CHAPTER 4 JOB COSTING 4-16 (10 min) Job order costing, process costing. a. Job costing l. Job costing b. Process costing m. Process costing c. Job costing n. Job costing d. Process costing o. Job costing e. Job costing p. Job costing f. Process costing q. Job costing g. Job costing r. Process costing h. Job costing (but some process costing)s. Job costing i. Process costing t. Process costing j. Process costing u. Job costing k. Job costing 4-17 (20 min.) Actual costing, normal costing, accounting for manufacturing overhead. 1. = = = 1.80 or 185% = = = 1.9 or 190% 2. Costs of Job 626 under actual and normal costing follow: Actual Normal Costing Costing 4-1
Transcript
CHAPTER 4JOB COSTING
4-16 (10 min) Job order costing, process costing.
a. Job costing l. Job costingb. Process costing m. Process costingc. Job costing n. Job costingd. Process costing o. Job costinge. Job costing p. Job costingf. Process costing q. Job costingg. Job costing r. Process costingh. Job costing (but some process costing)s. Job costingi. Process costing t. Process costingj. Process costing u. Job costingk. Job costing
4-17 (20 min.) Actual costing, normal costing, accounting for manufacturing overhead.
1. =
= = 1.80 or 185%
=
= = 1.9 or 190%
2. Costs of Job 626 under actual and normal costing follow:
There is no under- or overallocated overhead under actualcosting because overhead is allocated under actual costing bymultiplying actual manufacturing labor costs and the actualmanufacturing overhead rate. This, of course equals the actualmanufacturing overhead costs. All actual overhead costs areallocated to products. Hence, there is no under- oroverallocatead overhead.
4-18 (20 -30 min.) Job costing, normal and actual costing.
1. = =
= $50 per direct labor-hour
= =
= $42 per direct labor-hour
These rates differ because both the numerator and the denominatorin the two calculations are different—one based on budgetednumbers and the other based on actual numbers.
2a. Laguna Model
Mission Model
4-3
Normal costingDirect costs
Direct materialsDirect labor
Indirect costsAssembly support ($50 900; $50 1,010)
Total costs
$106,450
36,276
142,726
45,000 $187,72
6
$127,604
41,410
169,014
50,500 $219,51
4 2b. Actual costing
Direct costsDirect materialsDirect labor
Indirect costsAssembly support ($42 900; $42 1,010)
Total costs
$106,450
36,276
142,726
37,800 $180,52
6
$127,604
41,410
169,014
42,420 $211,43
4
3. Normal costing enables Anderson to report a job cost as soonas the job is completed, assuming that both the direct materialsand direct labor costs are known at the time of use. Once the 900direct labor-hours are known for the Laguna Model (June 2007),Anderson can compute the $187,726 cost figure using normalcosting. Anderson can use this information to manage the costs ofthe Laguna Model job as well as to bid on similar jobs later inthe year. In contrast, Anderson has to wait until the December2007 year-end to compute the $180,526 cost of the Laguna Modelusing actual costing.
Although not required, the following overview diagramsummarizes Anderson Construction’s job-costing system.
As calculated in requirement 2, the bid price to earn a 10%income-to-revenue margin is 400% of direct professional costs.Therefore, Taylor should bid 4 $9,000 = $36,000 for the RedRooster job.
Bid price to earn target operating income-to-revenue marginof 10% can also be calculated as follows:
Let R = revenue to earn target income R – 0.10R = $32,4000.90R = $32,400R = $32,400 ÷ 0.90 = $36,000
or, Direct costs $ 9,000 Indirect costs 23,400 Operating income 3,600 Bid price $36,000
4-9
4-22 (15–20 min.) Service industry, time period used to computeindirect cost rates.
1.
