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Solutions Manual, Chapter 3 71
Chapter 3
Systems Design: Job-Order Costing
Solutions to Questions
3-1 By definition, manufacturing overhead consists of costs that cannot be practically traced to products or jobs. Therefore, if these costs are to be assigned to products or jobs, they must be allocated rather than traced.
3-2 Job-order costing is used in situations where many different products or services that require separate costing are produced each peri- od. Process costing is used in situations where a single, homogeneous product, such as cement, bricks, or gasoline, is produced for long periods.
3-3 The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials costs traced to the job, direct labor costs traced to the job, and manufacturing overhead costs applied to the job. When a job is completed, the job cost sheet is used to compute the unit product cost.
3-4 A predetermined overhead rate is used to apply overhead to jobs. It is computed before a period begins by dividing the period’s estimated total manufacturing overhead by the period’s es- timated total amount of the allocation base. Thereafter, overhead is applied to jobs by multi- plying the predetermined overhead rate by the actual amount of the allocation base that is in- curred for each job. The most common allocation base is direct labor-hours.
3-5 A sales order is issued after an agree- ment has been reached with a customer on quan- tities, prices, and shipment dates for goods. The sales order forms the basis for the production order. The production order specifies what is to be produced and forms the basis for the job cost sheet. The job cost sheet, in turn, is used to summarize the various production costs incurred to complete the job. These costs are entered on the job cost sheet from materials requisition
forms, direct labor time tickets, and by applying overhead. 3-6 Some production costs such as a factory manager’s salary cannot be traced to a particular product or job, but rather are incurred as a result of overall production activities. In addition, some production costs such as indirect materials cannot be easily traced to jobs. If these costs are to be assigned to products, they must be allocated to the products. 3-7 If actual manufacturing overhead cost is applied to jobs, then the company must wait until the end of the accounting period to apply over- head and to cost jobs. If the company computes actual overhead rates more frequently to get around this problem, the rates may fluctuate widely. Overhead cost tends to be incurred somewhat evenly from month to month (due to the presence of fixed costs), whereas production activity often fluctuates. The result would be high overhead rates in periods with low activity and low overhead rates in periods with high activity. For these reasons, most companies use prede- termined overhead rates to apply manufacturing overhead costs to jobs. 3-8 The measure of activity used as the allo- cation base should drive 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 product costs will be distorted. 3-9 Assigning manufacturing overhead costs to jobs does not ensure a profit. The units pro- duced may not be sold and if they are sold, they may not be sold at prices sufficient to cover all costs. It is a myth that assigning costs to prod- ucts or jobs ensures that those costs will be re-
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covered. Costs are recovered only by selling to customers—not by allocating costs.
3-10 The Manufacturing Overhead account is credited when overhead cost is applied to Work in Process. Generally, the amount of overhead ap- plied will not be the same as the amount of actual cost incurred, since the predetermined overhead rate is based on estimates.
3-11 Underapplied overhead occurs when the actual overhead cost exceeds the amount of overhead cost applied to Work in Process invento- ry during the period. Overapplied overhead occurs when the actual overhead cost is less than the amount of overhead cost applied to Work in Pro- cess inventory during the period. Underapplied or overapplied overhead is disposed of by either closing out the amount to Cost of Goods Sold or by allocating the amount among Cost of Goods Sold and ending inventories in proportion to the applied overhead in each account. The adjust- ment for underapplied overhead increases Cost of Goods Sold (and inventories) whereas the ad- justment for overapplied overhead decreases Cost of Goods Sold (and inventories).
3-12 Manufacturing overhead may be un- derapplied for several reasons. Control over over- head spending may be poor. Or, some of the overhead may be fixed and the actual amount of the allocation base was less than estimated at the beginning of the period. In this situation, the amount of overhead applied to inventory will be less than the actual overhead cost incurred.
3-13 Underapplied overhead implies that not enough overhead was assigned to jobs during the period and therefore cost of goods sold was un- derstated. Therefore, underapplied overhead is added to cost of goods sold. Likewise, overap- plied overhead is deducted from cost of goods sold.
