To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER JOB COSTING 4-1 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 Cost-allocation base––a 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 reason––the longer the time period, the less the influence of seasonal patterns, and The denominator reason––the longer the time period, the less the effect of variations in output levels on the allocation of fixed costs 4-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 4-9 Actual costing and normal costing differ in their use of actual or budgeted indirect cost rates: Actual Normal Costing Costing Direct-cost rates Actual rates Actual rates Indirect-cost rates 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 cost-allocation base Underallocation or overallocation of indirect (overhead) costs can arise because of (a) the Numerator reason––the actual overhead costs differ from the budgeted overhead costs, and (b) the Denominator reason––the 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 4-2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 4-16 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 4-17 (10 min) Job order costing, process costing l m n o p q r s t u Job costing Process costing Job costing Job costing Job costing Job costing Process costing Job costing Process costing Job costing (20 min.) Actual costing, normal costing, accounting for manufacturing overhead Budgete d manufactur ing overhead rate Actual manufactur ing overhead rate = Budgeted manufactur ing overhead costs Budgeted direct manufactur ing labor costs = $1,750 ,000 = 1.75 or 175% $1,000 ,000 = Actual manufactur ing overhead costs Actual direct manufactur ing labor costs $1,862 ,000 = 1.9 or 190% $980 ,000 Costs of Job 626 under actual and normal costing follow: = Actual Costing Direct materials Direct manufacturing labor costs Manufacturing overhead costs $30,000 1.90; $30,000 1.75 Total manufacturing costs of Job 626 4-3 Normal Costing $ 40,000 30,000 $ 40,000 30,000 57,000 $127,000 52,500 $122,500 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Total manufacturing overhead allocated under normal costing = Actual manufacturing labor costs = $980,000 Budgeted overhead rate 1.75 = $1,715,000 Underallocated manufacturing = overhead Actual manufacturing – Manufacturing overhead costs overhead allocated = $1,862,000 $1,715,000 = $147,000 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 4-18 (20 -30 min.) Job costing, normal and actual costing Budgeted indirectcost rate = Budgeted indirect costs $8,000,000 = Budgeted direct labor-hours 160,000 hours = $50 per direct labor-hour Actual indirectcost rate = $6,888,000 Actual indirect costs = 164,000 hours Actual direct labor-hours = $42 per direct labor-hour These rates differ because both the numerator and the denominator in the two calculations are different—one based on budgeted numbers and the other based on actual numbers 2a Normal costing Direct costs Direct materials Direct labor Indirect costs Assembly support ($50 Total costs 900; $50 4-4 1,010) Laguna Model Mission Model $106,450 36,276 142,726 $127,604 41,410 169,014 45,000 $187,726 50,500 $219,514 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 2b Actual costing Direct costs Direct materials Direct labor Indirect costs Assembly support ($42 Total costs 900; $42 1,010) $106,450 36,276 142,726 $127,604 41,410 169,014 37,800 $180,526 42,420 $211,434 Normal costing enables Anderson to report a job cost as soon as the job is completed, assuming that both the direct materials and direct labor costs are known at the time of use Once the 900 direct labor-hours are known for the Laguna Model (June 2007), Anderson can compute the $187,726 cost figure using normal costing Anderson can use this information 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 until the December 2007 year-end to compute the $180,526 cost of the Laguna Model using actual costing Although not required, the following overview diagram summarizes Anderson Construction’s job-costing system