Chapter 3 Job Costing

Chapter 3

Job Costing

Quick Check Questions

Answers:

QC3-1. c QC3-3. c QC3-5. d QC3-7. b QC3-9. d

QC3-2. b QC3-4. b QC3-6. d QC3-8. a QC3-10. b

Short Exercises

(5 min.) S3-1

a. An automobile repair shop would use job costing.

b. A chemical manufacturer would use process costing.
c. A custom furniture builder would use job costing.
d. A movie production studio would use job costing.
e. A paint manufacturer would use process costing.

(5 min.) S3-2

Action Raw Materials Work in Process Finished

Inventory Inventory Goods
Inventory
a. Lumber is delivered by the supplier to the plant, Increase
where it is stored in a materials storeroom until
needed.
b. Lumber is requisitioned from the storeroom to be Decrease Increase
used for tops and seats for the tables.
c. Factory workers cut the lumber for the tables. Increase
d. Ten tables are completed and moved to the Decrease Increase
inventory storage area to await sale.
e. A customer purchases a table and takes it home. Decrease

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 Managerial Accounting 4e Solutions Manual

(10 min.) S3-3

Statement Term
1. e. Raw materials record; h. Materials requisition
2. d. Purchase orders
3. g. Receiving report
4. a. Bill of materials
5. b. Job cost record
6. f. Labor time record
7. i. Invoice
8. e. Raw materials record

(10 min.) S3-4

Req. 1
Hourly direct labor cost rate $60,000 per year
=
2,000 hours per year

= $30 per hour

Req. 2
Professional labor cost per hour $30.00
Plus: Indirect cost allocation rate per hour 25.00
Total hourly cost $55.00
Plus profit markup: (30% x $55 hourly 16.50
Hourly billing rate for Amy Jentes $71.50

(5 min.) S3-5
Req. 1
Predetermined manufacturing overhead $830,000
=
16,600 machine hours

= $50 per machine hour

Req. 2
Predetermined manufacturing overhead $830,000
=
$250,000 direct labor cost

= 332% of direct labor cost

Req. 3
Predetermined manufacturing overhead $830,000
=
80,000 direct labor hours

= $10.375 per direct labor hour

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 Chapter 3 Job Costing

(5-10 min.) S3-6

Note: The predetermined manufacturing overhead rates shown below are from the solutions to S3-5.

Req. 1
Total manufacturing = Actual use of cost allocation base × Predetermined manufacturing overhead
overhead allocated rate
= 16,000 hours × $50 per direct labor hour

= $800,000

Req. 2
Total manufacturing = Actual use of cost allocation base × Predetermined manufacturing overhead
overhead allocated rate
= $260,000 × 332%

= $863,200

Req. 3
Total manufacturing = Actual use of cost allocation base × Predetermined manufacturing overhead
overhead allocated rate
= 81,000 machine hours × $10.375 per machine hour

= $840,375

(5-10 min.) S3-7

Note: The allocated manufacturing overhead amounts shown below were from the solutions to S3-6

Req. 1
Manufacturing Overhead
(Actual) (Allocated)
840,000 800,000
40,000

Manufacturing overhead is underallocated by $40,000.

Req. 2
Manufacturing Overhead
(Actual) (Allocated)
840,000 863,200
23,200

Manufacturing overhead is overallocated by $23,200.

Req. 3
Manufacturing Overhead

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(Actual) (Allocated)
840,000 840,375
375

Manufacturing overhead is overallocated by $375.

Req. 4
In Royal Selangor’s particular case, using direct labor hours as an allocation was the best option, causing jobs to be
slightly overcosted by $375 only in the year. Using direct labor cost as an allocation base resulted in overcosting the
jobs by $23,200. Using machine hours led to the least accurate allocation with undercosting by $40,000.

(5-10 min.) S3-8

Req. 1
Predetermined manufacturing $1,890,000
=
overhead rate $2,160,000 of direct labor cost

= 87.50% of direct labor cost

Req. 2
Total manufacturing overhead allocated Actual use of cost allocation base × Predetermined
= manufacturing overhead rate

= $2,300,000 × 87.50%

= $2,012,500

Req. 3
Manufacturing Overhead
(Actual) (Allocated)
1,760,000 2,012,500
252,500

Manufacturing overhead is overallocated by $252,500.

(5 min.) S3-9

Req. 1
Direct materials $40
Labor (2 hours × $29) 58
Shop overhead (2 hours × $22) 44
Cost to J&B Appliance $142

Req. 2
Direct materials $40
Labor (2 hours × $76) 152
Price to charge customer $192

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 Chapter 3 Job Costing

(5-10 min.) S3-10

1. Managers use a predetermined manufacturing overhead rate so that they can get timely information on the
cost of producing various jobs. Managers could only use an actual rate if they waited until the end of the year
to obtain the actual total manufacturing overhead costs incurred, and the actual total quantity of the
allocation base. Managers are willing to sacrifice some accuracy for the sake of timeliness.

