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SOC 31A/B (1)


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Ryerson University
Margaret Buckby

Chapter 5: Job Costing 203 Chapter 5 Job Costing LEARNING OBJECTIVES Chapter 5 addresses the following questions: LO1 Explain product costs and cost flows through the manufacturing process. LO2 Describe how costs are assigned to customized goods and services. LO3 Allocate overhead costs to individual jobs. LO4 Discuss how job costing information affects managers’ incentives and decisions. LO5 Explain how spoilage, rework, and scrap are handled in job costing. LO6 Appreciate the quality and behavioural implications of spoilage. These learning objectives (LO1 through LO 6) are cross-referenced in the textbook to individual exercises and problems. © 2012 John Wiley and Sons Canada, Ltd. 204 Cost Management QUESTIONS 5.1 Most itemized statements recorded for a particular individual ("job") constitute a job order cost sheet. Examples of job costing record sheets include: Automobile repair bill Restaurant receipt Doctor, dentist, or veterinarian bill Telephone, electricity, or other utility bill Photocopying service receipt 5.2 Under actual costing there is no underapplied or overapplied overhead because actual costs and actual volumes of the allocation base are used to allocate overhead. Under normal costing, an estimated rate is used to allocate overhead that is based on estimates of cost and production. Because costs or volumes cannot be perfectly predicted, there will always be overapplied or underapplied overhead under normal costing. 5.3 Examples of businesses that would use job costing: veterinary clinic, dentist, custom iron security doors, print shop, automobile repair shop, attorney. Examples of businesses that would use process costing: local bottling companies, flour mill, and golf club manufacturer. 5.4 Spoilage costs include all of the direct materials, direct labour, and allocated overhead that accumulate before the unit is inspected and removed from production. If the unit is removed when 100% complete, then 100% of its costs are assigned. If the unit is less complete, the costs assigned reflect the level of completion. 5.5 Because overtime hours are more expensive than regular hours, the overtime premium should be treated as an indirect cost and assigned to overhead, while the regular cost of the hours is a direct cost that should be assigned to particular jobs. Assigning overhead to specific jobs just because the production schedule called for that job at that time unfairly treats those jobs. Overhead is guaranteed and will occur no matter what jobs are in process, so the overtime premium should be treated as an indirect cost and recorded as an overhead cost that is spread among all jobs. 5.6 Both systems treat direct material and direct labour costs in the same manner; these costs are assigned to the jobs on which they were actually incurred using the actual amount of allocation base used per job. The difference deals with indirect costs. In an actual cost system, actual indirect costs are totaled at the end of the period and then, retroactively, allocated to the jobs worked on during the period. In a normal cost system, indirect costs and activity are estimated at the start of the period and an estimated allocation rate is used during the period to assign the costs to jobs as work takes place. 5.7 If a customer requests a material that is known to increase defect rates more than other materials or requests a design that is more difficult to manufacture, any spoilage should be recorded as a cost of the specific job. Spoilage that is part of normal operations, such as fabric that is occasionally cut too small, should be recorded as overhead and spread across all jobs because this spoilage arises in a random manner. © 2012 John Wiley and Sons Canada, Ltd. Chapter 5: Job Costing 205 5.8 Cost pools are groups of overhead costs, that is, common costs for resources used to manufacture products or provide services. These costs need to be distributed among the goods and services to match cost with revenue during an accounting period. Cost allocation is the method used to distribute costs across units of goods or services. 