Chap 5 - BOOK SOLUTIONS PDF

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BOOK SOLUTIONS...

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Chapter 5 Sys Systems tems Design: Job-Or Job-Order der Costing

Solution to Discussion Cas Case e Students will likely generate wide variety of products and related costs, some of them will likely be similar to the following: Products

Cost Types

Audits Reviews Compilations Personal Tax Returns Corporate Tax Returns Consulting projects Valuations Bankruptcy advice

Professional staff salaries Office staff salaries Equipment Lease costs Utilities Supplies IT costs Software

Direct or Indirect? Indirect Indirect Indirect Indirect Indirect Indirect Indirect

Cost driver Hours worked by project % of total revenues These would likely be amalgamated into an overhead charge out rate applied to each job in proportion to hours worked or % of total revenues

It is important to note that when providing services rather than manufacturing products, most costs will be indirect and management needs to give careful thought to what drives each type of cost. Understanding what drives costs is key to developing good cost estimates which often serve as the basis for pricing in such industries.

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Solutions to Questions 5-1 By definition, manufacturing overhead consists of product 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. 5-2 Job-order costing is used in situations where many different products or services that require separate costing are produced each period. Process costing is used in situations where a single, homogeneous product, such as cement, bricks, or gasoline, is produced for long periods. 5-3 The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials costs traced to the job, direct labour costs traced to the job, and manufacturing overhead costs applied to the job. When a job is completed, the job cost sheet is used to compute the unit product cost. 5-4 A predetermined overhead rate is the rate used to apply overhead to jobs. It is computed before a period begins by dividing the period’s estimated total manufacturing overhead by the period’s estimated total amount of the allocation base. Thereafter, overhead is applied to jobs by multiplying the predetermined overhead rate by the actual amount of the allocation base that is incurred for each job. The most common allocation base is direct labour-hours. 5-5 A sales order is issued after an agreement has been reached with a customer on quantities, prices, and shipment dates for © McGraw-Hill Education Ltd., 2018 2

goods. The sales order forms the basis for the production order. The production order specifies what is to be produced and forms the basis for the job cost sheet. The job cost sheet, in turn, is used to summarize the various production costs incurred to complete the job. These costs are entered on the job cost sheet from materials requisition forms, labour time tickets, and by applying overhead. 5-6 The measure of activity used as the allocation base should drive the overhead cost; that is, the allocation base should cause the overhead cost. If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and product costs will be distorted. 5-7 A cost driver is a factor that causes overhead costs. The measure of activity used as the allocation base should drive the overhead cost; that is, the base should cause the overhead cost. Cost drivers are used to allocate indirect costs to units of product in a job-order costing system. 5-8 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. 5-9 The Manufacturing Overhead account is credited when overhead cost is applied to Work in Process. Managerial Accounting, 11th Edition

Generally, the amount of overhead applied will not be the same as the amount of actual cost incurred, since the predetermined overhead rate is based on estimates. This is because the application of overhead involves estimates (of the costs and the base for allocation) and the actual may vary from the estimates. 5-10 Underapplied overhead occurs when the actual overhead cost exceeds the amount of overhead cost applied to Work in Process invento-ry during the period. Overapplied overhead occurs when the actual overhead cost is less than the amount of overhead cost applied to Work in Process inventory during the period. Underapplied overhead is disposed of by closing out the amount to Cost of Goods Sold. Overapplied overhead is disposed of by allocating the amount among Cost of Goods Sold and ending inventories in proportion to the applied overhead in each account. The adjustment for underapplied overhead increases Cost of Goods Sold whereas the adjustment for overapplied overhead decreases Cost of Goods Sold and inventories. 5-11 Manufacturing overhead may be underapplied for several reasons. For example, control over overhead spending may be poor and actual costs may exceed the estimates. Or, some of the overhead may be fixed and the actual amount of the allocation base was less than estimated at the beginning of the period. In this situation, the amount of overhead applied to inventory will be less than the actual overhead cost incurred. If productions is less than estimated this may also result in overhead being underapplied.

5-12 Underapplied overhead implies that not enough overhead was assigned to jobs during the period and therefore cost of goods sold was understated. Therefore, underapplied overhead is added to cost of goods sold. Likewise, overapplied overhead is deducted from cost of goods sold. 5-13 Yes, overhead should be applied to value the Work in Process inventory at year-end. Since $7,500 of overhead was applied to Job A on the basis of $15,000 of direct labour cost, the company’s predetermined overhead rate must be 50% of direct labour cost. Thus, $2,000 of overhead should be applied to Job B at yearend: $4,000 direct labour cost × 50% = $2,000 applied overhead cost. 5-14 Direct material................... $12,00 0 Direct labour..................... 16,000 Manufacturing overhead: $16,000 × 150%............ 24,00 0 Total manufacturing cost.... $52,00 0 Unit product cost: $52,000  750 units....... $69.33

5-15 A plantwide overhead rate is a single overhead rate used throughout all production departments in a plant. Some companies use multiple overhead rates rather than plantwide rates to more appropriately allocate overhead costs among products. © McGraw-Hill Education. 2018. All rights reserved.

