1. 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 amounts of manufacturing
costs in each process.
2. Job-order costing is appropriate for many service firms. The key factor is that differing amounts
of resources must be used for different jobs. Examples of service firms that use job-order
costing are law firms, accounting firms, dental offices, automobile repair shops, and architectural
firms. The key point is that the costs of each job are unique to the job and must be tracked by job.
3. Normal costing defines product cost as the sum of actual direct materials, actual direct labor,
and applied overhead. The difference between actual costing and normal costing lies in the
treatment of overhead. Actual costing uses actual overhead; normal costing uses applied
overhead.
4. Actual overhead rates are rarely used because managers cannot wait until the end of the year
to obtain product costs. Information on product costs is needed as the year unfolds for planning,
control, and decision making.
5. Overhead is assigned to production using the predetermined rate. The predetermined overhead
rate is equal to estimated overhead divided by estimated activity level. The predetermined
overhead rate is multiplied by the actual activity level or the cost driver on which the rate is based.
6. Underapplied overhead means that the applied overhead is less than the actual overhead. As a
result, the unadjusted cost of goods is too small (because too little overhead has been applied).
So, Cost of Goods Sold will increase by the amount of underapplied overhead.
7. Overapplied overhead means that the applied overhead is more than the actual overhead. As a
result, the unadjusted cost of goods is too large (because too much overhead has been applied).
So, Cost of Goods Sold will decrease by the amount of overapplied overhead.
8. Unless all your jobs (lawns) are the same size and require the same services, you will need to
use a job-order costing system. At a minimum, you will need job-order cost sheets for each
customer. You will need labor time tickets to record the amount of time spent on each job, both
to cost the job and to pay the individual doing the work. A materials requisition form may be
needed if fertilizer or weed control products are used (alternatively, it may be possible to just list
the amount of product used directly on the job-order cost sheet). The more complicated your
business becomes (e.g., mowing, trimming, fertilizing, trimming shrubbery, planting shrubs and
trees), the more source documents will be needed to keep track of time, materials, and use of
capital equipment (e.g., trimmers, brush hogs). Basically, as the business grows, the need for
more formal accounting and source documentation grows.
4 JOB-ORDER COSTING AND
OVERHEAD APPLICATION
DISCUSSION QUESTIONS
4-1
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CHAPTER 4 Job-Order Costing and Overhead Application
9. Multiple overhead rates often produce a more accurate assignment of overhead costs to jobs.
This can be true if the departments through which products pass have different amounts of
overhead and if the various products spend differing amounts of time in the departments. For
example, a company may have two departments, but some products only go through one
department. It would be more accurate to assign less overhead cost to the products using only
one department. This can be easily accomplished using departmental overhead rates.
10. Materials requisition forms serve as the source document for posting materials usage and costs
to individual jobs. Time tickets serve a similar function for labor. Predetermined overhead rates
are used to assign overhead costs to individual jobs.
11. Because the overhead rate is based on direct labor cost, the amount of overhead applied will
increase. As a result, the total cost of each job will go up.
12. The overhead variance is the difference between applied overhead and actual overhead.
Typically, that variance is relatively small, and it is closed to Cost of Goods Sold. If overhead is
underapplied, the variance is added to Cost of Goods Sold. If overhead is overapplied, the
variance is subtracted from Cost of Goods Sold.
13. The cost of a job is often strongly related to the price charged. Logically enough, the higher the
cost of the job, the higher the price charged to the customer. This relationship makes sense not
only to the business but also to the customer. By comparing the cost of the individual job with the
price charged, the firm can determine the profit attributable to each job. Then, the firm can decide
whether the profit is sufficient to continue offering the product or service under the current terms.
14. Because advertising expense is a period expense, it has no effect on overhead—either applied or
actual. Therefore, changes in advertising expense cannot affect manufacturing cost or cost of
goods sold.
15. A departmental overhead rate application can be easily converted to a plantwide rate. First, the
estimated overhead for all departments is totaled, and a single plantwide driver is chosen. The
plantwide overhead rate is simply the estimated plantwide overhead divided by the plantwide
driver. When overhead is applied, the predetermined plantwide rate is multiplied by the actual
amount of driver used in the factory.
16. Producing departments work directly on the products and services being made, whereas support
departments provide indirect support to the producing departments.
17. Without any allocation of support department costs, users may view services as a free good and
consume more of the service than is optimal. Allocating support department costs would
encourage managers to use the service until such time as the marginal cost of the service is
equal to the marginal benefit.
4-2
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CHAPTER 4 Job-Order Costing and Overhead Application
18. The identification and use of causal factors ensures that support department costs are accurately
assigned to users. This increases the legitimacy of the control function and enhances
product-costing accuracy.
19. a. Number of employees
b. Square footage
c. Pounds of laundry
d. Orders processed
e. Maintenance hours worked
f. Number of employees
g. Number of transactions processed
20. The direct method allocates the direct costs of each support department directly to the producing
departments. No consideration is given to the fact that other support departments may use support
services. The sequential method allocates support department costs sequentially. First, the costs
of the center providing the greatest service to all user departments, including other support
departments, are allocated. Next, the costs of the second greatest provider of services are
allocated to all user departments, excluding any department(s) that has already allocated costs.
This continues until all support department costs have been allocated. The principal difference in
the two methods is the fact that the sequential method considers some interactions among
support departments and the direct method ignores interactions.
4-3
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CHAPTER 4 Job-Order Costing and Overhead Application
4-1. d
4-2. c
4-3. a
4-4. b
4-5. b
4-6. a
4-7. a
4-8. e
4-9. a
4-10. b
4-11. c
4-12. e
4-13. d
Direct materials……………………………………… $17,500
Direct labor…………………………………………… 10,000
Applied overhead ($5 × 500 DLH)………………… 2,500
Total job cost……………………………………… $30,000
÷ Number of units………………………………… 1,000
Unit cost………………………………………………… $ 30
MULTIPLE-CHOICE QUESTIONS
4-4
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CHAPTER 4 Job-Order Costing and Overhead Application
4-14. c
4-15. b
4-16. b
4-17. d
4-18. e
4-19. d
4-20. a
4-21. c
4-5
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CHAPTER 4 Job-Order Costing and Overhead Application
BE 4-22
1. Predetermined Overhead Rate =
= $416,000/$520,000
= 0.80, or 80% of direct labor cost
2. Overhead Applied to December Production = 0.80 × $43,700 = $34,960
BE 4-23
1. Applied Overhead = Overhead Rate × Actual Direct Labor Cost
= 0.80 × $532,000 = $425,600
Actual overhead………………………………………………… $423,600
Applied overhead……………………………………………… 425,600
Overhead variance…………………………………………… $ 2,000 overapplied
2. Unadjusted cost of goods sold……………………………… $1,890,000
Less: Overapplied overhead………………………………… (2,000)
Adjusted cost of goods sold………………………………… $1,888,000
BE 4-24
1. Cutting Department Overhead Rate = $240,000/150,000 mhrs
= $1.60 per machine hour
Sewing Department Overhead Rate = $350,000/100,000 DLH
= $3.50 per direct labor hour
2. Overhead Applied to Cutting in June = $1.60 × 13,640 = $21,824
Overhead Applied to Sewing in June = $3.50 × 8,600 = $30,100
3.