5.9 In job costing, direct costs such as direct materials and direct labour are traced to each individual job. Then the indirect costs, usually overhead costs, are allocated to all of the jobs completed during the period using either an actual or estimated allocation rate. This rate is developed by dividing an actual or estimated overhead cost by an actual or estimated volume of an allocation base. Typical allocation bases include labour cost, labour hours, and machine hours. If an estimated allocation rate is used, then end-of- period adjustments need to be made for any underapplied or overapplied overhead cost. 5.10 The three most common overhead allocation bases in job costing are labour hours, labour cost, and machine hours. Accountants try to identify overhead allocation bases that best reflect the flow of overhead resources to individual products. In a department that uses a lot of equipment and little labour, the overhead costs are more likely related to the machines, therefore, machine hours would be an appropriate base. If overhead is more related to labour and includes fringe benefits and other labour costs, labour hours is used if direct labour employees are paid similar wages. If direct labour employees have a wide variety of skills, and therefore there is wide variation in the hourly wage amount, then direct labour cost may more accurately reflect the use of overhead resources. 5.11 For job costing, information is needed about the resources used by individual jobs. This includes information from the payroll system, such as the number of hours specific employees work on particular jobs so that direct labour costs can be traced to each job. Information from materials stores is needed about the amount of direct materials used per job to trace direct costs to each job. Information collected by employees or equipment may be needed, such as number of machine hours, to use as the allocation base for overhead in some departments. Both fixed and variable overhead costs are also needed; they are usually accumulated in control accounts in the accounting records and then allocated to specific jobs. 5.12 If the amounts are immaterial, underapplied and overapplied overhead are closed to cost of goods sold (COGS). If overhead has been overapplied, too much overhead has been recorded to COGS and so the amount of overapplied overhead will be subtracted, and vice versa for underapplied. If the amount is material, over- or underapplied overhead is closed to COGS, finished goods, and ending work in progress based on their proportion of the total amount in those three accounts. If actual volume is below the normal range, however, underapplied overhead must be assigned to cost of goods sold; it cannot be added to inventory. 5.13 Job cost records for a manufacturing firm include all of the costs included for production such as direct materials and labour, indirect materials and labour, and overhead costs, for example the costs of renting, leasing or owning the manufacturing facility, insurance on the facility, depreciation of the manufacturing equipment, property taxes, material © 2012 John Wiley and Sons Canada, Ltd. 206 Cost Management handling costs, among others. In a service firm, the job cost records would include all costs related to providing the services, except the direct costs. 5.14 An overhead cost pool in an accounting firm would include the costs of all of the activities related to providing accounting services for clients other than costs that are traced directly to client jobs. These include costs for the receptionists; office space, heating, and lighting; and supplies used in preparing reports. Students may think of additional costs. 