INDIRECT COST POOL Assembly Support COST ALLOCATION BASE Direct Labor-Hours COST OBJECT: RESIDENTIAL HOME Indirect Costs Direct Costs DIRECT COSTS Direct Materials 4-5 Direct Manufacturing Labor To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 4-19 (10 min.) Budgeted manufacturing overhead rate, allocated manufacturing overhead Budgeted manufacturing overhead rate = = Budgeted manufacturing overhead Budgeted machine hours $2,850, 000 = $15/machine-hour 190, 000 machine-hours Manufacturing overhead allocated = Actual machine-hours × Budgeted manufacturing overhead rate = 195,000 × $15 = $2,925,000 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 4-6 $2,925,000 2,910,000 $ 15,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 4-20 (20-30 min.) Job costing, accounting for manufacturing overhead, budgeted rates An overview of the product costing system is INDIRECT COST POOL COST ALLOCATION BASE Machining Department Manufacturing Overhead Assembly Department Manufacturing Overhead Machine-Hours Indirect Costs COST OBJECT: PRODUCT DIRECT COST Direct Manuf Labor Cost Direct Costs Direct Manufacturing Labor Direct Materials Budgeted manufacturing overhead divided by allocation base: Machining overhead Assembly overhead: $1,800 ,000 = $36 per machine-hour 50,000 $3,600 ,000 = 180% of direct manuf labor costs $2,000 ,000 Machining department, 2,000 hours $36 Assembly department, 180% $15,000 Total manufacturing overhead allocated to Job 494 $72,000 27,000 $99,000 Machining Assembly $2,100,000 $ 3,700,000 Actual manufacturing overhead Manufacturing overhead allocated, 55,000 $36 180% $2,200,000 Underallocated (Overallocated) 1,980,000 — $ 120,000 4-7 — 3,960,000 $ (260,000) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 4-21 (20 25 min.) Job costing, consulting firm Budgeted indirect-cost rate = $13,000,000 ÷ $5,000,000 = 260% of professional labor costs INDIRECT COST POOL Consulting Consulting Support Support COST ALLOCATION BASE COST OBJECT: JOB FOR CONSULTING CLIENT Professional Professional Labor LaborCosts Costs Indirect Costs Direct Costs DIRECT COSTS Professional Labor At the budgeted revenues of $20,000,000, Taylor’s operating income of $2,000,000 equals 10% of revenues Markup rate = $20,000,000 ÷ $5,000,000 = 400% of direct professional labor costs 4-8 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Budgeted costs Direct costs: Director, $200 $ 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 $9,000 = $36,000 for the Red Rooster job Bid price to earn target operating income-to-revenue margin of 10% can also be calculated as follows: or, 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 Profit (0.40 9,000) 3,600 Bid price $36,000 4-9 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 4-22 (15–20 min.) Service industry, time period used to compute indirect cost rates Direct labor costs Variable costs as percentage of direct labor costs Variable overhead costs (Percentage direct labor costs) Fixed overhead costs Total overhead costs Total overhead costs as a percentage of direct labor costs Jan–March $400,000 April–June $280,000 90% 60% $360,000 300,000 $660,000 165% Job 332 Direct materials Direct labor costs Overhead allocated (variable + fixed) (165%; 180%; 170% of $6,000) Full cost of Job 332 July–Sept $250,000 60% $168,000 300,000 $468,000 $150,000 300,000 $450,000 167% 180% Oct–Dec $270,000 Total $1,200,000 60% $162,000 300,000 $462,000 $ 840,000 1,200,000 $2,040,000 171% 170% 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 (b) The full cost of Job 332, using the budgeted overhead rate of 180% for July–September, is $26,800 (c) The full cost of Job 332, using the annual budgeted overhead rate of 170%, is $26,200 Budgeted fixed overhead rate based on annual fixed overhead costs and annual direct labor costs = $1,200,000 $1,200,000 = 100% Job 332 Direct materials Direct labor costs Variable overhead allocated (90%; 60%; of $6,000) Fixed overhead allocated (100% of $6,000) Full cost of Job 332 Budgeted Variable Overhead Rate Used