Systems Design: Job-Order Costing

Chapter 2

Systems Design: Job-Order Costing

Solutions to Questions

Solutions Manual, Chapter 21

2-1By definition, overhead costs cannot practically be traced to products or jobs. Therefore, overhead costs must be allocated rather than traced if they are to be assigned to products or jobs.

2-2Job-order costing is used where many different products or services are produced each period. Each product (or job) is different from all others and requires separate costing. Process costing is used where a single, homogeneous product, such as cement, bricks, or gasoline, is continuously produced for long periods.

2-3The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials and direct labor costs traced to the job and manufacturing overhead cost applied to the job. When a job is completed, the job cost sheet is used to compute the cost per completed unit. The job cost sheet is also a control document for: (1) determining how many units have been sold and determining the cost of these units; and (2) determining how many units are still in inventory at the end of a period and determining the cost of these units on the balance sheet.

2-4A predetermined overhead rate is used to apply overhead to jobs. It is determined before a period begins and is computed by dividing the estimated total manufacturing overhead for the period by the estimated total units in the allocation base. Thereafter, overhead is applied to jobs by multiplying the predetermined overhead rate by the actual amount of the allocation base that is incurred for each job. The most common allocation base is direct labor hours.

2-5A sales order is issued after a firm agreement has been reached with a customer on matters relating to quantities, prices, and shipment dates for goods. This sales order is the basis for the production department to issue a production order. The production order summarizes the specifications of the goods involved, and is the basis for the accounting department’s preparation of a job cost sheet. The job cost sheet, in turn, is used to summarize the various production costs incurred in completing the job. These costs are entered on the job cost sheet from materials requisition forms and direct labor time tickets and from allocations of overhead via the predetermined overhead rate.

2-6Many production costs cannot be traced to a particular product or job, but rather are incurred as a result of overall production activities. Therefore, to be assigned to products, such costs must be allocated to the products. Examples of such costs would include utilities, maintenance on machines, and depreciation of the factory building. These costs are indirect production costs, as explained in Chapter 1.

2-7A firm will not know its actual manufacturing overhead costs until after a period is over. Thus, if actual costs were used to cost products, it would be necessary to wait until the period was over to add overhead cost to jobs or to add overhead cost to jobs as the overhead cost was incurred day by day. If the manager waits until after the period is over to add overhead cost to jobs, then cost data will not be available during the period. If the manager simply adds overhead cost to jobs as the overhead cost is incurred, then unit costs may fluctuate from month to month. This is because production activity often fluctuates, resulting in changes in average fixed costs, and some costs—such as heating costs—are subject to seasonal influences. For these reasons, most companies use predetermined overhead rates to apply overhead cost to jobs.

2-8An allocation base should be the cost driver of the overhead cost; that is, the base should cause the overhead cost. If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and their costs will be distorted.

2-9Assigning overhead costs to jobs does not ensure that there will be a profit. The units produced may not be sold and if they are sold, they may not in fact be sold at prices sufficient to cover all costs. It is a myth that assigning costs to products or jobs ensures that those costs will be recovered. Costs are recovered only by selling to customers—not by allocating costs.

2-10The Manufacturing Overhead account is credited when overhead cost is applied to Work in Process. Generally, the amount of overhead applied will not be the same as the amount of actual cost incurred, since the predetermined overhead rate figure which is used in applying overhead is based on estimates.

2-11Underapplied overhead occurs when the actual overhead cost exceeds the amount of overhead cost applied to Work in Process inventory during the period. Overapplied overhead occurs when the actual overhead cost is less than the amount of overhead cost applied to Work in Process inventory during the period. The simplest way to dispose of the under- or overapplied overhead is to close it out to Cost of Goods Sold. The adjustment for underapplied overhead increases Cost of Goods Sold (and inventories) whereas the adjustment for overapplied overhead decreases Cost of Goods Sold (and inventories).

2-12Overhead may be underapplied for a number of reasons. Poor control over overhead spending can result in actual overhead costs exceeding estimated overhead costs. Also, if some of the overhead isfixed and actual amount of the allocation base for the period is less than estimated at the beginning of the period, overhead will be underapplied.

2-13Underapplied overhead is added to cost of goods sold since underapplied overhead implies that not enough overhead was assigned to jobs during the period and therefore cost of goods sold is understated. Likewise, overapplied overhead is deducted from cost of goods sold.

2-14Yes, overhead should be applied so as to properly value the Work in Process inventory at year-end. Since $6,000 of overhead was applied to Job A on the basis of $8,000 of direct labor cost, the company’s predetermined overhead rate must be 75% of direct labor cost. Thus, $3,000 of overhead should be applied to Job B at year-end: $4,000 direct labor cost  75% = $3,000 overhead costs applied.

2-15

Direct material...... / $10,000
Direct labor...... / 12,000
Manufacturing overhead:
$12,000 × 125%...... / 15,000
Total manufacturing cost...... / $37,000
Unit product cost: $37,000 ÷ 1,000 units..... / $37

2-16A plantwide overhead rate is a single overhead rate used throughout all production departments. Some companies use a different overhead rate in each production department rather than a single plantwide rate. In situations where the cost driver for overhead cost differs from one department to another, the allocation base should also be different. Hence, multiple overhead rates can result in more accurate product costs.