5.15 The following diagram omits the actual direct materials cost and the final cost of goods sold because the amount of these costs are not available in self-study problem 1. © 2012 John Wiley and Sons Canada, Ltd. Chapter 5: Job Costing 207 MULTIPLE-CHOICE QUESTIONS 5.16 Which of the following statements is true if the overhead control account has a debit balance at the end of the period? a) Overhead is overapplied, and the difference should be credited to the appropriate accounts. b) Overhead is overapplied, and the difference should be debited to the appropriate accounts. c) Overhead is underapplied, and the difference should be debited to the appropriate accounts. d) Overhead is underapplied, and the difference should be credited to the appropriate accounts. Ans: C Use the following information to answer Question 5.17 to 5.20: The following information is selected from the accounting records of Walmer Company: January 1, 2012 December 31, 2012 Direct materials $ 35,000 $ 38,000 Work-in-process 42,000 28,000 Finished goods 32,000 27,000 Direct materials purchased $120,000 Direct labour $ 96,000 Direct labour rate per hour $ 12 Manufacturing overhead rate per direct labour hour $ 10 5.17 What was the manufacturing overhead cost for the year? a) $ 8,000 b) $ 9,600 c) $ 80,000 d) $115,200 Ans: C $10 * ($96,000/$12) 5.18 What was the prime cost for the year? a) $176,000 b) $197,000 c) $213,000 d) $293,000 Ans: C ($35,000 + $120,000 – $38,000) + $96,000 © 2012 John Wiley and Sons Canada, Ltd. 208 Cost Management 5.19 What was the cost of goods manufactured for the year? a) $339,000 b) $307,000 c) $296,000 d) $293,000 Ans: B [$213,000 from 5.17 + $80,000 from 5.18 + (42,000-28,000 change in WIP)] 5.20 What was the cost of goods sold for the year? a) $339,000 b) $312,000 c) $307,000 d) $302,000 Ans: B ($32,000 + 307,000 from 5.19 - $27,000) © 2012 John Wiley and Sons Canada, Ltd. Chapter 5: Job Costing 209 EXERCISES 5.21 Schedule of Cost of Goods Manufactured, Cost of Goods Sold, Income Statement – Canton Ltd. A. Canton Ltd. Schedule of Cost of Goods Manufactured For the Year Ended December 31, 2012 Direct Materials Beginning Direct Materials 13,200 Add Purchases of Direct Materials 98,200 111,40 Direct Materials Available for Use 0 Ending Direct Materials 16,200 Direct Materials Used in Production 95,200 Direct Labour 88,200 Manufacturing Overhead Amortization - factory 28,500 Factory Insurance 8,400 Factory Maintenance 25,300 Factory Utilities 14,500 Indirect Labour 19,500 Indirect Materials 7,800 104,00 Total Manufacturing Overhead 0 Manufacturing Costs Incurred in 287,40 2009 0 Add Beginning Work in Process © 2012 John Wiley and Sons Canada, Ltd. 210 Cost Management Inventory 24,800 Total Manufacturing Costs to 312,20 Account For 0 Less Ending Work in Process Inventory 35,200 277,00 Cost of Goods Manufactured 0 B. Prime Costs = Direct Materials + Direct Labour = 95,200 + 88,200 = 183,400 Conversion Costs = Direct Labour + Manufacturing Overhead = 88,200 + 104,000 = 192,200 © 2012 John Wiley and Sons Canada, Ltd. Chapter 5: Job Costing 211 C. Canton Ltd. Schedule of Cost of Goods Sold For the Year Ended December 31, 2012 Beginning Finished Good Inventory 65,800 Add Cost of Goods Manufactured 277,000 Cost of Goods Available for Sale 342,800 Less Ending Finished Goods Inventory 52,500 Cost of Goods Sold 290,300 D. Canton Ltd. Income Statement For the Year Ended December 31, 2012 482,00 Sales 0 290,30 Cost of Goods Sold 0 191,70 Gross Margin 0 Selling Expenses 70,400 General and Administrative Expenses 62,800 133,20 Total Expenses 0 Net Income 58,500 © 2012 John Wiley and Sons Canada, Ltd. 212 Cost Management 5.22 Custom Versus Mass Production Custom Mass X X Jewelry X Rolls Royce Automobiles X X Honda Automobiles X X Tax services in an accounting firm X X Haircuts X Personal shopping services X Breakfast cereal production Jewelry can be custom produced, for example if the consumer selects a stone and a separate setting and has them made into a ring, or mass-produced in a factory. A Rolls Royce is custom ordered to certain specifications. Hondas are typically mass produced, but could then be customized with rims, wheels, or lights. Tax services are custom produced for complex returns, but can be mass produced for T1 General Income Tax and Benefitreturns. Haircuts are usually custom, but in settings like the military could be mass produced because cuts are identical and quickly performed. 