PROBLEM: JOB ORDER

2. Richards Company employs a job order costing system. Only three jobs-Job #205, Job #206, and Job #207-were worked
on during January and February. Job #205 was completed February 10; the other two jobs were still in production on
February 28, the end of the company's operating year. Job cost sheets on the three jobs follow:

Job Cost Sheet

Job #205 Job #206 Job #207
January costs incurred:
Direct material $16,500 $ 9,300 $ —
Direct labor 13,000 7,000 —
Manufacturing overhead 20,800 11,200 —

February costs incurred:

Direct materials — 8,200 21,300
Direct labor 4,000 6,000 10,000
Manufacturing overhead ? ? ?

The following additional information is available:

a. Manufacturing overhead is assigned to jobs on the basis of direct labor cost.

b. Balances in the inventory accounts at January 31 were as follows:

Raw Material $40,000

Work in Process ?
Finished Goods 85,000
Required
a. Prepare T-accounts for Raw Material, Work in Process Inventory, Finished Goods
Inventory, and Manufacturing Overhead Control. Enter the January 31 inventory
balances given previously; in the case of Work in Process Inventory, compute the
January 31 balance and enter it into the Work in Process Inventory T-account.

b. Prepare journal entries for February as follows:

1. Prepare an entry to record the issue of materials into production and post the entry to
appropriate T-accounts. (In the case of direct material, it is not necessary to make a
separate entry for each job.) Indirect materials used during February totaled $4,000.

2. Prepare an entry to record the incurrence of labor cost and post the entry to appropriate T-
accounts. (In the case of direct labor, it is not necessary to make a separate entry for each
job.) Indirect labor cost totaled $8,000 for February.

3. Prepare an entry to record the incurrence of $19,000 in various actual manufacturing

overhead costs for February (credit Accounts Payable).

c. What apparent predetermined overhead rate does the company use to assign
overhead cost to jobs? Using this rate, prepare a journal entry to record the
application of overhead cost to jobs for February (it is not necessary to make a
separate entry for each job). Post this entry to appropriate T-accounts.

d. As stated earlier, Job #205 was completed during February. Prepare a journal entry
to show the transfer of this job off of the production line and into the finished good
warehouse. Post the entry to appropriate T-accounts.

e. Determine the balance at February 28 in the Work in Process inventory account.

How much of this balance consists of the cost of Job #206? Job #207?

99
ANS:
a.

Raw Materials Work in Process

Inventory Inventory
BB 40,000 BB 77,800
29,500 60,700
31,500 20,000
32,000
98,600

Finished Goods Manufacturing

Inventory Overhead Control
BB 85,000 4,000
60,700 8,000 32,000
19,000

b. 1. Work in Process Inventory 29,500

Manufacturing Overhead 4,000
Control
Raw Materials Inventory 33,500

2. Work in Process Inventory 20,000

Manufacturing Overhead
8,000
Control
Payroll 28,000

3. Manufacturing Overhead
19,000
Control
Accounts Payable 19,000

c. 160%/DL COST  $20,000 = $32,000

Work in Process Inventory 32,000

Manufacturing Overhead Control 32,000

d. Finished Goods Inventory 60,700

Work in Process Inventory 60,700

e. WIP INV 98,600

Job 206 =
Job 207 = $47,300
$51,300

JOB #205 JOB #206 JOB #207

Beg WIP $50,300 $27,500 -
Direct Mat 0 8,200 $21,300
Direct Labor 4,000 6,000 10,000
Factory Overhead 6,400 9,600 16,000
$60,700 $51,300 $47,300

DIF: Moderate OBJ: 4-4

100
3. The Pittman Company manufactures special purpose machines to order. On January 1, there were two jobs in
process, #705 and #706. The following costs were applied to these jobs in the prior year:

Job No.
705 706
Direct material $ 5,000 $ 8,000
Direct labor 4,000 3,000
Overhead 4,400 3,300
Total $13,400 $14,300

During January, the following transactions took place:

* Raw material costing $40,000 was purchased on account.
* Jobs #707, #708, and #709 were started and the following costs were applied to
them:

JOB
707 708 709
Direct materials $3,000 $10,000 $7,000
Direct labor 5,000 6,000 4,000

* Job #705 and Job #706 were completed after incurring additional direct labor costs
of $2,000 and $4,000, respectively
* Wages paid to production employees during January totaled $25,000.
* Depreciation for the month of January totaled $10,000.
* Utilities bills in the amount of $10,000 were paid for operations during December.
* Utilities bills totaling $12,000 were received for January operations.
* Supplies costing $2,000 were used.
* Miscellaneous overhead expenses totaled $24,000 for January.

Actual overhead is applied to individual jobs at the end of each month using a rate based on actual direct labor costs
Required
a. Determine the January overhead rate.

b. Determine the cost of each job.

c. Prepare a statement of cost of goods manufactured.

ANS:
a. MOH $4,000 + $10,000 + $12,000 + $2,000 + $24,000 = $52,000 = $2.4762/dl cost
$21,000 dl cost

b JOB JOB JOB JOB JOB

. #705 #706 #707 #708 #709
DM - - $ 3,000 $10,000 $ 1,000 = $ 20,000
DL $ 2,000 $ 4,000 5,000 6,000 4,000 = 21,000
MOH 4,952 9,905 12,381 14,857 9,905 = 52,000
Beg WIP 13,400 14,300 - - - = 27,700
$20,352 $28,205 $20,381 $30,857 $20,905 $120,700

c. Beg WIP $27,700

+ DM 20,000
+ DL 21,000
+ MOH 52,000
- End WIP 72,143
$48,557

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4. The Western Corporation, began operations on October 1. It employs a job order costing system. Overhead is charged at
a normal rate of $2.50 per direct labor hour. The actual operations for the month of October are summarized as follows:

a. Purchases of raw material, 25,000 pieces @ $1.20/piece.

b. Material and labor costs charged to production:

Direct Direct
Job No. Units Material labor cost labor hours
101 10,000 $4,000 $6,000 3,000
102 8,800 3,600 5,400 2,700
103 16,000 7,000 9,000 4,500
104 8,000 3,200 4,800 2,400
105 20,000 8,000 3,600 1,800

c. Actual overhead costs incurred:

Variable $18,500
Fixed 15,000

d. Completed jobs: 101, 102, 103, and 104

e. Sales-$105,000. All units produced on Jobs 101, 102, and 103 were sold.