2. Each situation has its drawbacks. An undercosted job could lead to actual losses or lower profits than
expected. An overcosted job could lead to higher pricing and becoming less competitive.

Student answers may vary.

(5-10 min.) S3-11

Journal Entry
POST.
DATE ACCOUNTS DEBIT CREDIT
REF.
Raw Materials Inventory 68,100
Accounts Payable 68,100
To record purchase of materials.

Work in Process Inventorya 63,000

Manufacturing Overheadb 500
Raw Materials Inventory 63,500
To record use of materials.
a.
for direct materials used on jobs.
b.
for indirect materials used in factory

Raw Materials Inventory

Bal. 38,000 63,500 Used
Purchased 68,100
Bal. 42,600

(5 min.) S3-12

Journal
POST.
DATE ACCOUNTS DEBIT CREDIT
REF.
Work in Process Inventory 218,000
Manufacturing Overhead 150,000
Cash 368,000
To record salaries and wages paid.

Direct labor = $120,000 + $98,000 = $218,000

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(5 min.) S3-13

Req. 1
Hourly direct labor cost rate $192,000 per year
=
2,400 hours per year

= $80 per hour

Req. 2
Client 367: 15 hours × $80 / hour = $1,200

Req. 3
Indirect cost $840,000
=
allocation rate 28,000 direct labor hours

= $30.00 per direct labor hour

Req. 4
Client 367: 15 hours × $30.00 per direct labor hour = $450

Req. 5
Direct labor……………………. $ 1,200
Indirect cost…………………… 450
Total job cost................... $1,650

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(5 min.) S3-14

Anita does not disclose to her employer, Collins

Company, that her brother is the owner of a Integrity - Mitigate actual conflicts of
company that is bidding on a major contract with interest, regularly communicate with
Collins Company. Anita is on the committee that business associates to avoid apparent
evaluates the bids and makes a recommendation conflicts of interest. Advise all parties of
1. about which bid to select. any potential conflicts.
Damon is asked to do an inventory count of a wide
assortment of parts. Damon does not know how Competence - Recognize and communicate
to distinguish the various parts. He guesses when professional limitations or other constraints
he enters the quantity. He does not ask for help that would preclude responsible judgment
2. because he does not want to look stupid. or successful performance of an activity.
Gabriel added in sales commissions to product Competence - Perform professional duties
cost on the financial statements because it in accordance with relevant laws,
3. seemed reasonable to include those costs. regulations, and technical standards.
At a neighborhood party, Jodi talks about the
upcoming bid her company is making for a county Confidentiality - Keep information
project. She shares specific cost estimates that are confidential except when disclosure is
4. included in the bid. authorized or legally required.

Jose changed the way that manufacturing

overhead is allocated to divisions on the monthly Credibility - Disclose all relevant
internal reports to better reflect resource usage. information that could reasonably be
However, he did not note the change on any of expected to influence an intended user's
the reports nor did he inform any managers of the understanding of the reports, analyses, or
5. change. recommendations.

(5-10 min.) S3-15

a. Process costing is used by companies that produce large numbers of identical units through a series of uniform
production steps or processes.

b. The job cost record is used to track and accumulate all of the costs for an individual job.

c. General Mills produces Cheerios cereal; it would use a process costing system to determine product cost.

d. Job costing is used by companies that produce unique services and products.

e. Raw materials are stored in a storeroom until a(n) materials requisition is received requesting the transfer of
the material to the production area.

f. Cost tracing is the assignment of direct costs to specific jobs.

g. Indirect costs cannot be traced to specific products, so they are divided up using a process called cost
allocation.

h. An aircraft carrier builder would use a job costing system to determine product cost.

i. A cost driver is any activity that causes a cost to be incurred.

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Exercises (Group A)

(10 min.) E3-16A

a. Aircraft builder – Job costing

b. Hospital – Job costing
c. Cement plant – Process costing
d. Dentist – Job costing
e. Advertising agency – Job costing
f. Custom-home builder – Job costing
g. Oil refinery – Process costing
h. House painter – Job costing
i. Manufacturer of computer chips – Process costing
j. Yacht builder – Job costing
k. Cereal manufacturer – Process costing
l. Landscaper – Job costing
m. Pet food processor – Process costing
n. Wallpaper installation service – Job costing

(10 min.) E3-17A

Materials Requisition
Number: #1250
Date: 9/14
Job: 1102
Part number Description Quantity Unit Cost Amount
WOCD06 Rough-hewn cedar planks 42 $3.00 $126
SSF0304 Stainless steel fasteners 78 $1.00 78
AS222 Reinforced aluminum screens 22 $2.50 55
Total $259

Labor Time Record

Employee: Greg Henderson Week: 9/14 – 9/20
Hourly wage rate: $11 Record #: 912
Date Job number Start Time End Time Hours Cost
9/14 1102 9:00 2:00 5 $ 55
9/14 1103 2:00 5:00 3 $ 33
9/15 etc.

