HMCost1e_SM_ch05
CHAPTER 5 PRODUCT AND SERVICE COSTING: JOB-ORDER SYSTEM
DISCUSSION QUESTIONS
1.Cost measurement is the process of deter-
mining the dollar amounts of direct materi-
als, direct labor, and overhead that should be assigned to production. Cost accumula-
tion (or assignment) is the process of asso-
ciating costs with the units produced. Essen-
tially, cost measurement is concerned with whether actual or estimated costs should be
used, and cost assignment is concerned with whether costs should be assigned to jobs or processes.
2.Actual costing is rarely used because man-
agers cannot wait until the end of the year to
obtain product costs. Information on product
costs is needed as the year unfolds for plan-
ning, control, and decision making.
3.Job-order costing accumulates costs by
jobs, and process costing accumulates costs by processes. Job-order costing is suitable for operations that produce custom-
made products that receive different doses
of manufacturing costs. Process costing, on
the other hand, is suitable for operations that produce homogeneous products that receive equal doses of manufacturing costs
in each process.
4.The principal difference between a manual
and an automated system is the nature of the records. In an automated system, termi-
nals can be used to input data directly to the
job, thus eliminating the need for many source documents such as time tickets and
requisition forms. Even if these forms are used and the data are entered on a batch
basis, the job-order cost sheet has been re-
placed with an electronic record. Instead of
cabinets with collections of job-order cost sheets, files are collections of job records located on disk or tape.
5.Materials requisition forms serve as the
source document for posting materials us-
age and costs to individual jobs. Time or work tickets serve a similar function for la-
bor. Predetermined overhead rates are used
to assign overhead costs to individual jobs. 6.Additional source documents must be de-
veloped to track use of multiple drivers in an
activity-based costing system. Thus, if a pur-
chasing rate is developed based on number
of purchase orders, then a source document
tracing the use of purchase orders by indi-
vidual jobs must be created.
7. Activity drivers are those factors that drive or
cause the consumption of overhead. Know-
ing what drives overhead costs allows a
more accurate assignment of overhead
costs to products.
8. Expected actual activity is the level of pro-
duction activity expected for the coming
year. Normal activity is the long-run average
activity level. Practical activity is the level of
activity achievable under efficient operating
conditions. Theoretical activity is the level of
activity achievable under ideal operating
conditions.
9.Assignment using normal activity produces
less fluctuation in period-to-period overhead
assignments. It also avoids assigning the
costs of idle capacity to products when pro-
duction is down.
10.When normal costing is used, the actual use
of overhead is not assigned to jobs. Instead,
applied overhead is assigned.
11. Unit cost:
Direct
materials................... $
7,500 Direct
labor..........................10,000 Overhead ($5 × 1,000)........5,000
Total.............................. $22,500 Unit cost = $22,500/500 = $45
12.More paperwork is required. Labor and
materials are assigned to departments in a
process-costing system. In a job-order sys-
tem, labor and materials must be tracked to
each job, requiring time tickets and more
use of materials requisitions. Additionally, a
job-order system requires a separate job
sheet for each job.
13.The normal cost of goods sold uses applied
overhead only. Adjusted cost of goods sold
is the normal cost of goods sold adjusted for
an overhead variance (increased for under-
applied and decreased for overapplied). 14.The cost of spoilage in this case is charged
to Overhead Control, because the demands
of the job itself did not lead to the spoilage. 15.In this case, the spoilage was due to the
demands of this particular job and would be
charged to the job.
CORNERSTONE EXERCISES
Cornerstone Exercise 5–1
1. Budgeted direct labor cost = $25 × 13,600 direct labor hours = $340,000
Overhead rate = $476,000/$340,000 = 1.40, or 140% of direct labor cost
42
41 Job
40 Job
2. J ob 39 Job
Balance, June 1............................. $34,500 $23,780 $15,000 $ 0 materials............................. 26,000 13,700 8,350 11,000 Direct
labor....................................10,000 18,500 3,000 2,900 Direct
25,900 4,200 4,060 overhead.......................... 14,000
Applied
Total.......................................... $84,500 $81,880 $30,550 $17,960
3. New budgeted direct labor cost = $20 × 13,600 direct labor hours = $272,000
New overhead rate = $476,000/$272,000 = 1.75, or 175% of direct labor cost
The applied overhead for all jobs would be higher since the new rate is higher
and the costs would be higher. (This assumes that there is no change in di-
rect labor hours. Direct labor hours were not given in the problem.)
