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CHAPTER 5PRODUCT 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 pro-cesses. Job-order costing is suitable for opera-tions 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 manufac-turing 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 lo-cated on disk or tape.

5. Materials requisition forms serve as the source document for posting materials usage and costs to individual jobs. Time or work tickets serve a similar function for labor. Predetermined overhead rates are used to assign overhead costs to individual jobs.

6. Additional source documents must be devel-oped to track use of multiple drivers in an activity-based costing system. Thus, if a purchasing rate is developed based on num-ber of purchase orders, then a source docu-ment tracing the use of purchase orders by individual jobs must be created.

7. Activity drivers are those factors that drive or cause the consumption of overhead. Knowing 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 activ-ity level. Practical activity is the level of activ-ity achievable under efficient operating condi-tions. Theoretical activity is the level of activ-ity achievable under ideal operating condi-tions.

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................... $ 7,500Direct labor......................... 10,000Overhead ($5 × 1,000)........ 5,000

Total............................. $ 22,500 Unit cost = $22,500/500 = $45

12. More paperwork is required. Labor and ma-terials 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.

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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 de-mands of this particular job and would be charged to the job.



CORNERSTONE EXERCISES

Cornerstone Exercise 5.1

1. Budgeted direct labor cost = $25 × 20,000 direct labor hours = $500,000Overhead rate = $260,000/$500,000 = 0.52, or 52% of direct labor cost

2. Job 39 Job 40 Job 41 Job 42 Balance, June 1.............................. $23,700 $34,600 $17,000 $ 0Direct materials.............................. 18,900 21,400 8,350 12,000Direct labor..................................... 10,000 18,500 3,000 2,900Applied overhead........................... 5,200 9,620 1,560 1,508

Total........................................... $57,800 $84,120 $29,910 $16,408

3. New budgeted direct labor cost = $20 × 20,000 direct labor hours = $400,000New overhead rate = $260,000/$400,000 = 0.65, or 65% of direct labor costThe 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 ac-tual direct labor hours. Actual direct labor hours were not given in the prob-lem.)

Cornerstone Exercise 5.2:

1. Ending Work in Process consists of Jobs 41 and 42:

Job 41................................................................... $29,910Job 42................................................................... 16,408

Ending Work in Process................................. $46,318

2. Ending balance in Finished Goods is Job 40 at $84,120.

3. Cost of goods sold = Job 39 = $57,800

4. Price of Job 39 = $57,800 × 1.3 = $75,140

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 $141,920 ($57,800 + $84,120).




1. Materials handling rate = $72,000/3,000 = $24 per moveEngineering rate = $165,000/10,000 = $16.50 per change orderOther overhead rate = $280,000/50,000 = $5.60 per direct labor hour

2. Job 13-43 Job 13-44 Job 13-45 Job 13-46Balance, July 1.................... $20,300 $19,800 $ 2,300 $ 0Direct materials................... 6,500 8,900 12,700 9,800Direct labor cost.................. 18,000 20,000 32,000 2,400Materials handling.............. 1,056 1,248 696 120Engineering......................... 495 660 330 330Other overhead................... 5,040 5,600 8,960 672

Total................................. $51,391 $56,208 $ 56.986 $13,322

3. Ending Work in Process consists of Jobs 13-45 and 13-46 = $70,308.

4. Cost of goods sold = Job 13-43 + Job 13-44 = $107,599

5. If Job 13-46 required no engineering changes, the cost of that job would be $330 lower and no other job would be affected.


1. Cost of the Tramel job with normal spoilage:Direct materials................................................... $1,900Direct labor.......................................................... 500Applied overhead ($500 × 1.4)........................... 700

Total job cost................................................... $3,100

2. Cost of rework:Direct materials................................................... $400Direct labor.......................................................... 100Applied overhead ($100 × 1.4)........................... 140

Total rework cost............................................. $640Journal entry:Overhead Control..................................................... 500

Materials................................................................ 400Payroll.................................................................... 100



Cornerstone Exercise 5.4 (Concluded)

3. If the rework required $200 of direct labor cost rather than $100, the cost of the Tramel 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.