Jan–MarchApril–June
July–Sept Oct–Dec Total
Direct labor costs $400,000 $280,000 $250,000 $270,000 $1,200,000Variable overhead
costs as a percentage of direct labor costs
90%
60%
60%
60%
Variable overhead costs (Percentage
direct labor costs) $360,000 $168,000 $150,000 $162,000
$840,000
Fixed overhead costs 300,000
300,000
300,000 300,000
1,200,000
Total overhead costs $660,000 $468,000 $450,000 $462,000 $2,040,000Total overhead costs as a percentage of direct labor costs
165%
167%
180%
171%
170%
Budgeted Overhead Rate Used
Job 332Jan–March
RateJuly–Sept
Rate
Average YearlyRate
Direct materials $10,000 $10,000 $10,000Direct labor costs 6,000 6,000 6,000Overhead allocated (variable + fixed) (165%; 180%; 170% of $6,000) 9,900 10,800 10,200Full cost of Job 332 $25,900 $26,800 $26,200
(a) The full cost of Job 332, using the budgeted overhead rateof 165% for January–March, is $25,900.
(b) The full cost of Job 332, using the budgeted overhead rate
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of 180% for July–September, is $26,800.
(c) The full cost of Job 332, using the annual budgeted overheadrate of 170%, is $26,200.
2.Budgeted fixed overhead rate based on annual fixed overhead costs and annual direct labor costs = $1,200,000 $1,200,000 = 100%
Budgeted Variable Overhead Rate Used
Job 332January–March
rateJuly–Sept
rateDirect materials $10,000 $10,000Direct labor costs 6,000 6,000Variable overhead allocated (90%; 60%; of $6,000) 5,400 3,600Fixed overhead allocated (100% of $6,000) 6,000 6,000Full cost of Job 332 $27,400 $25,600
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(a) The full cost of Job 332, using the budgeted variableoverhead rate of 90% for January–March and an annual fixedoverhead rate of 100%, is $27,400.
(b) The full cost of Job 332, using the budgeted variableoverhead rate of 60% for July–September and an annual fixedoverhead rate of 100%, is $25,600.
3. If Printers, Inc. sets prices at a markup of costs, thenprices based on costs calculated as in Requirement 2 (rather thanas in Requirement 1) would be more effective in deterring clientsfrom sending in last-minute, congestion-causing orders in theJanuary–March time frame. In this calculation, more variablemanufacturing overhead costs are allocated to jobs in the firstquarter, reflecting the larger costs of that quarter caused byhigher overtime and facility and machine maintenance. This methodbetter captures the cost of congestion during the first quarter.
4-23 (10–15 min.) Accounting for manufacturing overhead.
1. Budgeted manufacturing overhead rate=
= $30 per machine-hour
2. Work-in-Process Control 7,350,000 Manufacturing Overhead Allocated 7,350,000(245,000 machine-hours $30 per machine-hour = $7,350,000)
3. $7,350,000– $7,300,000 = $50,000 overallocated, an insignificant amount of actual manufacturing overhead costs $50,000 ÷ $7,300,000 = 0.66%.
Manufacturing Overhead Allocated7,350,000 Manufacturing Department Overhead Control7,300,000 Cost of Goods Sold 50,000
4-12
4-24 (3545 min.) Job costing, journal entries.
Some instructors may also want to assign Exercise 4-25. Itdemonstrates the relationships of the general ledger to theunderlying subsidiary ledgers and source documents.
1. An overview of the product costing system is:
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2. & 3.This answer assumes COGS given of $4,020 does not include thewriteoff of overallocated manufacturing overhead.
