COST ACCOUNTING AND CONTROL – Solutions Manual

CHAPTER 6
SYSTEMS DESIGN: JOB-ORDER COSTING

I. Answers to Questions
1. Job-order costing is used in those manufacturing situations where there are
many different products produced each period. Each product or job is different
from all others and requires separate costing. Process costing is used in those
manufacturing situations where a single, homogeneous product, such as cement,
bricks, or gasoline, is produced for long periods at a time.
2. A firm will not know its actual manufacturing overhead costs until after a period
is over. Thus, if actual costs were used to cost products, it would be necessary
either (1) to wait until the period was over to add overhead costs to jobs, or (2)
to simply add overhead cost to jobs as the overhead cost was incurred day by
day. If the manager waits until after the period is over to add overhead cost to
jobs, then cost data will not be available during the period. If the manager
simply adds overhead cost to jobs as the overhead cost is incurred, then unit
costs may fluctuate from month to month. This is because overhead cost tends
to be incurred somewhat evenly from month to month (due to the presence of
fixed costs), whereas production activity often fluctuates. For these reasons,
most firms use predetermined overhead rates, based on estimates of overhead
cost and production activity, to apply overhead cost to jobs.
3. An allocation base should act as a cost driver in the incurrence of the overhead
cost; that is, the base should cause the overhead cost. If the allocation base does
not really cause the overhead, then costs will be incorrectly attributed to
products and jobs and their costs will be distorted.
4. By definition, manufacturing overhead consists of costs that cannot be
practically traced to products or jobs. Therefore, if these costs are to be assigned
to products or jobs, they must be allocated rather than traced.
5. Assigning manufacturing overhead costs to jobs does not ensure a profit. The
units produced may not be sold and if they are sold, they may not be sold at
prices sufficient to cover all costs. It is a myth that assigning costs to products or
jobs ensures that those costs will be recovered. Costs are recovered only by
selling to customers—not by allocating costs.
6. The application of job costing is very similar in manufacturing and service
firms. Some differences is that service firms are likely to have a larger
proportion of direct labor in jobs than are manufacturers. Also, since service
firms do not have significant amounts of work-in-process or finished goods
inventory, service firms are not likely to need to use proration of underapplied
or overapplied overhead.

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 7. The best choice of a cost driver is that activity or output measure that best
represents what drives or causes overhead.
8. Due to the automation trend, the proper cost driver for a manufacturing firm
would probably be machine hours because the costs are predominantly related
to the equipment operation.
9. Normal cost of goods sold includes actual direct materials, actual direct labor,
and applied factory overhead costs for products sold. Adjusted cost of goods
sold equals normal cost of goods sold plus underapplied overhead (or less
overapplied overhead).
10. No. For most service-sector companies, labor is the single largest cost category.
For example, labor costs comprise over 70% of the total costs of many law
firms.
11. An advertising campaign for Pepsi is likely to be very specific to that individual
client. Job costing enables all the specific aspects of each job to identified. In
contrast, the processing of checking account withdrawals is similar for many
customers. Here, process costing can use to compute the cost of each checking
account withdrawal.
12. An accounting firm can use job cost information (a) to determine the
profitability of individual jobs, (b) to assist in bidding on future jobs, and (c) to
evaluate professionals who are in charge of managing individual jobs.
13. The main concern with the source documents of job cost records of accounting
and law firms of the accuracy of time records. Labor costs often make up over
half of the total costs. These firms may impose penalties on personnel who do
not submit accurate time records when required.
14. Over-costing may result in competitors entering a market and taking market
share for products that a company erroneously believes are low-margin or even
unprofitable. Under-costing mat result in companies selling products on which
they are in fact losing money, when they erroneously believe them to be
profitable.