1. Cost of the Tramel job with spoilage:Direct materials ($1,900 + $400)......................... $2,300Direct labor ($500 + $100)................................... 600Applied overhead ($600 × 1.4)........................... 840

Total job cost................................................... $3,740

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 Tramel job would increase by $240 to $3,980 [$3,740 + $100 + ($100 × 1.4)].



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 service. 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 consump-tion take place simultaneously.



Exercise 5.7

1. EcoScape Company should use job-order costing because each installation is unique and made to order. Materials may differ from job to job, as may di -rect labor.

2. Predetermined overhead rate = $50,400/6,720 = $7.50 per direct labor hourAverage wage rate = $66,495/6,045 = $11 per direct labor hourDirect materials................................................... $3,500Direct labor ($11 × 20)......................................... 220Overhead ($7.50 × 20)......................................... 150

Total cost.......................................................... $3,870

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 watering system is like every other so the cost of direct materials, direct la -bor, 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.Average Amounts June July AugustDirect materials......................................... $18,000 $24,000 $36,000Direct labor................................................ 12,000 16,000 24,000Overhead................................................... 10,900 12,340 14,500 Total cost.................................................. $40,900 $52,340 $74,500÷ number of installations............................. 60 80 120Total cost...................................................... $ 682 $ 654 $ 621

3. Predetermined overhead rate = $54,000/600 = $90 per system installedUnit cost per system = $300 + $200 + $90 = $590The cost of the basic system does not change from month to month.



Exercise 5.9

1. The two measures of activity level considered by Reggie are expected actual activity and theoretical activity.

2. Predetermined overhead rate using expected actual activity:Predetermined overhead rate = $12,000/(100 × 25 hours) = $4.80 per hourPredetermined overhead rate using theoretical activity:Predetermined overhead rate = $12,000/(125 × 25 hours) = $3.84 per hour

3. Reggie should use expected actual activity because it is unlikely that he will approach the theoretical activity level, especially with a new business. The expected actual activity level will be more likely to spread the overhead over the actual jobs, without a large overhead variance. Notice that Reggie cannot use normal activity level because he has not been in business for a number of years.

Exercise 5.10

1. Because the business is so small (Reggie is the only employee), all he really 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 documents)—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. Reggie will no longer be able to re-construct 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.



Exercise 5.11

1. Job 78:Direct materials................................................... $1,560Direct labor.......................................................... 3,000Overhead ($8.40 × 220)....................................... 1,848

Total job cost................................................... $6,408Unit cost = $6,408/200 = $32.04

Job 79:Direct materials................................................... $ 990Direct labor.......................................................... 3,000Overhead ($8.40 × 200)...................................... 1,680


2. Job 80:Direct materials................................................... $2,400Direct labor.......................................................... 3,300Overhead ($8.40 × 400)....................................... 3,360


3. Finished Goods........................................ 12,078*Work in Process.................................... 12,078

*Job 78 + Job 79 = $6,408 + $5,670 = $12,078

Cost of Goods Sold.................................. 5,670Finished Goods..................................... 5,670

Accounts Receivable (or Cash).............. 7,938**Sales Revenue....................................... 7,938

**$5,670 × 140% = $7,938



Exercise 5.12

1. Using Job 114 (any of the three jobs could be used, the overhead rate will be the same):Predetermined overhead rate = $1,170/$1,800

= 0.65, or 65% of direct labor cost

2. Job 114 Job 115 Job 116Balance, April 1......................................... $ 5,381 $ 5,214 $10,745Direct materials......................................... 16,500 12,200 5,000Direct labor................................................ 1,800 3,080 1,440Applied overhead..................................... 1,170 2,002 936