Actual overhead…………… $20,610 $35,750
Less: Applied
overhead…………………… 21,824 30,100
Overhead variance………… $ 1,214 overapplied $ 5,650 underapplied
BRIEF EXERCISES: SET A
Department
Cutting Sewing
Estimated Direct Labor Cost
Department
Estimated Overhead
4-6
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CHAPTER 4 Job-Order Costing and Overhead Application
BE 4-25
1. Predetermined Plantwide Overhead Rate = $590,000/131,200 DLH
= $4.50 per direct labor hour*
* Rounded
2. = $4.50 × 11,400 = $51,300
3. = Applied Overhead – Actual Overhead
= $51,300 – $56,360
= $5,060 underapplied
BE 4-26
1. Since the predetermined overhead rate is not given, it must be calculated from
BWIP amounts using either Job 44 or Job 45. Using Job 44,
=
= $780/$1,200
= 0.650, or 65.0%
(The predetermined overhead rate using Job 45 is identical.)
2. Job 45 Job 46 Job 47
Beginning balance, June 1……… $ 6,450 $ 0 $ 0
Direct materials…………………… 7,110 1,800 1,700
Direct labor………………………… 6,400 900 560
Applied overhead………………… 4,160 585 364
Total, June 30……………………… $24,120 $3,285 $2,624
3. By the end of June, Jobs 44, 45, and 47 have been transferred out of Work in
Process. Thus, the ending balance in Work in Process consists of Job 46.
Work in process, June 30…………… $3,285
While three jobs (44, 45, and 47) were transferred out of Work in Process and into
Finished Goods during June, only two jobs remain (Jobs 44 and 47).
Finished goods, June 1………………
Job 44……………………………………
Job 47……………………………………
Finished goods, June 30………………
4. One job, Job 45, was sold during June.
Cost of goods sold……………………
Overhead Applied in June
Overhead Variance
Job 44
Predetermined Overhead Rate Applied Overhead
Direct Labor Cost
$10,900
$ 7,080
2,500
800
520
$ 0
1 0,900
2,624
$13,524
$24,120
4-7
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CHAPTER 4 Job-Order Costing and Overhead Application
BE 4-27
1. Allocation ratios for S1 based on number of employees:
Cutting = 63/(63 + 147) = 0.30
Sewing = 147/(63 + 147) = 0.70
Allocation ratios for S2 based on number of maintenance hours:
Cutting = 16,000/(16,000 + 4,000) = 0.80
Sewing = 4,000/(16,000 + 4,000) = 0.20
2.
Allocate: S1 S2 Cutting Sewing
Direct costs…………………… $ 180,000 $ 150,000 $122,000 $ 90,500
S1…………………………… (180,000) — 54,000 126,000
S2…………………………… — (150,000) 120,000 30,000
Total…………………………… $ 0 $ 0 $296,000 $246,500
BE 4-28
1. Allocation ratios for S1 based on number of employees:
S2 = 30/(30 + 63 + 147) = 0.1250
Cutting = 63/(30 + 63 + 147) = 0.2625
Sewing = 147/(30 + 63 + 147) = 0.6125
Allocation ratios for S2 based on number of maintenance hours:
Cutting = 16,000/(16,000 + 4,000) = 0.8000
Sewing = 4,000/(16,000 + 4,000) = 0.2000
2. Support Departments Producing Departments
Allocate: S1 S2 Cutting Sewing
Direct costs…………………… $ 180,000 $ 150,000 $122,000 $ 90,500
S1…………………………… (180,000) 22,500 47,250 110,250
S2…………………………… — (172,500) 138,000 34,500
Total…………………………… $ 0 $ 0 $307,250 $235,250
Support Departments Producing Departments
4-8
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CHAPTER 4 Job-Order Costing and Overhead Application
BE 4-29
1. Predetermined Overhead Rate =
= $450,000/$600,000
= 0.75, or 75% of direct labor cost
2. Overhead Applied to December Production = 0.75 × $46,300 = $34,725
BE 4-30
1. Applied Overhead = Overhead Rate × Actual Direct Labor Cost
= 0.75 × $532,000 = $399,000
Actual overhead………………………………………… $412,600
Applied overhead………………………………………… 399,000
Overhead variance……………………………………… $ 13,600 underapplied
2. Unadjusted cost of goods sold…………………………$1,670,000
Add: Underapplied overhead…………………………… 13,600
Adjusted cost of goods sold…………………………… $1,683,600
BE 4-31
1. Firing Department Overhead Rate = $405,000/90,000 kiln hours
= $4.50 per kiln hour
Polishing Department Overhead Rate = $110,000/100,000 DLH
= $1.10 per direct labor hour
2. Overhead Applied to Firing in July = $4.50 × 7,400 = $33,300
Overhead Applied to Polishing in July = $1.10 × 8,600 = $9,460
3.
Actual overhead……… $34,000 $9,370
Less: Applied
overhead……………… 33,300 9,460
Overhead variance…… $ 700 underapplied $ 90 overapplied
Department Department
BRIEF EXERCISES: SET B
Estimated Overhead
Estimated Direct Labor Cost
Firing Polishing
4-9
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CHAPTER 4 Job-Order Costing and Overhead Application
BE 4-32
1. Predetermined Plantwide Overhead Rate = $515,000/128,750 DLH
= $4.00 per direct labor hour
2. = $4.00 × 10,950 = $43,800
3. = Applied Overhead – Actual Overhead
= $43,800 – $43,370
= $430 overapplied
BE 4-33
1. Since the predetermined overhead rate is not given, it must be calculated from
BWIP amounts using either Job 86 or Job 87. Using Job 86,
=
= $888/$1,200
= 0.740, or 74.0%
(The predetermined overhead rate using Job 87 is identical.)