Labor Time Record

Employee: Andrew Peck Week: 9/14 – 9/20
Hourly wage rate: $7 Record #: 913
Date Job number Start Time End Time Hours Cost
9/14 1101 8:00 12:00 4 $ 28
9/14 1102 12:00 4:00 4 $ 28
9/15 1103 8:00 10:00 2 $ 14
9/15 etc.

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Job Cost Record

Job Number: 1102
Customer: Wild Birds, Inc.
Job description: 30 Model 3F (platform bird feeders)
Date Started: Sep. 14 Date Completed: ________

Manufacturing Cost Information: Cost Summary

Direct Materials $259
Req. #1250:
Direct Labor $ 83
No. #912 (5 hours): $ 55
No. #913 (4 hours): $ 28
Manufacturing Overhead $ 18
9 hours x $2 per direct labor hour
Total Job Cost $360
Number of units ÷ 30
Cost per Unit $ 12.00

(10 min.) E3-18A

Req. 1
Calculate the predetermined overhead rate:
Predetermined $67,200
=
overhead rate 4,200 direct labor hours

= $16 per direct labor hour

Req. 2
Allocate overhead using the predetermined overhead rate:

Job 101: 180 direct labor hours × $16 per direct labor hour = $2,880
Job 102: 74 direct labor hours × $16 per direct labor hour = $1,184

Req. 3
Next, calculate the total job cost for each job:

Job #101 Job #102

Direct materials $18,000 $12,000
Direct labor
(180 direct labor hours × $24 per direct labor hour) 4,320
(74 direct labor hours × $24 per direct labor hour) 1,776
Overhead
(calculated in Req. 2) 2,880 1,184
Total job cost $25,200 $14,960

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(10 min.) E3-19A

Req. 1
Calculate the predetermined overhead rate:
Predetermined $356,400
=
overhead rate $648,000 direct labor cost*

= 55% of direct labor cost

*27,000 direct labor hours × $24 per direct labor hour = $648,000

Req. 2
First, calculate direct labor cost for Job 371:
125 direct labor hours × $24 per direct labor hour= $3,000

Next, allocate overhead using the predetermined overhead rate:

$3,000 × 55% = $1,650

Req. 3
Next, calculate the total job cost for each job:

Job #371
Direct materials $16,000
Direct labor
(125 direct labor hours × $24 per direct labor hour) 3,000
Overhead
(calculated in Req. 2) 1,650
Total cost of Job #371 $20,650

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 Chapter 3 Job Costing

(5-10 min.) E3-20A

Req. 1
First, calculate the predetermined overhead rate:
Predetermined manufacturing $320,000
=
overhead rate 20,000 machine hours

= $16 per machine hour

Next, tabulate the total job cost:

Job #102
Direct materials $9,500
Direct labor 800
(80 direct labor hours × $10 per direct labor hour)
Manufacturing overhead
(100 machine hours × $16 per machine hour) 1,600
Total job cost $11,900

Req. 2
Job #102
Total manufacturing cost of Job #102 $11,900
Production unit 1000 units
Manufacturing cost per unit $1.19
30% Mark-up on manufacturing cost × 1.30%
Selling price per unit $1.547

(10 min.) E3-21A

Req. 1
Virgin materials 120 $ 3.70 $ 444.00
Recycled-content materials 280 $ 2.60 $ 728.00
Direct labor 16 $12.00 $ 192.00
Manufacturing overhead (based on DLH) 16 $6.00 $ 96.00
Total job cost $1,460.00

Req. 2
Virgin materials 120
Recycled-content materials 280 70% (= 280 / 400)
Total pounds 400

Ludlow Plastics meets the 60% recycled-content requirement.