Cornerstone Exercise 5–2:
1. Ending Work in Process consists of Jobs 41 and 42:
41................................................................... $30,550
Job
42................................................................... 17,960
Job
Ending Work in Process................................. $48,510
2. Ending balance in Finished Goods is Job 40 at $81,880.
3. Cost of goods sold = Job 39 = $84,500
4. Price of Job 39 = $84,500 × 1.2 = $101,400
5. If the customer for Job 40 was able to pay for it by June 30, the balance in
Finished Goods would be zero and Cost of Goods Sold would consist of Jobs
39 and 40 and would total $166,380 ($84,500 + $81,880).
Cornerstone Exercise 5–3
1. Materials handling rate = $36,000/3,000 = $12 per move
Purchasing rate = $65,000/10,000 = $6.50 per purchase order
Other overhead rate = $280,000/20,000 = $14 per direct labor hour
10-45 Job 10-46
10-44 Job
2. Job 10-43 Job
Balance, July 1.................... $40,800 $41,600 $ 2,300 $ 0 materials................... 15,600 23,450 49,000 9,800
Direct
Direct labor cost.................. 18,000 20,000 32,000 2,400 handling............... 528 624 348 60
Materials
Purchasing........................... 195 260 130 130
14,000 22,400 1,680
overhead.................... 12,600
Other
Total................................ $87,723 $99,934 $106,178 $14,070
3. Ending Work in Process consists of Job 10-46 = $14,070.
4. Cost of goods sold = Job 10-43 + Job 10-44 = $187,657
5. If Job 10-46 required no moves, the cost of that job would be $60 lower and
no other job would be affected.
Cornerstone Exercise 5–4
1. Cost of the Gavin job with normal spoilage:
materials................................................... $2,300
Direct
labor (400)
Direct
($400 × 1.2)............................
480
overhead
Applied
job
cost................................................... $3,180
Total
2. Cost of rework:
materials................................................... $400
Direct
labor (100)
Direct
120
($100 × 1.2)............................
overhead
Applied
rework cost............................................. $620
Total
entry:
Journal
Control (500)
Overhead
Materials (400)
Payroll (100)
Cornerstone Exercise 5–4 (Concluded)
3. If the rework required $200 of direct labor cost rather than $100, the cost of
the Gavin job would not be affected since the rework was not included. In-stead, $600 would be debited to Overhead Control and $200 would be cred-ited to Payroll.
Cornerstone Exercise 5–5
1. Cost of the Gavin job with abnormal spoilage:
($2,300 + $400)......................... $2,700 materials
Direct
($400 + $100) (500)
labor
Direct
600
($500 × 1.2)............................
overhead
Applied
cost................................................... $3,800
Total
job
2. No journal entry is needed.
3. If the additional rework required $200 of direct labor rather than $100, then
the total cost of the Gavin job would increase by $220 to $4,020 [$3,800 + $100 + ($100 × 1.2)].
EXERCISES
Exercise 5–6
a. Bicycle production is manufacturing. The product is tangible and fairly ho-
mogeneous. (One bicycle model is much the same as another.) Production is separate from consumption.
b. Pharmaceuticals are manufacturing. A drug is tangible, and consumption is
separate from production. The product is not heterogeneous in that variation is minimized. (Drug companies must meet certain standards regulating al-lowable variation in the chemical composition of each tablet or dose.)
c. Income tax preparation is a service. It is heterogeneous in that the quality of
work varies from preparer to preparer and also to various returns prepared by the same preparer. While the printed return is tangible, the knowledge re-quired for it is not. In addition, the return cannot be prepared without the as-sistance of the taxpayer. Production and consumption are intertwined.
d. The application of artificial nails is a servic
e. It is heterogeneous in that the
quality of work varies from manicurist to manicurist. Additionally, the same manicurist may do a better job with some customers than with others. The production and consumption process are overlapping. While the nails are tangible, the application process is not and cannot be inventoried.
e. Glue production is manufacturing. The product is tangible and fairly homo-
geneous. (One bottle of glue is much the same as another produced by the same firm.) Production is separate from consumption.
f. Child care is a service. The services rendered are not tangible and cannot be
inventoried. They are heterogeneous. One caregiver differs from another, and the same caregiver may vary in quality (e.g., patience, creativity) throughout the day and/or with different children. Production and consumption take place simultaneously.
