Solution manual Cost Accounting 14e by Horngren Chapter 04 PDF

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Summary

CHAPTER 4JOB COSTING4-1 Cost pool––a grouping of individual indirect cost items. Cost tracing––the assigning of direct costs to the chosen cost object. Cost allocation––the assigning of indirect costs to the chosen cost object. Cost-allocation base––a factor that links in a systematic way an indirec...

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CHAPTER 4 JOB COSTING 4-1

Cost pool––a grouping of individual indirect cost items. Cost tracing––the assigning of direct costs to the chosen cost object. Cost allocation––the assigning of indirect costs to the chosen cost object. Cost-allocation base––a factor that links in a systematic way an indirect cost or group of indirect costs to cost objects.

4-2 In a job-costing system, costs are assigned to a distinct unit, batch, or lot of a product or service. In a process-costing system, the cost of a product or service is obtained by using broad averages to assign costs to masses of identical or similar units. 4-3 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 be identified. In contrast, the processing of checking account withdrawals is similar for many customers. Here, process costing can be used to compute the cost of each checking account withdrawal. 4-4 The seven steps in job costing are: (1) identify the job that is the chosen cost object, (2) identify the direct costs of the job, (3) select the cost-allocation bases to use for allocating indirect costs to the job, (4) identify the indirect costs associated with each cost-allocation base, (5) compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job, (6) compute the indirect costs allocated to the job, and (7) compute the total cost of the job by adding all direct and indirect costs assigned to the job. 4-5 Major cost objects that managers focus on in companies using job costing are a product such as a specialized machine, a service such as a repair job, a project such as running the Expo, or a task such as an advertising campaign. 4-6 Three major source documents used in job-costing systems are (1) job cost record or job cost sheet, a document that records and accumulates all costs assigned to a specific job, starting when work begins (2) materials requisition record, a document that contains information about the cost of direct materials used on a specific job and in a specific department; and (3) labor-time sheet, a document that contains information about the amount of labor time used for a specific job in a specific department. 4-7 The main advantages of using computerized source documents for job cost records are the accuracy of the records and the ability to provide managers with instantaneous feedback to help control job costs. 4-8 a. b.

Two reasons for using an annual budget period are The numerator reason––the longer the time period, the less the influence of seasonal patterns in overhead costs, and The denominator reason––the longer the time period, the less the effect of variations in output levels or quantities of the cost-allocation bases on the allocation of fixed costs.

4-1

4-9 Actual costing and normal costing differ in their use of actual or budgeted indirect cost rates: Actual Normal Costing Costing Direct-cost rates Actual rates Actual rates Indirect-cost rates Actual rates Budgeted rates Each costing method uses the actual quantity of the direct-cost input and the actual quantity of the cost-allocation base. 4-10 A house construction 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. 4-11 The statement is false. In a normal costing system, the Manufacturing Overhead Control account will not, in general, equal the amounts in the Manufacturing Overhead Allocated account. The Manufacturing Overhead Control account aggregates the actual overhead costs incurred while Manufacturing Overhead Allocated allocates overhead costs to jobs on the basis of a budgeted rate times the actual quantity of the cost-allocation base. Underallocation or overallocation of indirect (overhead) costs can arise because of (a) the Numerator reason––the actual overhead costs differ from the budgeted overhead costs, and (b) the Denominator reason––the actual quantity used of the allocation base differs from the budgeted quantity. 4-12 Debit entries to Work-in-Process Control represent increases in work in process. Examples of debit entries under normal costing are (a) direct materials used (credit to Materials Control), (b) direct manufacturing labor billed to job (credit to Wages Payable Control), and (c) manufacturing overhead allocated to job (credit to Manufacturing Overhead Allocated). 4-13 Alternative ways to make end-of-period adjustments to dispose of underallocated or overallocated overhead are as follows: (i) Proration based on the total amount of indirect costs allocated (before proration) in the ending balances of work in process, finished goods, and cost of goods sold. (ii) Proration based on total ending balances (before proration) in work in process, finished goods, and cost of goods sold. (iii) Year-end write-off to Cost of Goods Sold. (iv) The adjusted allocation rate approach that restates all overhead entries using actual indirect cost rates rather than budgeted indirect cost rates. 4-14 A company might use budgeted costs rather than actual costs to compute direct labor rates because it may be difficult to trace direct labor costs to jobs as they are completed (for example, because bonuses are only known at the end of the year). 4-15 Modern technology of electronic data interchange (EDI) is helpful to managers because it ensures that a purchase order is transmitted quickly and accurately to suppliers with minimum paperwork and costs.