Total...................................................... $ 24,851 $ 22,496 $18,121

3. Ending Work in Process consists of Jobs 114 and 116:Job 114................................................................. $24,851Job 116................................................................. 18,121


4. Cost of goods sold = Job 115 = $22,496

5. Price of Job 115 = $22,496 × 1.25 = $28,120



Exercise 5.13

1. Journal entries:

a. Materials.......................................................... 29,000Accounts Payable.......................................... 29,000

b. Work in Process............................................. 33,700Materials.......................................................... 33,700

c. Work in Process............................................. 6,320Wages Payable............................................... 6,320

d. Work in Process............................................. 4,108*Overhead Control........................................... 4,108*$6,320 × $0.65 = $4,108

e. Overhead Control........................................... 4,415Various Accounts........................................... 4,415

f. Finished Goods.............................................. 22,496Work in Process............................................. 22,496

g. Cost of Goods Sold........................................ 22,496Finished Goods.............................................. 22,496

Accounts Receivable..................................... 28,120**Sales Revenue................................................ 28,120**$22,496 × 125% = $28,120

2. Materials Work in ProcessBal. 12,730 (b) 33,700 Bal. 21,340 (f) 22,496

(a) 29,000 (b) 33,7008,030 (c) 6,320

(d) 4,10842,972

Finished GoodsBal. 8,700 (g) 22,496

(f) 22,4968,700



Exercise 5.14

1. Predetermined overhead rate using Job 70 = $1,425/$1,900 = 0.75, or 75%

2. 70 71 72 73 74 75 76 Balance, August 1....... $4,925 $4,275 $2,425 — — — —Direct materials........... 800 1,235 3,550 $5,000 $ 300 $ 560 $ 80Direct labor.................. 1,000 1,400 2,200 1,800 600 860 172Applied overhead........ 750 1,050 1,650 1,350 450 645 129

Total........................ $7,475 $7,960 $9,825 $8,150 $1,350 $2,065 $381

3. By August 31, Jobs 71, 74, and 76 are still in process:Job 71................................................................... $7,960Job 74................................................................... 1,350Job 76................................................................... 381

Work in process, August 31........................... $9,691

4. Cost of goods sold for August consists of Jobs 72 and 75:Job 72................................................................... $ 9,825Job 75................................................................... 2,065

Cost of goods sold.......................................... $11,890

5. August sales revenue = $11,890 × 1.20 = $14,268

Exercise 5.15

Cairle CompanyIncome Statement

For the Month of August

Sales............................................................................................................ $14,268Cost of goods sold..................................................................................... 11,890 Gross margin.............................................................................................. $ 2,378Selling and administrative expenses........................................................ 1,200 Operating income....................................................................................... $ 1,178



Exercise 5.16

1. a. Materials.......................................................... 45,670Accounts Payable.......................................... 45,670

b. Work in Process............................................. 40,990Materials.......................................................... 40,990

c. Work in Process............................................. 22,400Wages Payable............................................... 22,400

d. Overhead Control........................................... 9,020Cash................................................................. 9,020

e. Work in Process............................................. 8,800*Overhead Control........................................... 8,800*($22,400/$14) × $5.50 = $8,800


g. Accounts Receivable..................................... 73,750Sales Revenue................................................ 73,750

Cost of Goods Sold........................................ 59,000Finished Goods.............................................. 59,000

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



Exercise 5.17

1. Job 39:Direct materials................................................... $ 700Direct labor.......................................................... 1,980Overhead ($2.30 × 360)....................................... 828

Total job cost................................................... $3,508Unit cost = $3,508/60 = $58.47 (rounded)

Job 40:Direct materials................................................... $ 680Direct labor.......................................................... 2,480Overhead ($2.30 × 400)....................................... 920


2. Job 41:Direct materials................................................... $ 800Direct labor.......................................................... 1,240Overhead ($2.30 × 200)....................................... 460