2. Job 87 Job 88 Job 89
Beginning balance, March 1… $ 6,820 $ 0 $ 0
Direct materials……………… 7,000 2,100 1,500
Direct labor…………………… 6,000 900 500
Applied overhead……………… 4,440 666 370
Total, March 31………………… $24,260 $3,666 $2,370
3. By the end of March, Jobs 86, 87, and 89 have been transferred out of Work in
Process. Thus, the ending balance in Work in Process consists of Job 88.
Work in process, March 31……… $3,666
While three jobs (86, 87, and 89) were transferred out of Work in Process and into
Finished Goods during March, only two jobs remain (Jobs 86 and 89).
Finished goods, March 1…………
Job 86………………………………
Job 89………………………………
Finished goods, March 31………
4. One job, Job 87, was sold during March.
Cost of goods sold………………
$ 0
11,280
2,370
$13,650
$24,260
Predetermined Overhead Rate Applied Overhead
Overhead Applied in July
Overhead Variance
$11,280
Direct Labor Cost
Job 86
$ 6,888
3,000
800
592
4-10
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CHAPTER 4 Job-Order Costing and Overhead Application
BE 4-34
1. Allocation ratios for S1 based on square footage:
Assembly = 1,875/(1,875 + 625) = 0.75
Painting = 625/(1,875 + 625) = 0.25
Allocation ratios for S2 based on number of machine hours:
Assembly = 3,200/(3,200 + 12,800) = 0.20
Painting = 12,800/(3,200 + 12,800) = 0.80
2.
Allocate: S1 S2 Assembly Painting
Direct costs…………………… $ 200,000 $ 140,000 $115,000 $ 96,000
S1…………………………… (200,000) — 150,000 50,000
S2…………………………… — (140,000) 28,000 112,000
Total…………………………… $ 0 $ 0 $293,000 $258,000
BE 4-35
1. Allocation ratios for S1 based on square footage:
S2 = 500/(500 + 1,875 + 625) = 0.1667
Assembly = 1,875/(500 + 1,875 + 625) = 0.6250
Painting = 625/(500 + 1,875 + 625) = 0.2083
Allocation ratios for S2 based on number of machine hours:
Assembly = 3,200/(3,200 + 12,800) = 0.2000
Painting = 12,800/(3,200 + 12,800) = 0.8000
2. Support Departments Producing Departments
Allocate: S1 S2 Assembly Painting
Direct costs…………………… $ 200,000 $ 140,000 $115,000 $ 96,000
S1…………………………… (200,000) 33,340 125,000 41,660
S2…………………………… — (173,340) 34,668 138,672
Total…………………………… $ 0 $ 0 $274,668 $276,332
Support Departments Producing Departments
4-11
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CHAPTER 4 Job-Order Costing and Overhead Application
E 4-36
a. Hospital services—job-order
b. Custom cabinet making—job-order
c. Toy manufacturing—process
d. Soft-drink bottling—process
e. Airplane manufacturing (e.g., 767s)—job-order
f. Personal computer assembly—process
g. Furniture making—process
h. Custom furniture making—job-order
i. Dental services—job-order
j. Paper manufacturing—process
k. Nut and bolt manufacturing—process
l. Auto repair—job order
m. Architectural services—job-order
n. Landscape design services—job-order
o. Flashlight manufacturing—process
E 4-37
The following are examples; answers may vary.
a. Auto manufacturing—a shop that builds autos from scratch (the way Rolls Royce
used to build cars, or a car that can be built from kits) would use job-order costing.
Large automobile manufacturers use process costing. (While the customer may
think the car is being built to order when selecting among options, actually the
manufacturer waits until enough of the same orders are received to build a run
of virtually identical cars.)
b. Dental services—basic dental services use job-order costing, but denturists (who
make only dentures) can use process costing. (It is important to recognize that
while the dentures themselves are uniquely shaped to fit each patient, the costs
involved do not differ from patient to patient.)
c. Auto repair—a general automobile repair shop uses job-order costing. However,
a shop devoted to only one type of service or repair (e.g., oil change) can use
process costing yet price the cost of the number of quarts of oil used for each
customer.
d. Costume making—a small tailor shop would use job-order costing. However, a
large costume manufacturer that sews a certain number of costume designs
would use process costing.
EXERCISES
4-12
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CHAPTER 4 Job-Order Costing and Overhead Application
E 4-38
1. Predetermined Overhead Rate = $522,900/83,000 DLH
= $6.30 per direct labor hour
2. Applied Overhead = $6.30 × 7,600 DLH
= $47,880
E 4-39
1. Predetermined Overhead Rate = $582,400/80,000 DLH
= $7.28 per direct labor hour
2. Applied Overhead = $7.28 × 6,950 DLH
= $50,596
3. Applied Overhead = $7.28 × 84,100 DLH
= $612,248
Actual overhead…………………………… $613,320
Applied overhead………………………… 612,248
Underapplied overhead………………… $ 1,072
4. Adjusted Cost of Goods Sold = $927,000 + $1,072 = $928,072
E 4-40
1. Assembly Department Overhead Rate = $338,000/130,000 DLH
= $2.60 per direct labor hour
Testing Department Overhead Rate = $630,000/120,000 mhrs
= $5.25 per machine hour
2. Assembly Department Applied Overhead = $2.60 × 11,700 = $30,420
Testing Department Applied Overhead = $5.25 × 10,900 = $57,225
3. Assembly Testing
Department Department
Actual overhead…………………………… $29,850 $58,000
Applied overhead………………………… 30,420 57,225
Overhead variance…………………… $ (570) $ 775
Assembly department has overapplied overhead of $570.
Testing department has underapplied overhead of $775.
