892 Chapter 19 Job Order Costing

The actual production process for the software product is fairly straightforward.First, blank CDs are brought to a CD copying machine. The copying machine requires1 hour per 2,000 CDs.

After the program is copied onto the CD, the CD is brought to assembly, where as-sembly personnel pack the CD and manual for shipping. The direct labor cost for thiswork is $0.50 per unit.

The completed packages are then sold to retail outlets through a sales force.The sales force is compensated by a 15% commission on the wholesale price for allsales.

Total completed production was 100,000 units during the year. Other informationis as follows:

Number of software units sold in 2010 80,000Wholesale price per unit $100

Factory overhead cost is applied to jobs at the rate of $2,500 per copy machine hour.There were an additional 4,000 copied CDs, packaging, and manuals waiting to be as-sembled on December 31, 2010.

Instructions1. Prepare an annual income statement for the Movie Design 2010 product, including

supporting calculations, from the information above.2. Determine the balances in the finished goods and work in process inventory for the

Movie Design 2010 product on December 31, 2010.

Special Activities

The controller of the plant of Berry Building Supplies prepared a graph of the unit costsfrom the job cost reports for Product X-S1. The graph appeared as follows:

How would you interpret this information? What further information wouldyou request?

Un

it C

ost

$40

$35

$30

$25

$20

$15

$10

$5

$0

Day of WeekDay M T W R F M T W R F M T W R F M T W R F

SA 19-1Managerial analysis

Antelope Company makes attachments,such as backhoes and grader and bulldozer blades,for construction equipment. The company uses a job order cost system. Management isconcerned about cost performance and evaluates the job cost sheets to learn more aboutthe cost effectiveness of the operations. To facilitate a comparison, the cost sheet for Job110 (20 Z-15 backhoe buckets completed in April) was compared with Job 130, which wasfor 40 Z-15 backhoe buckets completed in October. The two job cost sheets follow.

SA 19-2Job order decisionmaking and rate deficiencies

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Job 110

Item: 20 Z-15 backhoe buckets

Direct Materials Direct Materials Materials: Quantity � Price � Amount

Steel (tons) 60 $750.00 $45,000Steel components (pieces) 350 4.00 1,400_______

Total materials $46,400_______

Direct Labor Direct Direct labor Hours � Labor Rate � Amount

Foundry 220 $15.00 $ 3,300Welding 320 17.00 5,440Shipping 100 12.00 1,200___ _______

Total direct labor 640 $ 9,940___ __________

Direct Total Factory Labor Overhead Cost � Rate � Amount

Factory overhead (200% of direct labor dollars) $9,940 � 200% $19,880_______

Total cost $76,220Total units ÷ 20_______Unit cost $ 3,811______________

Job 130

Item: 40 Z-15 backhoe buckets

Direct Materials Direct Materials Materials: Quantity � Price � Amount

Steel (tons) 140 $740.00 $103,600Steel components 700 4.00 2,800________

Total materials $106,400________

Direct Labor Direct Direct labor Hours � Labor Rate � Amount

Foundry 500 15.00 $ 7,500Welding 700 17.00 11,900Shipping 200 12.00 2,400_____ ________

Total direct labor 1,400 $21,800_____ _____________

Direct Total Factory Labor Overhead Cost � Rate � Amount

Factory overhead (200% of direct labor dollars) $21,800 � 200% $ 43,600________

Total cost $171,800Total units ÷ 40________Unit cost $ 4,295________________

Management is concerned with the increase in unit costs over the months from Aprilto October. To understand what has occurred, management interviewed the purchas-ing manager and quality manager.

Purchasing Manager: Prices have been holding steady for our raw materials during thefirst half of the year. I found a new supplier for our bulk steel that was willing tooffer a better price than we received in the past. I saw these lower steel prices andjumped at them, knowing that a reduction in steel prices would have a very favor-able impact on our costs.

Quality Manager: Something happened around mid-year. All of a sudden, we wereexperiencing problems with respect to the quality of our steel. As a result, we’vebeen having all sorts of problems on the shop floor in our foundry and welding op-eration.

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894 Chapter 19 Job Order Costing

1. Analyze the two job cost sheets, and identify why the unit costs have changed forthe Z-15 backhoe buckets. Complete the following schedule to help you in youranalysis:

Input Quantity per Input Quantity per Item Unit—Job 110 Unit—Job 130

SteelFoundry laborWelding labor

2. How would you interpret what has happened in light of your analysis andthe interviews?

Jack Thule just began working as a cost accountant for Toad Industries Inc., which man-ufactures gift items. Jack is preparing to record summary journal entries for the month.Jack begins by recording the factory wages as follows:

Wages Expense 60,000Wages Payable 60,000

Then the factory depreciation:

Depreciation Expense—Factory Machinery 16,000Accumulated Depreciation—Factory Machinery 16,000

Jack’s supervisor, Duke Fulbright, walks by and notices the entries. The followingconversation takes place:

Duke: That’s a very unusual way to record our factory wages and depreciation for the month.