5.23 Job Costing, Service Sector –Thanh Ng A. Direct labour costs: Professional labour$20,000 Support labour 10,000 Total 30,000 Other direct costs 17,000 (Fringe benefits + copying + phone) Allocated overhead 30,000 (100% of $30,000) Budgeted costs $77,000 This assumes that computer line costs cannot be traced to specific jobs. B. Fee = 110% * $77,000 = $84,700 C. Many factors could affect these costs. Because they are estimations, any relevant factors that were left out of the estimate could influence cost. It is difficult to predict how efficient the resources will be used. It is possible that the professional labour hours required are more or less than estimated, depending on the skills of the professionals and the accuracy with which the amount of work was estimated. If something was overlooked that requires more hours, the estimate will be off. Phone costs and computer costs may be different because rates change, or the job requires more or less telephone or computer work. © 2012 John Wiley and Sons Canada, Ltd. Chapter 5: Job Costing 213 Factors that could affect the actual costs: Price changes for any of the resources and unforeseen complications, such as computer crashes, problems with communication systems, illness of key professional and support employees, unforeseen problems in the actual work. 5.24 Job Costing, Service Sector – Ava Advertising Agency A. Overhead rate per hour (based on the labour hours: $120,000 ÷ 6,000 hours = $20/hr B. Direct Material: $32,000 Direct Labour: 1,200 x $45 = $54,000 Overhead allocated: 1,200 x $20 = $24,000 Total Job Cost for Job #1502 $110,000 C. Overhead allocated: 5,800 actual hrs x $20 = $116,000 Actual overhead: $127,600 Overhead underapplied: $(11,600) D. Debit Credit Cost of Services 11,600 Overhead (Service) 11,600 E. Direct Materials $45,000 Direct Labour: 1,000 x $45 $45,000 Overhead Cost: 1,000 x $20 $20,000 Job Costing: $110,000 F. Job Costing: $110,000 Mark up (Profit @ 40%) 44,000 Quote: $154,000 5.25 Job Costing, Service Sector - Mercy Hospital A. The hospital uses a job cost system because each patient has a different set of costs and times based on the type of surgery and other variable factors. The job cost system allows the hospital to see exactly what costs are incurred and can serve as a guide for billing patients. Because this information is needed for billing purposes, there is no additional cost for collecting it. © 2012 John Wiley and Sons Canada, Ltd. 214 Cost Management B. Budgeted overhead rate = Budgeted overhead costs / Budgeted volume of allocation base = $66,000 / 1,000 operating hours = $66 per hour C. Costs for Schuller: Direct costs: Patient medicine $ 250 Nurse 3,500 Supplies 800 Total direct $4,550 Allocated overhead: Overhead rate $66 per hour in surgery Times hours in surgery 4 hours Total overhead 264 Total costs $4,814 5.26 Job Costing, Over- and Underapplied Overhead, Journal Entries - Shane’s Shovels A. Notice that the company uses normal costing (overhead is allocated using an estimated rate). However, under normal costing the company is required to make an end-of-period adjustment for any overapplied or underapplied overhead. This means that the after- adjustment costs assigned to jobs completed will be actual cost: Direct materials issued to production $180,000 Overhead allocated 225,000 Direct labour costs 75,000 Total Normal Costs incurred $480,000 Overhead underapplied * 55,000 Total Actual Costs Incurred $535,000 * (250,000 + 30,000 - 225,000) B. This month overhead was underapplied by $55,000. This is the difference between total overhead costs of $280,000 (indirect materials of $30,000 plus other manufacturing overhead incurred of $250,000) and manufacturing overhead allocated of $225,000. C. Work in process $180,000 Raw materials inventory (direct materials used) $180,000 Overhead cost control $30,000 Raw materials inventory (indirect materials used) $30,000 Overhead cost control $250,000 Various accounts $250,000 © 2012 John Wiley and Sons Canada, Ltd. Chapter 5: Job Costing 215 Work in process $225,000 Overhead cost control (allocations) $225,000 Work in process $75,000 Wages payable $75,000 Finished goods $480,000 Work in process $480,000 The problem states that beginning and ending WIP inventories were both zero. Therefore, all jobs were completed. Total WIP costs = $180,000 + $225,000 + $75,000 = $480,000 Cost of Goods Sold $480,000 Finished goods $480,000 The problem does not provide any information about the delivery of jobs to customers. However, jobs are usually transferred to customers upon completion, so the following entry assumes that all finished goods