1. Lawn Pro Company should use job-order costing because each installation is
unique and made to order. Materials may differ from job to job, as may direct
labor.
2. Predetermined overhead rate = $59,840/5,440 = $11 per direct labor hour
Wage rate = $54,400/5,440 = $10 per direct labor hour
materials................................................... $3,500
Direct
labor
($10 × 30) (300)
Direct
330
Overhead
($11 × 30)............................................
cost......................................................... $4,130
Total
3. The company cannot use an actual cost system; it needs to know the cost of
each installation as it is completed. Since overhead is incurred unevenly
throughout the year, and certain overhead bills arrive after the need for unit
costs occur, overhead must be applied to production using a predetermined
rate.
Exercise 5–8
1. Irrigation Specialties should use a process-costing system because each wa-
tering system is like every other so the cost of direct materials, direct labor,
and overhead stays constant from job to job.
2. If Irrigation Specialties uses an actual costing system, the average amounts
for actual direct materials, actual direct labor, and actual overhead must be
calculated for each month.
June July August
Average
Amounts
materials........................................$300 $300 $300 Direct
labor............................................... 216 216 216 Direct
185
91
Overhead (260)
unit cost...................................... $776 $701 $607 Total
3. Predetermined overhead rate = $40,000/500 = $80 per system installed
Unit cost per system = $300 + $216 + $80 = $596
The cost of the basic system does not change from month to month.
1. The two measures of activity level considered by Shauntay are expected ac-
tual activity and theoretical activity.
2. Predetermined overhead rate using expected actual activity:
Predetermined overhead rate = $9,000/(75 × 20 hours) = $6.00 per hour
Predetermined overhead rate using theoretical activity:
Predetermined overhead rate = $9,000/(125 × 20 hours) = $3.60 per hour
3. Shauntay should use expected actual activity because it is highly unlikely
that he will approach the theoretical activity level, especially with a new busi-ness. The expected actual activity level will be more likely to spread the overhead over the actual jobs, without a large overhead variance. Notice that Shauntay cannot use normal activity level because he has not been in busi-ness for a number of years.
Exercise 5–10
1. Because the business is so small (Shauntay is the only employee), all he real-
ly needs is a job-order cost sheet. Actually, a folder for each job would do. He would file all receipts for materials purchased (these are source docu-ments)—or prorate to the particular job the cost of lumber, etc.—in the folder.
He could also file notes recording his time spent on the job. Of course, he will need a good system for accumulating costs, since he may need to refer to those to calculate actual overhead and direct materials purchases.
2. Now, the business is considerably larger. Shauntay will no longer be able to
reconstruct job costs from memory, since he is not the only one working on the various jobs. Now, he will need labor time tickets to help workers keep track of the time spent on the jobs. A more formal job-order cost sheet will also be needed, and periodic entries must be made to assign costs to the jobs.
1. Job 78:
materials................................................... $1,560 Direct
labor.......................................................... 3,000
Direct
1,848
Overhead
($8.40 × 220).......................................
cost................................................... $6,408 Total
job
Unit cost = $6,408/200 = $32.04
Job
79:
990 Direct
materials................................................... $
labor.......................................................... 3,000
Direct
1,680
Overhead
× 200).......................................
($8.40
cost................................................... $5,670 Total
job
Unit cost = $5,670/180 = $31.50
2. Job 80:
Direct
materials................................................... $2,400
labor.......................................................... 3,300
Direct
3,360
($8.40 × 400).......................................