4-2

4-16 a. b. c. d. e. f. g. h. i. j. k.

(10 min) Job order costing, process costing.

Job costing Process costing Job costing Process costing Job costing Process costing Job costing Job costing (but some process costing) Process costing Process costing Job costing

l. m. n. o. p. q. r. s. t. u.

4-3

Job costing Process costing Job costing Job costing Job costing Job costing Process costing Job costing Process costing Job costing

4-17

1.

(20 min.) Actual costing, normal costing, accounting for manufacturing overhead.

Budgeted manufacturing overhead rate

Actual manufactur ing overhead rate

=

Budgeted manufactur ing overhead costs Budgeted direct manufactur ing labor costs

=

$2,700,000 = 1.80 or 180% $1,500,000

=

Actual manufactur ing overhead costs Actual direct manufactur ing labor costs

$2,755,000 = 1.9 or 190% $1, 450, 000 Costs of Job 626 under actual and normal costing follow:

=

2.

Actual Costing Direct materials Direct manufacturing labor costs Manufacturing overhead costs $30,000 1.90; $30,000 1.80 Total manufacturing costs of Job 626 3.

Total manufacturing overhead allocated under normal costing =

$ 40,000 30,000

$ 40,000 30,000

57,000 $127,000

54,000 $124,000

Actual manufacturing labor costs

= $1,450,000

Normal Costing

Budgeted overhead rate

1.80

= $2,610,000 Underallocated manufacturing = overhead

Actual manufacturing – Manufacturing overhead costs overhead allocated

= $2,755,000

$2,610,000 = $145,000

There is no under- or overallocated overhead under actual costing because overhead is allocated under actual costing by multiplying actual manufacturing labor costs and the actual manufacturing overhead rate. This, of course equals the actual manufacturing overhead costs. All actual overhead costs are allocated to products. Hence, there is no under- or overallocated overhead.

4-4

4-18 1.

(20 -30 min.) Job costing, normal and actual costing. Budgeted indirectcost rate

=

Budgeted indirect costs (assembly support) $8,300,000 = Budgeted direct labor-hours 166,000 hours

= $50 per direct labor-hour Actual indirectcost rate

=

$6,520,000 Actual indirect costs (assembly support) = 163,000 hours Actual direct labor-hours

= $40 per direct labor-hour These rates differ because both the numerator and the denominator in the two calculations are different—one based on budgeted numbers and the other based on actual numbers. Laguna Model

2a. Normal costing Direct costs Direct materials Direct labor Indirect costs Assembly support ($50 Total costs 2b. Actual costing Direct costs Direct materials Direct labor Indirect costs Assembly support ($40 Total costs

960; $50

960; $40

1,050)

1,050)

Mission Model

$106,760 36,950 143,710

$127,550 41,320 168,870

48,000 $191,710

52,500 $221,370

$106,760 36,950 143,710

$127,550 41,320 168,870

38,400 $182,110

42,000 $210,870

3. Normal costing enables Amesbury to report a job cost as soon as the job is completed, assuming that both the direct materials and direct labor costs are known at the time of use. Once the 960 direct labor-hours are known for the Laguna Model (June 2011), Amesbury can compute the $191,710 cost figure using normal costing. Amesbury can use this information to manage the costs of the Laguna Model job as well as to bid on similar jobs later in the year. In contrast, Amesbury has to wait until the December 2011 year-end to compute the $182,110 cost of the Laguna Model using actual costing. Although not required, the following overview diagram summarizes Amesbury Construction’s job-costing system.

4-5

INDIRECT COST POOL

Assembly Support

COST ALLOCATION BASE

Direct Labor-Hours

COST OBJECT: RESIDENTIAL HOME

Indirect Costs Direct Costs

DIRECT COSTS

Direct Materials

4-6

Direct Manufacturing Labor

4-19

(10 min.) Budgeted manufacturing overhead rate, allocated manufacturing overhead.

1.

Budgeted manufacturing overhead rate =

= 2.

Manufacturing overhead allocated

=

Budgeted manufacturing overhead Budgeted machine hours $4, 200, 000 = $24 per machine-hour 175, 000 machine-hours

Actual machine-hours

Budgeted manufacturing overhead rate

= 170,000 × $24 = $4,080,000 3. Since manufacturing overhead allocated is greater than the actual manufacturing overhead costs, Gammaro overallocated manufacturing overhead: Manufacturing overhead allocated Actual manufacturing overhead costs Overallocated manufacturing overhead

4-7

$4,080,000 4,050,000 $ 30,000

4-20

(20-30 min.) Job costing, accounting for manufacturing overhead, budgeted rates.