(15 min.) E3-22A

Req. 1
Job Cost Record for Job B2
Direct materials $90,000

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Direct labor (200 direct labor hours x $8 per hour) 1,600
Manufacturing overhead (1.600 x 150%): 2,400
Total job cost 94,000
Units of goods completed 235
Cost per unit 400
40% Markup X 1.40%
Selling price 560

Req. 2
Direct labor cost (50 hours x $8 per hour) $400
Manufactured overhead cost ($400 x 150%) $600
Work in process inventory ($80,000 + $400 + $600) $81,000

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 Chapter 3 Job Costing

(10 min.) E3-23A

Req. 1
First, calculate the predetermined overhead rate:
Predetermined manufacturing $369,260
=
overhead rate 9,980 direct labor hours

= $37 per direct labor hour

Next, tabulate the total job cost:

Direct materials $ 25,300
Direct labor 20,400
(1,700 direct labor hours × $12 per direct labor hour)
Manufacturing overhead
(1,700 direct labor hours × $37 per direct labor hour) 62,900
Total job cost $108,600

Then, compute bid price:

Total manufacturing cost of job $108,600
31% Markup on manufacturing cost × 131%
Bid price $142,266

– or, alternatively:
–
Total manufacturing cost of job $108,600
Add 31% mark-up on manufacturing cost
(31% × $108,600) + 33,666
Bid price $142,266

Req. 2
First, calculate the predetermined overhead rate:
Predetermined manufacturing $369,260
=
overhead rate 18,463 machine hours

= $20 per machine hour

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(continued) E3-23A

Next, tabulate the total job cost:

Direct materials $25,300
Direct labor 20,400
(1,700 direct labor hours × $12 per direct labor hour)
Manufacturing overhead
(1,980 machine hours × $20 per machine hour) 39,600
Total job cost $85,300

Then, compute bid price:

Total manufacturing cost of job $ 85,300
31% Markup on manufacturing cost × 131%
Bid price $111,743

– or, alternatively:
Total manufacturing cost of job $ 85,300
Add 31% Markup on manufacturing cost
(31% × $85,300) + 26,443
Bid price $111,743

Req. 3
Whether or not Rosa wins the bid will depend on the allocation base the company chose to use during the year. Rosa’s
bid price will be $142,266 if the company uses direct labor hours as the allocation base. In this case, the company will
probably lose the job to Mauzy Recycling, since their bid was only $125,000. However, Rosa will probably win the bid if
machine hours are used as the allocation base. Using machine hours as an allocation base results in a bid price of
$111,743.
Note: Student answers may vary.

(15-20 min.) E3-24A

Predetermined overhead rate = 5,252,000/520,000 = $10.10/ Direct labor hour

Quarter Actual manufacturing Manufacturing Overhead Overallocated or

overhead incurred ($) allocated ($) (underallocated)
overhead ($)
First 1,313,000 1,212,000 (101,000)
Second 1,313,000 1,262,500 (50,500)
Third 1,313,000 1,464,500 151,500
Fourth 1,313,000 1,313,000 0
Total 5,252,000 5,252,000 0

(10-15 min.) E3-25A

Req. 1
Journal Entry
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Manufacturing Overhead $430,000
Accumulated Depreciation — plant and equipment 400,000
Property Tax Payable 20,500
Wages Payable 9,500

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 Chapter 3 Job Costing

Req. 2
Note: Predetermined overhead rate $8 $620,000
=
per MH 77,500 machine hours

Journal Entry
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Work in Process Inventory 432,000
Manufacturing Overhead (54,000 x $8 per MH) 432,000

Req. 3
Manufacturing Overhead
430,000 432,000 Allocated

$ 2,000 Overallocated

After correcting the error, Manufacturing Overhead is overallocated by $2,000.

Req. 4

Journal Entry
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Manufacturing Overhead 2,000
Cost of Goods Sold 2,000

Req. 5

Unadjusted cost of goods sold……………….... $580,000

Less: overallocated manufacturing overhead... (2,000)
Adjusted cost of goods sold……………………. $578,000

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(10 min.) E3-26A

Req. 1
Journal
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
a. Raw Materials Inventory 195,000
Accounts Payable 195,000

b. Work in Process Inventory 167,000

Manufacturing Overhead 27,000
Raw Materials Inventory 194,000

c. Work in Process Inventory 215,000

Manufacturing Overhead 45,000
Wages Payable 260,000

d. Manufacturing Overhead 26,000

Accum. Depreciation 17,000
Utilities Payable (or A/P) 9,000

e. Work in Process Inventory 87,000

Manufacturing Overhead 87,000

f. Website Expense 3,000

Accounts Payable 3,000

Req. 2
During January, actual manufacturing overhead costs totaled $98,000 ($27,000 + $45,000 + $26,000). By the end of
January, a total of $87,000 had been allocated to jobs. Therefore, manufacturing overhead had been underallocated by
$11,000.