January–March July–Sept rate rate $10,000 $10,000 6,000 6,000 4-10 5,400 3,600 6,000 $27,400 6,000 $25,600 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 4-35 (40 min.) Proration of overhead, two indirect-cost pools Machining Department Total actual machine-hours = 67,500 + 4,500 + 18,000 = 90,000 machine-hours Manufacturing, overhead allocated = 90,000 × $60 = $5,400,000 Manufacturing overhead, costs underallocated – Manufacturing, overhead allocated = Actual manufacturing, overhead costs = $6,200,000 – $5,400,000 = $800,000 Assembly Department Total actual direct manufacturing labor-hours = 90,000 + 4,800 + 25,200 = 120,000 direct manufacturing labor-hours Manufacturing overhead allocated = 120,000 × $40 = $4,800,000 Manufacturing overhead, costs overallocated Actual manufacturing, overhead costs = Manufacturing, overhead allocated = $4,800,000 – $4,700,000 = $100,000 1a Write-off to Cost of Goods Sold leads to (i) higher Cost of Goods Sold by $800,000 as a result of underallocation of manufacturing overhead in the Machining Department; and (ii) lower Cost of Goods Sold by $100,000 as a result of overallocation of manufacturing overhead in the Assembly Department Hence, Cost of Goods Sold = $16,000,000 + $800,000 – $100,000 = $16,700,000 4-29 – To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 1b Proration based on ending balances (before proration) in Work in Process, Finished Goods, and Cost of Goods Sold Account balance in each account after proration follows Account Balance (Before Proration) Account (1) Work in Process $ 3,250,000 (16.25%) Finished Goods 750,000 (3.75%) Cost of Goods Sold 16,000,000 (80.00%) $20,000,000 (100.00%) Proration of $800,000 Underallocated Overhead in Manufacturing Dept (2) 0.1625 × $800,000 =$130,000 0.0375 × $800,000 = 30,000 0.8000 × $800,000 = 640,000 $800,000 4-30 Proration of $(100,000) Overallocated Overhead in Assembly Dept (3) 0.1625 × ($100,000) =$ (16,250) 0.0375 × ($100,000) = (3,750) 0.8000 × ($100,000) = (80,000) $(100,000) Account Balance (After Proration) (4) = (1) + (2) + (3) $ 3,363,750 776,250 16,560,000 $20,700,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 1c Proration based on the overhead allocated (before proration) in the ending balances of Cost of Goods Sold, Finished Goods, and Work in Process for each department follows Machining Department Overhead Costs Allocated to Each Account in Machining Department Proration of $800,000 Using Budgeted Machine-Hour Rate × Underallocated Machining Actual Machine-Hours Department Overhead $60 × 18,000 = $1,080,000 (20%) 0.20 × $800,000 = $160,000 $60 × 4,500 = 270,000 ( 5%) 0.05 × $800,000 = 40,000 $60 × 67,500 = 4,050,000 (75%) 0.75 × $800,000 = 600,000 $5,400,000 100% $800,000 Account Work in process Finished goods Cost of goods sold Assembly Department Account Work in process Finished goods Cost of goods sold Overhead Costs Allocated to Each Account in Assembly Department Using Budgeted Direct Manuf Labor-Hour Rate × Actual Direct Manuf Labor-Hours $40 × 25,200 = $1,008,000 $40 × 4,800 = 192,000 $40 × 90,000 = 3,600,000 $4,800,000 (21%) ( 4%) (75%) 100% Proration of ($100,000) Overallocated Assembly Department Overhead 0.21 × ($100,000) = $ (21,000) 0.04 × ($100,000) = (4,000) 0.75 × ($100,000) = (75,000) $(100,000) Account balances in each account after proration of underallocated Machining Department costs and overallocated Assembly Department costs follow Account Balance (Before Account Proration) (1) Work in process $ 3,250,000 Finished goods 750,000 Cost of goods sold 16,000,000 $20,000,000 Proration of $800,000 Underallocated Machining Department Overhead (calculated earlier) (2) $160,000 40,000 600,000 $800,000 Proration of ($100,000) Overallocated Assembly Department Overhead (calculated Account Balance earlier) (After Proration) (3) (4) = (1) + (2) + (3) $ (21,000) $ 3,389,000 (4,000) 786,000 (75,000) 16,525,000 $(100,000) $20,700,000 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 amount in the Inventory and Cost of Goods Sold accounts (as in