Required: Compute the following balances on October 31:

a. Material inventory

b. Work in process inventory

c. Finished goods inventory

d. Cost of goods sold

e. Under- or overapplied overhead

ANS:

a. $30,000 - ($4,000 + $3,600 + $7,000 + $3,200 + $8,000) = $4,200

b. Job #105 $8,000 + $3,600 + ($1,800  2.50) = $16,100

c. Job #104 $3,200 + $4,800 + ($2,400  2.50) = $14,000

d. Job # 101 $4,000 + $6,000 + ($3,000  2.50) = $17,500

102 $3,600 + $5,400 + ($2,700  2.50) = 15,750
103 $7,000 + $9,000 + ($4,500  2.50) = 27,250
$60,500

e. Applied 14,400  $2.50 = $36,000

Actual 33,500
Overapplied $ 2,500

DIF: Moderate OBJ: 4-4

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 Steel Company.

Steel Company uses a job order costing system and develops its predetermined overhead rate based on machine hours.
The company has two jobs in process at the end of the cycle, Jobs #177 and #179.

Budgeted overhead $100,300

Budgeted machine hours 85,000
Raw material $ 63,000
Labor cost $ 50,000

5. Refer to Steel Company. What amount of overhead is charged to Jobs #177 and #179? Machine hours are split between
Jobs #177 and #179-65 percent and 35 percent, respectively. Actual machine hours equal budgeted machine hours.

ANS:
OH Applied = MH Cost  POHR
Job #177: 85,000 MH  65%= 55,250  $1.18 = $65,195
Job #179: 85,000 MH  35%= 29,750  $1.18 = $35,105

DIF: Easy OBJ: 4-4

6. Refer to Steel Company. Fifty-four percent of raw material belongs to Job 17 and 38 percent belongs to Job 179, and the
balance is considered indirect material. What amount of raw material used was allocated to overhead as indirect material?

ANS:
54% + 38% = 92%; this means that 8% is indirect or $5,040
(.08  $63,000).

DIF: Easy OBJ: 4-4

7. Refer to Steel Co. Labor cost was split 25 percent and 70 percent, respectively, between Jobs #177 and #179 for direct
labor. The remainder was indirect labor cost. What are the total costs of Jobs #177 and #179?

ANS:

Job #177 Job #179

DM $ 34,020 $23,940
DL 12,500 35,000
MOH 65,195 35,105
$111,715 $94,045

DIF: Moderate OBJ: 4-4

103
8. Sanderson Company manufactures custom-built conveyor systems for factory and commercial operations. Erin Smith is
the cost accountant for Sanderson and she is in the process of educating a new employee, Heather Fontenot about the job
order costing system that Sanderson uses. (The system is based on normal costs; overhead is applied based on direct labor
cost and rounded to the next whole dollar.) Lisa gathers the following job order cost records for July:

Direct Direct Total

Job No. Materials Labor Applied OH Cost
667 $ 5,901 $1,730 $ 1,990 $ 9,621
669 18,312 1,810 2,082 22,204
670 406 500 575 1,481
671 51,405 9,500 10,925 71,830
672 9,615 550 633 10,798

To explain the missing job number, Erin informed Heather that Job #668 had been completed in June. She also told her
that Job #667 was the only job in process at the beginning of July. At that time, the job had been assigned $4,300 for
direct material and $900 for direct labor. At the end of July, Job #671 had not been completed; all others had. Erin asked
Heather several questions to determine whether she understood the job order system.

Required: Help Heather answer the following questions:

a. What is the predetermined overhead rate used by ABC Company?

b. What was the total cost of beginning Work in Process inventory?

c. What was total prime cost incurred for the month of July?

d. What was cost of goods manufactured for July?

ANS:

a. Use any job started in July:

Rate = MOH JOB $670 $575 = 115%/DL Cost

DL COST $500

b. DM $4,300
DL 900
FOH 1,035 ($900  115%)
$6,235

c. Prime Cost =DM + DL

DM = $85,639 - 4,300 = $81,339

DL = 14,090 - 900 = 13,190
$94,529

d. COGM = $9,621 + 22,204 + 1,481 + 10,798 = $44,104

DIF: Easy OBJ: 4-4

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9. Perry Company uses a job order costing system and has the following information for the first week of June:

1. Direct labor and direct materials used:

Job No. Direct Material Direct Labor Hours

498 $1,500 116
506 960 16
507 415 18
508 345 42
509 652 24
511 308 10
512 835 30
Total $5,015 256

2. The direct labor wage rate is $4 per hour.

3. The overhead rate is $5 per direct labor hour.

4. Actual overhead costs for the week, $1,480.

5. Jobs completed: Nos. 498, 506, and 509.

6. The factory had no work in process at the beginning of the week.

Required:
a. Prepare a summary that will show the total cost assigned to each job.

b. Compute the amount of overhead over- or underapplied during the week.

c. Calculate the cost of the work in process at the end of the week.