4-13
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CHAPTER 4 Job-Order Costing and Overhead Application
E 4-41
1. Ending Balance = Beginning Balance + Prime Costs + Applied Overhead
$1,921 = $1,235 + $560 + Applied Overhead
Applied Overhead = $1,921 – $1,235 – $560 = $126
2. Direct Materials = 3 × Direct Labor
Prime Cost = Direct Materials + Direct Labor
$560 = (3 × Direct Labor) + Direct Labor
Direct Labor = $560/4 = $140
Direct Materials = 3 × Direct Labor = 3($140) = $420
3. Applied Overhead = Direct Labor × Overhead Rate
$126 = $140 × Overhead Rate
Overhead Rate = $126/$140 = 0.90, or 90%
E 4-42
1. Materials requisition form
2. Time ticket
3. Mileage log
4. Job-order cost sheet
E 4-43
1. Job 93 Direct Labor Hours = $2,160/$18 = 120 DLH
Job 94 Direct Labor Hours = $5,400/$18 = 300 DLH
Job 95 Direct Labor Hours = $2,610/$18 = 145 DLH
Job 96 Direct Labor Hours = $900/$18 = 50 DLH
2. August applied overhead for:
Job 93 = 120 DLH × $8 = $960
Job 94 = 300 DLH × $8 = $2,400
Job 95 = 145 DLH × $8 = $1,160
Job 96 = 50 DLH × $8 = $400
3. Job 93 Job 94 Job 95 Job 96
Beginning balance……… $ 8,750 $ 7,300 $ 0 $ 0
Direct materials………… 950 4,500 3,300 1,300
Direct labor……………… 2,160 5,400 2,610 900
Applied overhead……… 960 2,400 1,160 400
Total…………………… $12,820 $19,600 $7,070 $2,600
4. Work in Process, August 31, consists of unfinished jobs:
Job 94……………………… $19,600
Job 95……………………… 7,070
Job 96……………………… 2,600
Total…………………… $29,270
4-14
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CHAPTER 4 Job-Order Costing and Overhead Application
E 4-43 (Concluded)
5. Price of Job 93 = $12,820 + (0.40 × $12,820) = $17,948
6. Jagjit could treat the acquisition and use of the bulldozer as a separate department
and create a departmental overhead rate for it based on the hours used. That is, the
overhead rate would be the total budgeted cost of the bulldozer (depreciation, fuel,
maintenance, and so on) divided by the anticipated annual hours of use. In this way,
only the jobs requiring the use of the heavier equipment would be charged for it.
E 4-44
Job 877 Job 878 Job 879 Job 880
1. Beginning balance…………… $18,640 $ 0 $ 0 $ 0
Direct materials……………… 14,460 6,000 3,500 1,800
Direct labor…………………… 14,800 8,500 1,750 2,150
2. Applied overhead in October for:
Job 877 = $14,800 × 0.80 = $11,840
Job 878 = $8,500 × 0.80 = $6,800
Job 879 = $1,750 × 0.80 = $1,400
Job 880 = $2,150 × 0.80 = $1,720
3. Work in Process, October 31:
Job 878*…………………………………………………………… $21,300
Job 879**…………………………………………………………… 6,650
Job 880***………………………………………………………… 5,670
Total…………………………………………………………… $33,620
* $6,000 + $8,500 + $6,800 = $21,300
** $3,500 + $1,750 + $1,400 = $6,650
*** $1,800 + $2,150 + $1,720 = $5,670
4. Cost of Job 877 = $18,640 + $14,460 + $14,800 + $11,840 = $59,740
Price of Job 877 = $59,740 + (0.50 × $59,740) = $89,610
E 4-45
1. Balance in Work in Process (all incomplete jobs):
Job 303…………………………………………………………… $ 780
Job 306…………………………………………………………… 350
Job 308…………………………………………………………… 620
Job 309…………………………………………………………… 1,200
Job 310…………………………………………………………… 515
Total…………………………………………………………… $3,465
4-15
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CHAPTER 4 Job-Order Costing and Overhead Application
E 4-45 (Concluded)
2. Balance in Finished Goods (all jobs completed but not sold):
Beginning balance (Job 300)………………………………… $ 300
Job 301…………………………………………………………… 1,600
Job 304…………………………………………………………… 2,300
Job 305…………………………………………………………… 4,150
Total…………………………………………………………… $8,350
3. Cost of Goods Sold = Job 302 + Job 307
= $1,240 + $710
=
E 4-46
1. Job 86 Job 87 Job 88
Balance, July 1……………………………… $15,310 $ 4,250 $ 0
Direct materials……………………………… 4,450 10,300 13,150
Direct labor…………………………………… 16,000 12,200 24,000
Applied overhead…………………………… 5,000 3,000 10,000
Total………………………………………… $40,760 $29,750 $47,150
2. Work in Process, July 31 = Job 87 = $29,750
3. Finished Goods:
Beginning balance…………………………………………… $ 49,000
Job 88 (transferred in)………………………………………… 47,150
Job 82 (sold)…………………………………………………… (25,600)
Ending balance, July 31…………………………………… $ 70,550
4. Cost of Goods Sold = Job 82 + Job 86
= $25,600 + $40,760
=
5. Sales [$66,360 + (0.20 × $66,360)]…………………………… $79,632
Cost of goods sold………………………………………….… 66,360
Gross margin……………………………………………… $13,272
Less:
Variable marketing expenses (0.04 × $79,632)……… $3,185
Fixed marketing expenses……………………………… 1,275
Administrative expenses………………………………… 3,900 8,360
Operating income……………………………………………… $ 4,912
$66,360
$1,950
4-16
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CHAPTER 4 Job-Order Costing and Overhead Application
E 4-47
Job 213:
1. Number of Units =
= $855/$8.55
=
2. Total Sales Revenue = Price per Unit × Number of Units
= $12 × 100 units
= $1,200
3. Direct Labor Hours, Department 1 =
= $90/$6
= 15 DLH
Direct Labor Cost, Department 1 = 15 direct labor hours × $10 = $150
4. Overhead Applied, Department 2 = 25 machine hours × $8
= $200
Job 214:
1. Price per Unit =
= $4,375/350 units
=
2. Direct Labor Hours, Department 1 =
= $700/$10
= 70 DLH
Overhead Applied, Department 1 = Direct Labor Hours,
Department 1 × $6
= 70 DLH × $6
= $420
3. Materials Used in Production = Total Manufacturing Cost –
Direct Labor Cost,
Department 1 – Direct Labor Cost,
Department 2 – Overhead Applied,
Department 1 – Overhead Applied,
Department 2
= $3,073 – $700 – $100 – $420 – $400
= $1,453
Unit Cost
Total Manufacturing Cost
100 units
Direct Labor Rate
Total Sales Revenue
Number of Units
Direct Labor Cost, Department 1
$12.50
Overhead Applied, Department 1
Overhead Rate, Department 1
4-17
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CHAPTER 4 Job-Order Costing and Overhead Application
E 4-47 (Concluded)
4. Unit Cost =
= $3,073/350 units
=
Job 217:
1. Machine Hours, Department 2 =
= $160/$8
= 20 mhrs
2. Total Manufacturing Cost = Unit Cost × Number of Units
= $9.87 × 400 units
= $3,948
3. Direct Labor Cost, Department 2 = Total Manufacturing Cost – Materials
Used in Production – Direct Labor Cost,
Department 1 – Overhead Applied,
Department 1 – Overhead Applied,
Department 2
= $3,948 – $488 – $2,000 – $1,200 – $160
= $100
Job 225:
1. Number of Units =
= $1,150/$5 = 230 units
2. Unit Cost =
= $575/230 units
=
3. Machine Hours, Department 2 =
= $0/$8
= 0 mhrs
Total Sales Revenue
Overhead Applied, Department 2
Overhead Rate
Number of Units
Total Manufacturing Cost
$8.78
Price per Unit
Overhead Applied, Department 2
Overhead Rate
Number of Units
Total Manufacturing Cost
$2.50
4-18
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CHAPTER 4 Job-Order Costing and Overhead Application
E 4-48
1. Direct materials……………………………..…………………… $12,000
Direct labor:
Department A…………………………………………………… $8,100
Department B…………………………………………………… 2,160 10,260
Overhead ($10 × 570 DLH)……………………………………… 5,700
Total manufacturing costs…………………………………… $27,960
2. Unit Cost = $27,960/1,000 units = $27.96
3. Direct materials…………………………………………………… $12,000
Direct labor:
Department A…………………………………………………… $8,100
Department B…………………………………………………… 2,160 10,260
Overhead:
Department A ($3 × 450)……………………………………… 1,350
Department B ($7 × 800)……………………………………… 5,600
Total manufacturing costs……………………………………… $29,210
4. Unit Cost = $29,210/1,000 units = $29.21
E 4-49
1. Job 39 Job 40 Job 41 Job 42 Job 43
Balance, April 1 $ 540 $3,400 $2,990 $ 0 $ 0
Direct materials 700 560 375 3,500 6,900
Direct labor 500 600 490 2,500 3,000
Applied overhead 550 660 539 2,750 3,300
Total cost $2,290 $5,220 $4,394 $8,750 $13,200
2. Ending Balance in Work in Process = Job 39 + Job 42
= $2,290 + $8,750 = $11,040
Cost of Goods Sold for April = Job 40 + Job 41 + Job 43
= $5,220 + $4,394 + $13,200 = $22,814
3.