Jack: What do you mean? This is exactly the way we were taught to record wages and depreciation inschool. You know, debit an expense and credit Cash or payables, or in the case of depreciation, creditAccumulated Depreciation.

Duke: Well, it’s not the credits I’m concerned about. It’s the debits—I don’t think you’ve recorded thedebits correctly. I wouldn’t mind if you were recording the administrative wages or office equipment de-preciation this way, but I’ve got real questions about recording factory wages and factory machinery de-preciation this way.

Jack: Now I’m really confused. You mean this is correct for administrative costs, but not for factorycosts? Well, what am I supposed to do—and why?

1. Play the role of Duke and answer Jack’s questions.2. Why would Duke accept the journal entries if they were for administrative costs?

SA 19-4Recording manufac-turing costs

Digital-Tech Inc., a specialized equipment manufacturer, uses a job order costing sys-tem. The overhead is allocated to jobs on the basis of direct labor hours. The overheadrate is now $2,500 per direct labor hour. The design engineer thinks that this is illogi-cal. The design engineer has stated the following:

Our accounting system doesn’t make any sense to me. It tells me that every labor hour carriesan additional burden of $2,500. This means that direct labor makes up only 7% of our total prod-uct cost, yet it drives all our costs. In addition, these rates give my design engineers incentives to“design out” direct labor by using machine technology. Yet, over the past years as we have had lessand less direct labor, the overhead rate keeps going up and up. I won’t be surprised if next year therate is $3,000 per direct labor hour. I’m also concerned because small errors in our estimates of thedirect labor content can have a large impact on our estimated costs. Just a 30-minute error in ourestimate of assembly time is worth $1,250. Small mistakes in our direct labor time estimates reallyswing our bids around. I think this puts us at a disadvantage when we are going after business.

1. What is the engineer’s concern about the overhead rate going “up and up”?2. What did the engineer mean about the large overhead rate being a disad-

vantage when placing bids and seeking new business?3. What do you think is a possible solution?

SA 19-3Factory overhead rate

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As an assistant cost accountant for Spears Industries, you have been assigned to reviewthe activity base for the predetermined factory overhead rate. The president, JessicaRomo, has expressed concern that the over- or underapplied overhead has fluctuatedexcessively over the years.

An analysis of the company’s operations and use of the current overhead rate (directmaterials usage) has narrowed the possible alternative overhead bases to direct laborcost and machine hours. For the past five years, the following data have been gathered:

2010 2009 2008 2007 2006

Actual overhead $ 710,000 $ 860,000 $ 680,000 $ 640,000 $ 610,000Applied overhead 706,000 866,000 675,000 642,000 611,000__________ __________ __________ __________ __________(Over-) underapplied overhead $ 4,000 $ (6,000) $ 5,000 $ (2,000) $ 1,000__________ __________ __________ __________ ____________________ __________ __________ __________ __________Direct labor cost $2,820,000 $3,450,000 $2,700,000 $2,580,000 $2,450,000Machine hours 102,000 122,000 98,000 92,000 86,000

1. Calculate a predetermined factory overhead rate for each alternative base, assum-ing that rates would have been determined by relating the amount of factory over-head for the past five years to the base.

2. For each of the past five years, determine the over- or underapplied overhead, basedon the two predetermined overhead rates developed in part (1).

3. Which predetermined overhead rate would you recommend? Discuss thebasis for your recommendation.

SA 19-5Predetermined over-head rates

Answers to Self-Examination Questions

1. A Job order cost systems are best suited to busi-nesses manufacturing special orders from cus-tomers, such as would be the case for a repair shopfor antique furniture (answer A). A process costsystem is best suited for manufacturers of similarunits of products such as rubber manufacturers(answer B), coal manufacturers (answer C), andcomputer chip manufacturers (answer D).

2. C The journal entry to record the requisition ofmaterials to the factory in a job order cost sys-tem is a debit to Work in Process and a credit toMaterials.

3. B The job cost sheet accumulates the cost of ma-terials (answer A), direct labor (answer C), andfactory overhead applied (answer D). Indirectmaterials are NOT accumulated on the job ordercost sheets, but are included as part of factoryoverhead applied.

4. B

5. B If the amount of factory overhead appliedduring a particular period exceeds the actualoverhead costs, the factory overhead accountwill have a credit balance and is said to be over-applied (answer B) or overabsorbed. If theamount applied is less than the actual costs, theaccount will have a debit balance and is said tobe underapplied (answer A) or underabsorbed(answer C). Since an “estimated” predeterminedoverhead rate is used to apply overhead, a creditbalance does not necessarily represent an error(answer D).

Factory overhead applied to the job: 200 hours * $26 .25 = $5,250

Hours applied to the job: $3,000

$15 per hour= 200 hours

Predetermined FactoryOverhead Rate

=

$420,00016,000 dlh

= $26.25

Predetermined Factory Overhead Rate

=

Estimated Total Factory Overhead CostsEstimated Activity Base

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