ANS:
a. Job No. DM DL OH Total
498 $1,500 $ 464 $ 580 $2,544
506 960 64 80 1,104
507 415 72 90 577
508 345 168 210 723
509 652 96 120 868
511 308 40 50 398
512 835 120 150 1,105
$5,015 $1,024 $1,280 $7,319

b. Actual MOH $1,480

Applied MOH 1,280
Underapplied $ 200

c. JOB 507 $ 577

508 723
511 398
512 1,105
Ending WIP $2,803

105
11. Beauty Company manufactures picture frames of all sizes and shapes and uses a job order costing system. There is always
some spoilage in each production run. The following costs relate to the current run:

Estimated overhead (exclusive of spoilage) $160,000

Spoilage (estimated) $ 25,000
Sales value of spoiled frames $ 11,500
Labor hours 100,000

The actual cost of a spoiled picture frame is $7.00. During the year 170 frames are considered spoiled. Each spoiled frame
can be sold for $4. The spoilage is considered a part of all jobs.

a. Labor hours are used to determine the predetermined overhead rate. What is the predetermined
overhead rate per direct labor hour?
b. Prepare the journal entry needed to record the spoilage.
c. Prepare the journal entry if the spoilage relates only to Job #12 rather than being a part of all
production runs.

ANS:

a. $160,000 + $25,000 - $11,500 = $173,500

$173,500/100,000 = $1.735 per DLH
b. Disposal Value of Spoiled Work 680
Manufacturing Overhead 510
Work in Process Inventory 1,190
c. Disposal Value of Spoiled Work 680
Work in Process Inventory-Job #12 680

Fundamentals of Manufacturing Accounting

63. Brickman Corporation, which began operations on January 1 of the current year, reported the following
information:

Estimated manufacturing overhead $ 600,000

Actual manufacturing overhead 639,000
Estimated direct labor cost 480,000
Actual direct labor cost 500,000
Total debits in the Work-in-Process account 1,880,000
Total credits in the Finished-Goods account 920,000

Brickman applies manufacturing overhead to jobs on the basis of direct labor cost and adds a 60% markup to the
cost of completed production when finished goods are sold. On December 31, job no. 18 was the only job that
remained in production. That job had direct-material and direct-labor charges of $16,500 and $36,000,
respectively.

Required:
A. Determine the company’s predetermined overhead rate.
B. Determine the amount of under- or overapplied overhead. Be sure to label your answer.
C. Compute the amount of direct materials used in production.
D. Calculate the balance the company would report as ending work-in-process inventory.
E. Prepare the journal entry(ies) needed to record Brickman’s sales, which are all made on account.

LO: 2, 4, 5 Type: A

Answer:
A. Predetermined overhead rate: $600,000 ÷ $480,000 = 125% of direct labor cost
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 B. Actual manufacturing overhead ($639,000) - applied overhead ($500,000 x 125% = $625,000) = $14,000
underapplied

C. Total debits to Work-in-Process ($1,880,000) - direct labor ($500,000) - applied overhead ($625,000) = direct
materials used ($755,000)

D. The only job in production is job no. 18, which has direct material of $16,500 and direct labor of $36,000.
Applied overhead amounts to $45,000 ($36,000 x 125%), yielding a total job cost of $97,500 ($16,500 +
$36,000 + $45,000).

E. The company’s cost of goods sold equals $920,000, resulting in sales revenues of $1,472,000 ($920,000 x
160%). Thus:
Accounts Receivable 1,472,000
Sales Revenue 1,472,000

Cost of Goods Sold 920,000

Finished-Goods Inventory 920,000

Job-Costing Computations, Overhead Applicatio

64. Montgomery, Inc., which uses a job-costing system, is a labor-intensive firm, with many skilled craftspeople on
the payroll. Job no. 789 was the only job in process on January 1, having costs of $22,500 as of that date. Direct
materials used and direct labor incurred during January were:

Job No. Direct Materials Direct Labor

789 $ 2,000 $ 6,000
790 9,000 10,000
791 14,000 8,000
Job no. 791 was the only job in production as of January 31.
Required:
A. Should Montgomery use direct labor or machine hours as a cost driver. Why?
B. Assume that the company decided to use direct labor as its cost driver. If the budgeted amounts of direct
labor and manufacturing overhead are anticipated to be $200,000 and $300,000, respectively, what is the
firm's predetermined overhead rate?
C. Compute the cost of work-in-process inventory as of January 31.
D. Compute the cost of jobs completed during January.
E. Suppose that the company sold all of its completed jobs, adding a 40% markup to cost. How much would the
firm report as sales revenue?
Answer:
A. The company should use direct labor because it is a labor-intensive firm, with many
skilled craftspeople on the payroll. More than likely, a majority of overhead is
"driven" by people rather than machine operation
B. $300,000  $200,000 = 150% of direct labor cos
C. Direct material $14,000
Direct labor 8,000
Manufacturing overhead ($8,000 x 150%) 12,000
Total cost of job no. 791 $34,000

D. Beginning work in process $22,500

Direct material ($2,000 + $9,000) 11,000
Direct labor ($6,000 + $10,000) 16,000
Manufacturing overhead ($16,000 x 150%) 24,000
Total cost of job nos. 789 and 790 $73,500

E. Sales revenue: $102,900 ($73,500 x 140%)

107
Overview of Job-Costing Systems, Overhead AccountinG
65. Rockville, Inc., which uses a job-costing system, began business on January 1, 20x3 and applies manufacturing
overhead on the basis of direct-labor cost. The following information relates to 20x3:
 Budgeted direct labor and manufacturing overhead were anticipated to be $200,000 and $250,000,
respectively.
 Job nos. 1, 2, and 3 were begun during the year and had the following charges for direct material and direct
labor:
Job No. Direct Materials Direct Labor
1 $145,000 $35,000
2 320,000 65,000
3 55,000 80,000

 Job nos. 1 and 2 were completed and sold on account to customers at a profit of 60% of cost. Job no. 3
remained in production.
 Actual manufacturing overhead by year-end totaled $233,000. Rockville adjusts all under- and overapplied
overhead to cost of goods sold.