3-14 Yes, overhead should be applied to 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 compa- ny’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, direct labor cost × 75% = $3,000 applied over- head cost. 3- Direct material .................................. $10, Direct labor ...................................... 12, Manufacturing overhead: $12,000 × 125% ........................... 15, Total manufacturing cost ................... $37, Unit product cost: $37,000 ÷ 1,000 units .................... $
3-16 A plantwide overhead rate is a single overhead rate used throughout all production de- partments in a plant. Some companies use multi- ple overhead rates rather than plantwide rates to more appropriately allocate overhead costs among products. Multiple overhead rates should be used, for example, in situations where one department is machine intensive and another de- partment is labor intensive. 3-17 When automated equipment replaces direct labor, overhead increases and direct labor decreases. This results in an increase in the pre- determined overhead rate—particularly if it is based on direct labor. 3-18 When the predetermined overhead rate is based on the amount of the allocation base at capacity and the plant is operated at less than capacity, overhead will ordinarily be underapplied. This occurs because actual activity is less than the activity the predetermined overhead rate is based on. 3-19 Critics of current practice advocate dis- closing underapplied overhead on the income statement as Cost of Unused Capacity—a period expense. This would highlight the amount rather than burying it in other accounts.
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- The direct materials and direct labor costs listed in the exercise would have been recorded on four different documents: the materials requisi- tion form for Job ES34, the time ticket for Harry Kerst, the time ticket for Mary Rosas, and the job cost sheet for Job ES34.
- The costs for Job ES34 would have been recorded as follows:
Materials requisition form: Quantity Unit Cost Total Cost Blanks 40 $8.00 $ Nibs 960 $0.60 576 $
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 ES
Time ticket for Mary Rosas
Started Ended
Time Completed Rate Amount
Job Number 2:15 PM 4:30 PM 2.25 $14.00 $31.50 ES
Job Cost Sheet for Job ES Direct materials ... $896. Direct labor: Harry Kerst....... 39. Mary Rosas ...... 31. $966.
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The predetermined overhead rate is computed as follows:
Estimated total manufacturing overhead ....... $586, ÷ Estimated total direct labor hours (DLHs) .. 40,000 DLHs = Predetermined overhead rate.................... $14.65 per DLH
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- Actual direct labor-hours ......................... 8, × Predetermined overhead rate ............... $21. = Manufacturing overhead applied........... $176, Less: Manufacturing overhead incurred .... 172, $ 4,
Manufacturing overhead overapplied ........ $4,
- Because manufacturing overhead is overapplied, the cost of goods sold would decrease by $4,050 and the gross margin would increase by $4,050.
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- 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 predeter- mined overhead rate was 160%:
Studio overhead applied $320,
Total amount of the allocation base $200,000 direct staff costs
=160% of direct staff costs
- The Krimmer Corporation Headquarters project is the only job remaining in Work in Process at the end of the month; therefore, the entire $40,000 balance in the Work in Process account at that point must apply to it. Recognizing that the predetermined overhead rate is 160% of di- rect staff costs, the following computation can be made: Total cost added to the Krimmer Corporation Headquarters project ..... $40, Less: Direct staff costs ...................... $13, Studio overhead cost ($13,500 × 160%)................. 21,600 35, Costs of subcontracted work ............... $ 4, With this information, we can now complete the job cost sheet for the Krimmer Corporation Headquarters project: Costs of subcontracted work ........... $ 4, Direct staff costs ............................ 13, Studio overhead ............................. 21, Total cost to January 31 ................. $40,
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- Williams Chandler Nguyen Designer-hours ........................... 200 80 120 Predetermined overhead rate ....... × $45 × $45 × $ Overhead applied ........................ $9,000 $3,600 $5,
- Williams Chandler Direct materials cost .................... $ 4,800 $1, Direct labor cost .......................... 2,400 1, Overhead applied ........................ 9,000 3, Total cost ................................... $16,200 $6,
Completed Projects ..................... 22,600* Work in Process ..................... 22,600*
- The balance in the Work in Process account consists entirely of the costs associated with the Nguyen project: Direct materials cost ............................... $ 3, Direct labor cost ..................................... 1, Overhead applied ................................... 5, Total cost in work in process ................... $10,
- The balance in the Overhead account is determined as follows:
Overhead Actual overhead costs 16,000 18,000 Applied overhead costs 2,000 Overapplied overhead As indicated above, the credit balance in the Overhead account is called overapplied overhead.
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Note to the instructor: This exercise is a good vehicle for introducing the concept of predetermined overhead rates. This exercise can also be used as a launching pad for a discussion of the appendix to the chapter.
- As suggested, the costing problem does indeed lie with manufacturing overhead cost. Since manufacturing overhead is mostly fixed, the cost per unit increases as the level of production decreases. The problem can be “solved” by using a predetermined overhead rate, which should be based on expected activity for the entire year. Many students will use units of product in computing the predetermined overhead rate, as fol- lows:
Predetermined^ Estimated total manufacturing overhead cost
overhead rate (^) Estimated total amount of the allocation base
$840,
200,000 units
=$4.20 per unit.