2-17When direct labor is replaced by automated equipment, overhead increases and direct labor decreases. If the predetermined overhead rate is based on direct labor, this results in an increase in the predetermined overhead rate.

Solutions Manual, Chapter 21

Brief Exercise 2-1 (15 minutes)

a.Job-order costing

b.Job-order costing

c.Process costing

d.Job-order costing

e.Process costing*

f.Process costing*

g.Job-order costing

h.Job-order costing

i.Job-order costing

j.Job-order costing

k.Process costing

l.Process costing

* *Some of the listed companies might use either a process costing or a job-order costing system, depending on how operations are carried out and how homogeneous the final product is. For example, a plywood manufacturer might use job-order costing if its products are constructed of different woods or come in markedly different sizes.

Brief Exercise 2-2 (15 minutes)

1.These costs would have been recorded on four different documents: the materials requisition form for Job ES34, the time ticket for Harry Kerst, the time ticket for Mary Rosas, and the job cost sheet for Job ES34.

2.The costs would have been recorded as follows:

Materials requisition form:

Quantity / Unit Cost / Total Cost
Blanks / 40 / $8.00 / $320
Nibs / 960 / $0.60 / 576
$896

Time ticket for Harry Kerst

Started / Ended / Time Completed / Rate / Amount / Job Number
9:00 AM / 12:15 PM / 3.25 / $12.00 / $39.00 / ES34

Time ticket for Mary Rosas

Started / Ended / Time Completed / Rate / Amount / Job Number
2:15 AM / 4:30 PM / 2.25 / $14.00 / $31.50 / ES34

Job Cost Sheet for Job ES34

Direct materials...... / $896.00
Direct labor:
Harry Kerst...... / 39.00
Mary Rosas...... / 31.50
$966.50

Brief Exercise 2-3 (10 minutes)

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead...... / $586,000
÷ Estimated total direct labor hours (DLHs)...... / 40,000 / DLHs
= Predetermined overhead rate...... / $14.65 / per DLH

Brief Exercise 2-4 (15 minutes)

a.Raw Materials...... 86,000

Accounts Payable...... 86,000

b.Work in Process...... 72,000

Manufacturing Overhead...... 12,000

Raw Materials...... 84,000

c.Work in Process...... 105,000

Manufacturing Overhead...... 3,000

Wages Payable...... 108,000

d.Manufacturing Overhead...... 197,000

Various Accounts...... 197,000Chapter 3

Systems Design: Job-Order Costing

Solutions Manual, Chapter 21

Solutions to Questions

3-1By definition, overhead consists of costs that cannot practically be traced to products or jobs. Therefore, overhead costs must be allocated rather than traced if they are to be assigned to products or jobs.

3-2Job-order costing is used in situations where there are many different products or services produced each period. Each product (or job) is different from all others and requires separate costing. Process costing is used in situations where a single, homogeneous product, such as cement, bricks, or gasoline, is produced for long periods at a time.

3-3The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials cost traced to the job, direct labor cost traced to the job, and manufacturing overhead cost applied to the job. When a job is completed, the job cost sheet is used to compute the cost per completed unit. The job cost sheet is also a control document for: (1) determining how many units have been sold and determining the cost of these units; and (2) determining how many units are still in inventory at the end of a period and determining the cost of these units on the balance sheet.

3-4A predetermined overhead rate is used to apply overhead to jobs. It is determined before a period begins and is computed by dividing the estimated total manufacturing overhead for the period by the estimated total units in the allocation base. Thereafter, overhead is applied

to jobs by multiplying the predetermined overhead rate by the actual amount of the allocation base that is incurred for each job. The most common allocation base is direct labor hours.

3-5A sales order is issued after a firm agreement has been reached with a customer on matters relating to quantities, prices, and shipment dates for goods. This sales order then forms the basis for the production department to issue a production order. The production order summarizes the specifications of the goods involved, and forms the basis for the accounting department’s preparation of a job cost sheet. The job cost sheet, in turn, is used to summarize the various production costs incurred in completing the job. These costs are entered on the job cost sheet by means of materials requisition forms, direct labor time tickets, and allocations of overhead via the predetermined overhead rate.

3-6Many production costs cannot be traced to a particular product or job, but rather are incurred as a result of overall production activities. Therefore, in order to be assigned to products, such costs must be allocated to the products in some manner. Examples of such costs would include utilities, maintenance on machines, and depreciation of the factory building. These costs are indirect production costs, as explained in Chapter 2.

3-7A firm will not know its actual manufacturing overhead costs until after a period is over. Thus, if actual costs were used to cost products, it would be necessary either (1) to wait until the period was over to add overhead cost to jobs, or (2) to simply add overhead cost to jobs as the overhead cost was incurred day by day. If the manager waits until after the period is over to add overhead cost to jobs, then cost data will not be available during the period. If the manager simply adds overhead cost to jobs as the overhead cost is incurred, then unit costs may fluctuate from month to month. This is because overhead cost tends to be incurred somewhat evenly from month to month (due to the presence of fixed costs), whereas production activity often fluctuates. For these reasons, most firms use predetermined overhead rates to apply overhead cost to jobs.

