000 hours ´ $20 per hour = $480,000 = 2. Direct manufacturing labor­hours Manufacturing overhead allocated 3. From the debit entry to Finished Goods T­account, Cost of jobs completed and transferred fro m WIP = $940,000 From Work­in­Process T­account, Work in process inventory = $20,000 + $380,000 + $360,000 + $480,000 – $940,000 on 12/31/2008 = $300,000 4. 5. From the credit entry to Finished Goods Control T­account, Cost of goods sold (before proration) = $900,000 4­34 6. Manufacturing overhead underallocated Debits to Manufacturing Credit to Manufacturing – Overhead Allocated Overhead Control = $540,000 – $480,000 = $60,000 underallocated = 7. a. b. Write­off to Cost of Goods Sold will increase (debit) Cost of Goods Sold by $60,000. Hence, Cost of Goods Sold = $900,000 + $60,000 = $960,000. Proration based on ending balances (before proration) in Work in Process, Finished Goods, and Cost of Goods Sold. Account balances in each account after proration follows: Proration of $60,000 Account Balance Underallocated (Before Proration) Manufacturing Overhead (2) (3) $ 300,000 (24%) 0.24 ´ $60,000 = $14,400 50,000 ( 4%) 0.04 ´ $60,000 = 2,400 900,000 (72%) 0.72 ´ $60,000 = 43,200 $1,250,000 100% $60,000 Account Balance (After Proration) (4)=(2)+(3) $ 314,400 52,400 943,200 $1,310,000 Account (1) Work in Process Finished Goods Cost of Goods Sold 8. Needham’s operating income using write­off to Cost of Goods Sold and Proration based on ending balances (before proration) fo llows: Write­off to Cost of Goods Sold Revenues Cost of goods sold Gross margin Marketing and distribution costs Operating income/(loss) $1,090,000 960,000 130,000 140,000 $ (10,000) Proration Based on Ending Balances $1,090,000 943,200 146,800 140,000 $ 6,800 9. If the purpose is to report the most accurate inventory and cost of goods sold figures, the preferred method is to prorate based on the manufacturing overhead allocated co mponent in the inventory and cost of goods sold accounts. Proration based on the balances in Work in Process, Finished Goods, and Cost of Goods Sold will equal the proration based on the manufacturing overhead allocated component if the proportions of direct costs to manufacturing overhead costs are constant in the Work in Process, Finished Goods and Cost of Goods Sold accounts. Even if this is not the case, the prorations based on Work in Process, Finished Goods, and Cost of Goods Sold will better approximate the results if actual cost rates had been used rather than the write­off to Cost of Goods Sold method. Another considerat ion in Needham’s decisio n about how to dispose of underallocated manufacturing overhead is the effects on operating inco me. The write­off to Cost of Goods Sold will lead to an operating loss. Proration based on the balances in Work in Process, Finished Goods, and Cost of Goods Sold will help Needham avoid the loss and show an operating income. The main merit of the write­off to Cost of Goods Sold method is its simplicit y. However, accuracy and the effect on operating inco me favor the preferred and reco mmended proration approach. 4­35 4­38 (40-55 min.) Overview of general ledger relationships. 