II. Answers to Exercises

Exercise 1 (Job costing; actual and normal costing)

Requirement 1
Actual direct cost rate = P58 per professional labor-hour (given)

P744,000
Actual indirect cost rate = = P48 per professional labor-hour
15,500 hours

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 P960,000
Budgeted direct rate = = P60 per professional labor-hour
16,000 hours
P720,000
Budgeted indirect cost rate = = P45 per professional labor-hour
16,000 hours

(a) (b) (c)

Actual Normal Extended
Costing Costing Normal Costing
Direct Cost Rate P58 P58 P60
(Actual rate) (Actual rate) (Budgeted rate)
Indirect Cost Rate P48 P45 P45
(Actual rate) (Budgeted rate) (Budgeted rate)

Requirement 2
(a) (b) (c)
Actual Normal Extended
Costing Costing Normal Costing
Direct Costs P58 × 120 =P6,960 P58 × 120 =P6,960 P60 × 120 =P7,200
Indirect Costs 48 × 120 = 5,760 45 × 120 = 5,400 48 × 120 = 5,400
Total Job Costs P12,720 P12,720 P12,600
All these costing systems use the actual professional labor time of 120 hours. The
budgeted 110 hours for the Montreal Expos job is not used in job costing. However,
Chirac may have used the 110 hours number in bidding for the adult.
The actual costing figure of P12,720 exceeds the normal costing figure of P12,360,
because the actual indirect cost rate (P48) exceeds the budgeted indirect cost rate
(P45). The normal costing figure of P12,360 is less than the extend normal costing
figure of P12,600, because the actual direct cost rate (P58) is less than budgeted
direct cost rate (P60).

Exercise 2

Requirement (1)
The direct materials and direct labor costs listed in the exercise would have been
recorded on four different documents: the materials requisition form for Job KC123,
the time ticket for Kristine, the time ticket for Clarisse, and the job cost sheet for Job
KC123.

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Requirement (2)
The costs for Job KC123 would have been recorded as follows:

Materials requisition form:

Quantity Unit Cost Total Cost
Blanks 40 P80.00 P3,200
Nibs 960 P6.00   5,760
P8,960

Time ticket for Kristine

Time Job
Started Ended Completed Rate Amount Number
9:00 AM 12:15 PM 3.25 P120.00 P390.00 KC123

Time ticket for Clarisse

Time Job
Started Ended Completed Rate Amount Number
2:15 PM 4:30 PM 2.25 P140.00 P315.00 KC123

Job Cost Sheet for Job KC123

Direct materials................... P8,960.00
Direct labor:
Kristine........................ 390.00
Clarisse........................     315.00
P9,665.00

Exercise 3 (Applying Overhead with Various Bases)

Requirement 1
Predetermined overhead rates:
Company X:

Predetermined Estimated total manufacturing overhead cost

overhead rate
= Estimated total amount of the allocation base
P432,000
= 60,000 DLHs =P7.20 per DLH
Company Y:
Predetermined Estimated total manufacturing overhead cost
overhead rate
= Estimated total amount of the allocation base
P270,000
= 6-4
90,000 DLHs =P3.00 per MH
Company Z:

Predetermined Estimated total manufacturing overhead cost

overhead rate
= Estimated total amount of the allocation base
P384,000
= P240,000 materials cost = 160% of materials cost

Requirement 2
Actual overhead costs incurred................................................... P420,000
Overhead cost applied to Work in Process:................................
58,000* actual hours × P7.20 per hour................................   417,600
Underapplied overhead cost....................................................... P  2,400
* 7,000 hours + 30,000 hours + 21,000 hours = 58,000 hours

Exercise 4 (Departmental Overhead Rates)

Requirement 1
Milling Department:
Predetermined Estimated total manufacturing overhead cost
= Estimated total amount of the allocation base
overhead rate
P510,000
= = P8.50 per machine-hour
60,000 machine-hours
Assembly Department:
Predetermined Estimated total manufacturing overhead cost
= Estimated total amount of the allocation base
overhead rate
P800,000
= P640,000 direct labor cost = 125% of direct labor cost
Requirement 2
Overhead Applied
Milling Department: 90 MHs × P8.50 per MH P765
Assembly Department: P160 × 125%  200
Total overhead cost applied P965

Requirement 3
Yes; if some jobs required a large amount of machine time and little labor cost, they
would be charged substantially less overhead cost if a plantwide rate based on direct
labor cost were being used. It appears, for example, that this would be true of job 123

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 which required considerable machine time to complete, but required only a small
amount of labor cost.
Exercise 5

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead................................................ P586,000
÷ Estimated total direct labor hours (DLHs)...........................................    40,000 DLHs
= Predetermined overhead rate...............................................................    P14.65 per DLH