Required:
A. Compute the company's predetermined overhead application rate.
B. Compute Rockville's ending work-in-process inventory.
C. Determine Rockville's sales revenue.
D. Was manufacturing overhead under- or overapplied during 20x3? By how much?
E. Present the necessary journal entry to handle under- or overapplied manufacturing overhead at year-end.
F. Does the presence of under- or overapplied overhead at year-end indicate that Rockville's accountants made a
serious error? Briefly explain.
Answer:
A. $250,000 ÷ $200,000 = 125% of direct labor cost

B. Job no. 3:
Direct material $ 55,000
Direct labor 80,000
Manufacturing overhead ($80,000 x 125%) 100,000
Total cost of job no. 3 $235,000

C. Job nos. 1 and 2:

Direct material ($145,000 + $320,000) $465,000
Direct labor ($35,000 + $65,000) 100,000
Manufacturing overhead ($100,000 x 125%) 125,000
Total cost of job nos. 1 and 2 $690,000

Sales revenue: $1,104,000 ($690,000 x 160%)

D. Actual overhead $233,000

Applied overhead: [($35,000 + $65,000 +
$80,000) x 125%] 225,000
Underapplied overhead $ 8,000

E. Cost of Goods Sold 8,000

Manufacturing Overhea 8,000

108
 F. No. Companies use a predetermined application rate for several reasons, including
the fact that manufacturing overhead is not easily traced to jobs and products. The
predetermined rate is based on estimates of both overhead and an appropriate cost
driver, and situations where these amounts coincide precisely with actual
experiences are rare. As a result, under- or overapplied overhead typically arises at
year-end.

Overhead Calculations

66. Athens Corporation uses a job-cost system and applies manufacturing overhead to products on the basis of
machine hours. The company's accountant estimated that overhead and machine hours would total $800,000 and
50,000, respectively, for 20x1. Actual costs incurred follow.

Direct material used $250,000

Direct labor 300,000
Manufacturing overhead 816,000

The manufacturing overhead figure presented above excludes $27,000 of sales commissions incurred by the firm.
An examination of job-cost records revealed that 18 jobs were sold during the year at a total cost of $2,960,000.
These goods were sold to customers for $3,720,000. Actual machine hours worked totaled 51,500, and Athens
adjusts under- or overapplied overhead at year-end to Cost of Goods Sold.

Required:
A. Determine the company's predetermined overhead application rate.
B. Determine the amount of under- or overapplied overhead at year-end. Be sure to indicate whether overhead
was under- or overapplied.
C. Compute the company's cost of goods sold.
D. What alternative accounting treatment could the company have used at year-end to adjust for under- or
overapplied overhead? Is the alternative that you suggested appropriate in this case? Why?

LO: 4, 5, 6 Type: A, N

Answer:
A. $800,000 ÷ 50,000 = $16 per machine hour

B. Applied overhead (51,500 x $16) $ 824,000

Actual overhead 816,000
Overapplied overhead $ 8,000

C. Cost of goods sold, as reported $2,960,000

Less: Overapplied overhead 8,000
Cost of goods sold, adjusted $2,952,000

D. The company could have allocated the overapplication to work in process, finished
goods, and cost of goods sold. Although this method is acceptable, it is not
suggested in this case because of the immaterial dollar amount in relation to cost of
goods sold.

Job Costing: Focus on Overhead

67. Packard Products uses a job-costing system for its units, which pass from the Machining Department, to the
Assembly Department, to finished-goods inventory. The Machining Department is heavily automated; in
contrast, the Assembly Department performs a number of manual-assembly activities. The following information
relates to the Machining Department for the year just ended:

109
 Budgeted manufacturing overhead $8,000,000
Actual manufacturing overhead 7,975,000
Budgeted machine hours 500,000
Actual machine hours 510,000

The Machining Department data that follow pertain to job no. 243, the only job in production at year-end.

Direct materials $64,800

Direct labor cost 35,200
Machine hours 450

Required:
A. Assuming the use of normal costing, calculate the predetermined overhead rate that is used in the Machining
Department.
B. Compute the cost of the Machining Department's year-end work-in-process inventory.
C. Determine whether overhead was under- or overapplied during the year in the Machining Department.
D. If Packard disposes of the Machining Department's under- or overapplied overhead as an adjustment to Cost
of Goods Sold, would the company's Cost-of-Goods-Sold account increase or decrease? Explain.
E. How much overhead would have been charged to the Machining Department's Work-in-Process account
during the year?
F. Comment on the appropriateness of direct labor cost to apply manufacturing overhead in the Assembly
Department.

Answer:
A. Machining overhead rate: $8,000,000 ÷ 500,000 hours = $16 per machine hour

B. The ending work in process is carried at a cost of $107,200, computed as follows:

Direct materials $ 64,800

Direct labor 35,200
Manufacturing overhead (450 x $16) 7,200
Total cost $107,200

C. Actual overhead in the Machining Department amounted to $7,975,000, whereas applied overhead totaled
$8,160,000 (510,000 hours x $16). Thus, overhead was overapplied by $185,000 during the year.

D. The department's manufacturing overhead was overapplied by $185,000. As a result of this situation,
excessive overhead flowed from Work in Process, to Finished Goods, to Cost of Goods Sold, meaning that
the Cost-of-Goods-Sold account must be decreased at year-end.

E. The Work-in-Process account is charged with applied overhead, or $8,160,000.

F. The firm's selection of application bases is likely appropriate. The bases should "drive" the costs, meaning
there should be a strong cause-and-effect relationship between the base that is used and the amount of
overhead incurred. In the Assembly Department, a considerable portion of the overhead incurred is related to
manual-assembly (i.e., labor) operations.

Overhead Accounting: Working Backwards

68. Kent Products uses a predetermined overhead application rate of $18 per labor hour. A review of the company's
accounting records revealed budgeted manufacturing overhead for the period of $621,000, applied manufacturing
overhead of $590,400, and overapplied overhead of $11,900.

Required:

110
 A. Determine Kent's actual labor hours, budgeted labor hours, and actual manufacturing overhead.
B. Present the necessary year-end journal entry to handle the overapplied overhead, assuming that the firm
allocates over- or underapplied overhead to Cost of Goods Sold.