2. (1) Materials Control Accounts Payable Control
800800
(2) Work-in-Process Control Materials Control
710 710
(3) Manufacturing Overhead Control Materials Control
100 100
(4) Work-in-Process ControlManufacturing Overhead Control Wages Payable Control
1,300900
2,200(5) Manufacturing Overhead Control
Accumulated Depreciation––buildings and
manufacturing equipment
400
400
(6) Manufacturing Overhead Control Miscellaneous accounts
550 550
(7) Work-in-Process Control Manufacturing Overhead
Allocated (1.60 $1,300 = $2,080)
2,0802,080
(8) Finished Goods Control Work-in-Process Control
ii. Work in Process Control a 122,000Direct Materials Control 122,000
Source Document: Material Requisition Records, Job Cost RecordSubsidiary Ledger: Direct Materials Record, Work-in-Process Inventory, Records by Jobs
iii. Work in Process Control 80,000Manufacturing Overhead Control 54,500
Wages Payable Control 134,500Source Document: Labor Time Records, Job Cost RecordsSubsidiary Ledger:, Manufacturing Overhead Records, Employee Labor Records, Work-in-Process Inventory Records by Jobs
iv. Manufacturing Overhead Control 129,500Salaries Payable Control 20,000Accounts Payable Control 9,500Accumulated Depreciation Control
30,000Rent Payable Control
70,000Source Document: Depreciation Schedule, Rent Schedule, Maintenance wages due, Invoices for miscellaneous factory overhead itemsSubsidiary Ledger: Manufacturing Overhead Records
v. Work in Process Control 200,000Manufacturing Overhead Allocated
200,000($80,000 $2.50)
Source Document: Labor Time Records, Job Cost RecordSubsidiary Ledger: Work-in-Process Inventory Records by Jobs
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vi. Finished Goods Control b 387,000Work in Process Control 387,000
Source Document: Job Cost Record, Completed Job Cost RecordSubsidiary Ledger: Work-in-Process Inventory Records by Jobs, Finished Goods Inventory Records by Jobs
vii. Cost of Goods Sold c 432,000Finished Goods Control 432,000
Source Document: Sales Invoice, Completed Job Cost RecordSubsidiary Ledger: Finished Goods Inventory Records by Jobs
viii. Manufacturing Overhead Allocated 200,000Manufacturing Overhead Control
184,000Cost of Goods Sold 16,000
Source Document: Prior Journal Entries
ix. Administrative Expenses 7,000Marketing Expenses 120,000
Salaries Payable Control 30,000Accounts Payable Control 90,000Accumulated Depreciation, Office Equipment
Manufacturing Overhead Allocated(8) To close 200,000 (5) Manuf. overhead
allocated200,00
0Bal. 0
4-19
4-26 (45 min.) Job costing, journal entries.
Some instructors may wish to assign Problem 4-24. It demonstratesthe relationships of journal entries, general ledger, subsidiaryledgers, and source documents.
1. An overview of the product-costing system is
2. Amounts in millions.
(1) Materials ControlAccounts Payable Control
150150
(2) Work-in-Process ControlMaterials Control
145145
(3) Manufacturing Department Overhead Control
Materials Control
10 10
(4) Work-in-Process ControlWages Payable Control
90 90
(5) Manufacturing Department Overhead Control
Wages Payable Control
30 30
(6) Manufacturing Department Overhead Control
Accumulated Depreciation
19 19
(7) Manufacturing Department Overhead Control
Various liabilities
9
9
4-20
M anufacturing Overhead
M achine-Hours
Indirect CostsDirect Costs
DirectM aterials
DirectM anuf. Labor
INDIRECTCOSTPOOL
COSTALLOCATION
BASE
COST OBJECTPRODUCT
DIRECTCOSTS
(8) Work-in-Process ControlManufacturing Overhead
Allocated
63 63
(9) Finished Goods ControlWork-in-Process Control
294294
(10a) Cost of Goods SoldFinished Goods Control
292292
(10b) Accounts Receivable Control (orCash )
Revenues
400400
4-21
The posting of entries to T-accounts is as follows:
Materials Control Work-in-Process ControlBal. 12(1) 150
(2) 145(3) 10
Bal. 2(2) 145(4) 90(8) 63
(9) 294
Bal. 6
Finished Goods Control Cost of Goods SoldBal. 6(9) 294
(10a) 292 (10a) 292(11) 5
Manufacturing DepartmentOverhead Control Manufacturing Overhead
Allocated(3) 10(5) 30(6) 19(7) 9
(11) 68 (11) 63 (8) 63
Accounts Payable Control Wages Payable Control(1) 150 (4) 90
(5) 30
Accumulated Depreciation Various Liabilities(6) 19 (7) 9
Accounts ReceivableControl
Revenues
(10b) 400 (10b) 400
The ending balance of Work-in-Process Control is $6.
3. (11) Manufacturing Overhead Allocated 63Cost of Goods Sold 5 Manufacturing Department Overhead Control 68
4-22
Entry posted to T-accounts in Requirement 2.
4-23
4-27 (15 min.) Job costing, unit cost, ending work in progress.