1.

An overview of the product costing system is INDIRECT COST POOL

COST ALLOCATION BASE

Machining Department Manufacturing Overhead

Assembly Department Manufacturing Overhead

Machine-Hours

Indirect Costs

COST OBJECT PRODUCT

DIRECT COST

Direct Manuf. Labor Cost

Direct Costs

Direct Manufacturing Labor

Direct Materials

Budgeted manufacturing overhead divided by allocation base: $1,800 ,000 = $36 per machine-hour 50,000 $3,600 ,000 = 180% of direct manuf. labor costs Assembly overhead: $2,000 ,000

Machining overhead:

2.

Machining department, 2,000 hours $36 Assembly department, 180% $15,000 Total manufacturing overhead allocated to Job 494

$72,000 27,000 $99,000

Machining Assembly $2,100,000 $ 3,700,000

3. Actual manufacturing overhead Manufacturing overhead allocated, $36 55,000 machine-hours 180% $2,200,000 Underallocated (Overallocated)

1,980,000 — $ 120,000

4-8

— 3,960,000 $ (260,000)

4-21

(20 25 min.) Job costing, consulting firm.

1.

Budgeted indirect-cost rate for client support can be calculated as follows: Budgeted indirect-cost rate = $13,600,000 ÷ $5,312,500 = 256% of professional labor costs

INDIRECT COST POOL

Client Support

COST ALLOCATION BASE

Professional Labor Costs

COST OBJECT: JOB FOR CONSULTING CLIENT

Indirect Costs Direct Costs

DIRECT COSTS

2.

Professional Labor

At the budgeted revenues of $21,250,000 Taylor’s operating income of $2,337,500 equals 11% of revenues. Markup rate = $21,250,000 ÷ $5,312,500 = 400% of direct professional labor costs

4-9

3.

Budgeted costs Direct costs: Director, $198 4 $ 792 Partner, $101 17 1,717 Associate, $49 42 2,058 Assistant, $36 153 5,508 Indirect costs: Consulting support, 256% $10,075 Total costs

$10,075 25,792 $35,867

As calculated in requirement 2, the bid price to earn an 11% income-to-revenue margin is 400% of direct professional costs. Therefore, Taylor should bid 4 $10,075 = $40,300 for the Red Rooster job. Bid price to earn target operating income-to-revenue margin of 11% can also be calculated as follows: Let R = revenue to earn target income R – 0.11R = $35,867 0.89R = $35,867 R = $35,867 ÷ 0.89 = $40,300 Or Direct costs Indirect costs Operating income (0.11 Bid price

$40,300)

4-10

$10,075 25,792 4,433 $40,300

4-22

(15–20 min.) Time period used to compute indirect cost rates.

1. (1) (2) (3) (4)

Pools sold Direct manufacturing labor hours (0.5 Row 1) Fixed manufacturing overhead costs Budgeted fixed manufacturing overhead rate per direct manufacturing labor hour ($10,500 Row 2)

Quarter 3 150

1 700

2 500

350

250

$10,500

$10,500

$30

$42

Direct material costs ($7.50 500 pools; 150 pools) Direct manufacturing labor costs ($16 250 hours; 75 hours) Variable manufacturing overhead costs ($12 250 hours; 75 hours) Fixed manufacturing overhead costs ($42 250 hours; $140 × 75 hours) Total manufacturing costs Divided by pools manufactured each quarter Manufacturing cost per pool

75 $10,500

$140

4 150

Annual 1,500

75

750

$10,500

$140

$56

Budgeted Costs Based on Quarterly Manufacturing Overhead Rate 2nd Quarter 3rd Quarter $ 3,750 $ 1,125 4,000 3,000 10,500 $21,250 ÷ 500 $ 42.50

1,200 900 10,500 $13,725 ÷ 150 $ 91.50

2.