LO: 4, 5 Type: A

Answer:
A. Actual labor hours: $590,400 ÷ $18 per hour = 32,800 hours
Budgeted labor hours: $621,000 ÷ $18 per hour = 34,500 hours
Actual manufacturing overhead: $590,400 - $11,900 = $578,500

B. Manufacturing Overhead 11,900

Cost of Goods Sold 11,900
Analysis of Accounts to Derive Overhead Figures; Working Backwards

69. A review of the records of Milgrim, Inc., a new company, disclosed the following year-end information:
 Manufacturing Overhead account: Contained debits of $872,000, which included $20,000 of sales
commissions.
 Work-in-Process Inventory account: Contained charges for overhead of $875,000.
 Cost-of-Goods-Sold account: Contained a year-end debit balance of $3,680,000. This amount was computed
prior to any year-end adjustment for under- or overapplied overhead.

Milgrim applies manufacturing overhead to production by using a predetermined rate of $20 per machine hour.
Budgeted overhead for the period was anticipated to be $900,000.

Required:
A. Determine the actual manufacturing overhead for the year.
B. Determine the amount of manufacturing overhead applied to production.
C. Is overhead under- or overapplied? By how much?
D. Compute the adjusted cost-of-goods-sold figure that should be disclosed on the company's income statement.
E. How many machine hours did Milgrim actually work during the year?
F. Compute budgeted machine hours for the year.

LO: 4, 5, 6 Type: A

Answer:
A. $872,000 - $20,000 sales commissions = $852,000

B. $875,000 (given)

C. Manufacturing overhead is overapplied by $23,000 ($875,000 - $852,000).

D. Cost of goods sold $3,680,000

Less: Overapplied overhead 23,000
Cost of goods sold, adjusted $3,657,000

E. Milgrim would have applied overhead to production by using the actual machine
hours worked and the $20 application rate. Thus, the actual hours worked total
43,750 ($875,000 ÷ $20).

F. $900,000 ÷ $20 = 45,000 hours

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Project Costing in a Service Business

70. Fine & Associates is an interior decorating firm in Tucson. The following costs were incurred in a project to
redecorate the mayor's offices:

Direct material $ 29,000

Direct professional labor 42,000

The firm's budget for the year included the following estimates:

Budgeted overhead $800,000

Budgeted direct professional labor 640,000

Overhead is applied to contracts by using a predetermined overhead rate that is based on direct professional labor
cost. Actual professional labor during the year was $655,000 and actual overhead was $793,000.

Required:
A. Determine the total cost to redecorate the mayor's offices.
B. Calculate the under- or overapplied overhead for the year. Be sure to label your answer.

LO: 8 Type: A

Answer:
A. Direct material $ 29,000
Direct professional labor 42,000
Applied overhead ($42,000 x 125%*) 52,500
Total cost to redecorate $123,500

*$800,000  $640,000 = 125%

B. Applied overhead ($655,000 x 125%) $818,750

Actual overhead 793,000
Overapplied overhead $ 25,750
Project Costing, Architecture Firm

71. Boswell and Associates designs relatively small sports stadiums and arenas at various sites throughout the
country. The firm’s accountant prepared the following budget for the upcoming year:

Professional staff salaries $3,000,000

Administrative support staff 800,000
Other operating costs 200,000

Eighty percent of professional staff salaries are directly traceable to client projects, a figure that falls to 60% for
the administrative support staff and other operating costs. Traceable costs are charged directly to client projects;
nontraceable costs, on the other hand, are treated as firm overhead and charged to projects by using a
predetermined overhead application rate.

Boswell had one project in process at year-end: an arena that was being designed for Charlotte County. Costs
directly chargeable to this project were:

Professional staff salaries $90,000

Administrative support staff 17,300
Other operating costs 6,700

Required:

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 A. Determine Boswell’s overhead for the year and the firm’s predetermined overhead application rate. The rate
is based on costs directly chargeable to firm projects.
B. Compute the cost of the Charlotte County arena project as of year-end.
C. Present three examples of “other operating costs” that might be directly traceable to the Charlotte County
project.

LO: 8 Type: A, N

Answer:
A. Professional staff salaries $3,000,000
Administrative support staff 800,000
Other operating costs 200,000
Subtotal $4,000,000
Less: Direct costs
Professional staff salaries ($3,000,000 x 80%) $2,400,000
Administrative support staff and other costs
[($800,000 + $200,000) x 60%] 600,000 3,000,000
Nontraceable costs (i.e., overhead) $1,000,000

Predetermined application rate: $1,000,000 ÷ $3,000,000 = 33.33%

B. Professional staff salaries $ 90,000

Administrative support staff 17,300
Other operating costs 6,700
Subtotal $114,000
Overhead: $114,000 x 33.33% 38,000
Total $152,000

C. Possible examples include travel, overnight delivery fees, postage, selected costs
related to conducting focus-group studies, photocopying, and supplies related to
model construction.

Job Costing in a Consulting Firm

72. KLP provides consulting services and uses a job-order system to accumulate the cost of client projects. Traceable
costs are charged directly to individual clients; in contrast, other costs incurred by KLP, but not identifiable with
specific clients, are charged to jobs by using a predetermined overhead application rate. Clients are billed for
directly chargeable costs, overhead, and a markup.