Sales [$22,814 + (0.30 × $22,814)]……..………..……….………………….…… $29,658
Cost of goods sold……………….…………………………..…….……………… 22,814
Gross margin…………………….…………………………..…….…………… $ 6,844
Less: Selling and administrative expenses………….………………………… 4,575
Operating income………………….…………………………..…….………… $ 2,269
For the Month Ended April 30
Ensign Landscape Design
Income Statement
4-19
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CHAPTER 4 Job-Order Costing and Overhead Application
E 4-50
1.
Credit
a. Raw Materials
Accounts Payable 29,670
b. Work in Process
Raw Materials 24,500
c. Work in Process
Wages Payable 32,400
d. Overhead Control
Various Payables 17,880
e. Work in Process
Overhead Control 8,640
Total Direct Labor Hours = $32,400/$18 = 1,800 DLH
Applied Overhead = 1,800 DLH × $4.80 = $8,640
f. Finished Goods
Work in Process 50,020
g. Cost of Goods Sold
Finished Goods 53,040
Accounts Receivable
Sales Revenue 74,256
2. Job 58 Job 59 Job 60
Direct materials………………………………… $ 9,200 $ 8,900 $ 6,400
Direct labor……………………………………. 14,400 10,800 7,200
Applied overhead……………………………… 3,840 2,880 1,920
Total cost…………………………………… $27,440 $22,580 $15,520
3. Raw Materials:
Beginning balance…………………………… $ 2,300
Purchases……………………………………… 29,670
Direct materials……………………………….. (24,500)
Ending balance…………………………… $ 7,470
24,500
Journal
Date Account & Explanation Debit
29,670
32,400
74,256
8,640
17,880
50,020
53,040
4-20
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CHAPTER 4 Job-Order Costing and Overhead Application
E 4-50 (Concluded)
4. Work in Process:
Beginning balance…………………………………………… $ 0
Direct materials………………………………………………… 24,500
Direct labor……………………………………………………… 32,400
Applied overhead……………………………………………… 8,640
Jobs completed:
Job 58………………………………………………………… $27,440
Job 59……………………………………………..………… 22,580 (50,020)
Ending balance………………………………………………… $ 15,520
5. Finished Goods:
Beginning balance…………………………………………… $ 25,600
Jobs transferred in:
Job 58……………………………………………….……… $27,440
Job 59………………………………………………………. 22,580 50,020
Jobs sold:
Job 57………………………………………………………… $25,600
Job 58……………………………………………….……… 27,440 (53,040)
Ending balance………………………………………………… $ 22,580
E 4-51
1. Allocation ratios for Power based on number of machine hours:
Battery = 7,000/(7,000 + 1,000) = 0.8750
Small Motors = 1,000/(7,000 + 1,000) = 0.1250
Allocation ratios for General Factory based on square footage:
Battery = 5,000/(5,000 + 15,000) = 0.2500
Small Motors = 15,000/(5,000 + 15,000) = 0.7500
2.
General Small
Power Factory Battery Motors
Direct costs………………… $ 160,000 $ 430,000 $163,000 $ 84,600
Allocate:
Power…………………… (160,000) — 140,000 20,000
General Factory………… — (430,000) 107,500 322,500
Total………………………… $ 0 $ 0 $410,500 $427,100
3. Battery Overhead Rate = $410,500/18,000 DLH = $22.81
Small Motors Overhead Rate = $427,100/60,000 DLH = $7.12
Support Departments Operating Divisions
4-21
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CHAPTER 4 Job-Order Costing and Overhead Application
E 4-52
1. Allocation ratios for General Factory based on square footage:
Power = 1,000/(1,000 + 5,000 + 15,000) = 0.0476
Battery = 5,000/(1,000 + 5,000 + 15,000) = 0.2381
Small Motors = 15,000/(1,000 + 5,000 + 15,000) = 0.7143
Allocation ratios for Power based on number of machine hours:
Battery = 7,000/(7,000 + 1,000) = 0.8750
Small Motors = 1,000/(7,000 + 1,000) = 0.1250
2. Support Departments
General Small
Power Factory Battery Motors
Direct costs………………… $ 160,000 $163,000 $ 84,600
Allocate:
Power……………………… 20,468 (430,000) 102,383 307,149
General Factory*………… (180,468) — 157,910 22,559
Total………………………… $ 0 $ 0 $423,293 $414,308
* Totals for Battery and Small Motors do not add to the total for General Factory due to rounding.
Because all support department cost must be transferred to the producing departments, the
company will just “live with” the increase in cost transferred out.