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 Chapter 3 Job Costing

(10 min.) E3-27A

1. Direct materials used………………… $ 30,000

2. Indirect materials used……………… $ 3,500

3. Direct labor……………………………… $ 64,500

4. Indirect labor……………………………. $ 13,500

5. Cost of goods manufactured………… $ 125,500

6. Cost of goods sold…………………… $ 114,000

7. Actual manufacturing overhead $ 59,000

8. Allocated manufacturing overhead…. $ 42,000

9. Predetermined manufacturing
overhead rate, as a % of direct
labor cost; $42,000 /$ 64,500............ 65%

10. Manufacturing overhead is

($59,000 actual − $42,000 allocated) = $ 17,000 Underallocated

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Managerial Accounting 4e Solutions Manual

(15-20 min.) E3-28A

Req. 1
a. Direct labor cost rate:
Direct labor costs $2,150,000
=
Direct labor hours 14,000 hours

= $154 / hour (rounded)

b. Indirect cost allocation rate:

Indirect costs:
Office rent....………………. $ 220,000
Support staff salaries.…… 910,000
Utilities..............…………… 290,000
Total indirect costs..…….. $1,420,000

Predetermined indirect cost allocation rate:

Total estimated indirect costs $1,420,000
=
Total estimated direct labor costs $2,150,000

66% of direct
=
labor costs (rounded)

Req. 2
Predicted cost of Jamba Resources job:
Direct labor: 180 hours × $154 / hour…. $27,720
Indirect costs: $27,720 × 0.66........……. 18,295
Total predicted cost……………………… $46,015

Req. 3
Predicted cost (from Req. 2)......……….. $46,015
Desired profit ($46,015 x .40)…………………........……… 18,406
Required service revenue.........………… $64,421

The bid price should be $64,421 to earn a profit of 40% of predicted cost.

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 Chapter 3 Job Costing

(10 min.) E3-29A

Req. 1
Journal
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
a. Raw Materials Inventory 205,000
Accounts Payable 205,000

b. Work in Process Inventory 146,000

Manufacturing Overhead 28,000
Raw Materials Inventory 174,000

c. Work in Process Inventory 200,000

Manufacturing Overhead 10,000
Wages Payable 210,000

d. Manufacturing Overhead 30,000

Accum. Depreciation 16,000
Utilities Payable (or A/P) 14,000

e. Work in Process Inventory 56,000

Manufacturing Overhead 56,000

Req. 2
During January, actual manufacturing overhead costs totaled $68,000, while only $56,000 had been allocated to jobs.
Therefore, by the end of January, manufacturing overhead had been underallocated by $12,000.

Note: T-account not required.

Manufacturing Overhead
(Actual) (Allocated)
(2) 28,000
(3) 10,000
(4) 30,000
(5) 56,000
12,000

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Exercises (Group B)

(10 min.) E3-30B

Job Order Process

a. Small electric fans √
b. Custom made furniture √
c. Hubcap manufacturer √
d. Advertising company √
e. Pencils √
f. Paint √
g. Textbook publishing √
h. Mineral water bottle √
i. Catering service √
j. Audit firm √
k. Chemicals √
l. Wedding planner √
m. Toyota car √
n. Basketballs √

(10 min.) E3-31B

Materials Requisition
Number: 1250
Date: 9/14
Job: 1102
Part number Description Quantity Unit Cost Amount
WOCD06 Rough-hewn cedar planks 40 $2.50 $ 100
SSF0304 Stainless steel fasteners 82 $1.00 82
AS222 Reinforced aluminum screens 26 $1.50 39
Total $221

Labor Time Record

Employee: Greg Henderson Week: 9/14 – 9/20
Hourly wage rate: $11 Record #: 912
Date Job number Start Time End Time Hours Cost
9/14 1102 9:00 1:00 4 $ 44
9/14 1103 1:00 5:00 4 $ 44
9/15 etc.

Labor Time Record

Employee: Andrew Peck Week: 9/14 – 9/20
Hourly wage rate: $7 Record #: 913
Date Job number Start Time End Time Hours Cost
9/14 1101 9:00 12:00 3 $ 21
9/14 1102 12:00 5:00 5 $ 35
9/15 1103 9:00 11:00 2 $ 14
9/15 etc.

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 Chapter 3 Job Costing

Job Cost Record

Job Number: 1102
Customer: Wild Birds, Inc.
Job description: 24 Model 3F (platform bird feeders)
Date Started: Sep. 14 Date Completed: ________

Manufacturing Cost Information: Cost Summary

Direct Materials
Req. #1250 $221
Direct Labor
No. #912 (4 hours) $44
No. #913 (5 hours) $35 $ 79
Manufacturing Overhead
9 hours x $3 per direct labor hour $ 27
Total Job Cost $327
Number of units ÷ 24
Cost per Unit $ 13.63

(10 min.) E3-32B

Req. 1
Calculate the predetermined overhead rate:
Predetermined $63,750
=
overhead rate 4,250 direct labor hours

= $15 per direct labor hour

Req. 2
Job 101: $2,625 ($15 x 175 direct labor hours)
Job 102: $1,110 ($15 x 74 direct labor hours)