Overhead
Ending Work in Process................................. $9,060
3. Finished Goods........................................12,078*
Work in Process................................... 12,078 *Job 78 + Job 79 = $6,408 + $5,670 = $12,078
Cost of Goods Sold..................................5,670
Finished
Goods.................................... 5,670
(or Cash)..............7,938**
Accounts
Receivable
Revenue...................................... 7,938 Sales
**$5,670 × 140% = $7,938
1. Using Job 114 (any of the three jobs could be used, the overhead rate will be
the same):
Predetermined overhead rate = $1,350/$1,800
= 0.75, or 75% of direct labor cost
116
115 Job
2. Job 114 Job
Balance, April 1........................................ $ 6,800 $ 4,630 $11,175 materials........................................ 16,500 12,200 5,000 Direct
labor...............................................
4,200 4,200 3,000 Direct
overhead..................................... 3,150 3,150
2,250
Applied
Total..................................................... $30,650 $24,180 $21,425
3. Ending Work in Process consists of Jobs 114 and 116:
114................................................................. $30,650
Job
Job
21,425
116.................................................................
Ending Work in Process................................. $52,075
4. Cost of goods sold = Job 115 = $24,180
5. Price of Job 115 = $24,180 × 1.2 = $29,016
1. Journal entries:
Materials.......................................................... 26,000
a.
26,000 Accounts
Payable......................................
Process............................................. 33,700
in
b.
Work
Materials...................................................... 33,700 Process............................................. 11,400
in
c.
Work
11,400 Payable...........................................
Wages
Process............................................. 8,550*
in
d.
Work
8,550 Control.......................................
Overhead
*$11,400 × $0.75 = $8,550
Control........................................... 8,718
e.
Overhead
8,718 Various
Accounts.......................................
Finished Goods.............................................. 24,180
f.
Process.........................................
24,180 in
Work
g. Cost of Goods Sold........................................ 24,180
Goods.......................................... 24,180 Finished
Receivable..................................... 29,016**
Accounts
Sales
Revenue............................................ 29,016 **$24,180 × 120% = $29,016
1. Predetermined overhead rate using Job 170 = $1,710/$1,900 = 0.90, or 90%
2. 170 171 172 173 174 175 176
Balance, August 1.......$5,210 $4,280 $ 2,560 — — — — materials........... 1,800 1,735 6,550 $4,500 $1,300 $ 600 $280 Direct
labor.................. 1,000 1,400 4,200 1,800 800 860 300 Direct
overhead........900 1,260 3,780 1,620 720 774 270
Applied
Total........................$8,910 $8,675 $17,090 $7,920 $2,820 $2,234 $850
3. By August 31, Jobs 171, 174, and 176 are still in process:
8,675 171................................................................. $
Job
174................................................................. 2,820
Job
850
176.................................................................
Job
Work in process, August 31........................... $12,345
4. Cost of goods sold for August consists of Jobs 172 and 175:
Job
172................................................................. $17,090
175.................................................................
2,234
Job
Cost of goods sold.......................................... $19,324
5. August sales revenue = $19,324 × 1.50 = $28,986
Exercise 5–15
Dabo Company
Income Statement
For the Month of August Sales............................................................................................................ $28,986
19,324 Cost of goods sold.....................................................................................
9,662 Gross margin.............................................................................................. $ Selling and administrative expenses........................................................
1,860
7,802 Operating income....................................................................................... $
1. a. Materials.......................................................... 45,670
45,670 Payable......................................
Accounts
Process............................................. 40,990
in
Work
b.
Materials...................................................... 40,990 in
Process............................................. 22,400
Work
c.
22,400 Payable...........................................
Wages
Control........................................... 9,020
d.
Overhead
9,020 Cash............................................................
Process............................................. 8,800*
in
Work
e.
8,800 Control.......................................
Overhead
*($22,400/$14) × $5.50 = $8,800
Finished Goods.............................................. 58,000
f.
58,000 Work
Process.........................................
in
Receivable..................................... 73,750
g.
Accounts
Revenue............................................ 73,750 Sales
Cost of Goods Sold........................................ 59,000
Goods.......................................... 59,000 Finished
2. Ending balances:
a. Materials Inventory = $1,200 + $45,670 – $40,990 = $5,880
b. WIP Inventory = $3,400 + $40,990 + $22,400 + $8,800 – $58,000 = $17,590
c. Overhead Control = $9,020 – $8,800 = $220
d. Finished Goods Inventory = $2,630 + $58,000 – $59,000 = $1,630
1. Job 39:
700 materials................................................... $
Direct
labor.......................................................... 1,980
Direct
828
($2.30 × 360).......................................