The predetermined overhead rate could also be set on the basis of di- rect labor cost or direct materials cost. The computations are:
Predetermined^ Estimated total manufacturing overhead cost
overhead rate (^) Estimated total amount of the allocation base
$840,
$240,000 direct labor cost
=350% of direct labor cost.
Predetermined^ Estimated total manufacturing overhead cost
overhead rate (^) Estimated total amount of the allocation base
$840,
$600,000 direct materials cost
=140% of direct materials cost.
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- Item (a): Actual manufacturing overhead costs for the year. Item (b): Overhead cost applied to work in process for the year. Item (c): Cost of goods manufactured for the year. Item (d): Cost of goods sold for the year.
- Manufacturing Overhead............................. 30, Cost of Goods Sold ................................ 30,
- The overapplied overhead will be allocated to the other accounts on the basis of the amount of overhead applied during the year in the ending balance of each account: Work in process ................................ $ 32,800 8 % Finished goods.................................. 41,000 10 Cost of goods sold ............................ 336,200 82 Total cost ......................................... $410,000 100 % Using these percentages, the journal entry would be as follows: Manufacturing Overhead ........................... 30, Work in Process (8% × $30,000) .......... 2, Finished Goods (10% × $30,000) ......... 3, Cost of Goods Sold (82% × $30,000).... 24,
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- The overhead applied to Ms. Miyami’s account would be computed as follows: 2005 2006 Estimated overhead cost (a) ............................. $144,000 $144, Estimated professional staff hours (b) ............... 2,400 2, Predetermined overhead rate (a) ÷ (b).............. $60 $ Professional staff hours charged to Ms. Miyami’s account ..................................... × 5 × 5 Overhead applied to Ms. Miyami’s account ......... $300 $
- If the actual overhead cost and the actual professional hours charged turn out to be exactly as estimated there would be no underapplied or overapplied overhead. 2005 2006 Predetermined overhead rate (see above) ......... $60 $ Actual professional staff hours charged to cli- ents’ accounts (by assumption) ...................... × 2,400 × 2, Overhead applied ............................................. $144,000 $144, Actual overhead cost incurred (by assumption) .. 144,000 144, Under- or overapplied overhead ........................ $ 0 $ 0
- If the predetermined overhead rate is based on the professional staff hours available, the computations would be: Estimated overhead cost (a) ............................... $144,000 $144, Professional staff hours available (b) ................... 3,000 3, Predetermined overhead rate (a) ÷ (b) ............... $48 $ Professional staff hours charged to Ms. Miyami’s account .......................................................... × 5 × 5 Overhead applied to Ms. Miyami’s account .......... $240 $
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- Milling Department:
Predetermined^ Estimated total manufacturing overhead cost overhead rate = Estimated total amount of the allocation base
$510, = =$8.50 per machine-hour 60,000 machine-hours
Assembly Department:
Predetermined^ Estimated total manufacturing overhead cost overhead rate = Estimated total amount of the allocation base
$800, = =125% of direct labor cost $640,000 direct labor cost
- Overhead Applied Milling Department: 90 MHs × $8.50 per MH .. $ Assembly Department: $160 × 125%............. 200 Total overhead cost applied ........................... $
- Yes; if some jobs require a large amount of machine time and little labor cost, they would be charged substantially less overhead cost if a plant- wide rate based on direct labor cost were used. It appears, for example, that this would be true of Job 407 which required considerable machine time to complete, but required only a small amount of labor cost.
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- The predetermined overhead rate is computed as follows:
Predetermined^ Estimated total manufacturing overhead cost overhead rate = Estimated total amount of the allocation base
$170, = =$2.00 per machine-hour 85,000 machine-hours
- The amount of overhead cost applied to Work in Process for the year would be: 80,000 machine-hours × $2.00 per machine-hour = $160,000. This amount is shown in entry (a) below: Manufacturing Overhead (Utilities) 14,000 (a) 160, (Insurance) 9, (Maintenance) 33, (Indirect materials) 7, (Indirect labor) 65, (Depreciation) 40, Balance 8,
Work in Process (Direct materials) 530, (Direct labor) 85, (Overhead) (a) 160,
- Overhead is underapplied by $8,000 for the year, as shown in the Manu- facturing Overhead account above. The entry to close out this balance to Cost of Goods Sold would be: Cost of Goods Sold ...................................... 8, Manufacturing Overhead ........................... 8,