1. Direct manufacturing labor rate per hour $25 Manufacturing overhead costallocated per manufacturing labor-hour $20 Job M1 Job M2Direct manufacturing labor costs $275,000
$200,000
Direct manufacturing labor hours ($275,000 $25; $200,000 $25) 11,000
2.Number of pipes produced for Job M1 1,500 Cost per pipe ($570,000 1,500) $380
3. Finished Goods Control 570,000Work-in-Process Control 570,000
4-24
4. Raymond Company began May 2009 with no work-in-processinventory. During May, it started and finished M1. It alsostarted M2, which is still in work-in-process inventory at theend of May. M2’s manufacturing costs up to this point, $410,000,remain as a debit balance in the Work-in-Process Inventoryaccount at the end of May 2009.
4-25
4-28 (2030 min.) Job costing; actual, normal, and variationfrom normal costing.
1. Actual direct cost rate for professional labor= $58 perprofessional labor-hour
Actual indirect cost rate = = $48 per professional
labor-hour
= = $60 per professional labor-
hour
Budgeted indirect cost rate = = $45 per
professional labor-hour
(a)ActualCosting
(b)NormalCosting
(c)Variation of
NormalCosting
Direct-CostRate
$58(Actualrate)
$58(Actualrate)
$60(Budgeted
rate)Indirect-CostRate
$48(Actualrate)
$45(Budgetedrate)
$45(Budgeted
rate)
2. (a)ActualCosting
(b)NormalCosting
(c)Variation of
Normal CostingDirect CostsIndirect CostsTotal Job Costs
$58 120 = $6,960
48 120 =5,760
$12,720
$58 120 = $6,960
45 120 = 5,400
$12,360
$60 120 = $ 7,200 45 120 = 5,400
$12,600
All three costing systems use the actual professional labor timeof 120 hours. The budgeted 110 hours for the Pierre Enterprisesaudit job is not used in job costing. However, Chirac may have
4-26
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 indirect-cost rate($48) exceeds the budgeted indirect-cost rate ($45). The normalcosting figure of $12,360 is less than the variation of normalcosting (based on budgeted rates for direct costs) figure of$12,600, because the actual direct-cost rate ($58) is less thanthe budgeted direct-cost rate ($60).
Although not required, the following overview diagramsummarizes Chirac’s job-costing system.
4-27
4-29 (30 min.) Job order costing: actual, normal, and variationfrom normal costing.
1a. Actual costing
Direct cost rate = Actual professional labor costs ÷ Actual professional labor-hours
= $1,320,000 ÷ 22,000 hours = $60 per professional-hour
Indirect cost rate = Actual support costs ÷ Actual professional labor-hours = $2,400,000 ÷ 22,000 hours
= $109.09 per professional-hour
1b. Normal costing
Budgeted professional hours = Budgeted hours per lawyer Number of lawyers = 2500 8 = 20,000 hours
Direct cost rate = Actual professional labor costs ÷ Actual professional labor-hours
= $1,320,000 ÷ 22,000 hours = $60 per professional-hour
Indirect cost rate = Budgeted support costs ÷ Budgeted professional labor-hours = $2,000,000 ÷ 20,000 hours = $100 per professional-hour
1c. Variation from normal costing that uses budgeted rates fordirect costs
= $1,100,000 ÷ 20,000 hours = $55 per professional-hour
Indirect cost rate = Budgeted support costs ÷ Budgeted professional labor-hours
4-28
= $2,000,000 ÷ 20,000 hours = $100 per professional-hour
2. The costs of Ari Apostolus’ will under each method follow:
a. Actual CostingDirect costs 4,000 hours $60 per hour $240,000Indirect costs 4,000 hours $109.09 per hour 436,360Total costs $676,360
b. Normal CostingDirect costs 4,000 hours $60 per hour $240,000Indirect costs 4,000 hours $100 per hour 400,000Total costs $640,000
c. Variation from normal costingDirect costs 4,000 hours $55 per hour $220,000Indirect costs 4,000 hours $100 per hour 400,000Total costs $620,000
4. Writing off all of the overallocated plant overhead to Cost ofGoods Sold (CGS) is usually warranted when CGS is large relative to Work-in-Process and Finished Goods Inventory and the overallocated plant overhead is immaterial. Both these conditions apply in this case. ROW should write off the $4,000 overallocated plant overhead to Cost of Goods Sold Account.