Overhead
job
cost................................................... $3,508
Total
Unit cost = $3,508/60 = $58.47 (rounded)
40:
Job
materials................................................... $
680
Direct
labor.......................................................... 2,480
Direct
920
Overhead
($2.30 × 400).......................................
cost................................................... $4,080
job
Total
Unit cost = $4,080/100 = $40.80
2. Job 41:
materials................................................... $
800
Direct
labor.......................................................... 1,240
Direct
460
Overhead
($2.30 × 200).......................................
Ending Work in Process................................. $2,500
3. Finished Goods................................................... 7,588*
Work in Process.............................................. 7,588
*$3,508 + $4,080 = $7,588
Cost of Goods Sold............................................. 4,080
Goods............................................... 4,080 Finished
Receivable.......................................... 5,712**
Accounts
5,712 Sales
Revenue.................................................
**$4,080 × 140% = $5,712
1. Job 10-280:
materials.............................................................$4,730 Direct
labor....................................................................2,000 Direct
overhead:
Applied
up..................................................................$ 400
Setting
Machining (408)
2,408
overhead......................................................... 1,600 Other
Total job cost.................................................................$9,138
Unit cost = $9,138/200 = $45.69
10-282:
Job
materials.............................................................$5,600 Direct
labor (800)
Direct
overhead:
Applied
up.................................................................. $500
Setting
Machining (204)
overhead (640)
1,344 Other
Total job cost.................................................................$7,744
Unit cost = $7,744/100 = $77.44
2. Job 10-281:
3,800 materials.............................................................$
Direct
labor....................................................................4,600 Direct
Applied
overhead:
up..................................................................$ 300
Setting
Machining (510)
4,490 Other
overhead......................................................... 3,680 Ending Work in Process...............................................$12,890
3. Finished Goods................................................... 16,882*
Work in Process.............................................. 16,882
*$9,138 + $7,744 = $16,882
Cost of Goods Sold............................................. 9,138
Goods............................................... 9,138 Finished
Accounts
Receivable.......................................... 13,707**
Revenue................................................. 13,707 Sales
**$9,138 × 150% = $13,707
1. a. Materials.......................................................... 113,300
113,300 Payable......................................
Accounts
Process............................................. 82,500
in
Work
b.
Control........................................... 8,800
Overhead
Materials...................................................... 91,300 Process............................................. 67,000
in
c.
Work
Control........................................... 18,750
Overhead
Payable...........................................
85,750 Wages
Overhead
Control........................................... 46,200
d.
46,200 Payables.......................................
Various
in
Process............................................. 73,700*
Work
e.
73,700 Overhead
Control.......................................
*$67,000 × 110% = $73,700
Finished Goods.............................................. 230,000
f.
Process.........................................
230,000 Work
in
g. Cost of Goods Sold........................................ 215,000
Finished
Goods.......................................... 215,000
Receivable..................................... 301,000**
Accounts
Revenue............................................ 301,000 Sales
**140% × $215,000 = $301,000
h. Cost of Goods Sold........................................ 50***
Control.......................................
50
Overhead
***Actual overhead = $8,800 + $18,750 + $46,200 = $73,750
overhead......................................... $73,750
Actual
73,700
overhead.......................................
Applied
Underapplied......................................... $ 50
Exercise 5–19 (Concluded)
2. After underapplied overhead is charged to cost of goods sold:
*No actual overhead costs were assigned to Work in Process as the company
does not use an actual cost system. The amount assigned to Work in Proc-
ess was the applied overhead of $73,700.