3. Finished Goods................................................... 7,588*Work in Process............................................... 7,588

*$3,508 + $4,080 = $7,588

Cost of Goods Sold............................................. 4,080Finished Goods............................................... 4,080

Accounts Receivable.......................................... 5,712**Sales Revenue................................................. 5,712

**$4,080 × 140% = $5,712



Exercise 5.18

1. Job 13-280:Direct materials.............................................................. $4,730Direct labor..................................................................... 2,000Applied overhead:

Setting up.................................................................. $ 400Machining.................................................................. 408Other overhead.......................................................... 1,600 2,408

Total job cost................................................................. $9,138Unit cost = $9,138/200 = $45.69

Job 13-282:Direct materials.............................................................. $5,600Direct labor..................................................................... 800Applied overhead:

Setting up.................................................................. $500Machining.................................................................. 204Other overhead.......................................................... 640 1,344

Total job cost................................................................. $7,744Unit cost = $7,744/100 = $77.44

2. Job 13-281:Direct materials.............................................................. $ 3,800Direct labor..................................................................... 4,600Applied overhead:

Setting up.................................................................. $ 300Machining.................................................................. 510Other overhead.......................................................... 3,680 4,490

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............................................. 9,138Finished Goods............................................... 9,138

Accounts Receivable.......................................... 13,707**Sales Revenue................................................. 13,707

**$9,138 × 150% = $13,707



Exercise 5.19


b. Work in Process............................................. 82,500Overhead Control........................................... 8,800Materials.......................................................... 91,300

c. Work in Process............................................. 67,000Overhead Control........................................... 18,750Wages Payable............................................... 85,750

d. Overhead Control........................................... 46,200Various Payables............................................ 46,200

e. Work in Process............................................. 73,700*Overhead Control........................................... 73,700*$67,000 × 110% = $73,700


g. Cost of Goods Sold........................................ 215,000Finished Goods.............................................. 215,000Accounts Receivable..................................... 301,000**Sales Revenue................................................ 301,000**140% × $215,000 = $301,000

h. Cost of Goods Sold........................................ 50***Overhead Control........................................... 50***Actual overhead = $8,800 + $18,750 + $46,200 = $73,750Actual overhead............................................. $73,750Applied overhead........................................... 73,700

Underapplied.............................................. $ 50



Exercise 5.19 (Concluded)

2. After underapplied overhead is charged to cost of goods sold:

Overhead Control8,800 73,700

18,75046,200

50 500

3. Work in Process10,000 230,000

82,50067,00073,700*

3,200

*No actual overhead costs were assigned to Work in Process as the com-pany does not use an actual cost system. The amount assigned to Work in Process was the applied overhead of $73,700.

Exercise 5.20

1. Setup rate = $156,000/1,200 = $130 per setupPurchasing rate = $187,500/15,000 = $12.50 per partOther overhead rate = $420,000/50,000 = $8.40 per direct labor hour

2. Job 15 Job 16 Job 17 Job 18 Job 19 Balance, March 1......... $34,500 $39,890 $24,090 $ 0 $ 0Direct materials........... 28,000 37,900 25,350 11,000 13,560Direct labor.................. 10,000 8,500 23,000 12,900 8,000Applied overhead:

Setups..................... 2,600 1,820 4,550 1,040 1,950Purchasing............. 1,875 2,250 2,500 6,250 3,750

Other overhead........... 5,460 4,872 13,440 7,308 4,368 Total cost................ $82,435 $95,232 $92,930 $38,498 $31,628



3. Ending balance in Work in Process = Job 18 + Job 19= $38,498 + $31,628 = $70,126

4. Cost of goods sold = Job 15 + Job 16 + Job 17 = $82,435 + $95,232 + $92,930 = $270,597



CPA-TYPE EXERCISES

Exercise 5.21c. March 1, balance $ 12,000Direct materials 50,000Direct labor 30,000Applied overhead 24,000Less: transfer to Finished Goods ( 100,000 )Work-in-Process balance, March 31 $ 16,000Job 83 = Direct materials + Direct labor + Applied overhead$16,000 = Direct materials + ($3,400/0.8) + $3,400Direct materials = $8,350