Req. 3
Job #101 Job #102
Direct materials $15,500 $10,500
Direct labor
(175 direct labor hours × $15 per direct labor hour) 3,500
(74 direct labor hours × $15 per direct labor hour) 1,480
Overhead
(calculated in Req. 2) 2,625 1,110
Total job cost $21,625 $13,090

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Managerial Accounting 4e Solutions Manual

(10 min.) E3-33B

Req. 1
Calculate the predetermined overhead rate:
Predetermined $404,800
=
overhead rate $736,000 direct labor cost*

= 55% of direct labor cost

*23,000 direct labor hours × $32 per direct labor hour= $736,000

Req. 2
First, calculate direct labor cost for Job 371:
140 direct labor hours × $32 per direct labor hour = $4,480

Next, allocate overhead using the predetermined overhead rate:

$4,480 × 55% = $2,464

Req. 3
Calculate the cost of Job 371.
Job #371
Direct materials $13,500
Direct labor
(140 direct labor hours × $32 per direct labor hour) 4,480
Overhead
(calculated in Req. 2) 2,464
Total cost of Job #371 $20,444

(5-10 min.) E3-34B

Req 1.
Predetermined manufacturing overhead rate = $8,000 / 1,000 machine hours

= $8 per machine hours

Job #30
Direct materials 5,000
Direct labor (100 direct labor hours x $8 per hour) 800
Manufacturing overhead (80 machine hours x $8 per hour) 640
Total job cost $6,440

Req 2.
Job #30
Total manufacturing cost $6,440
Production unit 2,000 unit
Manufacturing cost per unit $3.22
35% markup on manufacturing cost x 1.35%
Selling price per unit $4.347

(10 min.) E3-35B

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 Chapter 3 Job Costing

Req. 1
Virgin materials 150 $ 4.40 $ 660.00
Recycled-content materials 350 $ 3.20 1,120.00
Direct labor 20 $15.00 300.00
Manufacturing overhead (based on DLH) 20 $8.00 160.00
Total job cost $2,240.00

Req. 2
Virgin materials 150
Recycled-content materials 350 70% (=350/500)
Total pounds 500

This job meets the 40% recycled-content requirement.

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Managerial Accounting 4e Solutions Manual

(15 min.) E3-36B

Req. 1
Job Cost Record for Job 310
Direct Materials: Total
Lumber: 51 units at $9 per unit $459
Padding: 15 yards at $21 per yard $315
Upholstery fabric: 32 yards at $25 per yard $800
Total Direct Materials $1,574

Direct Labor:
Yimeng Li: 8 hours at $9 per hour $ 72

Jesse Ray: 13 hours at $13 per hour $169

Total Direct Labor $ 241

Manufacturing Overhead Allocated:

$8 per Direct Labor Hour x 21 direct labor hours (8 + 13) $ 168

Total Job Cost $1,983

Req. 2
Sales price per unit $ 700.00
Job cost per unit ($1983 / 7, rounded to nearest cent) (283.29)
Gross profit per unit $ 416.71

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 Chapter 3 Job Costing

(10 min.) E3-37B

Req. 1
First, calculate the predetermined overhead rate:
Predetermined manufacturing $348,950
=
overhead rate 9,970 direct labor hours

= $35 per direct labor hour

Next, calculate the total job cost:

Direct materials $ 25,400
Direct labor
(1,500 direct labor hours × $13 per direct labor hour) 19,500
Manufacturing overhead
(1,500 direct labor hours × $35 per direct hour) 52,500
Total job cost $97,400

Then, compute bid price:

Total job cost $97,400
30% markup × 130%
Bid price $126,620

or, alternatively:
Total job cost $97,400
Add 30% markup on manufacturing cost
(30% × $97,400) + 29,220

Bid price $126,620

Req. 2
First, calculate the predetermined overhead rate:
Predetermined manufacturing $348,950
=
overhead rate 13,958 machine hours

= $25 per machine hour

Next, calculate the total job cost:

Direct materials $25,400
Direct labor
(1,500 direct labor hours × $13 per direct labor hour) 19,500
Manufacturing overhead
(2,000 machine hours × $25 per machine hour) 50,000
Total job cost $94,900

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Managerial Accounting 4e Solutions Manual

(continued) E3-37B

Then, compute bid price:

Total job cost $ 94,900
30% markup × 130%
Bid price $123,370

or, alternatively:
Total manufacturing cost of job $ 94,900
Add 30% markup on manufacturing cost
(30% × $94,900) + 28,470
Bid price $123,370

Req. 3
Whether or not Colwell wins the bid will depend on the allocation base the company chose to use during the year.
Colwell’s bid price will be $126,620 if the company uses direct labor hours as the allocation base. In this case, the
company will probably lose the job to the Drund Recycling, since their bid was only $125,500. However, Colwell will
probably win the bid if machine hours is used as the allocation base. Using machine hours as an allocation base results
in a bid price of $123,370.