1. & 3. An effect ive approach to this problem is to draw T­accounts and insert all the known figures. Then, working with T­account relat ionships, so lve 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 Work­in­Process Control 10,000 (4) 70,000 150,000 90,000 X Purchases Y 70,000 70,000 X (1) DM (2) DL (3) Overhead (a) (c) Y 305,000 310,000 320,000 5,000 3,000 23,000 Finished Goods Control 20,000 (5) 305,000 325,000 25,000 Cost of Goods Sold 300,000 (d) 305,000 X (4) Y (5) 300,000 300,000 6,000 87,000 (a) (b) (d) Manufacturing Department Overhead Control 85,000 (d) 1,000 1,000 Manufacturing Overhead Allocated 93,000 (3) (c) 90,000 3,000 Manufacturing overhead cost rate = $90,000 ÷ $150,000 = 60% Wages Payable Control (a) Various Accounts (b) 6,000 1,000 4­36 2. Adjust ing and closing entries: (a) Work­in­Process Control Manufacturing Department Overhead Control Wages Payable Control To recognize payro ll costs (b) Manufacturing Department Overhead Control Various accounts To recognize miscellaneous manufacturing overhead (c) Work­in­Process Control Manufacturing Overhead Allocated To allocate manufacturing overhead 5,000 1,000 6,000 1,000 1,000 3,000 3,000 Note: Students tend to forget entry (c) ent irely. Stress that a budgeted overhead allocat ion rate is used consistent ly throughout the year. This po int 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 product­costing system is INDIRE CT COS T P OOL } Manufac turing Overhead COS T A LLO CA T I O N B A S E } } } Direc t Manufac turing Labor Costs COS T OB J E CT: J OB Indirect Costs Direct Costs DIRE CT CO S T Direc t Materials Direc t Manufac turing Labor 3. See the answer to 1. 4­37 4­39 (30 min.) Allocation and proration of overhead. 1. Budgeted overhead rate = Budgeted overhead costs ÷ Budgeted labor costs = £1,500 ÷ £2,000 = 75% of labor cost 2. Ending work in process Job 1 £25 20 15 £60 Job 2 £15 32 24 £71 Total £ 40 52 39 £131 Direct material costs Direct labor costs Overhead (0.75 × Direct labor costs) Total costs Cost of goods sold = Beginning WIP + Manufacturing costs – Ending WIP = £0 + (£900 + £1,800 + £1,800 × 0.75) – £131 = £3,919 3. Overhead allocated = 0.75 × £1,800 = £1,350 Overallocated overhead = Actual overhead – Allocated overhead = £1,250 – £1,350 = £100 overallocated 4.a. All overallocated overhead is written off to cost of goods sold. WIP inventory remains unchanged. Dec. 31, 1762 Account Balance Account (Before Proration) (1) (2) Work­in­Process £ 131 Cost of goods sold 3,919 £4,050 4b. Write­off of £100 Overallocated overhead (3) £ 0 (100) £(100) Dec. 31, 1762 Account Balance (After Proration) (4) = (2) + (3) £ 131 3,819 £3,950 Overallocated overhead prorated based on ending balances Dec. 31, 1762 Balance (Before Proration) (2) £ 131 3,919 £4,050 Balance as a Percent of Total (3) = (2) ÷ £4,050 0.03 0.97 1.00 Proration of £100 Overallocated Overhead (4) = (3) ´ £100 £ (3) (97) £(100) Dec. 31, 1762 Balance (After Proration) (5) = (2) + (4) £ 128 3,822 £3,950 Account (1) Work­in­Process Cost of Goods Sold 5. Writ ing o ff all o f the overallocated overhead to Cost of Goods Sold (CGS) is warranted when CGS is large relative to Work­in­Process Inventory and Finished Goods Inventory and the overallocated overhead is immaterial. Both these condit ions apply in this case. Franklin & Son Print ing should write off the £100 overallocated overhead to Cost of Goods Sold account. 4­38 4­40 (20 min.) Job costing, contracting, ethics. 1. Direct manufacturing costs: Direct materials Direct manufacturing labor Indirect manufacturing costs, 150% ´ $6,000 Total manufacturing costs $25,000 6,000 $31,000 9,000 $40,000 Aerospace bills the Navy $52,000 ($40,000 ´ 130%) for 100 X7 seats or $520 ($52,000 ¸ 100) per X7 seat. 2. Direct manufacturing costs: Direct materials a Direct manufacturing labor Indirect manufacturing costs, 150% ´ $5,000 Total manufacturing costs $25,000 5,000 $30,000 7,500 $37,500 a $6,000 – $400 ($25 ´ 16) setup – $600 ($50 ´ 12) design Aerospace should have billed the Navy $48,750 ($37,500 ´ 130%) for 100 X7 seats or $487.50 ($48,750 ¸ 100) per X7 seat. 3. The problems the letter highlights (assuming it is correct) include the following: a. Costs included that should be excluded (design costs) b. Costs double­counted (setup included as both a direct cost and in an indirect cost pool) c. Possible conflict of interest in Aerospace Comfort purchasing materials fro m a family­related company Steps the Navy could undertake include the fo llowing: (i) Use only contractors with a reputation for ethical behavior as well as qualit y products or services. (ii) Issue guidelines detailing acceptable and unacceptable billing pract ices by contractors. For example, prohibit ing the use of double­counting cost allocat ion methods by contractors. (iii)Issue guidelines detailing acceptable and unacceptable procurement practices by contractors. For example, if a contractor purchases fro m a family­related company, require that the contractor obtain quotes from at least two other bidders. (iv) Emplo y auditors who aggressively mo nitor the bills submitted by contractors. (v) Ask contractors for details regarding determinat ion of costs. 4­39 4­41 (35 min.) Job costing­service industry. 1. 2. Band As I Lay Dieing Ask Me Later Total Tours in Process (TIP) June 30, 2009 Materials (1) $250 350 $600 Labor (2) $400 200 $600 Overhead Total (3) = 150% × (2) (4) $600 $1,250 300 850 $900 $2,100 Cost of Co mpleted Tours (CCT) in June 2009 Materials Labor (1) (2) $ 400 $ 700 475 700 275 400 $1,150 $1,800 Overhead (3) = 150% × (2) $1,050 1,050 600 $2,700 Total (4) $2,150 2,225 1,275 $5,650 Band Grunge Express Different Strokes Maybe Tomorrow Total a 3. Overhead allocated = 1.50 × 1,400 = $2,100 Underallocated overhead = Actual overhead – Allocated overhead = $2,500 – 2,100 = $400 underallocated a Total labor in June = $100+$300+$400+$200+$400 = $1,400 4a. Underallocated overhead is written off to CCT CIP inventory remains unchanged. June 30, 2009 Balance (Before Proration) (1) $2,100 5,650 $7,750 Proration of $400 Underallocated Overhead (2) $ 0 400 $400 June 30, 2009 Balance (After Proration) (3) = (1) + (2) $2,100 6,050 $8,150 Account CIP CCT 4b. Underallocated overhead prorated based on ending balances June 30, 2009 Balance (Before Proration) (1) $2,100 5,650 $7,750 Balance as a Percent of Total (2) = (1) ÷ $7,750 0.271 0.729 1.000 Proration of $400 Underallocated Overhead (3) = (2) ´ $400 0.271 ´ $400 =$108 0.729 ´ $400 = 292 $400 June 30, 2009 Balance (After Proration) (4) = (1) + (3) $2,208 5,942 $8,150 Account TIP CCT 4­40 4c. Underallocated overhead prorated based on June overhead in ending balances Overhead allocated June 30, 2009 in June Included in Balance June 30, 2009 (Before Proration) Balance (1) (2) a $2,100 $ 900 b 5,650 1,200 $7,750 $2,100 Overhead allocated in June Included in June 30, 2009 as a Percent of Total (3) = (2) ÷ $2,100 0.43 0.57 1.00 Proration of $400 Underallocated Overhead (4) = (3) ´ $400 0.43 ´ $400 =$172 0.57 ´ $400 = 228 $400 June 30, 2009 Balance (After Proration) (5) = (1) + (4) $2,272 5,878 $8,150 Account TIP CCT a June labor for As I Lay Dieing and Ask Me Later × 150% = ($400 + $200) × 150% = $600 × 150% = $900 June labor for Grunge Express, Different Strokes and Maybe Tomorrow × 150% = ($100 + $300 + $400) × 150% = $800 × $150 = $1,200 b 5. I would choose the method in 4c because this method results in account balances based on actual overhead allocation rates. The account balances before proration in TIP and CCT are significant and underallocated overhead is material. Furthermore, the ratio of ending balances in TIP andCCT is different from the ratio of overhead allocated to each of these accounts in June. 4­41 ...
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This note was uploaded on 10/11/2010 for the course ACCT 321 taught by Professor Cole during the Spring '10 term at University of Miami.

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