Exercise 5.22

d.Overhead rate =( $120,000 + $200,000)/80,000 = $4 per direct labor hour

Direct materials $ 4,000Direct labor 6,000Applied overhead ($4 × 2,000) 8,000Cost of proposed job $18,000

Exercise 5.23

d.

Exercise 5.24

a.Purchasing and receiving rate = $60,000/(500 + 2,000) = $24/purchase orderProduct X allocation = $24 × 500 = $12,000Product Y allocation = $24 × 2,000 = $48,000

Exercise 5.25

c.



PROBLEMS

Problem 5.26


b. Work in Process............................................. 50,000Overhead Control........................................... 8,800Materials.......................................................... 58,800

c. Work in Process............................................. 75,000Overhead Control........................................... 36,000Administrative Expense................................. 28,000Selling Expense.............................................. 19,000Wages Payable............................................... 158,000

d. Overhead Control........................................... 10,400Accumulated Depreciation............................ 10,400

e. Overhead Control........................................... 1,450Property Taxes Payable................................. 1,450

f. Overhead Control........................................... 6,200Prepaid Insurance.......................................... 6,200

g. Overhead Control........................................... 5,500Utilities Payable.............................................. 5,500

h. Selling Expense.............................................. 7,900Cash ................................................................ 7,900

i. Administrative Expense................................. 800Selling Expense.............................................. 1,650Accumulated Depreciation............................ 2,450

j. Administrative Expense................................. 750Accounts Payable.......................................... 750

k. Work in Process ($18 × 4,000)....................... 72,000Overhead Control........................................... 72,000

l. Finished Goods.............................................. 160,000Work in Process............................................. 160,000



Problem 5.26 (Concluded)

2. Materials Work in ProcessBal. 7,500 (b) 58,800 Bal. 37,000 (l) 160,000

(a) 60,100 (b) 50,0008,800 (c) 75,000

(k) 72,00074,000

Finished Goods Overhead ControlBal. 50,000 (b) 8,800 (k) 72,000

(l) 160,000 (c) 36,000210,000 (d) 10,400

(e) 1,450(f) 6,200(g) 5,500

3,650*

*Overapplied overhead.

3. Jerico CompanyStatement of Cost of Goods Manufactured

For the Month Ended May 31, 20XX

Direct materials.............................................................. $ 50,000Direct labor..................................................................... 75,000Overhead:

Supplies..................................................................... $ 8,800Indirect labor............................................................. 36,000Depreciation, plant, and equipment........................ 10,400Property taxes........................................................... 1,450Utilities, factory......................................................... 5,500Insurance................................................................... 6,200

$68,350



Plus: Overapplied overhead.................................... 3,650 Overhead applied...................................................... 72,000

Manufacturing costs added.......................................... $197,000Add: Beginning work in process.................................. 37,000Less: Ending work in process...................................... (74,000 )Cost of goods manufactured........................................ $160,000

4. Cost of goods sold decreases by $3,650.



Problem 5.27

1. Overhead rate = $162,500/50,000 = $3.25 per machine hourJob 1 Job 2

Direct materials.................................................... $4,500 $ 9,340Direct labor........................................................... 1,200 2,100Overhead ($3.25 × 200 MHr)................................ 650 650 Total manufacturing cost.................................... $6,350 $12,090Plus 40% markup................................................. 2,540 4,836 Bid price............................................................... $8,890 $16,926

2. Purchasing rate = $40,000/5,000 = $8 per purchase orderSetup cost rate = $37,500/500 = $75 per setupEngineering rate = $45,000/2,500 = $18 per engineering hourOther cost rate = $40,000/50,000 = $0.80 per machine hour