Solutions Manual, Chapter 5

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Multiple overhead rates should be used, for example, in situations where one department is machine intensive and another department is labour intensive.

inventories then there would be a double charge made for the inventory variance, one for this period and one for last period.

5-16 When automated equipment replaces direct labour, overhead increases and direct labour decreases. This results in an increase in the predetermined overhead rate—particularly if it is based on direct labour. 5-17 Yes, predetermined overhead rates in general smooth product costs when costs change during a year or where production volume varies. The predetermined overhead rate is computed by using the yearly estimated total overhead divided by the estimated base for the year. This rate is used to calculate the product cost for each period. The product cost becomes an average cost rather than an actual cost which would include the fluctuations. 5-18 Since predetermined overhead is supposed to average out fluctuations during a year, it is logical that when actual overhead turns out to be less than estimated (i.e., overhead is overapplied), this amount should not all be charged to income this period since inventory will be undervalued on the balance sheet Those actual costs, if allocated to WIP and Finished Goods inventory, will then be charged against income with the related goods are sold which better satisfies the matching principle. 5-19 Opening inventories for work in process and finished goods contain overhead costs from previous periods. These amounts are contained in the cost of goods sold for the current period. If cost of goods sold for the current period was not reduced by the opening © McGraw-Hill Education Ltd., 2018 4

Managerial Accounting, 11th Edition

Foundational Ex Exercises ercises 1. The estimated total manufacturing overhead cost is computed as follows:

Estimated fixed manufacturing overhead...................

$10,000

Estimated variable manufacturing overhead: $1.00 per DLH × 2,000 DLHs.................................

2,000

Estimated total manufacturing overhead cost.............

$12,000

The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead (a)....

$12,000

Estimated total direct labor hours (DLHs) (b). .

2,000 DLHs

Predetermined overhead rate (a) ÷ (b)...........

$6.00 per DLH

2. The manufacturing overhead applied to Jobs P and Q is computed as follows:

Job P

Job Q

Actual direct labor hours worked (a)...............

1,400

500

Predetermined overhead rate per DLH (b).......

$6.00

$6.00

Manufacturing overhead applied (a) × (b).......

$8,400

$3,000

3. The direct labor hourly wage rate can be computed by focusing on either Job P or Job Q as follows:

Direct labor cost (a).......................................

Job P

Job Q

$21,000

$7,500

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Actual direct labor hours worked (b)...............

1,400

500

Direct labor hourly wage rate (a) ÷ (b)...........

$15.00

$15.00

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Managerial Accounting, 11th edition

Foundational Ex Exercises ercises -continu -continued ed 4. Job P’s unit product cost and Job Q’s assigned manufacturing costs are computed as follows: Total manufacturing cost assigned to Job P: Direct materials................................

$13,000

Direct labor......................................

21,000

Manufacturing overhead applied ($6 per DLH × 1,400 DLHs)............

8,400

Total manufacturing cost...................

$42,400

Unit product cost for Job P: Total manufacturing cost (a)..............

$42,400

Number of units in the job (b)...........

20

Unit product cost (a) ÷ (b)................

$2,120

Total manufacturing cost assigned to Job Q: Direct materials................................

$ 8,000

Direct labor......................................

7,500

Manufacturing overhead applied ($6 per DLH × 500 DLHs)...............

3,000

Total manufacturing cost...................

$18,500

5. The journal entries are recorded as follows: Raw Materials........................ 22,000 © McGraw-Hill Education Ltd., 2018. Solutions Manual, Chapter 5

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Accounts Payable..........

22,000

Work in Process..................... 21,000 Raw Materials...............

21,000

6. The journal entry is recorded as follows: Work in Process..................... 28,500 Wages Payable..............

28,500

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Managerial Accounting, 11th edition

Foundational Ex Exercises ercises -continu -continued ed 7. The journal entry is recorded as follows: Work in Process...................................... 11,400 Manufacturing Overhead.......................

11,400

8. The Schedule of Cost of Goods Manufactured is as follows: Direct materials: Raw materials inventory, beginning................ $

0

Add: Purchases of raw materials.................... 22,000 Total raw materials available.........................