Note: Student answers may vary.

(15-20 min.) E3-38B

Req. 1
Predetermined manufacturing overhead rate $580,000
=
72,500 machine hours

= $8 per machine hour

Req. 2
Allocated manufacturing overhead
= 57,000 machine hours ×
$8 per machine hour

= $456,000

Req. 3
Depreciation on plant and equipment........... $495,000
Property taxes on plant.................................. 21,500
Plant janitors’ wages...................................... 8,000
Total manufacturing overhead....................... $524,500

Manufacturing overhead was underallocated by 68,500 ($524,500 actual − $456,000 allocated) during the year.

Req. 4
Since manufacturing overhead was underallocated, jobs were undercosted by $68,500.

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 Chapter 3 Job Costing

(10-15 min.) E3-39B

Req. 1
Journal
POST.
DATE ACCOUNTS REF. DEBIT CREDIT
Manufacturing Overhead $434,500
Accumulated Depreciation — plant and equipment 405,000
Property Tax Payable 21,500
Wages Payable 8,000

Req. 2
Note: Predetermined overhead rate $8 $580,000
=
per MH 72,500 machine hours

Journal Entry
POST.
DATE ACCOUNTS REF. DEBIT CREDIT
Work in Process Inventory 456,000
Manufacturing Overhead 456,000
To record manufacturing
overhead allocated

Req. 3
Manufacturing Overhead
434,500 456,000
21,500

After correcting the error, Manufacturing Overhead is overallocated by $21,500.

Req. 4
Journal Entry
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Manufacturing Overhead 21,500
Cost of Goods Sold 21,500

Req. 5

Unadjusted cost of goods sold……………….... $620,000

Overallocated manufacturing overhead.......... (21,500)
Adjusted cost of goods sold……………………. $598,500

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Managerial Accounting 4e Solutions Manual

(10 min.) E3-40B

Req. 1
Journal Entry
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
a. Raw Materials Inventory 180,000
Accounts Payable 180,000

b. Work in Process Inventory 158,000

Manufacturing Overhead 4,000
Raw Materials Inventory 162,000

c. Work in Process Inventory 215,000

Manufacturing Overhead 25,000
Wages Payable 240,000

d. Manufacturing Overhead 30,000

Accum. Depreciation 19,000
Utilities Payable (or A/P) 11,000

e. Work in Process Inventory 56,000

Manufacturing Overhead 56,000

f. Website Expense 4,000

Accounts Payable 4,000

Req. 2
During January, actual manufacturing overhead costs totaled $59,000 ($4,000 + $25,000 + $30,000). By the end of
January, a total of $56,000 had been allocated to jobs. Therefore, manufacturing overhead had been underallocated by
$3,000.

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 Chapter 3 Job Costing

(10 min.) E3-41B

1. Direct materials used………………… $ 28,500

2. Indirect materials used……………… $ 6,500

3. Direct labor……………………………… $ 64,000

4. Indirect labor……………………………. $ 10,000

5. Cost of goods manufactured………… $126,000

6. Cost of goods sold…………………… $115,500

7. Actual manufacturing overhead

($6,500 + $10,000 + $38,000)………. $ 54,500

8. Allocated manufacturing overhead…. $ 42,000

9. Predetermined manufacturing
overhead rate, as a % of direct
labor cost; $42,000 / $64,000............ (rounded) 66%

10. Manufacturing overhead is

($54,500 actual − $42,000 allocated) = $ 12,500 underallocated

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Managerial Accounting 4e Solutions Manual

(15-20 min.) E3-42B

Req 1.
Direct labor cost rate = $40,000 / 2,000 hours = $20 per hour

Indirect costs = 4,000 + 20,000 + 2,000 + 2,000 = $26,000

Predetermined indirect cost allocation rate = $26,000 / $40,000

= 65% of direct labor cost

Req 2.
Predicted cost of the new job:
Direct labor (150 hours x $ 20 per hour) $3,000
Indirect costs ($3,000 x 0.65) $1,950
Total predicted cost $4,950

Req 3.
Price to charge the client = $4,950 x 1.25 = $6,187.50

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 Chapter 3 Job Costing

(10 min.) E3-43B

Journal
Accounts Debit Credit
$ $
a. Finished Goods Inventory 10,200
Work in Process Inventory 10,200

b. Work in Process Inventory 8,000

Raw Materials Inventory 8,000

c. Raw Materials Inventory 25,000

Account Payable 25,000

d. Work in Process Inventory 70,000

Manufacturing Overhead 70,000

e. Account Receivable 14,000

Sale 14,000

Cost of Goods Sold 8,000

Finish Goods Inventory 8,000

f. Cost of Goods Sold 5,000

Manufacturing Overhead 5,000

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Managerial Accounting 4e Solutions Manual