inventory is transferred to cost of goods sold. Cost of Goods Sold $55,000 Overhead cost control (adjustment) $55,000 The amount of underapplied overhead was calculated in Part B. Notice this is also equal to the balance of entries to the overhead control account: $30,000 + $250,000 – $225,000. The balance in the overhead control account will be zero after this entry is recorded. Notice that with the overhead cost adjustment, the total costs recorded in cost of goods sold of $535,000 ($480,000 + $55,000) are equal to the total costs in part A. 5.27 Job Costing, Underapplied Overhead, Solve for Unknowns -- Traco A. Budgeted direct labour cost: Overhead allocation rate = ____Budgeted fixed overhead____ Budgeted volume of allocation base 80% of DL cost = $800,000 / Budgeted direct labour cost Budgeted direct labour costs * 80% of DL costs = $800,000 Budgeted direct labour cost = $800,000/80% Budgeted direct labour cost = $1,000,000 © 2012 John Wiley and Sons Canada, Ltd. 216 Cost Management B. Total fixed overhead allocated: Underapplied overhead = Budgeted fixed overhead – Allocated overhead $12,000 = $800,000 – Allocated overhead Allocated overhead = $800,000 - $12,000 Allocated overhead = $788,000 C. Direct labour cost for the year: Allocated overhead = Overhead allocation rate × Actual direct labour cost $788,000 = 80% × Actual labour cost Actual labour cost = $788,000 / 80% Actual labour cost = $985,000 5.28 Job Costing, Over- and Underapplied, Journal Entries -- Huber and Sons A. Work in Process $ 167 Raw Materials Inventory $ 167 Work in Process $ 224 Wages Payable $ 224 Work in Process $ 922 Overhead Cost Control $ 922 B. Actual overhead was $899, and overhead allocated was $922. Overhead was overapplied by: $922 – $899 = $23. Overhead Cost Control $ 23 Cost of Goods Sold $ 23 C. Beginning work in process $ 123 + Materials 167 + Labour 224 + Overhead allocated 922 Total manufacturing costs 1,436 – Cost of goods sold 1,233 Ending work in process $ 203 © 2012 John Wiley and Sons Canada, Ltd. Chapter 5: Job Costing 217 5.29 Job Costing, Service Sector, Fixed and Variable Overhead Costs, Over- and Underapplied Overhead -- Opinion Research A. Total costs for Job 717: Fixed overhead rate = $60,000/3,000 client hours = $20 per client hour Variable overhead = $50 per client hour Total overhead = $20 + $50 = $70 per client hour Direct costs – Job 717 $ 52,000 Overhead costs (850 hours × $70 per hour) 59,500 Total cost – Job 717 $111,500 B. (1) Fixed overhead costs include the costs for offices such as rent, lease, or depreciation costs, insurance and property taxes, licenses, training materials for new employees, and telephone costs if they are flat-rate. Students may think of other fixed overhead costs. (2) Variable overhead costs would be indirect labour that is related to surveying activities (assuming the cost is not based on fixed work schedules), telephone costs if they are based on usage, supplies, among others. Students may think of other variable overhead costs. C. Overhead over- or underapplied during July: Actual overhead $220,000 Allocated overhead (2,800 hours × $70 per hour) 196,000 Underapplied overhead $ 24,000 5.30 Job Costing, Service Sector, Return on Revenue -- Trainor and Associates A. Overhead cost allocation rate: Overhead costs / Volume of allocation base $1,975,000/$1,000,000 DL costs = 197.5% of DL costs B. Bid to earn 15% of revenue: Partner time (20 hours × $100 per hour) $ 2,000.00 Associate time (45 hours × $50 per hour) 2,250.00 Total direct labour cost 4,250.00 Allocated overhead ($4,250 × 197.5% 8,393.75 Total cost $12,643.75 © 2012 John Wiley and Sons Canada, Ltd. 218 Cost Management Desired Profit = 15% * Revenue Profit = Revenue – $12,643.75 Substituting: 15% * Revenue = Revenue – $12,643.75 100% * Revenue – 15% * Revenue = $12,643.75 85% * Revenue = $12,643.75 Revenue = $12,643.75 / 85% Revenue = $14,875.00 5.31 Job Costing, Price Quote, Over- and Underapplied Overhead -- Home Contracting Company A. The overhead allocation rate = $11,120,000/$8,000,000 = 139% of direct costs B. Price quote for job: Direct costs ($25,000 + $15,000) $ 40,000 Overhead allocation ($40,000 × 139%) 55,600 Total costs 95,600 Markup ($95,600 × 40%) 38,240 Price quote $133,840 C. Calculation