Job 1 Job 2 Direct materials.................................................... $4,500 $ 9,340Direct labor........................................................... 1,200 2,100Overhead:Purchasing ($8 × 15); ($8 × 20)........................... 120 160Setups ($75 × 3); ($75 × 4).................................. 225 300Engineering ($18 × 45); ($18 × 10)...................... 810 180Other ($0.80 × 200); ($0.80 × 200)....................... 160 160 Total manufacturing cost.................................... $7,015 $12,240Plus 40% markup................................................. 2,806 4,896 Bid price............................................................... $9,821 $17,136

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.



Problem 5.28

1. $37,500/7,500 = $5.00 per direct labor hour

2. $90,000/7,500 = $12.00 per direct labor hour

3. May 20:Direct materials (600 × $0.02)......................... $12.00Direct labor (0.75 × $8).................................... 6.00Applied overhead (0.75 × $5).......................... 3.75

Total job cost............................................... $21.75June 20:

Direct materials (600 × $0.02)......................... $12.00Direct labor (0.75 × $8).................................... 6.00Applied overhead (0.75 × $12)........................ 9.00

Total job cost............................................... $27.00

4. Photocopying overhead rate = $37,500/7,500 = $5.00 per direct labor hourComputer-aided printing overhead rate = $52,500/2,000 = $26.25 per machinehourThe use of two rates more accurately costs the jobs in this shop as it shows a better cause-and-effect relationship between activity and overhead cost.

Problem 5.29

1. Bid prices with plantwide rate:Plantwide rate = $2,500,000/250,000 = $10 per direct labor hour

Job 97-28 Job 97-35Prime costs.......................................................... $120,000 $50,000Overhead.............................................................. 60,000 * 10,000 *

Total costs...................................................... $180,000 $60,000Markup (50%)....................................................... 90,000 30,000

Total bid revenues......................................... $270,000 $90,000Units..................................................................... ÷ 14,400 ÷ 1,500

Unit bid price.................................................. $ 18.75 $ 60.00 *(6,000 × $10); (1,000 × $10)




2. Bid prices with departmental rates:Rates: Department A: $500,000/200,000 = $2.50 per direct labor hour

Department B: $2,000,000/120,000 = $16.67 per machine hour

Job 97-28 Job 97-35Prime costs......................................................... $120,000 $ 50,000Overhead............................................................ 20,835 a 51,010 b

Total costs..................................................... $140,835 $101,010Markup (50%)...................................................... 70,418 50,505

Total bid revenues........................................ $211,253 $151,515Units.................................................................... ÷ 14,400 ÷ 1,500

Unit bid price................................................. $ 14.67 $ 101.01 a($2.50 × 5,000) + ($16.67 × 500)b($2.50 × 400) + ($16.67 × 3,000)

3. Plantwide Departmental DifferencesRevenues ............. $90,000 $362,768 $272,768Cost of goods sold............. 60,000 241,845 181,845

Gross profit ............. $30,000 $120,923 $ 90,923 If plantwide overhead is used, only Job 97-35 would have been won. There-fore, the revenues and cost of goods sold pertain only to that job. If depart -mental rates had been used, the bids on both jobs would have been won. Therefore, the revenues and cost of goods sold pertain to both jobs, and gross profit would have gone up by $90,923.

4. The departments differ significantly in their overhead intensity, with Depart-ment B being much more automated. Jobs spending more time in Depart-ment B ought to receive more overhead costs. Use of departmental rates provides this outcome.



Problem 5.30

1. Direct materials ($0.60 × 50)............................... $30.00Direct labor ($0.15 × 50)...................................... 7.50Overhead ($0.20 × 50)......................................... 10.00

Total cost.......................................................... $47.50This spoilage is normal and should be added to Overhead Control.