2. Budgeted manufacturing overhead divided by allocation base:
a. Machining Department:
= $50 per machine-hour
b. Finishing Department:
= 200% of direct manufacturing labor costs
4-32
COST OBJECT:JOB
3. Machining Department overhead, $50 130 hours $6,500Finishing Department overhead, 200% of $1,250 2,500Total manufacturing overhead allocated $9,000
4. Total costs of Job 431:Direct costs:
Direct materials––Machining Department$14,000––Finishing Department 3,000
Direct manufacturing labor—Machining Department 600—Finishing Department 1,250$18,850
Indirect costs:Machining Department overhead, $50 130$6,500Finishing Department overhead, 200% of $1,250 2,500
9,000Total costs $27,850
The per-unit product cost of Job 431 is $27,850 ÷ 200 units = $139.25 per unit
The point of this part is (a) to get the definitionsstraight and (b) to underscore that overhead is allocated bymultiplying the actual amount of the allocation base by thebudgeted rate.
6. A homogeneous cost pool is one where all costs have the sameor a similar cause-and-effect or benefits-received relationshipwith the cost-allocation base. Solomon likely assumes that allits manufacturing overhead cost items are not homogeneous.Specifically, those in the Machining Department have a cause-and-
4-33
effect relationship with machine-hours, while those in theFinishing Department have a cause-and-effect relationship withdirect manufacturing labor costs. Solomon believes that thebenefits of using two cost pools (more accurate product costs andbetter ability to manage costs) exceeds the costs of implementinga more complex system.
4-34
4-32 (1520 min.) Service industry, job costing, law firm.
1.
2. =
=
= $65 per professional labor-hour
Note that the budgeted professional labor-hour direct-costrate can also be calculated by dividing total budgetedprofessional labor costs of $2,600,000 ($104,000 per professional 25 professionals) by total budgeted professional labor-hoursof 40,000 (1,600 hours per professional 25 professionals),$2,600,000 40,000 = $65 per professional labor-hour.
=
=
=
= $55 per professional labor-hour
4. Richardson
Punch
Direct costs:Professional labor, $65 100; $65 150
Indirect costs:Legal support, $55 100; $55 150
$ 6,500
5,50 0
$12,000
$9,750
8,2 50
$18,000
4-35
3
4-33 (25–30 min.) Service industry, job costing, two direct-and indirect-cost categories, law firm(continuation of 4-32).
Although not required, the following overview diagram is helpfulto understand Keating’s job-costing system.
1. Professional
PartnerLabor
ProfessionalAssociate
Labor
Budgeted compensation perprofessionalDivided by budgeted hoursof billable time per professionalBudgeted direct-cost rate
$ 200,000
÷1,600 $125 perhour*
$80,000
÷1,600 $50 per
hour†
*Can also be calculated as =
= = $125
†Can also be calculated as =
= = $ 50
4-36
ProfessionalLabor-Hours
GeneralSupport
COST OBJECT:JOB FORCLIENT
INDIRECTCOSTPOOL
COSTALLOCATION
BASE
}
DIRECTCOST
Indirect CostsDirect Costs
PartnerLabor-Hours
SecretarialSupport
ProfessionalAssociate Labor
ProfessionalPartner Labor
2. GeneralSupport
Secretarial
SupportBudgeted total costsDivided by budgeted quantity ofallocation baseBudgeted indirect cost rate
4. Richardson PunchSingle direct - Singleindirect (from Problem 4-32)Multiple direct – Multipleindirect (from requirement 3 ofProblem 4-33)
Difference
$12,000
17,000
$ 5,000undercosted
$18,000
18,000
$ 0 no change
The Richardson and Punch jobs differ in their use ofresources. The Richardson job has a mix of 60% partners and 40%associates, while Punch has a mix of 20% partners and 80%associates. Thus, the Richardson job is a relatively high user ofthe more costly partner-related resources (both direct partnercosts and indirect partner secretarial support). The refined-costing system in Problem 4-32 increases the reported cost inProblem 4-32 for the Richardson job by 41.7% (from $12,000 to$17,000).
4-38
4-34 (2025 min.) Proration of overhead.