3. Battery Overhead Rate = $423,293/18,000 DLH = $23.52
Small Motors Overhead Rate = $414,308/60,000 DLH = $6.91
$ 430,000
Operating Divisions
4-22
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CHAPTER 4 Job-Order Costing and Overhead Application
P 4-53
1. Overhead Rate = $789,000/100,000 DLH = $7.89 per DLH
2. Job 741 Job 743 Job 744 Job 745
Balance, July 1……… $ 29,870 $27,880 $ 0 $ 0
Direct materials…… 25,500 14,450 13,600 8,420
Direct labor………… 61,300 28,700 24,500 21,300
Applied overhead…… 31,560 15,622 12,624 11,046
Total cost………… $148,230 $86,652 $50,724 $40,766
3. Ending Balance in Work in Process = Job 742 + Job 744 + Job 745
= $170,341 + $50,724 + $40,766
= $261,831
4. Cost of Goods Sold = Job 741 + Job 743
= $148,230 + $86,652
= $234,882
P 4-54
1. Cost of Alban job:
Professional time (85 hours × $120)……………………………… $10,200
Mileage (510 miles @ $0.50)………………………………………… 255
Photographs…………………………………………………………… 120
Total………………………………………………………………… $10,575
2. Overhead is included in the rate for professional time. This is easier for
professionals than to calculate a separate overhead rate and charge it to clients.
In effect, Spade Millhone charges a conversion cost rate, not a labor rate, to its
clients.
PROBLEMS
Job 742
$ 55,215
39,800
48,500
26,826
$170,341
4-23
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CHAPTER 4 Job-Order Costing and Overhead Application
P 4-54 (Concluded)
3. Answers may vary. The following is one example.
Beginning Ending Total
Date Client Mileage Mileage Miles
7/8 Alban 56,780 56,815 Ofc. to claimant #1, 35
to Dr. Phony, to
claimant #2, to ofc.
7/9 Alban 56,815 56,903 Ofc. to claimant #3, 88
to claimant #4, to ofc.
7/10 Alban 56,903 57,078 Ofc. to witness #3, 175
to client, to ofc.
7/11 Alban 57,078 57,290 Ofc. to claimant #2, 212
to claimant #4, to ofc.
Note: Separate mileage logs are kept by Rex Spade and Victoria Millhone.
Then, relevant amounts are transferred to cost sheets (or folders) for each
client.
Rex Spade Mileage Log
Destination
4-24
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CHAPTER 4 Job-Order Costing and Overhead Application
P 4-55
1. Overhead Rate = $374/$440 = 0.8500 times direct labor cost
(This rate was calculated using information from the Carter job; however, the
Pelham and Tillson jobs would give the same answer.)
2. Carter Pelham Tillson Jasper Dashell
Beginning WIP……… $1,024 $1,910 $3,621 $ 0 $ 0
Direct materials…… 600 550 770 2,310 190
Direct labor………… 300 200 240 2,100 240
Applied overhead…… 255 170 204 1,785 204
Total……………… $2,179 $2,830 $4,835 $6,195 $634
Note: This is just one way of setting up the job-order cost sheets. You might
prefer to keep the details on the materials, labor, and overhead in beginning
inventory costs.
3. Since the Tillson and Jasper jobs were completed, the others must still be in
process. Therefore, the ending balance in Work in Process is the sum of the costs
of the Carter, Pelham, and Dashell jobs.
Carter………………………………… $2,179
Pelham……………………………… 2,830
Dashell……………………………… 634
Ending work in process……… $5,643
Cost of Goods Sold = Tillson Job + Jasper Job = $4,835 + $6,195 = $11,030
4.
Sales (1.30 × $11,030)……………………………………………………………… $14,339
Cost of goods sold………………………………………………………………… 11,030
Gross margin…………………………………………………………………… $ 3,309
Marketing and administrative expenses………………………………………… 2,635
Operating income……………………………………………………………… $ 674
Pavlovich Prosthetics Company
Income Statement
For the Month Ended January 31
4-25
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CHAPTER 4 Job-Order Costing and Overhead Application
P 4-56
1. OH Rate = $108,000/18,000 mhrs = $6.00 per machine hour
2. Department A: $75,000/10,000 mhrs = $7.500 per machine hour
Department B: $33,000/8,000 mhrs = $4.125 per machine hour
3.
Plantwide: Plantwide:
70 mhrs × $6.00 = $420 70 mhrs × $6.00 = $420
Departmental: Departmental:
20 mhrs × $7.500……… $150.00 50 mhrs × $7.500………… $375.00
50 mhrs × $4.125……… 206.25 20 mhrs × $4.125………… 82.50
$356.25 $457.50
Department A appears to be more overhead intensive, so jobs spending more
time in Department A ought to receive more overhead. Thus, departmental rates
provide more accuracy.
4. Plantwide rate: $135,000/18,000 mhrs = $7.50
Department B: $60,000/8,000 mhrs = $7.50
Plantwide: Plantwide:
70 mhrs × $7.50 = $525 70 mhrs × $7.50 = $525
Departmental: Departmental:
20 mhrs × $7.50………… $150.00 50 mhrs × $7.50…………… $375.00
50 mhrs × $7.50………… 375.00 20 mhrs × $7.50…………… 150.00
$525.00 $525.00
Assuming that machine hours is a good cost driver, the departmental rates reveal
that overhead consumption is the same in each department. In this case, there is
no need for departmental rates, and a plantwide rate is sufficient.
Job 73
Job 73 Job 74
Job 74
4-26
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CHAPTER 4 Job-Order Costing and Overhead Application
P 4-57
1. Overhead Rate = $432,000/8,000 mhrs = $54.00 per machine hour
Job 1 Job 2
Direct materials…………………………………………… $ 6,725 $ 9,340
Direct labor……………………………………………….… 1,800 3,100
Overhead ($54.00 × 200 machine hours)……………… 10,800 10,800
Total manufacturing cost……………………………… $19,325 $23,240
Plus 35% markup…………………………………………… 6,764 8,134
Bid price………………………………………………… $26,089 $31,374
2. Welding Overhead Rate = $220,000/5,000 mhrs = $44.00 per machine hour
Assembly Overhead Rate = $62,000/10,000 dlhrs = $6.20 direct labor hour
Finishing Overhead Rate = $150,000/2,000 mhrs = $75.00 per machine hour
Job 1 Job 2
Direct materials……………………………………………… $ 6,725 $ 9,340
Direct labor………………………………………………… 1,800 3,100
Overhead:
Welding ($44.00 × 50); ($44.00 × 50)………………… 2,200 2,200
Assembly ($6.20 × 60); ($6.20 × 20)………………… 372 124
Finishing ($75.00 × 90); ($75.00 × 125)……………… 6,750 9,375
Total manufacturing cost………………………………… $17,847 $24,139
Plus 35% markup…………………………………………… 6,246 8,449
Bid price………………………………………….……… $24,093 $32,588
4-27
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CHAPTER 4 Job-Order Costing and Overhead Application
P 4-58
1. Jan’s Job Ed’s Job
Materials……………………………………………….…………… $ 50 $ 75
Direct labor ($6 × 10 hours; $6 × 20 hours)………………… 60 120
Applied overhead:
0.20 × ($50 + $60)……………………………………………… 22
0.20 × ($75 + $120)…………………………………………… 39
Total………………………………………………………………… $132 $234
2. Since Jan’s job is more like the jobs Steve is used to doing, her costs are likely
to be more accurate. Clearly, Steve is unsure just how to cost Ed’s job. If he
expects to get more use from the tools he buys for Ed’s job, then he can absorb
them into his overhead rate. If not, perhaps they should be added to the cost of
Ed’s job as a part of materials.
P 4-59
1. Job 64:
Direct materials…………………………………………….………
Direct labor…………………………………………….…………
Overhead ($11 × 410 DLH)………………………………………
Total cost…………………………………………….…………
Unit Cost = $14,790/50 units = $295.80
2. Ending Work in Process = Cost of Job 65
= $785 + $9,328 + ($11 × 583 DLH) = $16,526
3.
Finished Goods
Work in Process 14,790
Cost of Goods Sold
Finished Goods 14,790
Accounts Receivable
Sales Revenue 25,883
(1.75 × $14,790) = $25,883
25,883
14,790
14,790
$ 3,560
6,720
4,510
$14,790
Date
Journal
Account & Explanation Debit Credit
4-28
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CHAPTER 4 Job-Order Costing and Overhead Application
P 4-60
1.
Debit
a. Raw Materials 4,610
Accounts Payable 4,610
b. Work in Process 4,800
Raw Materials 4,800
c. Work in Process [$14 × (65 DLH + 90 DLH)] 2,170
Wages Payable 2,170
d. Work in Process ($6.20 × 155 DLH) 961
Overhead Control 961
e. Overhead Control 973
Cash 973
2.
Direct materials……………… $3,170 Direct materials……………… $1,630
Direct labor…………………… 910 Direct labor…………………… 1,260
Applied overhead…………… 403 Applied overhead…………… 558
Total………………………… $4,483 Total………………………… $3,448
Debit
f. Finished Goods 4,483
Work in Process 4,483
g. Cost of Goods Sold 2,770
Finished Goods 2,770
Accounts Receivable 3,463
Sales ($2,770 × 1.25) 3,463
Date Account & Explanation Credit
Journal
Date Account & Explanation Credit
Job 518 Job 519
Journal
4-29
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CHAPTER 4 Job-Order Costing and Overhead Application
P 4-60 (Concluded)
3.
Direct materials:
Beginning raw materials inventory…………… $1,025
Purchases of raw materials…………………… 4,610
Total raw materials available………………… $5,635
Ending raw materials…………………………… 835
Raw materials used……………………………… $4,800
Direct labor…………………………………..……… 2,170
Overhead……………………………………………… $ 973
Less: Underapplied overhead………………… 12
Overhead applied………………………………… 961
Current manufacturing costs……………………… $7,931
Add: Beginning work in process………………… 0
Total manufacturing costs…………………… $7,931
Less: Ending work in process…………………… 3,448
Cost of goods manufactured………………… $4,483
P 4-61
1. = Direct Labor Cost × Overhead Rate
= $80,000 × Overhead Rate
= 1.75, or 175% of Direct Labor Cost
2. Applied overhead………………………………..…………………… $140,000
Actual overhead………………………………..……………………… 138,500
Overapplied overhead………………………………..…………… $ 1,500
3. Direct materials………………………………………………………… $ 40,000
Direct labor……………………………………………………………… 80,000
Overhead applied……………………………………………………… 140,000
$260,000
Add: Beginning work in process…………………………………… 17,000
Less: Ending work in process……………………………………… (32,000)
Cost of goods manufactured……………………………………… $245,000
Nelson Company
Schedule of Cost of Goods Manufactured
For the Month Ended April 30
Overhead Rate
$140,000
Applied Overhead
4-30
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CHAPTER 4 Job-Order Costing and Overhead Application
P 4-61 (Concluded)
4.
Debit
Overhead Control 1,500
Cost of Goods Sold 1,500
Adjusted Cost of Goods Sold:
$210,000
(1,500)
$208,500
5. Direct labor (1,000 × $10)……………………………………………………… $10,000
Overhead applied (1.75 × 10,000)…………………………………………… 17,500
Direct materials ($32,000 – $10,000 – $17,500)……..……………………… 4,500
Ending work in process…………………………………………………… $32,000
P 4-62
1. Overhead Rate = $129,600/13,500 DLH = $9.60 per direct labor hour
2. Direct materials………………………………………………………………… $ 2,750
Direct labor……………………………………….……………………………… 5,355
Applied overhead*……………………………………………………………… 3,024
Total cost of Job K456……………………………………….…………… $11,129
* $9.60 × ($5,355/$17) = $3,024
3.
Debit
Overhead Control 172,500
Lease Payable 6,800
Accumulated Depreciation 19,340
Wages Payable 90,400
Utilities Payable 14,560
Other Payables 41,400
Work in Process ($9.60 × 18,100 DLH) 173,760
Overhead Control 173,760
4. Actual overhead……………………………………………… $172,500
Applied overhead……………………………………..……… 173,760
Overapplied overhead…………………………………… $ 1,260
5. Normal cost of goods sold………………………………… $635,600
Less: Overapplied overhead……………………………… (1,260)
Adjusted cost of goods sold…………………………… $634,340
Date Account & Explanation Credit
Journal
Date Account & Explanation Credit
Journal
4-31
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CHAPTER 4 Job-Order Costing and Overhead Application
P 4-63
1.
Debit
a. Raw Materials 42,630
Accounts Payable 42,630
b. Work in Process 27,000
Raw Materials 27,000
c. Work in Process 26,320
Wages Payable 26,320
d. Overhead Control 19,950
Cash 19,950
e. Work in Process [($26,320/$14) × $10] 18,800
Overhead Control 18,800
2. Job 703:
Beginning balance, work in process…………………… $10,000
Direct materials……………………………………………… 12,500
Direct labor ($14 × 780 DLH)……………………………… 10,920
Overhead applied ($10 × 780 DLH)……………………… 7,800
Total………………………………………………………… $41,220
Job 704:
Direct materials……………………………………………… $14,500
Direct labor ($14 × 1,100 DLH)…………………………… 15,400
Overhead applied ($10 × 1,100 DLH)…………………… 11,000
Total………………………………………………………… $40,900
Journal
Date Account & Explanation Credit
4-32
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CHAPTER 4 Job-Order Costing and Overhead Application
P 4-63 (Concluded)
3.