2. Price = $380 × 1.5 = $570 (Spoilage is not attributable to this job and should not be added to job cost.)

3. Spoilage cost is identical to that computed in Requirement 1. However, in this case, the spoilage is attributable to demanding requirements of the job, and the cost is added to the job cost.

4. Price = ($380 + $47.50) × 1.5 = $641.25

Problem 5.31

1. Direct materials (75 × $0.45)............................... $33.75Direct labor (1.2 × $8).......................................... 9.60Overhead (1.2 × $4)............................................. 4.80

Total cost.......................................................... $48.15

2. Direct materials (75 × $0.45)............................... $33.75Direct labor (1.70 × $8)........................................ 13.60Overhead (1.70 × $4)......................................... 6.80

Total cost.......................................................... $54.15The rework cost is normal but is not attributable to the job, so it should be assigned to overhead.

3. The price charged for the new letters is 75 letters × $0.60 for a total of $45.



Problem 5.32

1. Land...................................................................... $ 7,813*Direct Materials.................................................... 8,000Direct labor.......................................................... 6,000Subcontractor...................................................... 14,000

$35,813*$250,000/8 = $31,250 per acre; $31,250 × 0.25 = $7,813General condition costs and finance costs can be classified as production costs and would correspond to overhead in a manufacturing firm. Most (if not all) of the marketing costs are traceable to each job (advertising may be for the subdivision and thus common to all units). Some may argue that fi-nance costs are not production costs, and they would classify these sepa-rately.

2. Job-Order Cost SheetJob 3

MATERIALS DIRECT LABOR OVERHEADReq. No. Amount Hrs. Rate Amount Hrs. Rate AmountMaterials $8,000 $ 6,000 General $6,000*Land 7,813 Finance 4,765

Subctr. 14,000

Cost Summary Direct materials................ $15,813Direct labor....................... 20,000Overhead.......................... 10,765 Total cost......................... $46,578

*$120,000/20 = $6,000 per unit

General condition costs are prorated to the 20 units. Finance costs are in-cluded as they are a cost of building the home. However, marketing costs are a selling expense and are not inventoriable. The cost of the land was de-termined in Requirement 1.

3. Overhead is equivalent to general conditions and finance costs. Finance costs are traceable to each job; therefore, no allocation problem exists. Allo-cating general condition costs evenly among the housing units may create unit cost distortions. It could be argued that larger homes, for example, would place greater demands on site utilities, insurance, architect’s fees, and decorating. Allocating these costs on the basis of square footage would likely provide more accurate cost assignments.




4. Production costs................................................. $46,578Marketing costs................................................... 800

Total cost.......................................................... $47,378Selling price = $47,378 × 140% = $66,329Profit..................................................................... $66,329

47,378 $18,951

Problem 5.33

1. Job-Order Cost SheetJob 267

MATERIALS DIRECT LABOR OVERHEADKind Amount Employee Hrs. Rate Amount Hrs. Rate AmountNovocaine $14 Dentist 0.25 $60 $15 0.5 $32 $16Amalgam 18 Asst. 0.50 20 10

Cost Summary Direct materials................ $32Direct labor....................... 25Overhead.......................... 16 Total cost......................... $73

Gross profit computation:Charge......................................... $110Cost............................................. 73

Gross profit............................. $ 37The X-ray is a direct cost of a job assuming that an X-ray is taken for each job. If X-rays are used for more than one treatment (as they often are), then it be-comes a common cost. X-rays could be included in overhead, and services could be priced to cover the cost of X-rays. Apparently, this practice treats X-rays as a profit-making activity, and they are therefore costed and priced sepa-rately.