Direct material costs ($7.50 500 pools; 150 pools) Direct manufacturing labor costs ($16 250 hours; 75 hours) Variable manufacturing overhead costs ($12 250 hours; 75 hours) Fixed manufacturing overhead costs ($56 250 hours; 75 hours) Total manufacturing costs Divided by pools manufactured each quarter Manufacturing cost per pool

4-11

Budgeted Costs Based on Annual Manufacturing Overhead Rate 2nd Quarter 3rd Quarter $ 3,750 $1,125 4,000 3,000 14,000 $24,750 500 $ 49.50

$42,000

1,200 900 4,200 $7,425 150 $49.50

3. Prices based on quarterly budgeted manufacturing overhead rates calculated in requirement 1 ($42.50 130%; $91.50 130%) Price based on annual budgeted manufacturing overhead rates calculated in requirement 2 ($49.50 130%; $49.50 130%)

2nd Quarter

3rd Quarter

$55.25

$118.95

$64.35

$64.35

Splash should use the budgeted annual manufacturing overhead rate because capacity decisions are based on longer annual periods rather than quarterly periods. Prices should not vary based on quarterly fluctuations in production. Splash could vary prices based on market conditions and demand for its pools. In this case, Splash would charge higher prices in quarter 2 when demand for its pools is high. Pricing based on quarterly budgets would cause Splash to do the opposite— to decrease rather than increase prices!

4-12

4-23 1.

(10–15 min.) Accounting for manufacturing overhead. Budgeted manufacturing overhead rate =

$7,500,000 250,000 machine-hours

= $30 per machine-hour 2.

Work-in-Process Control Manufacturing Overhead Allocated (245,000 machine-hours $30 per machine-hour = $7,350,000)

7,350,000 7,350,000

3. $7,350,000– $7,300,000 = $50,000 overallocated, an insignificant amount of actual manufacturing overhead costs $50,000 ÷ $7,300,000 = 0.68%. Manufacturing Overhead Allocated Manufacturing Department Overhead Control Cost of Goods Sold

4-13

7,350,000 7,300,000 50,000

4-24

(35 45 min.) Job costing, journal entries.

Some instructors may also want to assign Exercise 4-25. It demonstrates the relationships of the general ledger to the underlying subsidiary ledgers and source documents. 1.

An overview of the product costing system is:

INDIRECT COST POOL

COST ALLOCATION BASE

Manufacturing Overhead

Direct Manufacturing Labor Costs

Indirect Costs

COST OBJECT: PRINT JOB

DIRECT COST

Direct Costs

Direct Materials

4-14

Direct Manuf. Labor

2. & 3. This answer assumes COGS given of $4,020 does not include the writeoff of overallocated manufacturing overhead. 2.

(1) (2) (3) (4) (5) (6) (7)

(8) (9) (10) (11)

Materials Control Accounts Payable Control Work-in-Process Control Materials Control Manufacturing Overhead Control Materials Control Work-in-Process Control Manufacturing Overhead Control Wages Payable Control Manufacturing Overhead Control Accumulated Depreciation––buildings and manufacturing equipment Manufacturing Overhead Control Miscellaneous accounts Work-in-Process Control Manufacturing Overhead Allocated (1.60 $1,300 = $2,080) Finished Goods Control Work-in-Process Control Accounts Receivable Control (or Cash) Revenues Cost of Goods Sold Finished Goods Control Manufacturing Overhead Allocated Manufacturing Overhead Control Cost of Goods Sold

4-15

800 800 710 710 100 100 1,300 900 2,200 400 400 550 550 2,080 2,080 4,120 4,120 8,000 8,000 4,020 4,020 2,080 1,950 130

3. Bal. 1/1/2011 (1) Accounts Payable Control (Purchases) Bal. 12/31/2011

Bal. 1/1/2011 (2) Materials Control (Direct materials) (4) Wages Payable Control (Direct manuf. labor) (7) Manuf. Overhead Allocated Bal. 12/31/2011

Bal. 1/1/2011 (8) WIP Control (Goods completed) Bal. 12/31/2011

(10) Finished Goods Control (Goods sold) Bal. 12/31/2011

Materials Control 100 (2) Work-in-Process Control (Materials used) 800 (3) Manufacturing Overhead Control (Materials used) 90 Work-in-Process Control 60 (8) Finished Goods Control (Goods completed) 710

100

4,120

1,300 2,080 30 Finished Goods Control 500 (10) Cost of Goods Sold

4,020

4,120 600 Cost of Goods Sold (11) Manufacturing Overhead 4,020 Allocated (Adjust for overallocation) 3,890

Manufacturing Overhead Control (3) Materials Control (11) To close (Indirect materials) 100 (4) Wages Payable Control (Indirect manuf. labor) 900 (5) Accum. Deprn. Control (Depreciation) 400 (6) Accounts Payable Control (Miscellaneous) 550 Bal. 0

(11) To close

710

Manufacturing Overhead Allocated 2,080 (7) Work-in-Process Control (Manuf. overhead allocated) Bal.

4-16