2. = – = $4,900,000 – $4,500,000*= $400,000
*$60 75,000 actual machine-hours = $4,500,000
a. Write-off to Cost of Goods Sold
Account(1)
AccountBalance(Before
Proration)(2)
Write-off of $400,000
UnderallocatedManufacturing
Overhead(3)
AccountBalance(After
Proration)(4) = (2) +
(3)
Work in ProcessFinished GoodsCost of Goods SoldTotal
$ 750,0001,250,000
8,000,000 $10,000,000
$ 00
400,000 $400,000
$ 750,0001,250,000
8,400,000 $10,400,000
b. Proration based on ending balances (before proration) in Work in Process, Finished Goods and Cost of Goods Sold.
Account(1)
Account Balance(Before
Proration)(2)
Proration of$400,000
UnderallocatedManufacturing
Overhead(3)
AccountBalance(After
Proration)(4) = (2) +
(3)Work in ProcessFinished GoodsCost of GoodsSoldTotal
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.
3. Alternative (c) is theoretically preferred over (a) and (b).Alternative (c) yields the same ending balances in work inprocess, finished goods, and cost of goods sold that would havebeen reported had actual indirect cost rates been used.
Chapter 4 also discusses an adjusted allocation rateapproach that results in the same ending balances as doesalternative (c). This approach operates via a restatement of theindirect costs allocated to all the individual jobs worked onduring the year using the actual indirect cost rate.
4-35 (15 min.) Normal costing, overhead allocation,working backward. 1a.Manufacturing overhead allocated = 200% × Direct manufacturinglabor cost
$3,600,000 = 2 × Direct manufacturing laborcost
Direct manufacturing labor cost = = $1,800,000
b. = + +
$8,000,000 = Direct material used + $1,800,000 + $3,600,000
Direct material used = $2,600,000
2. + Total manufacturing cost = Cost of goods manufactured
+
Denote Work-in-process on 12/31/2009 by X
$320,000 + $8,000,000 = $7,920,000 + X
X = $400,000
4-41
Work-in-process inventory, 12/31/09 = $400,000.
4-42
4-36 (40 min.) Proration of overhead with two indirect costpools.
2a. All overallocated overhead is written off to cost of goods sold.
Both Work in Process and Finished goods inventory remain unchanged.
Account
Dec. 31, 2008Balance(Before
Proration)(1)
Proration of$10,000
OverallocatedOverhead
(2)
Dec. 31, 2008Balance(After
Proration)(3) = (1) + (2)
WIP $ 150,000
0 $ 150,000
Finished Goods 250,000
0 250,000
Cost of Goods Sold
1,600,000
+$3,000 –$13,000
1,590,000
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Total $2,000,000
$10,000 $1,990,000
2b. Overallocated overhead prorated based on ending balances
Account
Dec. 31, 2008Balance(Before
Proration)(1)
Balance as a Percent of Total
(2) = (1) ÷$2,000,000
Proration of$10,000
OverallocatedOverhead
(3) = (2) 10,000
Dec. 31, 2008Balance(After
Proration)(4) = (1) – (3)
WIP $ 150,000 0.075
0.075 × $10,000 = $750
$149,250
Finished Goods 250,000 0.125
0.125 × $10,000 =1,250 248,750
Cost of GoodsSold
1,600,000 0.800
0.800 × $10,000 =8,000
1,592,000
Total $2,000,000 1.000
$10,000
$1,990,000
2c. Overallocated overhead prorated based on overhead in ending balances. (Note: overhead must be allocated separately from each department. This can be done using the number of machine hours/direct labor hours as a surrogate for overhead in ending balances.)