Exercise 5–20
1. Engineering design rate = $156,000/6,000 = $26 per engineering hour
Purchasing rate = $96,000/10,000 = $9.60 per part
Other overhead rate = $350,000/50,000 = $7 per direct labor hour
18 Job
19
16 Job
17 Job
2. Job 15 Job
March
1........ $34,500 $39,890 $24,090 $ 0 $ 0
Balance,
materials..........28,000 37,900 25,350 11,000 13,560 Direct
labor.................10,000 8,500 23,000 12,900 8,000 Direct
overhead:
Applied
design 1,300 520 1,040 3,120 6,760 Engineering
Purchasing.............1,440 1,728 1,920 4,800 2,880 overhead...........4,550 4,060 11,200 6,090 3,640
Other
cost...............$79,790 $92,598 $86,600 $37,910 $34,840 Total
3. Ending balance in Work in Process = Job 18 + Job 19
= $37,910 + $34,840 = $72,750
4. Cost of goods sold = Job 15 + Job 16 + Job 17
= $79,790 + $92,598 + $86,600 = $258,988
PROBLEMS
Problem 5–21
1. a. Materials.......................................................... 60,100
60,100 Accounts
Payable......................................
in
Process............................................. 50,000
b.
Work
Control........................................... 8,800
Overhead
Materials...................................................... 58,800 Process............................................. 75,000
in
c.
Work
Control........................................... 36,000
Overhead
Expense................................. 28,000
Administrative
Expense.............................................. 19,000
Selling
Payable........................................... 158,000 Wages
Control........................................... 10,400
Overhead
d.
10,400
Depreciation........................
Accumulated
Control........................................... 1,450
Overhead
e.
1,450
Payable.............................
Property
Taxes
Control........................................... 6,200
f.
Overhead
Insurance......................................
6,200 Prepaid
Control........................................... 5,500
Overhead
g.
5,500 Payable..........................................
Utilities
Selling
Expense.............................................. 7,900
h.
7,900 Cash............................................................
Administrative Expense (800)
i.
Expense.............................................. 1,650
Selling
2,450
Depreciation........................
Accumulated
Administrative Expense (750)
j.
750 Payable......................................
Accounts
k. Work in Process ($18 × 4,000)....................... 72,000
72,000 Control.......................................
Overhead
Goods.............................................. 160,000
Finished
l.
160,000
Process.........................................
in
Work
Problem 5–21 (Concluded)
*Overapplied overhead.
Company
3. Jerico
Statement of Cost of Goods Manufactured
For the Month Ended May 31, 20XX
materials.............................................................$ 50,000
Direct
labor....................................................................75,000
Direct
Overhead:
8,800
Supplies.................................................................... $
Indirect
labor............................................................ 36,000
plant, and equipment....................... 10,400
Depreciation,
Property
taxes.......................................................... 1,450
factory........................................................ 5,500
Utilities,
Insurance..................................................................6,200
$68,350
Overapplied overhead....................................3,650
Plus:
applied.................................................72,000 Overhead
costs added.......................................... $197,000
Manufacturing
Add: Beginning work in process.................................37,000 Less: Ending work in process..................................... (74,000)
Cost of goods manufactured.......................................$160,000
4. Cost of goods sold decreases by $3,650.
1. Overhead rate = $162,500/50,000 = $3.25 per machine hour
2
1 Job
Job
9,340
Direct
materials.................................................... $4,500 $
labor........................................................... 1,200 2,100 Direct
650 650
× 200 MHr)................................
($3.25
Overhead
manufacturing cost.............................. $6,350 $12,090 Total
4,836
2,540 Plus 40% markup.................................................
price.......................................................... $8,890 $16,926 Bid
2. Purchasing rate = $40,000/5,000 = $8 per purchase order
Setup cost rate = $37,500/500 = $75 per setup
Engineering rate = $45,000/2,500 = $18 per engineering hour
Other cost rate = $40,000/50,000 = $0.80 per machine hour
Job
2
1 Job
materials.................................................... $4,500 $
9,340
Direct
labor........................................................... 1,200 2,100 Direct
Overhead:
Purchasing ($8 × 15); ($8 × 20)...................... 120 160 Setups ($75 × 3); ($75 × 4)............................. 225 300 Engineering ($18 × 45); ($18 × 10)................ 810 180 Other ($0.80 × 200); ($0.80 × 200)..................
160 160 manufacturing cost.................................... $7,015 $12,240
Total
4,896
2,806 Plus 40% markup.................................................
price.......................................................... $9,821 $17,136 Bid
3. The activity-based approach to assigning overhead gives a more accurate
cost figure because so much of the overhead is non-unit-level and there is product diversity.