requirement 1c) Note, however, that prorating based on ending balances in Work in Process, Finished Goods, and Cost of Goods Sold (as in requirement 1b) yields a close approximation to the more accurate proration in requirement 1c Also note that the write-off to Cost of Goods Sold method (as in requirement 1a) results in account balances in Work in Process, Finished Goods, and Cost of Goods sold that are not very different from the most accurate method Furthermore, the write-off to Cost of Goods Sold method is simpler than the other methods Depending on the objectives of proration, a manager may prefer any one of the methods over the other two 4-31 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 4-36 (35 min.) General ledger relationships, under- and overallocation The solution assumes all materials used are direct materials A summary of the T-accounts for Needham Company before adjusting for under- or overallocation of overhead follows: Direct Materials Control 1-1-2006 Purchases 12-31-2006 Work-in-Process Control 30,000 Material used for 1-1-2006 400,000 manufacturing 380,000 Direct materials 50,000 Direct manuf Labor Manuf overhead Allocated 12-31-2006 Finished Goods Control 1-1-2006 10,000 Cost of goods Transferred in sold from WIP 940,000 12-31-2006 50,000 20,000 Transferred to 380,000 finished goods 940,000 360,000 480,000 300,000 Cost of Goods Sold Finished goods 900,000 Sold Manufacturing Overhead Control 900,000 Manufacturing Overhead Allocated Manufacturing Overhead Costs 540,000 Manufacturing overhead allocated to work in process From Direct Materials Control T-account, Direct materials issued to production = $380,000 that appears as a credit Direct manufacturing labor-hours Manufacturing overhead allocated Direct manufacturing labor costs Direct manufacturing wage rate per hour $360,000 = = 24,000 hours $15 per hour Manufacturing = Direct manufacturing overhead rate labor hours = 24,000 hours $20 = $480,000 = From the debit entry to Finished Goods T-account, Cost of jobs completed and transferred from WIP = $940,000 From Work-in-Process T-account, Work in process inventory on 12/31/2006 480,000 = $20,000 + $380,000 + $360,000 + $480,000 – $940,000 = $300,000 From the credit entry to Finished Goods Control T-account, Cost of goods sold (before proration) = $900,000 4-32 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Manufacturing overhead underallocated a b Debits to Manufacturing Credit to Manufacturing – Overhead Allocated Overhead Control = $540,000 – $480,000 = $60,000 underallocated = Write-off 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: Account (1) Work in Process Finished Goods Cost of Goods Sold Proration of $60,000 Account Balance Underallocated (Before Proration) Manufacturing Overhead (2) (3) $ 300,000 0.24 $60,000 = $14,400 (24%) 50,000 ( 0.04 $60,000 = 2,400 4%) 900,000 0.72 $60,000 = 43,200 (72%) $1,250,000 $60,000 100% Account Balance (After Proration) (4)=(2)+(3) $ 314,400 52,400 943,200 $1,310,000 Needham’s operating income using write-off to Cost of Goods Sold and Proration based on ending balances (before proration) follows: Write-off 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 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 component 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 write-off to Cost of Goods Sold method Another consideration in Needham’s decision about how to dispose of underallocated manufacturing overhead is the effects on operating income The write-off 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 4-33 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The main merit of the write-off to Cost of Goods Sold method is its simplicity However, accuracy and the effect on operating income favor the preferred and recommended proration approach 4-34 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 4-37 (40 55 min.) Overview of general ledger relationships & 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) (a) (b) Manufacturing Department Overhead Control 85,000 (d) 