For C & A department:
Account
Allocated Overheadin Dec. 31, 2008
Balance(1)
Allocated Overhead in Dec. 31, 2008 Balance as a Percent of Total(2) = (1) ÷ $160,000
Proration of$3,000
UnderallocatedOverhead
(3) = (2) $3000 WIP 200 $40 = $
8,000 0.050.05 $3,000 =
$ 150Finished Goods
600 $40 =24,000 0.15
0.15 $3,000 =450
Cost of GoodsSold
3,200 $40 =128,000 0.80
0.80 $3,000 =2,400
4-44
Total $160,000 1.00 $3,000
For finishing department:
Account
Allocated Overheadin Dec. 31, 2008
Balance (4)
AllocatedOverhead
in Dec. 31,2008 Balance
as a Percent ofTotal
(5) = (4) ÷$100,000
Proration of $13,000Underallocated
Overhead (6) = (5) $13,000
WIP 100 $50 =$ 5,000 0.05
0.05 $13,000 = $650
Finished Goods
400 $50 =20,000 0.20
0.20 $13,000 =2,600
Cost of GoodsSold
1,500 $50 =75,000 0.75
0.75 $13,000 =9,750
Total $100,000 1.00 $13,000
Account
Dec. 31, 2008Balance(Before
Proration) (7)
Underallocated/Overallocated Overhead
(8) = (3) – (6)
Dec. 31, 2009Balance(After
Proration) (9) = (7) + (8)
WIP $150,000
$150 – $650= $ (500)
$149,500
Finished Goods 250,000
$450 – $2,600 =(2,150)
247,850
Cost of Goods Sold
1,600,000
$2,400 – $9,750 =(7,350)
1,592,650
Total $2,000,000 $(10,000) $1,990,000
3. The first method is simple and Cost of Goods Sold accounts for80% of the three account amounts. The amount of overallocatedand underallocated overhead is also immaterial. Allocation tothe other two accounts is minimal. Therefore, write-off to costof goods sold is the most cost effective alternative.
4-45
4-37 (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 Work-in-Process Control1-1-2008 30,000Purchases
400,000
Material usedfor
manufacturing380,000
1-1-2008 20,000Direct materials
380,000
Transferred to finished goods
940,000
12-31-200850,000
Direct manuf. Labor 360,000Manuf. overhead allocated
480,00012-31-2008 300,000
Finished Goods Control Cost of Goods Sold1-1-2008 10,000Transferred in from WIP
940,000
Cost of goods sold 900,000
Finished goods sold 900,000
12-31-200850,000
Manufacturing OverheadControl
Manufacturing OverheadAllocated
Manufacturing overhead costs540,000
Manufacturing overhead allocated to work in process 480,000
1. From Direct Materials Control T-account,Direct materials issued to production = $380,000 that appears
as a credit.
2. Direct manufacturing labor-hours =
4-46
= = 24,000 hours
=
= 24,000 hours $20 per hour = $480,000
3. From the debit entry to Finished Goods T-account, Cost of jobs completed and transferred from WIP = $940,000
5. From the credit entry to Finished Goods Control T-account, Cost of goods sold (before proration) = $900,000
6. =
–
= $540,000 – $480,000= $60,000 underallocated
7. a. 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.
b. 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)
Account Balance(Before
Proration)
Proration of $60,000UnderallocatedManufacturing
Overhead(3)
AccountBalance(After
Proration)
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(2) (4)=(2)+(3)Work in Process
$ 300,000 (24%)
0.24 $60,000 = $14,400
$ 314,400
Finished Goods 50,000 ( 4%) 0.04 $60,000 = 2,400
52,400
Cost of Goods Sold
900,000 (72 % )
0.72 $60,000 = 43,200
943,200
$1,250,000 100 % $60,000
$1,310,000
8. Needham’s operating income using write-off to Cost of Goods Sold and Proration based on ending balances (before proration) follows:
Write-off to Proration BasedCost of Goods on Ending
Sold BalancesRevenues $1,090,000 $1,090,000Cost of goods sold 960,000 943,200Gross margin 130,000 146,800Marketing and distribution costs 140,000 140,000Operating income/(loss) $ (10,000) $ 6,800
9. If the purpose is to report the most accurate inventory andcost of goods sold figures, the preferred method is to proratebased on the manufacturing overhead allocated component in theinventory and cost of goods sold accounts. Proration based on thebalances in Work in Process, Finished Goods, and Cost of GoodsSold will equal the proration based on the manufacturing overheadallocated component if the proportions of direct costs tomanufacturing overhead costs are constant in the Work in Process,Finished Goods and Cost of Goods Sold accounts. Even if this isnot the case, the prorations based on Work in Process, FinishedGoods, and Cost of Goods Sold will better approximate the resultsif actual cost rates had been used rather than the write-off toCost of Goods Sold method.