KLP anticipates the following costs for the upcoming year:

Percentage of Cost
Directly Traceable
Cost to Clients
Professional staff salaries $5,000,000 80%
Administrative support staff 600,000 50
Travel 200,000 80
Other operating costs 200,000 20
Total $6,000,000

KLP's partners desire to make a $480,000 profit for the firm and plan to add a percentage markup on total cost to
achieve that figure.
On May 14, KLP completed work on a project for Lawson Manufacturing. The following costs were incurred:
professional staff salaries, $68,000; administrative support staff, $8,900; travel, $10,500; and other operating
costs, $2,600.
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Required:
A. Determine KLP's total traceable costs for the upcoming year and the firm's total anticipated overhead.
B. Calculate the predetermined overhead rate. The rate is based on total costs traceable to client jobs.
C. What percentage of total cost will KLP add to each job to achieve its profit target?
D. Determine the total cost of the Lawson Manufacturing project. How much would Lawson be billed for
services performed?
Answer:
A. Traceable costs total $4,500,000, computed as follows:

Percent Traceable
Total Cost Traceable Cost
Professional staff salaries $5,000,000 80% $4,000,000
Administrative support staff 600,000 50 300,000
Travel 200,000 80 160,000
Other operating costs 200,000 20 40,000
Total $6,000,000 $4,500,000

KLP's overhead (i.e., the nontraceable costs) totals $1,500,000 ($6,000,000 - $4,500,000).

B. Predetermined overhead rate: $1,500,000 ÷ $4,500,000 = 33.33%

C. Target profit percentage: $480,000 ÷ $6,000,000 = 8%
D. The total cost of the Lawson Manufacturing project is $120,000, and the billing is $129,600, as follows:

Professional staff salaries $ 68,000

Administrative support staff 8,900
Travel 10,500
Other operating costs 2,600
Subtotal $ 90,000
Overhead ($90,000 x 33.33%) 30,000
Total cost $120,000
Markup ($120,000 x 8%) 9,600
Billing to Lawson $129,600

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EXERCISES: Process Costing

Equivalent Units

59. Superior Chemical Company refines a variety of petrochemical products. The following data pertain to the firm's
Cincinnati plant:

Work in process, August 1: 100,000 gallons

Direct material 100% complete
Conversion 25% complete
Units started into production 1,375,000 gallons
Work in process, August 31: 120,000 gallons
Direct material 100% complete
Conversion 80% complete

Required:
Compute the equivalent units of direct materials and conversion for August.
Answer:
Units
Completed and transferred out during August 1,355,000*
Work in process at August 31 120,000
Percentage complete as to material x 100% 120,000
Equivalent units: materials 1,475,000

Units
Completed and transferred out during August 1,355,000*
Work in process at August 31 120,000
Percentage complete as to conversion x 80% 96,000
Equivalent units: conversion 1,451,000

*100,000 + 1,375,000 - 120,000 = 1,355,000

Equivalent Units
60. Coronado Products employs a process-costing system for its manufacturing operations. All materials are added at
the beginning of the process, and conversion costs are incurred uniformly throughout production. The
information that follows relates to September
Units
Work in process, September 1 (30% complete as to conversion) 8,900
Units started during September 28,500
Total units to account for 37,400

Units completed during September 29,700

Work in process, September 30 (80% complete as to conversion) 7,700
Total units accounted for 37,400

Required:
A. Calculate equivalent units of direct material for September.
B. Calculate equivalent units of conversion activity for September.

Answer:
Units
A. Completed and transferred out during September 29,700
Work in process at September 30 7,700
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 Percentage complete as to material x 100% 7,700
Equivalent units: materials 37,400

Units
B. Completed and transferred out during September 29,700
Work in process at September 30 7,700
Percentage complete as to conversion x 80% 6,160
Equivalent units: conversion 35,860

Equivalent Units
61. State Chemical uses a weighted-average process-costing system. The following data relate to May:

Work in process, May 1: 25,000 pounds

Direct material 70% complete
Conversion 80% complete
Units started into production 80,000 pounds
Work in process, May 31: 30,000 pounds
Direct material 40% complete
Conversion 65% complete
Required:
A. Calculate the number of pounds completed during May.
B. Calculate equivalent units of materials and conversion for May.
C. Does State introduce all of its direct materials at the very beginning of production? Explain your answer.
Answer:
A. 25,000 + 80,000 - 30,000 = 75,000

B. Units
Completed and transferred out during May 75,000
Work in process at May 31 30,000
Percentage complete as to material x 40% 12,000
Equivalent units: materials 87,000

Units
Completed and transferred out during May 75,000
Work in process at May 31 30,000
Percentage complete as to conversion x 65% 19,500
Equivalent units: conversion 94,500

C. No. The ending work-in-process inventory is only 40% complete with respect to
material. If material were introduced at the very beginning of the process, this number
would be 100%.
Interpretation of Data: Process Costing
62. Portal Manufacturing, which began business in 1956, uses a weighted-average process-costing system. The
following figures pertain to July:
Physical Equivalent Units
Units Materials Conversion
Units completed 120,000 120,000 120,000
Ending work in process 40,000 40,000 18,000

All materials are introduced at the start of the process, and conversion cost is incurred evenly throughout
production. The company used direct materials that cost $640,000; conversion amounted to $8 per equivalent
unit.
Required:
A. Calculate the direct materials cost per equivalent unit.
B. Calculate the cost of units completed and transferred.
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 C. What percentage of conversion work will be performed on the 40,000-unit ending work-in-process inventory
during August?
D. In all likelihood, were all of the 120,000 completed units begun in July? Explain.
Answer:
A. $640,000 ÷ (120,000 + 40,000) = $4

B. 120,000 x ($4 + $8) = $1,440,000

C. Forty-five percent (18,000 ÷ 40,000) of the work was performed in July, leaving 55% for August.

D. No. In a continuous processing environment, the beginning work-in-process inventory is often the first batch
of goods to be completed. These units entered production in a previous month.

Process Costing: Miscellaneous Computations and Concepts

63. National, Inc., uses a weighted-average process-costing system. All materials are introduced at the start of
manufacturing; in contrast, conversion cost is incurred uniformly throughout production. The company had
respective work-in-process inventories on May 1 and May 31 of 42,000 units and 50,000 units, the latter of which
was 70% complete. The production supervisor noted that National completed 85,000 units during the month.