IV. Answers to Multiple Choice

1. D 8. B 15. C
2. C 9. B 16. C
3. C 10. A 17. A
4. D 11. C 18. D
5. C 12. C 19. C
6. A 13. D 20. A
7. D 14. B 21. D

III. Answers to Problems

Problem 1

Requirement 1
a. Raw Materials Inventory.......................................................210,000
Accounts Payable.............................................................. 210,000
b. Work in Process.................................................................... 178,000
Manufacturing Overhead...................................................... 12,000
Raw Materials Inventory.................................................. 190,000
c. Work in Process.................................................................... 90,000
Manufacturing Overhead...................................................... 110,000
Salaries and Wages Payable............................................. 200,000
d. Manufacturing Overhead...................................................... 40,000
Accumulated Depreciation................................................ 40,000
e. Manufacturing Overhead...................................................... 70,000
Accounts Payable.............................................................. 70,000
f. Work in Process.................................................................... 240,000
Manufacturing Overhead.................................................. 240,000
30,000 MH x P8 per MH = P240,000.
g. Finished Goods...................................................................... 520,000

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 Work in Process................................................................ 520,000
h. Cost of Goods Sold............................................................... 480,000
Finished Goods................................................................. 480,000
Accounts Receivable............................................................. 600,000
Sales.................................................................................. 600,000
P480,000 × 1.25 = P600,000

Requirement 2

Manufacturing Overhead Work in Process

(b) 12,000 240,000 (f) Bal. 42,000 510,000 (g)
(c) 110,000 (b) 178,000
(d) 40,000 (c) 90,000
(e) 70,000 (f) 240,000
8,000 Bal. 30,000
(Overapplied
overhead)

Problem 2

Requirement 1

The costing problem does, indeed, lie with manufacturing overhead cost, as
suggested. Since manufacturing overhead is mostly fixed, the cost per unit increases
as the level of production decreases. The problem can be solved by use of
predetermined overhead rates, which should be based on expected activity for the
entire year. Many students will use units of product in computing the predetermined
overhead rate, as follows:
Estimated manufacturing overhead cost, P840,000
= P4.20 per unit.
Estimated units to be produced, 200,000
The predetermined overhead rate could also be set on the basis of either direct labor
cost or direct materials cost. The computations are:
Estimated manufacturing overhead cost, P840,000 350% of direct
Estimated direct labor cost, P240,000 = labor cost
Estimated manufacturing overhead cost, P840,000 140% of direct
Estimated direct materials cost, P600,000 = materials cost

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Requirement 2
Using a predetermined overhead rate, the unit costs would be:
Quarter
First Second Third Fourth
Direct materials........................ P240,000 P120,000 P 60,000 P180,000
Direct labor.............................. 96,000 48,000 24,000 72,000
Manufacturing overhead:
Applied at P4.20 per units;
350% of direct labor cost, or
140% of direct materials cost 336,000 168,000 84,000 252,000
Total cost.......................... P672,000 P336,000 P168,000 P504,000
Number of units produced 80,000 40,000 20,000 60,000
Estimated cost per unit............ P8.40 P8.40 P8.40 P8.40

Problem 3

Requirement 1
Predetermined Overhead Rate
= P1,235,475 / 86,700 = P14.25 per direct labor-hour

Requirement 2
a. Direct Materials Inventory 125,000
Accounts Payable 125,000
P25 x 5,000 = P125,000
b. Supplies Inventory 1,800
Accounts Payable 1,800
P36 x 50 = P1,800
c. Work-in-Process Inventory 87,500
Factory Overhead 1,098
Direct Materials Inventory 87,500
Supplies Inventory 1,098
P25 x 3,500 = P87,500
P36 x 30.5 = P1,098
d. Work-in-Process Inventory 141,900
Factory Overhead 46,000
Cash 187,900

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 P187,900 - P46,000 = P141,900
Direct labor-hours used = P141,900 / P22 = 6,450 hours
e. Factory Overhead 15,230
Cash 15,230
f. Factory Overhead 3,500
Prepaid Insurance 3,500
g. Factory Overhead 8,200
Accumulated Depreciation 8,200
(Factory Asset)
h. Selling & Administrative Expense 2,400
Accumulated Depreciation 2,400
i. Selling & Administrative 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 = P14.25 x 6,450 DL hour = P91,912.50

Work-in-Process Inventory 91,912.50

Factory Overhead Applied 91,912.50
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