22,000

Deduct: Raw materials inventory, ending.......

1,000

Raw materials used in production..................

$21,000

Direct labor......................................................

28,500

Manufacturing overhead applied to work in process inventory............................................

11,400

Total manufacturing costs..................................

60,900

Add: Beginning work in process inventory..........

0 60,900

Deduct: Ending work in process inventory..........

18,500

Cost of goods manufactured..............................

$42,400

9. The journal entry is recorded as follows: Finished Goods....................................... 42,400 Work in Process....................................

42,400

10. The completed T-account is as follows: © McGraw-Hill Education Ltd., 2018. Solutions Manual, Chapter 5

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Work in Process Beg. Bal.

(a) (b) (c) (d)

0

(a)

21,000

(b)

28,500

(c)

11,400 (d)

End. Bal.

18,500

42,400

Raw material used in production = $21,000 Direct labor cost = $28,500 Manufacturing overhead applied = $11,400 Cost of goods manufactured = $42,400

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Managerial Accounting, 11th edition

Foundational Ex Exercises ercises -continu -continued ed 11. The Schedule of Cost of Goods Sold is as follows: Finished goods inventory, beginning................... $ Add: Cost of goods manufactured......................

0 42,400

Cost of goods available for sale.......................... 42,400 Deduct: Finished goods inventory, ending...........

0

Unadjusted cost of goods sold........................... $42 ,400 12. The journal entry is recorded as follows: Cost of Goods Sold.................................. 42,400 Finished Goods.....................................

42,400

13. The amount of underapplied overhead is computed as follows: Actual direct labor-hours (a).......................

1,900

Predetermined overhead rate (b)................

$6.00

Manufacturing overhead applied (a) × (b)... $11,400 Actual manufacturing overhead................... $12,500 Deduct: Manufacturing overhead applied.....

11,400

Underapplied overhead.............................. $ 1,100 14. The journal entry is recorded as follows: Cost of Goods Sold.................................. 1,100 Manufacturing Overhead.......................

1,100

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Managerial Accounting, 11th edition

Exerc Exercise ise 5-1 (10 minutes) a.

Job-order costing

b.

Job-order costing

c.

Job-order costing

d.

Job-order costing

e.

Process costing

f.

Process costing

g.

Job-order costing

h.

Process costing

i.

Job-order costing

j.

Process costing

k.

Job-order costing

l.

Process costing

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Exerc Exercise ise 5-2 (10 minutes)

1. Total direct labor-hours required for Job A-200: Direct labor cost...............................

$120

÷ Direct labor wage rate per hour.....

$12

= Total direct labor hours..................

10

Total manufacturing cost assigned to Job A-200: Direct materials................................

$200

Direct labor......................................

120

Manufacturing overhead applied ($18 per DLH × 10 DLHs)...............

180

Total manufacturing cost...................

$500

2. Unit product cost for Job A-200: Total manufacturing cost..................

$500

÷ Number of units in the job............

50

= Unit product cost.........................

$10

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Managerial Accounting, 11th Canadian Edition

Exerc Exercise ise 5-3 (10 minutes) The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead........

$348,000

÷ Estimated total direct labour hours (DLHs).

20,000 MHs

= Predetermined overhead rate....................

$17.40 per MH

Actual Overhead

$336,400

Overhead Applied (19,500 x $17.40)

$339,300

Therefore, overhead is overapplied by $2,900

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Exerc Exercise ise 5-4 (15 minutes) a. Raw Materials........................

45,000

Accounts Payable..........

45,000

b. Work in Process.....................

70,000

Manufacturing Overhead........

55,000

Raw Materials...............

125,000

c. Work in Process.....................

183,00 0

Manufacturing Overhead........

29,000

Wages Payable..............

d .

Manufacturing Overhead........ Various Accounts...........

212,000

189,00 0 189,000

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Managerial Accounting, 11th Canadian Edition

Exerc Exercise ise 5-5 (10 minutes) 1. Actual direct labour-hours.........................

12,600

× Predetermined overhead rate................

$23.10

= Manufacturing overhead applied............ $291,060

Overhead is under applied by $4,940 ($291,060 applied versus $296,000 actual) 2. The journal entry to dispose of under applied overhead is recorded as follows: Cost of Goods Sold.................................. 4,940 Manufacturing Overhead.......................

4,940

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Exerc Exercise ise 5-6 (15 minutes) 1. Actual manufacturing overhead costs...............

$ 48,000

Manufacturing overhead applied: 10,0...