Costs in the May 1 work-in-process inventory were subdivided as follows: materials, $51,000; conversion,
$148,000. During May, National charged production with $124,500 of material and $956,000 of conversion,
resulting in a material cost per equivalent unit of $1.30.
Required:
A. Determine the number of units that National started during May.
B. Compute the number of equivalent units with respect to conversion cost.
C. Determine the conversion cost per equivalent unit.
D. Compute the cost of the May 31 work-in-process inventory.
E. What account would have been credited to record National’s completed production?

LO: 2, 3, 4, 5 Type: RC, A

Answer:
A. Since National had accounted for 135,000 units (85,000 + 50,000), the company must have started 93,000
units in May (135,000 - 42,000).

B. Equivalent units for conversion cost total 120,000 [85,000 + (50,000 x 70%)].

C. The conversion cost per equivalent unit is $9.20 [($148,000 + $956,000) ÷ 120,000 units].

D. Ending work in process totals $387,000: materials, $65,000 (50,000 x $1.30) + conversion, $322,000 [(50,000
x 70%) x $9.20].

E. Work-in-Process Inventory

Cost of Goods Completed, Ending Work in Process

64. Manhattan, Inc., uses a weighted-average process-costing system. All materials are introduced at the beginning of
production; conversion cost is incurred evenly throughout manufacturing. The following information pertains to
April:

Beginning work in process (80% complete) 9,000 units

Goods completed during April 53,000 units
Ending work in process (30% complete) 12,000 units

117
 The company's accountant has already computed the cost per equivalent unit, as follows: materials, $5;
conversion, $14.

Required:
Calculate the cost of goods completed during April and the cost of the ending work-in-process inventory.

LO: 3, 5 Type: A

Answer:
Cost of goods completed:
53,000 x ($5 + $14) = $1,007,000

Cost of ending work in process:

(12,000 x $5) + (12,000 x 30% x $14) = $110,400

Calculation of Equivalent Units, Unit Costs, Transfer, and Inventory

65. Edwards Company had a beginning work-in-process inventory of 30,000 units on June 1. These units contained
$120,000 of direct materials and $272,000 of conversion cost. The following data relate to activity during June:

Production completed (units) 70,000

Ending work in process, 60% complete (units) 20,000
Direct materials used ($) 258,000
Conversion cost ($) 695,600

Edwards uses a weighted-average process-costing system. All materials are added at the start of manufacturing;
in contrast, conversion cost is incurred evenly throughout production.

Required:
A. Compute the total equivalent units for direct material and conversion cost.
B. Compute the cost per equivalent unit of direct material and conversion cost.
C. Determine the cost of completed production.
D. Determine the cost of the June 30 work in process.

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A. Equivalent units:
Direct
Material Conversion
Transferred to finished goods 70,000 70,000
Work in process, June 30 20,000 12,000
Total 90,000 82,000

B. Cost per equivalent unit:

Work in process, June 1 $120,000 $272,000
Costs added during June 258,000 695,600
Total costs $378,000 $967,600
Equivalent units ÷ 90,000 ÷ 82,000
Cost per equivalent unit $4.20 $11.80

C. Cost of completed production:

Material (70,000 x $4.20) $ 294,000
Conversion (70,000 x $11.80) 826,000
Total $1,120,000

D. Cost of work in process at June 30:

Material (20,000 x $4.20) $ 84,000
Conversion (12,000 x $11.80) 141,600
Total $ 225,600

119
Calculation of Equivalent Units, Unit Costs, Transfer, and Inventory

66. On May 1, Dandy Company had a work-in-process inventory of 10,000 units. The units were 100% complete for
material and 30% complete for conversion, with respective costs of $30,000 and $1,850.

During the month, 150,000 units were completed and transferred to finished goods. The May 31 ending work-in-
process inventory consisted of 10,000 units that were 100% complete with respect to materials and 80% complete
with respect to conversion.

Costs added during the month were $330,000 for materials and $503,750 for conversion.

Required:
Using the weighted-average method, calculate:
A. total equivalent units for material and conversion.
B. the cost per equivalent unit for material and conversion.
C. the cost transferred to finished goods.
D. the cost of ending work in process.

LO: 3, 4, 5 Type: A

Answer:
A. Equivalent units:
Direct
Material Conversion
Transferred to finished goods 150,000 150,000
Work in process, May 31 10,000 8,000
Total 160,000 158,000

B. Cost per equivalent unit:

Work in process, May 1 $ 30,000 $ 1,850
Costs added during May 330,000 503,750
Total costs $360,000 $505,600
Equivalent units 160,000 158,000
Cost per equivalent unit $2.25 $3.20

C. Cost of completed production:

Material (150,000 x $2.25) $337,500
Conversion (150,000 x $3.20) 480,000
Total $817,500

D. Cost of work in process at May 31:

Material (10,000 x $2.25) $ 22,500
Conversion (8,000 x $3.20) 25,600
Total $ 48,100

120
Analysis of Work-in-Process Account

67. Baxter Products manufactures office furniture by using an assembly-line process. All direct materials are
introduced at the start of the process, and conversion cost is incurred evenly throughout manufacturing. An
examination of the company's Work-in-Process account for August revealed the following selected information:

Debit side—
August 1 balance: 600 units, 40% complete; cost, $44,600*
Production started: 1,800 units
Direct materials used during August: $90,000
August conversion cost: $51,400

Credit side—
Production completed: 1,400 units

*Supplementary records disclosed direct material cost of $30,000 and conversion cost of $14,600.

Conversations with manufacturing personnel revealed that the ending work in process was 80% complete.

Required:
A. Determine the number of units in the August 31 work-in-process inventory.
B. Calculate the cost of goods completed during August, and prepare the appropriate journal entry to record
completed production.
C. Determine the cost of the August 31 work-in-process inventory.

LO: 3, 4, 5 Type: A

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Answer:
A. The ending work in process consisted of 1,000 units (600 + 1,800 - 1,400).