2. Surfaces Assistanta Dentistb Novocaine Amalgam OH c Total Cost1 $6.67 $10 $14 $12 $10.67 $53.33

210.00 15 14 18 16.00 73.00313.33 20 14 24 21.33 92.67416.67 25 14 30 26.67 112.33a(20/60) × $20 b(20/60) × 0.5 × $60 c(20/60) × $32(30/60) × $20 (30/60) × 0.5 × $60 (30/60) × $32(40/60) × $20 (40/60) × 0.5 × $60 (40/60) × $32(50/60) × $20 (50/60) × 0.5 × $60 (50/60) × $32

1-Surface 2-Surface 3-Surface 4-SurfaceUnit revenue................... $90.00 $110.00 $150.00 $175.00Unit cost......................... 53.33 73.00 92.67 112.33

Gross profit............... $36.67 $ 37.00 $ 57.33 $ 62.67Profit/revenue................ 40.7% 33.6% 38.2% 35.8%The gross profit per unit increases as the surfaces increase, but the profit percentage decreases. Whether this increase is fair (to either the patient or the corporation) depends on what is considered a normal rate of return for these services.



Problem 5.34

1. Job-Order Cost SheetPotassium Aspartate

MATERIALS DIRECT LABOR OVERHEADType Quantity Cost Hrs. Rate Amount Cost Rate AmountAspartic 195.00 $1,121.25 16 $12.50 $200 $200 110% $220Citric 15.00 30.30K2CO3 121.50 563.76Rice 30.00 12.90

Cost Summary Direct materials................$1,728.21Direct labor....................... 200.00Overhead.......................... 220 .00 Total cost.........................$2,148.21

÷ 300 Unit cost...........................$ 7.16

Price charged: $7.16 × 130% = $9.31If overhead is allocated accurately, they should not sell at $8.80 as the job earns less than the markup.

2. Revenues ($2,148.21 × 130%).................. $2,792.67Cost of goods sold................................... 2,148 .21

Gross profit........................................... $ 644 .46

3. Total actual costs:Direct materials......................................... $1,790.00Direct labor................................................ 225.00Applied overhead..................................... 247.50

Total....................................................... $2,262.50Actual unit cost: $2,262.50/300 = $7.54Unexpected loss:Bid based on actual cost ($2,262.50 × 1.30)..... $2,941.25Actual revenue.................................................... 2,792.67

Loss.................................................................. $ 148.58 Possible reasons for loss:a. Workers may have been wasteful with the materials.b. Workers may have been inefficient.c. Overhead costs may not have been controlled properly.d. Expected costs were too optimistic.




4. Total billing:Materials............................................................... $1,790.00Labor.................................................................... 225.00Applied overhead................................................ 247.50Underapplied overhead...................................... 30.00

Total cost.......................................................... $2,292.50Markup (30%)....................................................... 687.75

Total price........................................................ $2,980.25You could explain that Nutratask uses a predetermined overhead rate to as-sign overhead to jobs and that adding underapplied overhead is an adjust-ment required to assign actual overhead to the job. Adding underapplied overhead to the job does not necessarily imply inefficient use of overhead costs. It does imply that the estimated overhead cost of the job was not equal to the actual cost. The customer could then be reminded that the agreement was actual cost plus 30%. If the customer is still not satisfied, good relations may require deletion of the $30 charge. In the future, prob-lems like this could be avoided by not showing two separate overhead charges.

Problem 5.35

Answers will vary.

CYBER RESEARCH CASE

5.36

Answers will vary.



The Collaborative Learning Exercise Solutions can be found on the instructor website at http://login.cengage.com.

The following problems can be assigned within CengageNOW and are auto-graded. See the last page of each chapter for descriptions of these new assign-ments.

Analyzing Relationships—Calculate Cost of various jobs to show impact of costs on WIP, Finished Goods, Cost of Goods Sold.

Integrative Problem—Job Order Costing, Support Department Allocation, Relevant Costing (Covering chapters 5, 7, and 17)

Integrative Problem—Job Costing, Joint Costs, Process Costing, Decentralization (Covering chapters 5, 6, 7, and 10)

Blueprint Problem—Job Order Costing



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