Requirement 3

Actual Overhead = P1,098 + P46,000 + P15,230 + P3,500 + P8,200 + P13,500

= P87,528

Overapplied Overhead = P91,912.50 - P87,528 = P4,384.50

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 Requirement 4

Aries Corporation
Schedule of Cost of Goods Manufactured and Sold
For the month ended August 31, 20X1

Direct materials:
Beginning materials inventory P 0.00
Purchase 125,000.00
Total materials available P125,000.00
Deduct: ending materials inventory (37,500.00) P 87,500.00
Direct labor 141,900.00
Factory overhead applied 91,912.50
Total manufacturing costs P 321,312.50
Add: beginning work-in-process inventory 0.00
Deduct: ending work-in-process inventory ( 175,312.50)
Cost of goods manufactured P 146,000.00
Add: beginning finished goods inventory 0.00
Deduct: ending finished goods inventory (34,000.00)
Normal cost of goods sold P 112,000.00
Deduct: overapplied overhead ( 4,384.50)
Cost of goods sold P 107,615.50

Requirement 5

Aries Corporation
Income Statement
For the month ended August 31, 20X1

Sales P 132,000.00
Cost of Goods Sold ( 107,615.50)
Gross Margin P 24,384.50
Selling & Administrative Expense* 21,150.00
Net Income P 3,234.50

* S & A Expense = P2,400 + P5,500 + P13,250 = P21,150

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 Answer to Test Material 6-1
Requirement 1
a. Raw Materials.............................................................. 160,000
Accounts Payable.................................................. 160,000
b. Work in Process........................................................... 120,000
Factory Overhead Control............................................ 20,000
Raw Materials....................................................... 140,000
c. Work in Process........................................................... 90,000
Factory Overhead Control............................................ 60,000
Sales Commissions Expense........................................ 20,000
Salaries Expense........................................................... 50,000
Salaries and Wages Payable.................................. 220,000
d. Factory Overhead Control............................................ 13,000
Insurance Expense........................................................ 5,000
Prepaid Insurance.................................................. 18,000
e. Factory Overhead Control............................................ 10,000
Accounts Payable.................................................. 10,000
f. Advertising Expense.................................................... 15,000
Accounts Payable.................................................. 15,000
g. Factory Overhead Control............................................ 20,000
Depreciation Expense................................................... 5,000
Accumulated Depreciation.................................... 25,000
h. Work in Process........................................................... 110,000
Factory Overhead Applied.................................... 110,000

Estimated total factory overhead cost P99,000

= = P2.20 per MH
Estimated total units of the allocation base 45,000 MHs

50,000 actual MHs x P2.20 per MH = P110,000 overhead applied.

i. Finished Goods............................................................. 310,000

Work in Process.................................................... 310,000

j. Accounts Receivable.................................................... 498,000

Sales...................................................................... 498,000

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 Cost of Goods Sold...................................................... 308,000
Finished Goods..................................................... 308,000

Requirement 2

Raw Materials Work in Process

Bal. 10,000 (b) 140,000 Bal. 4,000 (i) 310,000
(a) 160,000 (b) 120,000
(c) 90,000
(h) 110,000
Bal. 30,000 Bal. 14,000

Finished Goods Factory Overhead Control

Bal. 8,000 (j) 308,000 (b) 20,000
(i) 310,000 € 60,000
(d) 13,000
€ 10,000
(f) 20,000
Bal. 10,000

Cost of Goods Sold Factory Overhead Applied

(j) 308,000 (h) 110,000

Requirement 3

Factory overhead is underapplied by P13,000 for the year. The entry to close this balance
to Cost of Goods Sold would be:
Cost of Goods Sold.............................................................. 13,000
Factory Overhead Applied........................................... 13,000

Requirement 4
MS COMPANY
Income Statement
For the Year Ended June 30

Sales..................................................................................... P498,000
Less cost of goods sold (P308,000 + P13,000)................... 321,000
Gross margin....................................................................... 177,000
Less selling and administrative expenses:
Sales commissions........................................................ P 20,000
Administrative salaries................................................. 50,000
Insurance expense........................................................ 5,000
Advertising expenses.................................................... 15,000

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 Depreciation expense................................................... 5,000 95,000

Net operating income.......................................................... P 82,000

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