Assignment 7.2 Handout

Accounting 2

Handouts

Assignment 7.2 Handout

1. Sherborn Construction, Inc., is a home builder in New Mexico. Sherborn uses a job order costing system in which each house is a job. Because it constructs houses, the company uses accounts titled Construction wages and Construction overhead. The following events occurred during August:

Requirements

R1. Record the events in the general journal.

R2. Open T-accounts for Work in process inventory and Finished goods inventory. Post the appropriate entries to these accounts, identifying each entry by letter. Determine the ending account balances, assuming that the beginning balances were zero.

R3. Add the costs of the unfinished houses, and show that this total amount equals the ending balance in the Work in process inventory account.

R4. Add the cost of the completed house that has not yet been sold, and show that this equals the ending balance in Finished goods inventory.

R5. Compute gross profit on the house that was sold. What costs must gross profit cover for Sherborn Construction?

2. Classic Technology, Co., manufactures CDs and DVDs for computer software and entertainment companies. Classic uses job order costing and has a perpetual inventory system. On November 2, Classic began production of 5,100 DVDs, Job 423, for Cheetah Pictures for $1.30 each. Classic promised to deliver the DVDs to Cheetah by November 5. Classic incurred the following costs:

Classic Technology allocates manufacturing overhead to jobs based on the relation between estimated overhead ($520,000) and estimated direct labor costs ($450,000). Job 423 was completed and shipped on November 3.

Requirements

R1. Prepare a job cost record similar to the following example for Job 423. Calculate the predetermined overhead rate; then apply manufacturing overhead to the job.

R2. Journalize in summary form the requisition of direct materials and the assignment of direct labor and manufacturing overhead to Job 423.

R3. Journalize completion of the job and the sale of the 5,100 DVDs.

3. Robin Design, Inc., is a Web site design and consulting firm. The firm uses a job order costing system, in which each client is a different job. Robin Design traces direct labor, licensing costs, and travel costs directly to each job. It allocates indirect costs to jobs based on a predetermined indirect cost allocation rate, computed as a percentage of direct labor costs. At the beginning of 2011, managing partner Judi Jacquin prepared the following budget:

In November 2011, Robin Design served several clients. Records for two clients appear here:

Requirements

R1. Compute Robin Design’s predetermined indirect cost allocation rate for 2011.

R2. Compute the total cost of each job.

R3. If Jacquin wants to earn profits equal to 20% of service revenue, how much (what fee) should she charge each of these two clients?

R4. Why does Robin Design assign costs to jobs?

Decision Case

Nature’s Own manufactures organic fruit preserves sold primarily through health food stores and on the Web. The company closes for two weeks each December to enable employees to spend time with their families over the holiday season. Nature’s Own’s manufacturing overhead is mostly straight-line depreciation on its plant and air-conditioning costs for keeping the berries cool during the summer months. The company uses direct labor hours as the manufacturing overhead allocation base. President Cynthia Ortega has just approved new accounting software and is telling Controller Jack Strong about her decision.

“I think this new software will be great,” Ortega says. “It will save you time in preparing all those reports.”

“Yes, and having so much more information just a click away will help us make better decisions and help control costs,” replies Strong. “We need to consider how we can use the new system to improve our business practices.”

“And I know just where to start,” says Ortega. “You complain each year about having to predict the weather months in advance for estimating air-conditioning costs and direct labor hours for the denominator of the predetermined manufacturing overhead rate, when professional meteorologists can’t even get tomorrow’s forecast right! I think we should calculate the predetermined overhead rate on a monthly basis.”

Controller Strong is not so sure this is a good idea.

Requirements

R1. What are the advantages and disadvantages of Ortega’s proposal?

R2. Should Nature’s Own compute its predetermined manufacturing overhead rate on an annual basis or monthly basis? Explain.

Accounting 2 Assignment Handout Page 1 of 5 10/22/2012