B. The cost of goods completed during August totaled $112,000 (1,400 units x $80):

Percentage of
Completion Equivalent Units
Physical With Respect to Direct
Units Conversion Material
Conversion
Work in process, August 1 600 40%
Units started during August 1,800
Total units to account for 2,400

Units completed and

transferred during August 1,400 100% 1,400 1,400
Work in process, August 31 1,000 80% 1,000 800
Total units accounted for 2,400
Total equivalent units 2,400 2,200

Direct
Material Conversion Total
Work in process, August 1 $ 30,000 $14,600 $ 44,600
Costs incurred during August 90,000 51,400 141,400
Total costs to account for $120,000 $66,000 $186,000
Equivalent units 2,400 2,200
Cost per equivalent unit $50 $30 $80

Finished-Goods Inventory 112,000

Work-in-Process 112,000
Inventory
C. The cost of the August 31 work-in-process inventory is $74,000:
Direct materials (1,000 x $50) $50,000
Conversion cost (800 x $30) 24,000
$74,000

122
Process Costing: Data Interpretation and Working Backwards

68. Lakey uses a weighted-average process-costing system. Material A is added at the start of production; packaging
material is introduced at the end. Conversion costs are incurred evenly throughout manufacturing.

The following selected data were extracted from the company's production report:

Units completed 15,000

Ending work in process (units) 6,000
Equivalent units: conversion cost 16,800
Equivalent-unit cost: material A ($) 5
Equivalent-unit cost: packaging ($) 2
Total conversion cost ($) 134,400

Required:
A. Compute the equivalent-unit cost for conversion cost.
B. How far into the manufacturing process is the ending work-in-process inventory?
C. Would the total equivalent units for Material A and the packaging material be the same? Why?
D. Compute the cost of goods completed during the period.
E. Compute the cost of the ending work-in-process inventory.
F. What account would be debited to record the cost of goods completed during the period?

LO: 2, 3, 4, 5 Type: A, N

Answer:
A. $134,400 ÷ 16,800 = $8

B. Total conversion units 16,800

Conversion units for completed production 15,000
Conversion units for work in process 1,800

1,800 ÷ 6,000 = 30%

C. No. Material A is added at the beginning of production and would be part of the
ending work-in-process inventory. Given that the ending work in process is only
30% complete, these goods have yet to reach the completion of manufacturing
where packaging is introduced.

D. 15,000 x ($5 + $2 + $8) = $225,000

E. Material A: 6,000 x $5 $30,000

Packaging material ---
Conversion cost: 1,800 x $8 14,400
Total $44,400

F. Finished-Goods Inventory

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Operation Costing

69. Levitt Corporation, which uses an operation-costing system, has three processing departments. All units pass
through Department no. 1; upon completion, 70% of the goods are sent to Department no. 2 and 30% are sent to
Department no. 3. Additional data follow.
 Forty thousand units were manufactured during the year.
 Conversion cost in each department was: No. 1, $380,000; no. 2, $196,000; and no. 3, $150,000.
 Batch no. 67, which consisted of 500 units, was sent to Department no. 3 for its additional processing. Direct
materials of $23,500 and $11,900 were introduced to this batch in Department nos. 1 and 3, respectively.

Levitt assigns conversion cost to goods manufactured on the basis of units produced.

Required:
A. Determine the conversion cost per unit in Department no. 1, Department no. 2, and Department no. 3.
B. Compute the total cost of batch no. 67.
C. Operation costing is sometimes referred to as a hybrid costing system. Briefly explain.

LO: 7 Type: RC, A

Answer:
A. Department no. 1: $380,000 ÷ 40,000 units = $9.50
Department no. 2: $196,000 ÷ 28,000 units (40,000 x 70%) = $7.00
Department no. 3: $150,000 ÷ 12,000 units (40,000 x 30%) = $12.50

B. Direct materials ($23,500 + $11,900) $35,400

Department no. 1 conversion (500 x $9.50) 4,750
Department no. 3 conversion (500 x $12.50) 6,250
Total cost $46,400

C. Operation costing is a hybrid system because it contains features that are present in
both a job-costing system and a process-costing system. Direct materials are
assigned directly to the batches of goods produced; in contrast, conversion costs
are accumulated by department and are then assigned to manufactured goods by
using an averaging technique.

124
Operation Costing

70. Orville Knitters manufactures sweaters and uses an operation-costing system. All sweaters are processed through
Department no. 1, with subsequent processing taking place in Department no. 2 or Department no. 3 depending on
the type of fabric used. Twenty thousand sweaters were produced during the year; there was no beginning or
ending work in process. Sixty percent of the goods were sent to Department no. 2 for manufacturing.

Conversion cost incurred in the three departments totaled $504,000, subdivided as follows: Department no. 1,
$360,000; Department no. 2, $60,000; and Department no. 3, $84,000.

Data pertaining to two representative orders, nos. 545 and 567, were:

No. 545 No. 567

Direct materials $112,000 $94,000
Number of sweaters 800 1,300
Subsequent processing department No. 3 No. 2

Required:
A. Explain the nature of operation costing.
B. Determine the cost of order nos. 545 and 567.

LO: 7 Type: RC, A

Answer:
A. Operation costing is used by firms that produce different models of similar products. The
products go through essentially the same manufacturing process, so conversion costs can
be assigned in a manner similar to that used in process-costing systems. Materials, on the
other hand, are unique to the individual goods being produced and, accordingly, the cost is
assigned by batch (or in a manner similar to that used in job costing).

B.
Conversion cost per sweater:
Department no. 1: $360,000 ÷ 20,000 sweaters = $18.00
Department no. 2: $60,000 ÷ (20,000 x 60%) sweaters = $5.00
Department no. 3: $84,000 ÷ (20,000 x 40%) sweaters = $10.50

No. 545 No. 567

Direct materials $112,000 $ 94,000
Conversion cost: No. 1
800 sweaters x $18.00; 1,300 sweaters x $18.00 14,400 23,400
Conversion cost: No. 2
1,300 sweaters x $5.00 6,500
Conversion cost: No. 3
800 sweaters x $10.50 8,400
Total $134,800 $123,900

125