Debit Credit
f. Finished Goods 41,220
Work in Process 41,220
h. Cost of Goods Sold 6,240
Finished Goods 6,240
Accounts Receivable 8,112
Sales 8,112
4. a. Raw Materials:
Beginning balance………………………… $ 6,070
Add: Purchases………………………… 42,630
Less: Materials requisitioned………… (27,000)
Ending balance………………………… $ 21,700
b. Work in Process:
Beginning balance………………………… $ 10,000
Add: Materials requisitioned………… 27,000
Direct labor………………………… 26,320
Overhead applied………………… 18,800
Less: Jobs completed…………………… (41,220)
Ending balance………………………… $ 40,900
c. Finished Goods:
Beginning balance………………………… $ 6,240
Add: Jobs completed…………………… 41,220
Less: Jobs sold…………………………… (6,240)
Ending balance………………………… $41,220
Journal
Date Account & Explanation
4-33
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CHAPTER 4 Job-Order Costing and Overhead Application
P 4-64
1. Direct method:
Proportion of: Laboratory Pathology
Number of samples……………………… 0.6000 0.4000
Transactions processed………………… 0.6500 0.3500
Direct costs…………………………………… $345,000 $456,000
Delivery:
(0.6000 × $240,000)……………………… 144,000
(0.4000 × $240,000)……………………… 96,000
Accounting:
(0.65 × $270,000)………………………… 175,500
(0.35 × $270,000)………………………… 94,500
Total…………………………………………… $664,500 $646,500
2. Delivery Accounting Laboratory Pathology
Transactions……………… 0.0500 — 0.6175 0.3325
Number of samples……… — — 0.6000 0.4000
Direct costs………………… $ 240,000 $ 270,000 $345,000 $456,000
Accounting:
(0.0500 × $270,000)…… 13,500 (13,500)
(0.6175 × $270,000)…… (166,725) 166,725
(0.3325 × $270,000)…… (89,775) 89,775
Delivery:
(0.6000 × $253,500)…… (152,100) 152,100
(0.4000 × $253,500)…… (101,400) 101,400
Total………………………… $ 0 $ 0 $663,825 $647,175
P 4-65
1. a. Direct method:
Drilling Assembly
Machine hours………………………… 0.8000 0.2000
Kilowatt-hours………………………… 0.1000 0.9000
Maintenance:
(0.80 × $320,000)…………………… $256,000
(0.20 × $320,000)…………………… $ 64,000
Power:
(0.10 × $400,000)…………………… 40,000
(0.90 × $400,000)…………………… 360,000
Direct costs……………………………… 163,000 90,000
Total…………………………………… $459,000 $514,000
4-34
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CHAPTER 4 Job-Order Costing and Overhead Application
P 4-65 (Concluded)
Drilling: $459,000/30,000 mhrs = $15.30 per machine hour
Assembly: $514,000/40,000 DLH = $12.85 per direct labor hour
Prime costs………………………………………………… $1,817.00
Drilling ($15.30 × 2 mhrs)………………………………… 30.60
Assembly ($12.85 × 50 DLH)…………………………… 642.50
Total cost……………………………………………… $2,490.10
Markup (15%)……………………………………………… 373.52
Bid price………………………………………………… $2,863.62
b. Sequential method: Allocate Power first, then Maintenance
Maintenance Power Drilling Assembly
Machine hours……… — — 0.80 0.20
Kilowatt-hours……… 0.10 — 0.09 0.81
Direct costs…………… $ 320,000 $ 400,000 $163,000 $ 90,000
Power:
(0.10 × $400,000)… 40,000 (40,000)
(0.09 × $400,000)… (36,000) 36,000
(0.81 × $400,000)… (324,000) 324,000
Maintenance:
(0.80 × $360,000)… (288,000) — 288,000
(0.20 × $360,000)… (72,000) 72,000
Total…………………… $ 0 $ 0 $487,000 $486,000
Drilling: $487,000/30,000 mhrs = $16.23 per machine hour
Assembly: $486,000/40,000 DLH = $12.15 per direct labor hour
Prime costs………………………………………………… $1,817.00
Drilling ($16.23 × 2 mhrs)………………………………… 32.46
Assembly ($12.15 × 50 DLH)…………………………… 607.50
Total cost……………………………………………… $2,456.96
Markup (15%)……………………………………………… 368.54
Bid price………………………………………………… $2,825.50
2. The sequential method is the more accurate because it considers some of the
support department interactions.
4-35
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CHAPTER 4 Job-Order Costing and Overhead Application
Case 4-66
1. Mrs. Lucky won’t like being charged more for one job when the same number
and type of announcements were produced in each job.
2. May: Actual Rate = $20,000/500 hours = $40 per hour
Overhead assigned: $40 × 5 hours = $200
June and July: Actual Rate = $20,000/250 hours = $80 per hour
Overhead assigned: $80 × 5 hours = $400
3. Predetermined Rate = $240,000/(500 hours × 12) = $40 per hour
Cost and price of each job:
Direct materials………………………
Direct labor……………………………
Overhead (5 hours × $40)…………
Total cost…………………………
Plus 25% markup……………………
Price…………………………………
Using a predetermined rate will avoid the nonuniform production revealed in
the first two requirements and result in a more accurate application of overhead
and fairer costing of the summer jobs.
CASES
$593.75
$250.00
25.00
200.00
$475.00
118.75
4-36
© 2018 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 4 Job-Order Costing and Overhead Application
Case 4-67
1. The solution Doug proposes is not ethical. Although maintaining the current
plantwide rate is probably not illegal, its continuation has one purpose: to extract
extra profits from government business. Doug knows the plantwide rate is not
accurately assigning overhead costs to the various jobs and is willing to alter the
assignments on an “unofficial basis” for purposes of bidding on private-sector
jobs. Fundamentally, ethical behavior is concerned with choosing right over
wrong. To knowingly overcharge the government for future business certainly
seems wrong. To continue overpricing knowing the new overhead rates would
more than make up for any lost profits from the government sector (through more
competitive bidding in the private sector) is a clear indication of greed. While
managers have an obligation to maximize profits, this obligation must be within
ethical boundaries.
2. Tonya should first determine whether or not Gunderson has a corporate code of
conduct. She can pursue the avenues suggested by the code. For example, if
Tonya cannot persuade Doug to refrain from implementing his scheme, she
could present her objections to Doug’s immediate supervisor. If a resolution
cannot be realized at this level, then Tonya should go to the next higher
management level. If no resolution is possible after appealing to all higher levels,
then resignation may be the only remaining option.
4-37
© 2018 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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