Another consideration in Needham’s decision about how todispose of underallocated manufacturing overhead is the effectson operating income. The write-off to Cost of Goods Sold willlead to an operating loss. Proration based on the balances inWork in Process, Finished Goods, and Cost of Goods Sold will helpNeedham avoid the loss and show an operating income.
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The main merit of the write-off to Cost of Goods Sold methodis its simplicity. However, accuracy and the effect on operatingincome favor the preferred and recommended proration approach.
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4-38 (4055 min.) Overview of general ledger relationships.
1. & 3. An effective approach to this problem is to draw T-accounts and insert all the known figures. Then, working with T-account relationships, solve for the unknown figures (here codedby the letter X for beginning inventory figures and Y for endinginventory figures).
(a) Work-in-Process Control 5,000Manufacturing Department Overhead Control1,000
Wages Payable Control 6,000To recognize payroll costs
(b) Manufacturing Department Overhead Control 1,000Various accounts 1,000
To recognize miscellaneous manufacturing overhead
(c) Work-in-Process Control 3,000Manufacturing Overhead Allocated 3,000
To allocate manufacturing overhead
Note: Students tend to forget entry (c) entirely. Stressthat a budgeted overhead allocation rate is usedconsistently throughout the year. This point is a majorfeature of this problem.
(d) Manufacturing Overhead Allocated 93,000Manufacturing Department Overhead Control87,000Cost of Goods Sold 6,000
To close manufacturing overhead accounts and overallocated overhead to cost of goods sold
An overview of the product-costing system is
3. See the answer to 1.
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4-39 (30 min.) Allocation and proration of overhead.
4.a. All overallocated overhead is written off to cost of goods sold.
WIP inventory remains unchanged.
Account(1)
Dec. 31, 1762Account Balance
(BeforeProration)
(2)
Write-off of£100
Overallocatedoverhead
(3)
Dec. 31, 1762Account Balance
(AfterProration)
(4) = (2) + (3)Work-in-Process £ 131 £ 0 £ 131
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Cost of goods sold
3,919
(100)
3,819
£4,050 £(100) £3,950
4b. Overallocated overhead prorated based on ending balances
Account(1)
Dec. 31, 1762Balance(Before
Proration)(2)
Balance as a Percent of Total(3) = (2) ÷ £4,050
Proration of£100
OverallocatedOverhead
(4) = (3) £100
Dec. 31,1762 Balance
(AfterProration) (5) = (2) +
(4)Work-in-Process
£ 131 0.03 £ (3)
£128
Cost of GoodsSold 3,919 0.97 (97) 3,822
£4,050 1.00 £(100) £3,950
5. Writing off all of the overallocated overhead to Cost of Goods Sold (CGS) is warranted when CGS is large relative to Work-in-Process Inventory and Finished Goods Inventory and the overallocated overhead is immaterial. Both these conditions apply in this case. Franklin & Son Printing should write off the£100 overallocated overhead to Cost of Goods Sold account.
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4-40 (20 min.) Job costing, contracting, ethics.
1. Direct manufacturingcosts:
Direct materialsDirect manufacturing
laborIndirect manufacturingcosts,
150% $6,000Total manufacturingcosts
$25,000 6,00
0 $31,000
9,00 0
$40,000
Aerospace bills the Navy $52,000 ($40,000 130%) for 100X7 seats or $520 ($52,000 100) per X7 seat.
2. Direct manufacturing costs: Direct materials Direct manufacturing labora
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 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
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Steps the Navy could undertake include the following:
(i) Use only contractors with a reputation for ethicalbehavior as well as quality products or services.
(ii) Issue guidelines detailing acceptable and unacceptablebilling practices by contractors. For example,prohibiting the use of double-counting cost allocationmethods by contractors.
(iii) Issue guidelines detailing acceptable andunacceptable procurement practices by contractors. Forexample, if a contractor purchases from a family-relatedcompany, require that the contractor obtain quotes fromat least two other bidders.
(iv) Employ auditors who aggressively monitor the billssubmitted by contractors.
(v) Ask contractors for details regarding determination ofcosts.
5. I would choose the method in 4c because this method resultsin account balances based on actual overhead allocation rates.The account balances before proration in TIP and CCT aresignificant and underallocated overhead is material. Furthermore,the ratio of ending balances in TIP and CCT is different from theratio of overhead allocated to each of these accounts in June.