1,000 1,000 X (4) (d) Manufacturing Overhead Allocated 93,000 (3) (c) 70,000 70,000 305,000 305,000 300,000 300,000 6,000 87,000 90,000 3,000 Manufacturing overhead cost rate = $90,000 ÷ $150,000 = 60% Wages Payable Control (a) 6,000 Various Accounts (b) 1,000 4-35 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 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 Manufacturing Department Overhead Control Cost of Goods Sold To close manufacturing overhead accounts and overallocated overhead to cost of goods sold 93,000 An overview of the product-costing system is INDIRECT COST POOL Manufacturing Overhead COST ALLOCATION BASE Direct Manufacturing Labor Costs Indirect Costs COST OBJECT: JOB DIRECT COST Direct Costs Direct Materials See the answer to 4-36 Direct Manufacturing Labor 87,000 6,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 4-38 (15 min.) General ledger relationships, under- and overallocation, service industry 1 Jobs-in-Process Control Cash Control 150,000 150,000 Direct Professional Labor Control Cash Control 1,500,000 1,500,000 Jobs-in-Process Control Direct Professional Labor Costs Charged to Jobs 1,450,000 1,450,000 Engineering Support Overhead Control Cash Control 1,140,000 1,140,000 Jobs-in-Process Control Engineering Support Overhead Allocated 1,160,000 1,160,000 Cost of Jobs Billed Jobs-in-Process Control 2,500,000 2,500,000 Accounts Receivable Revenues 3,500,000 3,500,000 Direct Professional Labor Costs Charged to Jobs Engineering Support Overhead Allocated Cost of Jobs Billed Direct Professional Labor Control Engineering Support Overhead Control Revenues Cost of Jobs Billed ($2,500,000 + $30,000) Gross Margin Gross Margin percentage = $970,000 $3,500,000 = 4-37 1,450,000 1,160,000 30,000 1,500,000 1,140,000 $3,500,000 2,530,000 $ 970,000 27.7% To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 4-39 (30 min.) Allocation and proration of manufacturing overhead Although not required, an overview of the product costing system follows: INDIRECT COST POOL Manufacturing Overhead COST ALLOCATION BASE Direct Manufacturing Labor Costs Indirect Costs COST COSTOBJECT: OBJECT: PRODUCT JOB DIRECT COST Direct Costs Direct Manufacturing Labor Direct Materials $252,000 = $0.60 per direct manufacturing labor dollar $420,000 The Work-in-Process inventory breakdown at the end of 2007 for Jobs 1768B and 1819C is: Direct materials (given) Direct manufacturing labor (given) Manufacturing overhead allocated, 60% DML$ Total manufacturing costs Job 1768B $22,000 11,000 Job 1819C $ 42,000 39,000 Total $ 64,000 50,000 6,600 $39,600 23,400 $104,400 30,000 $144,000 The finished goods inventory at the end of 2007 is $156,000 (given) A direct manufacturing labor cost of $40,000 implies a budgeted manufacturing overhead costs component of $24,000 The COGS is $1,600,000 (given) The total direct manufacturing labor of $400,000 implies direct manufacturing labor in COGS of $310,000 ($400,000 – $11,000 – $39,000 – $40,000) Hence, manufacturing overhead allocated in COGS is 60% $310,000 = $186,000 Direct materials in COGS is $1,104,000 ($1,600,000 – $310,000 – $186,000) 4-38 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The summary account information is as follows: Work in process Finished goods Cost of goods sold Total Direct Manufacturing Direct Manufacturing Overhead Materials Labor Allocated $ 64,000 $ 50,000 $ 30,000 92,000 40,000 24,000 1,104,000 310,000 186,000 $1,260,000 $400,000 $240,000 Total $ 144,000 156,000 1,600,000 $1,900,000 Overallocated,manufacturing,overhead = Manufacturing overhead,incurred = $240,000 – $186,840 = $53,160 Manufacturing overhead,allocated – 3a Account Work in process Finished goods Cost of goods sold Total Proration of $53,160 Account Overallocated Balance Manuf (Before Proration) Overhead (1) (2) $ 144,000 (144/1,900 = 7.58%) $( 4,030) 156,000 (156/1,900 = 8.21%) ( 4,364) 1,600,000 (1,600/1,900 = 84.21%) (44,766) $1,900,000 100.00% $(53,160) End-of-Year Balance (After Proration) (3)=(1)+(2) $ 139,970 151,636 1,555,234 $1,846,840 