3-8An allocation base should be a cost driver of the overhead cost; that is, the base should cause the overhead cost. If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and their costs will be distorted.

3-9Assigning overhead costs to jobs does not ensure that there will be a profit. The units produced may not be sold and if they are sold, they may not in fact be sold at prices sufficient to cover all costs. It is a myth that assigning costs to products or jobs ensures that those costs will be recovered. Costs are recovered only by selling to customers—not by allocating costs.

3-10The Manufacturing Overhead account is credited when overhead cost is applied to Work in Process. Generally, the amount of overhead applied will not be the same as the amount of actual cost incurred, since the predetermined overhead rate figure which is used in applying overhead is based on estimates.

3-11Underapplied overhead occurs when the actual overhead cost exceeds the amount of overhead cost applied to Work in Process inventory during the period. Overapplied overhead occurs when the actual overhead cost is less than the amount of overhead cost applied to Work in

Process inventory during the period. Under- or overapplied overhead is disposed of by either closing out the amount to Cost of Goods Sold or allocating the amount among Cost of Goods Sold and ending inventories in proportion to the applied overhead in each account. The adjustment for underapplied overhead increases Cost of Goods Sold (and inventories) whereas the adjustment for overapplied overhead decreases Cost of Goods Sold (and inventories).

3-12Overhead may be underapplied for a number of reasons. One reason might be that there was not good control over overhead spending and as a result actual overhead costs exceeded estimated overhead costs. Another reason might be that some of the overhead is fixed and actual amount of the allocation base was less than estimated at the beginning of the period. The amount of overhead applied to Work in Process will decline in proportion to a decline in the allocation base. However, if there is any fixed cost in the overhead, it will not decline as much as the volume declines and hence overhead will be underapplied.

3-13Underapplied overhead is added to cost of goods sold since underapplied overhead implies that not enough overhead was assigned to jobs during the period and therefore cost of goods sold is understated. Likewise, overapplied overhead is deducted from cost of goods sold.

3-14Yes, overhead should be applied in order to properly value the Work in Process inventory at year-end. Since $6,000 of overhead was applied to Job A on the basis of $8,000 of direct labor cost, the company’s predetermined overhead rate must be 75% of direct labor cost. Thus, $3,000 of overhead should be applied to Job B at year-end: $4,000 direct labor cost  75% = $3,000 overhead costs applied.

3-15

Brief Exercise 2-5 (10 minutes)

Actual direct labor-hours...... / 12,600
× Predetermined overhead rate...... / $23.10
= Manufacturing overhead applied...... / $291,060

Brief Exercise 2-6 (30 minutes)

1. / Cost of Goods Manufactured
Direct materials:
Raw materials inventory, beginning...... / $24,000
Add: Purchases of raw materials...... / 53,000
Total raw materials available...... / 77,000
Deduct: Raw materials, ending...... / 6,000
Raw materials used in production...... / 71,000
Less indirect materials included in manufacturing overhead / 8,000 / $63,000
Direct labor...... / 62,000
Manufacturing overhead applied to work in process inventory / 41,000
Total manufacturing costs...... / 166,000
Add: Beginning work in process inventory...... / 41,000
207,000
Deduct: Ending work in process inventory...... / 38,000
Cost of goods manufactured...... / $169,000
2. / Cost of Goods Sold
Finished goods inventory, beginning...... / $86,000
Add: Cost of goods manufactured...... / 169,000
Goods available for sale...... / 255,000
Deduct: Finished goods inventory, ending...... / 93,000
Unadjusted cost of goods sold...... / 162,000
Add: Underapplied overhead...... / 8,000
Adjusted cost of goods sold...... / $170,000

Brief Exercise 2-7 (30 minutes)

Parts 1 and 2.

Cash / Raw Materials
75,000 / (a) / (a) / 75,000 / 73,000 / (b)
152,000 / (c)
126,000 / (d)
Work in Process / Finished Goods
(b) / 67,000 / (f) / 379,000
(c) / 134,000 / 379,000 / 379,000 / (f)
(e) / 178,000
379,000 / 379,000 / (f)
Manufacturing Overhead / Cost of Goods Sold
(b) / 6,000 / 178,000 / (e) / (f) / 379,000 / 28,000 / (g)
(c) / 18,000 / 351,000
(d) / 126,000
(g) / 28,000 / 28,000

Brief Exercise 2-8 (15 minutes)

1. / Actual direct labor-hours...... / 8,250
× Predetermined overhead rate...... / $21.40
= Manufacturing overhead applied...... / $176,550
Less: Manufacturing overhead incurred...... / 172,500
$4,050
Manufacturing overhead overapplied...... / $4,050

2.Since manufacturing overhead is overapplied, the cost of goods sold would be decreased by $4,050 and the gross margin would increase by $4,050.

Exercise 2-9 (30 minutes)

1.Since $320,000 of studio overhead cost was applied to Work in Process on the basis of $200,000 of direct staff costs, the apparent predetermined overhead rate is 160%: