4–1 What is the strategic role of a costing system?
4-4 Companies that are likely to use a job costing system have a wide variety
4–5 Which costing system is extensively used in the service
4–6 What document is prepared to accumulate costs for each
4-7 The determination of a predetermined overhead rate has four steps: (1)
estimate the factory overhead costs for an appropriate operating period,
usually a year, (2) select the most appropriate cost driver(s) for applying the
factory overhead costs, (3) estimate the total amount or activity level of the
4–8 What is the role of material requisition forms in a job costing
system? Time tickets? Bills of materials?
4–9 What does the statement that accounting for overhead
4-9 Since the overhead cost cannot be traced directly to a particular product, we need
a good costing system, which can assign overhead accurately to specific
products. Generally speaking, the more expensive or extensive a costing
4-10 Costs originate with the purchase of materials. These direct materials
4–11 What do underapplied overhead and overapplied overhead
mean? How are these amounts disposed of at the end of a period?
4-11 Underapplied overhead is the amount of actual factory overhead that
exceeds the factory overhead applied. Overapplied overhead is the amount
4-11 Underapplied overhead is the amount of actual factory overhead that
exceeds the factory overhead applied. Overapplied overhead is the amount
4–12 Why would manufacturing firms switch from direct labor-
hours to machine-hours as the cost driver for factory overhead
application?
4–14 Distinguish between an actual costing system and a normal
costing system. What are the components of the actual manufacturing
costs and the components of the normal manufacturing costs?
4–15 What is the best way to choose an appropriate cost driver when
applying factory overhead?
4–16 What is the difference between normal and abnormal spoilage?
Brief Exercises 4-17 through 4-28
4-17 How is job costing different in a service firm from a manufacturer?
4-20 If the overhead rate is $10 per machine hours, and there are 20 labor hours, 16
machine hours, and 2 personnel on the job, how much overhead should be applied
to the job?
4-19 Nieto Machine Shop has 4,000 labor hours and 8,000 machine hours used in May.
Total budgeted overhead for May is $40,000. What is the overhead rate using labor
hours and also using machine hours? Which would you pick and why?
4-18 A small consulting firm has an overhead rate of 200% of direct labor charged to
each job. The materials cost (including travel and other direct costs) for a
particular job is $10,000 and the direct labor is $20,000. What is total job cost
for this job?
4-21 Some firms pool overhead into a single plant wide overhead pool, while others
collect overhead costs into manufacturing departments, each of which has an
overhead cost pool and overhead cost application rate. Which approach is likely to
provide more accurate cost numbers for cost estimating, pricing, and performance
evaluation?
200,000$
222,000$
15,000$
43,000$
20,000$
50,000$
350,000$
360,000$
22,000$
650,000$
30,000$
700,000$
4-22 Basic Job Costing Assume the
following for White Top, Inc, for the
current year. White Top applies
overhead on the basis of units
produced.
Budgeted overhead
Actual overhead
Actual labor hours
Actual number of units sold
Underapplied overhead
Budgeted production
Required How many units were produced in
the current year?
4-22
4-23 Assume the following for Round Top, Inc.,
for the current year. Round Top applies
overhead on the basis of units produced.
Budgeted overhead
Actual overhead
Actual labor-hours
Actual number of units sold
Overapplied overhead
Budgeted production (units)
Required How many units were produced in in
the current year?
4-23
The information on units sold and the number of labor hours is
0.50$ per unit
4-26 If actual overhead is $613,000 in a given year and the overhead rate is $10
per unit, 60,000 units were sold, and 59,000 units were produced. For the
end of the year, is overhead underapplied or overapplied, and a by how
much?
4-24 Company A has a number of jobs that are processed through similar
manufacturing processes. However, most jobs have labor hours
requirements ranging from 100 to 130 hours, while these jobs differ
significantly in the number of machine hours required for each job –
some as low as 50, other as high as 5,000 hours. One reason for this
is a well trained labor pool that has the ability to work cross-
functionally, and perform a variety of duties. What do you think is the
best overhead rate basis for this firm, labor hours, machine hours, or
some other rate basis? Explain your answer.
4-24 Because of the greater variability of machine hours among jobs, job cost
will be more strongly influenced by the use of machine hours. The fact that
4-25 What are the three types of potential error in overhead application?
4-23
The information on units sold and the number of labor hours is
4-28 When overhead is overapplied, is the balance of cost of good sold, before
adjustment, too low or too high? Why?
1. New Century Software, Inc @ http://www.newcenturysoftware.com/
The goal of New Century Software, Inc. is to provide products and services to help meet the facilities-based
information needs of the pipeline industry through the use of Geographic Information Systems (GIS),
Automated Mapping and Facilities Management (AM/FM) software.
The company's Windows-based software products provide an integrated approach to GIS
implementation and augment the functionality of leading GIS packages.
Based in Colorado, the company has assisted in the development of GIS for pipeline companies in the
United States by providing facilities database consulting, data conversion services, and integrated software
applications.
2. FedExOffice @ http://www.fedex.com
FedExOffice is a provider of a variety of office and business services such as copying and printing.
The company uses job costing.
1. The following is a list of websites for a number of large companies. Briefly describe each company and
3. TXI Cement @ http://www.txi.com/
TXI Cement has a history in the cement industry of 90 years. They are one of only two companies in the USA that
produces white cement. TXI Cement is constantly trying to be energy efficient, by generating electricity, and using
alternate energy and raw materials sources. Distribution of products is done via two cement plants in Southern
California as well as terminals in San Diego and Stockton. TXI is one of the largest bagged cement producers in
the USA.
Cement is a finely ground, manufactured mineral product that when combined with water, sand, gravel and other
materials forms concrete, the most widely used construction material in the world.
The company uses process costing.
Reasons:
High volume, low cost product.
It is not economically feasible to keep track of the detailed cost elements applied to each unit of production (the
bag of cement).
TXI is largely a domestic company because its product is expensive to transport. The company’s operations are
primarily in Texas (production) and California (sales). TXI’s product is a highly environmentally sensitive
1. New Century Software, Inc @ http://www.newcenturysoftware.com/
The goal of New Century Software, Inc. is to provide products and services to help meet the facilities-based
information needs of the pipeline industry through the use of Geographic Information Systems (GIS),
Automated Mapping and Facilities Management (AM/FM) software.
The company's Windows-based software products provide an integrated approach to GIS
implementation and augment the functionality of leading GIS packages.
Based in Colorado, the company has assisted in the development of GIS for pipeline companies in the
United States by providing facilities database consulting, data conversion services, and integrated software
applications.
2. FedExOffice @ http://www.fedex.com
FedExOffice is a provider of a variety of office and business services such as copying and printing.
The company uses job costing.
Reasons:
Costs can be precisely calculated by the basis of the different jobs. Each package has a specific
TXI is largely a domestic company because its product is expensive to transport. The company’s operations are
primarily in Texas (production) and California (sales). TXI’s product is a highly environmentally sensitive
product, and the company’s Web site explains the efforts it makes on the production side of the business to
manage the environmental impact. From the TXI Web site:
“TXI offers one of the most eco
-friendly and cleanest options to address the issue of ready-mix concrete
construction waste. This is a major piece of the construction process that has been historically difficult to manage
–
where does one put all that waste concrete? TXI has developed a unique solution to this decades-long
4. Paramount Pictures @ http://www.paramount.com/
Paramount pictures, the motion picture production company, is a unit of Viacom, a large company in the
entertainment industry with such labels as MTV Films, Nickelodeon Movies, and DreamWorks Studios. It
offers an array of choices in the form of movies, TV shows, and musical entertainment.
The company uses job costing.
5. Coca-Cola: http://www.coca-cola.com/
Coca-Cola is the world’s most recognized brand, a significant global company with more than 400 different
beverage brands produced and sold in more than 200 countries.
1. Zurich Financial Services Group: www.zurich.com
The Zurich Financial Services Group is a global leader in the financial services industry, providing
its customers with solutions in the area of financial protection and asset accumulation. The Group
concentrates its activities in five business segments: non-life and life insurance, reinsurance,
2. Reichhold Chemical Company: http://www.reichhold.com/
Reichhold is a large manufacturer of chemical products including coatings (epoxy, acrylic and
other resins), latex (in a joint venture with Dow Chemical Company), and composites (gelcoats and
resins used in the manufacture of fiberglass products including boats, bathroom fixtures, and other
1. The following is a list of websites for a number of global companies. Briefly describe each company and
3. Nestle S.A.: www.nestle.com
Nestle is one of the leading food companies in the world. Its product portfolio includes brands such
as Perrier, Poland Springs, Nescafe, Lean Cuisine, Alpo, Butterfinger, and Kit Kat. The whole food
production process is a continuous high
-volume one and so will have a process costing system.
4. Evian @
http://www.evian.com/
Evian Natural Spring Water is bottled exclusively at its source in Evian
-les-Bains located in the
French Alps. Filled, sealed bottles are then shipped to over 120 countries throughout the world.
Evian spring water is perfect by
nature. Naturally pure and fresh, it is not artificially treated or processed in any way. Its unique
source in the heart of the French Alps guarantees Evian natural spring waters remarkable purity.
1. Zurich Financial Services Group: www.zurich.com
The Zurich Financial Services Group is a global leader in the financial services industry, providing
its customers with solutions in the area of financial protection and asset accumulation. The Group
concentrates its activities in five business segments: non-life and life insurance, reinsurance,
2. Reichhold Chemical Company: http://www.reichhold.com/
Reichhold is a large manufacturer of chemical products including coatings (epoxy, acrylic and
other resins), latex (in a joint venture with Dow Chemical Company), and composites (gelcoats and
resins used in the manufacture of fiberglass products including boats, bathroom fixtures, and other
The fact that Evian is a global company is clear from its Web site. The sustainability issues for Evian
Exercise 4-31 Cost Flows, Applying Overhead
Erkens Company uses a job costing system with normal costing and applies factory overhead on the basis of
machine-hours. At the beginning of the year, management estimated that the company would incur $1,980,000 of
factory overhead costs and use 66,000 machine-hours.
Carlson Company recorded the following events during the month of April:
a. Purchased 180,000 pounds of materials on account; the cost was $5.00 per pound.
2. Journal Entries:
a. Materials Inventory 900,000
Accounts Payable 900,000
180,000 x $5 = $900,000
b. Work-in-Process Inventory 525,000
($600,000 - $75,000)
Factory Overhead 75,000
(15,000 x $5)
Materials Inventory (120,000 x$5) 600,000
c. Work-in-Process Inventory 240,000
2. Journal Entries:
a. Materials Inventory 900,000
Accounts Payable 900,000
180,000 x $5 = $900,000
b. Work-in-Process Inventory 525,000
($600,000 - $75,000)
Factory Overhead 75,000
(15,000 x $5)
Materials Inventory (120,000 x$5) 600,000
c. Work-in-Process Inventory 240,000
Factory Overhead 40,000
Accrued Payroll 280,000
3. Actual factory overhead:
B10 C44 G15
Direct labor ($8/hour) $34,000 ? $10,000
Direct materials $42,000 $61,000 ?
Overhead applied ? $20,750 $6,000
2.
Applied overhead for B10 = .6x $34,000 = $20,400
Total applied overhead in February:
B10 $20,400
Exercise 4-32 Application of Overhead; Working with Unknowns
Job Number
Alles Company uses a job costing system that applies factory overhead on the basis of direct labor. No job
was in process on February 1. During the month of February, the company worked on these three jobs.
During the month, the company completed and transferred Job B10 to the finished goods inventory. Jobs
C44 and G15 were not completed and remain in work in process at the cost of $148,650 at the end of the
month. Actual factory overhead costs during the month totaled $38,500
1. What is the predetermined factory overhead rate?
September 1, inventories
Materials inventory $7,500
Work-in-process inventory (All Job A) $31,200
Finished goods inventory $67,000
Material purchases $104,000
Direct material requisitioned
Job A $65,000
Job B $33,500
Direct labor-hours
What is the total Cost of Job A? Labor rate= $8.50
September Direct materials requisitioned 65,000$
September Direct labor cost 35,700
September Applied overhead 27,300
September 1 Work-in-process 31,200
TOTAL Cost Job A 159,200$
predetermined OH rate = $617,500/95,000 $6.50
What is the total factory overhead applied during September?
September Applied Overhead $50,050
Solution (30 min)
Exercise 4-33 Application of Overhead
Total overhead cost applied during September:
Applied Overhead = total direct labor-hours x overhead rate
= (4,200 + 3,500) x $6.50 = $50,050
Johnson Inc. is a job-order manufacturing company that uses a predetermined overhead rate based on direct
labor-hours to apply overhead to individual jobs. For the current year, estimated direct labor-hours are
95,000, and estimated factory overhead is $617,500. The following information is for September of the
current year. Job A was completed during September, and Job B was started but not finished.
1. What is the total Cost of Job A?
2. What is the total factory overhead applied during September?
3. What is the overapplied or underapplied overhead for September?
What is the overapplied or underapplied overhead for September?
Total overhead cost applied during September:
Applied Overhead = total direct labor-hours x overhead rate
= (4,200 + 3,500) x $6.50 = $50,050
Exercise 4-34 Application of Overhead
Whitley Construction Company is in the home remodeling business. Whitley has three teams of highly-skilled employees, each of
whom has multiple skills of carpentry, painting, and other home remodeling activities. Each team is led by an experienced e
mpl
oyee
who coordinates the work done on each job. As the needs of different jobs change, some team members may be shifted to other
teams for short periods of time. Whitley uses a job costing system to determine job costs and to serve as a basis for biddi
ng and
pricing the jobs. Direct materials and direct labor are easily traced to each job, using Whitley’s cost tracking software.
Overhead
2.Suppose that for the entire year, Whitley used 23,800 labor hours and total actual overhead was $525,000. What 3. is the
4.
What are some of the potential sustainability issues for Whitley?
5. Whitley has chosen direct labor hours as the cost driver
-base for applying overhead. What are some alternative cost drivers,
and how would you choose among them?
4. As a construction company, Whitley has a lot of waste to dispose of, most of which
are less harmful.
5. The possible cost drivers in this case include direct labor hours (used by Whitley),
direct labor cost, and materials cost. There is not likely to be much difference between
Budgeted total factory overhead $568,000
Budgeted total direct labor-hours 71,000
Company's Ledger
2.
Exercise 4-35 Application of Overhead
Tomek Company uses a job costing system that applies factory overhead on the basis of direct labor-
hours. The company’s factory overhead budget for the current year included the following estimates:
1.
Exercise 4-36 Overhead Rate; Pricing
Norton Associates is an advertising agency in Columbus, Ohio. The company's controller estimated
that it would incur $325,000 in overhead costs for the current year. Because the overhead costs of each
project change in direct proportion to the amount of direct professional hours incurred, the controller
decided that overhead should be applied on the basis of professional hours. The controller estimated
25,000 professional hours for the year. During October, Norton incurred the following costs to make a
20-second TV commercial for Central Ohio Bank. Actual overhead costs to make the commercial
2. What is the total amount of the bill that Norton will send Central Texas Bank?
Direct Materials
Paint
Hours
Labor Cost
at $10.75
Exercise 4-37 Overhead Application
Progressive Painting Company (PPC) is a successful company in commercial and residential painting. PPC has a
variety of jobs: new construction, repair and repainting existing structures, and restoration of very old buildings and
homes. The company is known for the quality and reliability of its work, and customers expect to pay a little more
for those benefits. One of the company’s core values is sustainability, and it insists on using the most
environmentally friendly paints and materials in its work; it has refused jobs where the client required a more
environmentally harmful paint than PPC thought was appropriate for the application.
This value has lost PPC some
jobs, but has attracted a loyal and growing customer base.
The company uses job costing and applies overhead on the basis of direct labor hours. Overhead for the company
consists of painting equipment, trucks, supervisory labor, supplies and administrative operation costs. The total
budgeted costs for the year are shown below.
2.
The Prevette job required oil-based paint and the clean-up after the job required the use of chemicals that,
after use, had to be disposed of in an environmentally appropriate way. In contrast, the Harmon job required
water
-based paint and the job clean-up was very quick and simple and involved no harmful chemicals. Does
the job costing in part 1 above capture the difference between the two jobs in the types of paint used? Do you
think the costing system should capture this difference, if any, and if so how do you think the cost system should
be changed?
2. The oil-based paint, because it required more clean-up time and materials (harmful chemicals),
increased direct labor hours and increased materials costs (due to the purchase of the clean
-up
chemicals), both of which are included in job cost. The disposal of the clean
-up waste is likely to be
disposing of the waste clean
-up materials in an environmentally appropriate manner is commendable.
Exercise 4-38 Spoilage and Scrap
1. Journal entries to record spoilage costs:
a. To record the normal spoilage attributable to Job X12
2. Journal entries to record scrap sold:
a. To record the scrap sold attributable to a specific job
Note: See also the Comments on Cost Management in Action at the end of the chapter regarding a similar costing situation.
Problem 4-39 Overhead Rates Used for Each Machine in a Printing Plant
Solution (25 min)
Ennis Inc.’s Forms Solutions Group (http://www.ennis.com/) is a Texas-based machine-
intensive printing company that produces business forms. The resources demanded by a
specific job depend on the type and amount of paper used and the composition and the
construction of the business form. All jobs are constrained by the time necessary on a press
and on a collator capable of producing forms at the required size.
Ennis Inc.’s Forms Solutions (EFS) uses job costing for pricing and bidding decisions.
EFS uses a separate factory overhead rate for each machine. Costs of machine operator,
support personnel, and supplies are identified directly with presses and collators. Other factory
overhead costs – including insurance, supervision, and office salaries – are allocated to
machines based on their processing capacity (cost driven is the number of feet of business
form per minute), weighted by the maximum paper width and complexity (the cost driver is
the number of colors and other features) that they are capable of handling.
When EFS receives a request for a bid on a particular job, the company uses computer
software to determine direct material costs based on the type and quantity of paper. Then it
identifies the least expensive press and collator that are capable of handling the specifications
for the business form ordered. The third step is to estimate the total press and collator
processing costs by using specific cost-driver rates per machine time multiplied by the
estimated processing time. The bid price is calculated by adding a standard markup to the total
press, collator, and direct material costs. A higher markup is used for rush jobs and jobs
requiring special features.
Required
Discuss the strengths and weaknesses of the EFS costing system and its strategic implications.
This short case is intended as a basis for class discussion that could the following
topics and questions: application of job costing in the printing industry; what are the
factors driving the accuracy of product costing; how does the choice of job costing
method affect pricing; what is the effect of cost allocation methods on management
behavior, performance evaluation, and how does a chosen cost method advance or
hinder the firm’s progress to its strategic goals? Some observations that I would
bring out in this discussion include:
EFS uses a job costing system in which materials and direct labor are traced to the
job, and overhead is traced to each machine and then applied to the jobs based on
machine usage
A strength would be that EFS has put a lot of effort into tracing the printing costs
accurately and using an overhead allocation approach that attempts to trace the
costs of the machinery to the jobs that used that machinery
I would begin a discussion of the EFS approach to allocating other overhead costs –
insurance, supervision, and office salaries – to the jobs based on the capacity of the
machines. That is, machines with more printing capacity (where capacity is the
number of feet of forms produced per minute of machine time) will receive a larger
portion of this portion of overhead. This is very much like a volume based rate,
which is OK, but does not reflect the actual behavior of these costs. Suppose the
total of other overhead is significant. Then small jobs on high capacity (fast)
machines will be charged a relatively high rate. Conversely, large jobs on low-
capacity machines will be charged a relatively low rate. How this would affect
pricing and the allocation of jobs to machines is not easy to predict.
The strategic issue is (as in Problem 4-51above) the (unknown) impact of cost
calculations on competitive pricing, and therefore on the company’s
competitiveness. The success of the company depends on its ability to set a
competitive price, recognizing that the company has unused capacity (in a seasonal
business) in some periods of the year.
Source: Jacci L. Rodgers, S. Mark Comstock and Karl Pritz, “Customize Your
Costing System,” Management Accounting, May 1993, pp. 31-32. See also, Lisa
Cross, “Benefiting from Costing and Pricing Tools,” Graphic Arts Monthly, July
2004, pp 32-34.
This short case is intended as a basis for class discussion that could the following
topics and questions: application of job costing in the printing industry; what are the
factors driving the accuracy of product costing; how does the choice of job costing
method affect pricing; what is the effect of cost allocation methods on management
behavior, performance evaluation, and how does a chosen cost method advance or
Problem 4-40 Plantwide versus Departmental Overhead Rate
Rose Bach was recently hired as controller of Empco Inc., a sheet metal
manufacturer. Empco has been in the sheet metal business for many years and is
currently investigating ways to modernize its manufacturing process. At the first
staff meeting Rose attended, Bob Kelley, chief engineer, presented a proposal for
automating the drilling department. He recommended that Empco purchase two
3. How would you improve the allocation of overhead costs?
1. Empco Inc. is currently using a plantwide overhead rate that is
applied on the basis of direct labor dollars. In general, a plantwide
factory overhead rate is acceptable only if a similar relationship
between overhead and direct labor exists in all departments, or the
company manufactures products, which receive proportional
2. Because Empco uses a plantwide overhead rate applied on the
basis of direct labor dollars, thus elimination of direct labor in the
Drilling Department through the introduction of robots may appear to
3. In order to improve the allocation of overhead costs , Empco should:
1. Empco Inc. is currently using a plantwide overhead rate that is
applied on the basis of direct labor dollars. In general, a plantwide
factory overhead rate is acceptable only if a similar relationship
between overhead and direct labor exists in all departments, or the
company manufactures products, which receive proportional
2. Because Empco uses a plantwide overhead rate applied on the
basis of direct labor dollars, thus elimination of direct labor in the
Drilling Department through the introduction of robots may appear to
3. In order to improve the allocation of overhead costs , Empco should:
Direct Materials $200
Direct Labor $12 per hr. $300
Machine hours 20
DL Hours per Unit:
Problem 4-41 Plantwide versus Departmental Overhead Rate
2. If factory overhead were applied on the basis of machine-hours, what would
be the plantwide overhead rate?
3. If the company produced 1,000 units during the year, what was the total
amount of applied factory overhead in each department in requirements 1 and
2?
4. If you were asked to evaluate the performance of each department manager,
which allocation basis (cost driver) would you use? Why?
Ryan Corporation manufactures a popular fax machine. Cost estimates for one unit of the product
for the year follow:
Labor and machine-hour breakdowns by department:
4. If direct labor-hours are used to apply factory overhead, Department A is
assigned more than its total estimated overhead and Department B is assigned
5. Using DLHs for Departent A and Machine Hours for Department B:
4. If direct labor-hours are used to apply factory overhead, Department A is
assigned more than its total estimated overhead and Department B is assigned
JOB # MATERIALS LABOR OVERHEAD TOTAL
T114 $31,500 $16,250 $28,750 $76,500
Budgeted Overhead
Variable
Indirect Materials $68,000
Indirect Labor $56,000
Employee Benefits $28,000
Fixed
Supervision $13,000
Depreciation $15,000
- 50,000 - 50,000
Problem 4-42 Application of Overhead
Work in Process Inventory for Carston, Inc. at the beginning of period:
The company's budgeted costs for the year
are as follows:
Indirect Labor
1. What was the actual overhead for the year?
2. What was overapplied or underapplied overhead for the year?
3. Job T114 was the only job completed and sold in the year. What amount was included in the cost of the goods sold
for this job?
4. What was the amount of Work-in-Process Inventory at the end of the year?
2. LABOR Applied OH
10,000$
18,000
4. Work-in-Process Inventory: $237,000 =$33,000 + $68,000 + $136,000
MATERIALS LABOR Applied OH
-$
x
JOB #
T114
T119
JOB #
T114
1Predetermined Overhead Rate
= $455,600 ÷ 33,500 = $13.60 per direct labor hour
2a. Factory Overhead 1,800
Prepaid Insurance 1,800
1,025
Accumulated Depreciation 1,025
c. Materials Inventory 336
Accounts Payable 336
$16 x21 = $336
d. Factory Overhead 6,510
Cash 6,510
e. Work-in-Process Inventory 140,000
Factory Overhead
20,000
Cash 160,000
f. Factory Overhead 6,270
Cash 6,270
Problem 4-43 Cost Flows, Application of Overhead
Solution (40 min)
b. Selling & Administrative Expense
Dream Makers is a small manufacturer of gold and platinum. It uses a job costing system that applies overhead on
the basis of direct labor-hours. Budgeted factory overhead for the year was $455,600, and management budgeted
33,500 direct labor-hours. The company had no materials, work-in-process or finished goods inventory at the
beginning of April. These transactions were recorded during April:
a. April insurance cost for the manufacturing property and equipment was $1,800. The premium had been paid in
January.
b. Recorded $1,025 depreciation on an administrative asset.
c. Purchased 21 pounds of high-grade polishing materials at $15 per pound (indirect material).
5. Prepare the income statement for April
n. Accounts Receivable 56,410
3. Actual Overhead = $1,800 + $6,510 + $20,000 + $6,270 + $1,600
+ $3,505 = $39,685
Overapplied Overhead = $40,800 - $39,685 = $1,115
Decrease Cost of Goods Sold
4,5
Dream Makers
April 30
Data
Cost of Goods Manufactured 64,000$
Cost of Goods Sold 47,860
Estimated depreciation 455,600
Estimated direct labor hours 33,500
Direct labor hours in April 3,000
Depreciation Expense--Plant 3,505$
Direct Materials Used 18,500
Indirect Materials Used 1,600
Direct Labor 140,000
Indirect Labor 20,000
Finished Goods Inventory, Beginning -
Finished Goods Inventory, Ending 16,140 =64,000-47,860
Factory utilities 6,510
Factory insurance 1,800
Selling and Administrative 6,685 =1,025+5,660
Work-in-Process Inventory, Beginning -
Work-in-Process Inventory, Ending 135,500 =140,000+18,500+42,000-65,000
Advertising Expense 2,650
Sales Revenue 56,410
Other factory overhead 6,270
Dream Makers
Statement of Cost of Goods Manufactured
Direct Materials Used 18,500$
For the Month Ended April 30
The following information applies to the O'Donnell Company for March production. There are only two jobs (X and Y) in production in March.
Job X Job Y TOTAL
Material A 16,000 Material A 8,000 16,000 24,000
Material B 12,000 Material B 3,000 8,000 11,000
Indirect Materials 3,000 Subtotal: 11,000 24,000 35,000
TOTAL: 31,000 Indirect Materials 39,000
TOTAL: 74,000
Problem Data Summary:
Direct
Application Rate
46.00$ per machine hr
1. Total Manufacturing Costs for each job
Job X Job Y Total
Total Direct Materials
Cost
11,000$ 24,000$ 35,000$
Solution (20 min)
Purchased direct materials and indirect materials with the
following summary of receiving reports:
Issued direct materials and indirect materials with this summary of requisitions:
Problem 4-44 Application of Overhead
Factory labor incurred is summarized by these time
Factory utilities, factory depreciation, and factory insurance incurred is
2. Calculate the amount of overapplied or underapplied overhead and state whether the cost of goods sold
account will be increased or decreased by the adjustment.
x Application rate 46$ 46$
2. Calculate Factory Overhead Under or Overapplied
Actual Factory OH:
Indirect Materials 39,000$
Indirect Labor 28,000
Utilities 3,000
Job S Job T TOTAL
Material A 28,500$ 71,250$ 99,750$
Material B 12,000 35,000 47,000
Subtotal: 40,500$ 106,250$ 146,750
Indirect Materials 211,000
2. Overapplied overhead: $22,875
See calculations below:
Problem Information
Direct
Materials
Direct Labor Labor Hours
Job S 55,500$ 6,175
Material A 28,500$
Material B 12,000
Job T 45,000$ 4,275
Material A 71,250$
Material B 35,000
Factory Overhead Application Rate $42.50 per labor hr
1. Total Manufacturing Costs for each job
Job S Job T Total
Total Direct Materials Cost 40,500.00$ 106,250.00$ 146,750.00$
Total Direct Labor Cost
2. Calculate Factory Overhead Under or Overapplied
42.50
Problem 4-45 Application of Overhead
Direct materials and indirect materials used are as follows:
The following information is for Punta Company for July 2013:
Actual Factory OH:
Indirect Materials 211,000$
Indirect Labor 133,000
Problem 4-46 Cost Flows, Application of Overhead
2.
a. Direct Materials Inventory 130,000
Accounts Payable 130,000
$26 x 5,000 = $130,000
b. Materials Inventory 1,800
Accounts Payable 1,800
$36 x 50 = $1,800
c. Work-in-Process Inventory 91,000
Factory Overhead 1,116
Materials Inventory 91,000
Materials Inventory 1,116
$26 x 3,500 = $91,000
$36 x 31.0 = $1,116
d. Work-in-Process Inventory 141,900
Factory Overhead 46,000
Cash 187,900
$187,900 - $46,000 = $141,900
Direct labor-hours used = $141,900 ÷$22 = 6,450 hours
e. Factory Overhead 15,230
Cash 15,230
f. Factory Overhead 3,500
Prepaid Insurance 3,500
g. Factory Overhead 8,500
Accumulated Depreciation 8,500
h. Selling & Administrative Expense 2,400
Accumulated Depreciation 2,400
i. Advertising Expense 5,500
Cash 5,500
j. Factory Overhead 13,500
Cash 13,500
k. Selling & Administrative Expense 13,250
Cash 13,250
l. Applied Overhead = $14.50 x 6,450 DL hour = $93,525
Mooresville Corporation manufactures eighteenth-century, classical-style furniture. It uses a job costing system that
applies factory overhead on the basis of direct labor-hours. Budgeted factory overhead for the year was $1,261,500, and
management budgeted 87,000 direct labor-hours. These transactions were recorded during August:
a. Purchased 5,000 square feet of oak on account at $26 per square foot.
b. Purchased 50 gallons of glue on account at $36 per gallon (indirect material).
c. Requisitioned 3,500 square feet of oak and 31 gallons of glue for production.
d. Incurred and paid payroll costs of $187,900. Of this amount, $46,000 were indirect labor costs; direct labor
l. Applied Overhead = $14.50 x 6,450 DL hour = $93,525
Work-in-Process Inventory 93,525
Factory overhead 93,525
m. Finished Goods Inventory 146,000
Work-in-Process Inventory 146,000
n. Accounts Receivable 132,000
Sales Revenue 132,000
Cost of Goods Sold 112,000
Finished Goods Inventory 112,000
Overhead
Indirect materials $300,000
Indirect labor $1,600,000
Depreciation-Building $293,000
Depreciation-Furniture $25,000
1.) Compute the firm's overhead rate
Budgeted overhead rate 160%
3.) Compute a separate job cost for the Gargus and the Feller accounts.
Gargus Account $6,500
2.) Compute the amount of overhead to be charged to the Gargus and Feller accounts using the predetermined overhead
Problem 4-47 Application of Overhead; Service Industry
Meyers CPA Firm
Annual Budget
Dept. Number Job Number Requisition Number Quantity Cost per Unit
12906 B9766 4,550 1.34$
22907 B9767 110 22.18$
1 $3.00 per direct labor-hour
2150% of direct labor cost
1.
Job Number Direct Materials Direct Labor Factory Overhead Total Costs
Increase in Department 1 direct labor rate 10%
Increase in Department 2 direct labor rate 25%
Job Number Direct Materials Direct Labor Factory Overhead Total Costs
2906 $12,077.50 $13,670.80 $5,736.00 $31,484.30
2907 $2,439.80 $1,509.60 $2,264.40 $6,213.80
Problem 4-48 Job Cost; Pivot Tables in Excel (Excel tutorial on text web site)
Summary of Direct Materials Requisitions
2.
Summary of Job Completion
Decker Screw Manufacturing Company produces special screws made to customer specification. During
June, the following data pertained to the below listed costs. Decker had no beginning work-in-process
inventory for June. Of the jobs begun in June, Job 2906 was completed and sold on account for $30,000,
Job 2907 was completed but not sold, and Job 2908 was still in process.
SEE ALSO Solution Below for greater detail
22908 23 48.00$ 1,104.00$ 32
Labor Overhead
Department 1 6.50$ 3.00$ per labor hour
Department 2 8.88$ 150% per labor dollar
22907 110 22.18$ 2,439.80$
22908 23 48.00$ 1,104.00$
2908 Total 10,104.00$
Grand Total 24,621.30$
Labor
Department Number Job No. Labor Hours Labor Cost
22908 32 284.16
2908 Total 183 1,265.66
Grand Total 2,231 14,901.34$
Applied Overhead
Labor hours Dept 1 1,912 0 151
OH Rate in Dept 1 $3.00 $3.00 $3.00
Subtotal Dept 1 $5,736.00 $0.00 $453.00
Labor Hours Dept 2 0 136.00 32.00
Labor Rate Dept 2 8.88$ 8.88$ 8.88$
OH Rate in Dept 2 150% 150% 150%
22908 23 48.00$ 1,104.00$ 32
Labor Overhead
Department 1 7.15$ 3.00$ per labor hour
Department 2 11.10$ 150% per labor dollar
Job 2906
Job 2907
Job 2908
22907 110 22.18$ 2,439.80
22908 23 48.00$ 1,104.00
2908 Total 10,104.00
Grand Total 24,621.30$
Labor
Department Number Job No. Labor Hours Labor Cost
12906
22908 32
355.20
2908 Total 183 1,434.85
Grand Total 2,231 16,615.25$
Applied Overhead
Labor hours Dept 1 1,912 0 151
OH Rate in Dept 1 $3.00 $3.00 $3.00
Subtotal Dept 1 $5,736.00 $0.00 $453.00
Job 2906
Job 2907
Job 2908
Part 3
Solution Using Pivot Tables in Excel
DATA:
Requistions for matreial or time tickets
22908 23 48.00$ 1,104.00$ 32
Rates: Labor Overhead
Department 1 6.50$ 3.00$ per labor hour
Department 2 8.88$ 150% per labor dollar
Solution:
First, do a Pivot Table on Jobs and Departments for labor hours and materials cost:
Job No.
Department Number Data 2906 2907 2908 Grand Total
1 Sum of Materials Cost 12,077.50$ 9,000.00$ 21,077.50$
Sum of Labor Hours 1912 151 2063
2 Sum of Materials Cost 2,439.80$ 1,104.00$ 3,543.80$
Sum of Labor Hours 136 32 168
Total Sum of Materials Cost 12,077.50$ 2,439.80$ 10,104.00$ 24,621.30$
Total Sum of Labor Hours 1912 136 183 2231
Then, complete the cost report below to obtain cost for each job:
Problem 4-48 Job Cost; Pivot Tables in Excel (Excel tutorial on text web site)
Applied Overhead
Part 4
Solution Using Pivot Tables in Excel
DATA:
Requistions for material or time tickets
22908 23 48.00$ 1,104.00$ 32
Rates: Labor Overhead
Department 1 7.15$ 3.00$ per labor hour
Department 2 11.10$ 150% per labor dollar
Solution:
First, do a Pivot Table on Jobs and Departments for labor hours and materials cost:
Job No.
Department Number Data 2906 2907 2908 Grand Total
1 Sum of Materials Cost 12,077.50$ 9,000.00$ 21,077.50$
Sum of Labor Hours 1912 151 2063
2 Sum of Materials Cost 2,439.80$ 1,104.00$ 3,543.80$
Sum of Labor Hours 136 32 168
Total Sum of Materials Cost 12,077.50$ 2,439.80$ 10,104.00$ 24,621.30$
Total Sum of Labor Hours 1912 136 183 2231
Then, complete the cost report below to obtain cost for each job:
Problem 4-48 Job Cost; Pivot Tables in Excel (Excel tutorial on text web site)
Applied Overhead
Inventories July 1 July 31
Direct Materials $36,500 ?
Work in Process $41,000 ?
Finished Goods $0 $0
Cost of Goods Sold, July ?
1Total Direct Labor cost incurred for for July 237,000$ =(3,500+2,800+1,600) x $30
OH applied in July (given) 900,600$
OH Application Rate 380%
=$900,600 ÷ 237,000
2Beginning Materials Inventory 36,500$
+Purchases in July 55,000
-Materials used in July 54,600
=Ending Balanced in Materials Inventory 36,900$
3Actual factory overhead cost incurred during the month of July:
Indirect labor 6,900hrs x $30/hr 207,000$
Rent 131,500
Utility 180,600
Repairs and maintenance 188,500
Depreciation 131,100
Other 56,000
Actual factory OH cost in July 894,700$
4
Solution (40 min)
Problem 4-59 Application of Overhead; Schedule of Cost of Goods Manufactured
Haughton Company uses a job costing system for its production costs and a predetermined factory
overhead rate based on direct labor costs to apply factory overhead to all jobs. During the month of
July, the firm processed three jobs: X13, X14, and X15, of which X13 was started in June. The firm
was able to recover only a fragment of its records, as shown below, after a recent attack on its
computer.
7. What is the cost per unit of Job X13 if it has a total of 100 units?
8. Prepare the statement of cost of goods sold for July.
Ending balance of work in process inventory account
Job X14 Job X15 Total
DM 24,220$ 14,000$ 38,220$
DL 84,000 48,000 132,000
Applied overhead 319,200 182,400 501,600
427,420$ 244,400$ 671,820$
5
Haughton Company
6Over- or under-applied overhead:
Problem 4-50 Application of Overhead; Ethics
Aero Systems is a manufacturer of airplane parts and engines for a variety of military and commercial aircraft.
It has two production departments. Department A is machine intensive; Department B is labor intensive. Aero
Systems has adopted a traditional plantwide rate using the direct labor-hour-based overhead allocation system.
The company recently conducted a pilot study using a departmental overhead rate costing system. This system
used two overhead allocation bases: machine-hours for Department A and direct labor-hours for Department
B. The study showed that the system, which will be more accurate and timely, will assign lower costs to the
government jobs and higher costs to the company’s nongovernmental jobs. Apparently, the current (less
accurate) direct labor-based costing system has overcosted government jobs and undercosted private business
jobs. On hearing of this, top management has decided to scrap the plans for adopting the new departmental
overhead rate costing system because government jobs constitute 40 percent of Aero Systems’ business and
the new system will reduce the price and thus the profit for this part of its business.
Required
As the management accountant participating in this pilot study project, what is your responsibility when you
hear of top management’s decision to cancel the plans to implement the new departmental overhead rate
costing system? Can you ignore your professional ethics code in this case? What would you do?
1.
Raw sweet corn $6.50
2.
Cost per Pound
Problem 4-51 Operation Costing
Cost Information for the Month of January
Brian Canning Co., which sells canned corn, uses an operation costing system. Cans of corn are
classified as either sweet or regular, depending on the type of corn used. Both types of corn go through
the separating and cleaning operations, but only regular corn goes through the creaming operation.
During January, tow batches of corn were canned from start to finish. Batch X consisted of 800 pounds
of sweet corn and batch Y consisted of 700 pounds of regular corn. The company had no beginning or
ending work-in-process inventory. The following cost information is for the month of January:
a. To record the requisition of the raw corn for both types less
the cream cost:
WIP Inventory: Separation Department.......7,350
Direct Materials Inventory....………….......7,350
$5,200 + $2,450 - $300 = $7,350
b. To apply conversion costs to the Separation Department:
WIP Inventory: Separation Department .......1,500
Conversion Costs Applied ……...…………1,500
c. To transfer both types of corn to the Cleaning Department:
WIP Inventory: Cleaning Department.....…...8,850
WIP Inventory: Separation Department.....8,850
$7,350 + $1,500 = $8,850
d. To apply conversion cost to the Cleaning Department:
WIP Inventory: Cleaning Department......…….900
Conversion Costs Applied..………….…..…. 900
e. To transfer the Regular Corn to the Creaming Department
and the Sweet Corn to Finished Goods Inventory:
WIP Inventory: Creaming Department........3,270
Finished Goods Inventory……………..…....6,480
WIP Inventory: Cleaning Department......9,750
$2,450 - $300 + ($1 x 700) + ($0.60 x 700) = $3,270
$5,200 + ($1 x 800) + ($0.60 x 800) = $6,480
$8,850 + $900 = $9,750
f. To transfer cream costs and conversion cost to the
Creaming Department:
WIP Inventory: Creaming Department….......510
Direct Materials Inventory.……….………..300
Conversion Costs Applied ………………..210
Problem 4-52 Spoilage, Rework, and Scrap
1. Normal spoilage is the occurrence of unacceptable units arising under efficient operating
2. a. Spoiled units are unacceptable units of production that are either
discarded or sold for disposal value.
b. Rework units are unacceptable units or production that are
3. a. An analysis of the 5,000 units rejected by Richport Company for Job
No. N1192-122 yields the following breakdown between normal and
abnormal spoilage.
Units
Richport Company manufactures products that often require specification changes or modifications to
meet customer needs. Consequently, Richport employs a job costing system for its operations.
Although the specification changes and modifications are commonplace, Richport has been able to
establish a normal spoilage rate of 2.5% of good units produced (before spoilage). The company
recognizes normal spoilage during the budgeting process and classifies it as a component of factory
overhead. Thus, the predetermined overhead rate used to apply factory overhead costs to jobs includes an
allowance for net spoilage cost for normal spoilage. If spoilage on a job exceeds the normal rate, it is
considered abnormal and then must be analyzed and the cause of the spoilage must be submitted to
management.
1. Normal spoilage is the occurrence of unacceptable units arising under efficient operating
2. a. Spoiled units are unacceptable units of production that are either
discarded or sold for disposal value.
b. Rework units are unacceptable units or production that are
3. a. An analysis of the 5,000 units rejected by Richport Company for Job
No. N1192-122 yields the following breakdown between normal and
abnormal spoilage.
Units
Normal spoilage* 3,000
Abnormal spoilage:
Design defect 900
Other [5,000 – (3,000 + 900)] 1,100
Total units rejected 5,000
*Normal spoilage = .025 of normal input
Normal input = 117,000 ÷ (1-.025)
= 120,000 units