of over- or underapplied overhead: This question cannot be answered from the information provided because the actual amount of overhead costs is not provided. However, if we assume that actual overhead costs are equal to estimated overhead costs, then: Actual overhead costs (assumed) $11,120,000 Allocated overhead ($7,200,000×139%) 10,008,000 Underapplied overhead $ 1,112,000 5.32 Normal and Abnormal Spoilage -- Franklin Fabrication A. The spoilage for Job 359 should be categorized as abnormal spoilage because operations were out of control while the supervisor was on vacation. This cost is recorded as a separate loss. B. The spoilage of wire mesh for the gate is normal spoilage; it arises as a regular part of operations because it is such fine wire. This spoilage would be assigned to the cost of the job because the customer understood that the fine wire is more difficult to work with. © 2012 John Wiley and Sons Canada, Ltd. Chapter 5: Job Costing 219 C. The following entries assume that the costs were already recorded in WIP (the usual case). Therefore, the credit entry is to WIP inventory. Loss from abnormal spoilage $20 Work in process inventory (Job 359 – spoiled metal at cost) $20 Overhead cost control $150 Work in process inventory (Job 350 – spoiled gate at cost) $150 5.33 Direct Costs and Overhead - Job 87M A. This question involves definitions and relationships. The problem provides the following information: Material = $400 Overhead = 0.75*(material + labour) Substituting the cost of material into overhead: Overhead = $400*0.75 + 0.75 * labour Overhead = $300 + 0.75 *labour Further: Material + labour + overhead = $2,100 Substitution gives: $400 + labour + ($300 + 0.75 *labour) = $2,100 $700 + 1.75 * labour = $2,100 1.75 * labour = $2,100 - $700 Labour = $1,400 / 1.75 Labour = $800 B. Overhead = 0.75*($400 + $800) = $900 5.34 Analysis of WIP T-Account - Jeeter Company A. Work-In-Process Inventory Beginning Balance 48,000 Direct materials 160,000 Direct labour 120,000 Factory overhead 150,000 To finished goods 442,000 Ending Balance 36,000 © 2012 John Wiley and Sons Canada, Ltd. 220 Cost Management B. Overhead = 120%*Direct labour $9,000 = 1.2 * Direct labour Direct labour = $9,000/1.2 Direct labour = $7,500 C. $36,000 is total cost of Job 850 at the end of the month. Total cost = Direct materials + Direct labour + Factory overhead $36,000 = Direct materials + $7,500 + $9,000 Direct materials= $19,500 5.35 Journal Entries - Langley Ltd. A. Work-in-Process $13,000 Raw Materials Inventory $13,000 Work-in-Process $20,000 Wages Payable $20,000 Work-in-Process ($20,000 x 1.5) a $30,000 Overhead Cost Control $30,000 Overhead Cost Control $28,000 Various Accounts $28,000 Finished Goods b $64,750 Work-in-Process $64,750 c Cost of Goods Sold $61,450 Finished Goods $61,450 Overhead Cost Control $2,000 Cost of Goods Sold $ 2,000 a The overhead rate can be determined from the data on beginning work-in-process. For example, the data for order 88 implies that the rate is $1,800/1,200 = 150% of direct labour cost. The same rate can be determined from the data for order 105. b Beginning work-in-process (order 88 + order 105) $ 5,400 Direct materials 13,000 Direct labour 20,000 Overhead allocated 30,000 Total manufacturing costs 68,400 Ending work-in-process ($1,150 + 1,000 + 1,500) (3,650) Cost of goods manufactured $64,750 © 2012 John Wiley and Sons Canada, Ltd. Chapter 5: Job Costing 221 cBeginning finished goods $ 0 Cost of goods manufactured 64,750 Goods available for sale 64,750 Ending finished goods (3,300) Cost of goods sold $61,450 B. The overapplied or underapplied overhead can be closed to cost of goods sold as shown above. Alternatively, it can be prorated to work-in-process, finished goods, and cost of goods sold in proportion to the flow of costs in each account during the period. The criterion usually used is whether the overhead adjustment is material in size. Each organization has different criteria for setting the lower limit for materiality, but it is often between 5% and 10% of the amount of actual overhead cost. In this textbook, 10% is generally considered to be material. 