3b Account Work in process Finished goods Cost of goods sold Total Account Balance (Before Proration) $ 144,000 156,000 1,600,000 $1,900,000 Allocated Manuf Overhead in Account Balance (Before Proration) $ 30,000(12.5%) 24,000(10.0%) 186,000(77.5%) $240,000100.0% 4-39 Proration of $53,160 Overallocated Manufacturing Overhead $( 6,645) ( 5,316) (41,199) $(53,160) Account Balance (After Proration) $ 137,355 150,684 1,558,801 $1,846,840 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The COGS amount when the overallocated overhead is immediately written off to COGS is $1,546,840 (see below) compared to $1,555,234 in 3(a) and $1,558,801 in 3(b) Thus, with a lower COGS, there is a higher operating income Account Work in process Finished goods Cost of goods sold Total Account Write-off to Balance COGS of $53,160 (Before Proration) Overallocated $ 144,000 156,000 1,600,000 $1,900,000 $ 0 (53,160) $(53,160) Account Balance (After Proration) $ 144,000 156,000 1,546,840 $1,846,840 The adjusted allocation rate approach would adjust the cost of job 1819C for the amount of manufacturing overhead overallocated to it For 2007, manufacturing overhead is overallocated to each job by 22.15% ($53,160 $240,000) Hence, the cost of job 1819C would be decreased by 22.15% Manufacturing overhead allocated to 1819C = 22.15% $23,400 = $5,183.10) Cost of Job 1819C would then appear as follows: Direct materials Direct manufacturing labor Manufacturing overhead allocated Adjustment for manufacturing overhead overallocated Cost of job after adjustment for overallocation 4-40 $42,000.00 39,000.00 23,400.00 (5,183.10) $99,216.90 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 4-40 (20 min.) Job costing, contracting, ethics Direct manufacturing costs: Direct materials Direct manufacturing labor Indirect manufacturing costs, 150% $6,000 Total manufacturing costs $25,000 6,000 9,000 $40,000 Aerospace bills the Navy $52,000 ($40,000 100) per X7 seat a Direct manufacturing costs: Direct materials a Direct manufacturing labor Indirect manufacturing costs, 150% $5,000 Total manufacturing costs $6,000 – $400 ($25 16) setup – $600 ($50 130%) for 100 X7 seats or $520 ($52,000 $25,000 5,000 $30,000 7,500 $37,500 12) design Aerospace should have billed the Navy $48,750 ($37,500 ($48,750 100) per X7 seat $31,000 130%) for 100 X7 seats or $487.50 The problems the letter highlights (assuming it is correct) include the following: a Costs included that should be excluded (design costs) b Costs double-counted (setup included as both a direct cost and in an indirect cost pool) c Possible conflict of interest in Aerospace Comfort purchasing materials from a family-related company Steps the Navy could undertake include the following: (i) Use only contractors with a reputation for ethical behavior as well as quality products or services (ii) Issue guidelines detailing acceptable and unacceptable billing practices by contractors For example, prohibiting the use of double-counting cost allocation methods by contractors (iii)Issue guidelines detailing acceptable and unacceptable procurement practices by contractors For example, if a contractor purchases from a family-related company, require that the contractor obtain quotes from at least two other bidders (iv) Employ auditors who aggressively monitor the bills submitted by contractors (v) Ask contractors for details regarding determination of costs 4-41 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 4-41 (25 min.) Service industry, job costing, accounting for overhead costs, budgeted rates Examples of direct costs for Jefferson, a painting contractor: costs of paints used for a job, costs of painters’ labor, and costs of any losses that occur at a job that Jefferson has to cover Examples of indirect costs: insurance costs, cost of gas for the trucks, cost of maintenance for trucks and painting equipment, cost of painters’ uniforms, and depreciation on equipment Overhead allocated to Job A21 as of 2/1/2007 = 0.80 × Actual direct labor costs of Job A21 = 0.80 × $50,000 = $40,000 Overhead allocated to Job A24 as of 2/28/2007 = 0.80 × Actual direct labor costs of Job A24 = 0.80 × $40,000 = $32,000 Overhead allocated,to jobs in February = 0.80 × Actual direct labor costs in February = 0.80 × $120,000 = $96,000 Actual overhead costs incurred in February = $102,000 Underallocated overhead costs = $102,000 – $96,000 = $6,000 Cost of Jobs Billed for February 2007 Jobs-in-Process Control balance 1/31/2007 Manufacturing costs in February: Direct materials Direct labor Overhead costs allocated Manufacturing costs to account for Jobs-in-Process Control balance 2/28/2007 Cost of Jobs Billed unadjusted $120,000* $150,000 120,000 96,000 Adjustment for underallocated overhead costs in February: Actual overhead costs $102,000 Allocated overhead costs 96,000 Cost of Jobs Billed adjusted *Cost of Job A21 = Direct materials + Direct labor + Overhead allocated = $30,000 + $50,000 + $40,000 = $120,000 †Cost of Job A24 = Direct materials + Direct labor + Overhead allocated = $20,000 + $40,000 + $32,000 = $92,000 4-42 366,000 486,000 92,000† 394,000 6,000 $400,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Video Case The video case can be discussed using only the case writeup in the chapter Alternatively, instructors can have students view the videotape of the company that is the subject of the case The videotape can be obtained by contacting your Prentice Hall representative The case questions challenge students to apply the concepts learned in the chapter to a specific business situation WHEELED COACH: Job Costing Step 1: Identify the job that is the chosen cost object: ambulances Step 2: Identify the direct costs of each job: direct labor (workers performing assembly tasks) and direct materials (steel, aluminum, wood products, upholstery, glass, truck chassis, wiring) Step 3: Choose cost-allocation bases for indirect cost allocation: Indirect costs include plant supervision, engineering, plant lease and utilities, and maintenance Wheeled Coach’s choices for a cost-allocation base are: direct labor hours, direct labor dollars, machine-hours, direct materials dollars, or units of production Wheeled Coach uses direct-labor hours Step 4: Identify indirect costs associated with each cost-allocation base: With a single allocation base, direct-labor hours, a single cost pool called manufacturing overhead costs can be used to represent indirect costs The amount given in the problem is $21 million Step 5: Compute the rate per unit of each cost-allocation based used to allocate indirect costs to the job: This is done by dividing total overhead costs in the pool (step 4) by the total quantity of the allocation base (step 3) For Wheeled Coach, $21 million divided by 700,000 actual direct labor hours equals $30 per direct-labor hour Step 6: Compute the indirect costs allocated to the job: Multiply the actual quantity of directlabor hours used for each job by the rate from step For Wheeled Coach, Job 06-MX24D used 1,775 direct labor hours multiplied by $30 per direct-labor hours yields $52,500 Step 7: Compute the total cost of the job by adding all direct and indirect costs assigned to the job For Wheeled Coach Job 06-MX24D: Direct labor: Direct materials: Manufacturing overhead: Total: $ 22,750 $ 25,200 $ 52,500 $100,450 Source documents such as labor time records (e.g., timecards), job-cost records (or jobcost sheets), and materials-requisition records would all be found in this typical job-costing manufacturing environment 4-43 ... costing Job costing (but some process costing) Process costing Process costing Job costing 4-17 (10 min) Job order costing, process costing l m n o p q r s t u Job costing Process costing Job costing... Process costing Job costing Job costing Job costing Job costing Process costing Job costing Process costing Job costing (20 min.) Actual costing, normal costing, accounting for manufacturing overhead... ebook, solutions and test bank, visit http://downloadslide.blogspot.com 4-16 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