5.36 Cost of Goods Sold Schedule - The Rebecca Corporation STATEMENT OF COST OF GOODS MANUFACTURED Direct Materials: Beginning DirectMaterials $16,200 Add Purchases of Direct Materials 20,000 DirectMaterials available for use 36,200 Less Ending DirectMaterials (17,000) DirectMaterials used in production 19,200 Direct labour (3,300*$10) 33,000 Manufacturing Overhead allocated (3,300*$2.60) 8,580 Total manufacturing costs Incurred 60,780 Add Beginning Work in Process Inventory $ 5,100 Total Manufacturing Costs to Account For 65,880 Less ending work-in-process ($4,320 + $5,000 + $1,300) (10,620) Cost of goods manufactured $55,260 5.37 Cumulative Exercise (Chapter 4): Job Costing , special order, over- and underapplied overhead - Vern’s Van Service The overhead allocation rate is $6,400/$5,000, or $1.28 per labour dollar. A. Summary of jobs: 207 208 209 210 211 Total Materials $ 970 $ 650 $ 800 $ 950 $ 110 $ 3,480 Labour 1,400 1,200 800 1,700 400 5,500 Overhead 1,792 1,536 1,024 2,176 512 7,040 Total $4,162 $3,386 $2,624 $4,826 $1,022 $16,020 © 2012 John Wiley and Sons Canada, Ltd. 222 Cost Management B. First compare the actual to the allocated overhead for the month. Actual overhead is $6,550 ($750 +$2,200 + $3,600). Allocated overhead is $7,040 from the summary above. The difference of $490 ($6,550 - $7,040) is overapplied and needs to be removed from cost of goods sold. C. Direct material and labour costs for this customer total $2,800 ($1,700 + $1,100). Assuming that overhead costs are primarily fixed and that direct labour costs are variable, the minimum price (to break even on the job) would be equal to $2,800. 5.38 Job Costing Journal Entries, Close Over- or Underapplied overhead -- Vern’s Van Service A. Journal entries: Work in process $ 3,480 Overhead Cost Control 750 Raw Materials Inventory $ 4,230 Work in process $ 5,500 Overhead Cost Control 2,200 Wages Payable $ 7,700 Work in process $ 7,040 Overhead Cost Control ($5,500×$1.28) $ 7,040 Overhead Cost Control $ 3,600 Various Accounts $ 3,600 Finished Goods $14,998 Work in process $14,998 Jobs 207, 208, 209 and 210 Cost of Goods Sold $10,172 Finished Goods $10,172 Jobs 207, 208 and 209 ($4,162 + $3,386 + $2,624 = $10,172) B. Journal entries for overhead Overhead Cost Control $490 Cost of Goods Sold $490 The problem instructed students to close over- or underapplied overhead to cost of goods sold. For Vern’s Van Service, the amount of overapplied cost of goods sold was small, so it would probably be viewed as immaterial—and it would be reasonable to close it to cost of goods sold. © 2012 John Wiley and Sons Canada, Ltd. Chapter 5: Job Costing 223 5.39 Allocating Overhead, Over- and Underapplied Overhead, Spoilage - The Futons for You Company A. Budgeted fixed factory overhead cost $160,000 Budgeted machine hours 100,000 hours Overhead estimated allocation rate = $160,000/100,000 hours = $1.60 per machine hour B. Overhead allocated to Job No. 21: Machine-hours used on job * Budgeted overhead rate = 16,000 hours * $1.60 = $25,600 C. Actual overhead = $160,000 Allocated overhead = 110,000 x $1.60 = $176,000 Overapplied overhead = $176,000 - $160,000 = $16,000 D. Cost of goods sold should be reduced because too much overhead was allocated. E. If the amount is material, it should be prorated among work-in-process, finished goods, and cost of goods sold. F. Spoilage that was incurred during production of Job 21 should be allocated to Job 21 because it arose through the choice of a special fabric that is known to dull the blades. 5.40 Job Costing, Close Over- or Underapplied Overhead -- ABC Industries A. The overhead allocation rate is $80,000/$200,000 = $0.40 per dollar of labour cost. The total cost of each job is Job 1231 Job 1232 Job 1233 Total Materials $ 45,000 $ 70,000 $ 30,000 $145,000 Labour 70,000 90,000 50,000 210,000 Overhead 28,000 36,000 20,000 84,000 $143,000 $196,000 $100,000 $439,000 B. The cost of goods sold is job 1231 $143,000 C. The amount of overapplied or underapplied overhead Actual overhead $82,000 Overhead applied 84,000 Total overhead overapplied $ 2,000 © 2012 John Wiley and Sons Canada, Ltd. 224 Cost Management Ending Balance Weights * $2,000 WIP Job 1233 $100,000 22.78% $ 456 FG Job 1232 196,000 44.65% 893 COGS Job 1231 143,000 32.57% 651 $439,000 100.00% $2,000
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