Problems (Group A)
(25-30 min.) P3-44A

Req.1
Total estimated manufacturing overhead cost = 24,500 + (5 x 3,700) = $43,000
Predetermined manufacturing overhead rate = $43,000 / 3,700 hours = $11.62 per direct
labor hours

Req 2.
Job GT1 Job GT5
Actual direct labor hours 2,900 700
Predetermined overhead rate per hours $11.62 $11.62
Manufacturing overhead allocated $33,698 $8,134

Req 3.
Manufacturing overhead allocated = 33,698 + 8,134 = 41,832
Underallocated manufactured overhead cost = 43,000 – 41,832 = $1,168

Req 4..
Job GT1 finish goods inventory = 30,000 + 18,000 + 33,698 = $81,698

(20-25 min.) P3-45A

Req. 1
Total estimated indirect costs
= $823,400 *
Direct labor hours 17,900 direct labor hours

Predetermined Indirect Cost =

Allocation Rate $46 per direct labor hour

* $160,000 + $95,000 + $505,400 + $63,000 = $823,400

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 Chapter 3 Job Costing

(continued) P3-45A
Req. 2
Clark & Taylor
Estimated Cost of Jobs
Port Chance Golf
GoVacation.com
Resort
Direct Costs:
Direct labor
720 hr. x $ 100 per DL hr $ 72,000
40 hr. x $ 100 per DL hr $ 4,000
Software licensing costs 2,400 200
Travel 7,000 0
Total Direct Costs $ 81,400 $ 4,200
Indirect Costs:
$ 46 per DL hr x 720 hr. 33,120
$ 46 per DL hr x 40 hr. 1,840
Total Cost $ 114,520 $ 6,040
DL cost: $1,790,000 / 17,900 hours = $100 / hour.

Req. 3
Sales revenue − Total cost = Profit
Sales revenue − Total cost = 0.20 × Sales revenue
0.80 × Sales revenue = Total cost

Sales revenue = Total cost

0.80

GoVacation.com:
Total job cost $114,520
= $ 143,150.
% of costs to revenue 0.80

Port Chance:
Total job cost $ 6,040
= $ 7,550.
% of costs to revenue 0.80

Req. 4
Clark & Taylor assigns costs to jobs to help the company set fees that cover all costs and contribute to profit. Assigning
costs to individual clients can also help the company control costs.

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Managerial Accounting 4e Solutions Manual

(20-25 min.) P3-46A

Req. 1
Total estimated indirect costs $ 315,000*
= = 21%
Direct labor cost $1,500,000

* $180,000 + $46,000 + $24,000 + $65,000 = $315,000

Req. 2
Falcon Design
Estimated Cost of Dining Treats and TalkNow.com Jobs
Dining Treats TalkNow.com
Direct Costs:
Direct labor
760 hrs. × $ 200 $ 152,000
35 hrs. × $ 200 $ 7,000
Software licensing costs 2,700 150
Travel 8,000 0
Total Direct Costs $ 162,700 $ 7,150
Indirect Costs:
21% × $152,000 31,920
21% × $ 7,000 1,470
Total Cost $ 194,620 $ 8,620

Req. 3
Sales revenue − Total cost = Profit
Sales revenue − Total cost = 0.20 × Sales revenue
0.80 × Sales revenue = Total cost

Sales revenue = Total cost

0.80

Dining Treats:
$194,620
= $243,275
0.80

TalkNow.com:
$8,620
= $10,775
0.80

Req. 4
Falcon Design assigns costs to jobs to help the company set fees that cover all costs and contribute to profit. Assigning
costs to individual clients can also help Falcon Design control costs.

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 Chapter 3 Job Costing

(30-35 min.) P3-47A

Job Cost Record

JOB NO. 298
CUSTOMER NAME AND ADDRESS ATV Corporation
JOB DESCRIPTION 170 TX tires
DATE PROMISED 10-10 DATE STARTED 9-30 DATE COMPLETED 10-3
DIRECT MATERIALS DIRECT LABOR MANUFACTURING OVERHEAD ALLOCATED
REQUISITION LABOR TIME RECORD
DATE NO. AMOUNT NO. AMOUNT DATE RATE AMOUNT
20 XX
9 30 437 $960 1896 $216 10 3 $22 per direct
10 2 439 400 labor houra $924
3 501 1,200 1904 600
OVERALL COST SUMMARY
DIRECT MATERIALS.………... $2,560
DIRECT LABOR............……… 816
MANUFACTURING OVERHEAD
ALLOCATED…... 924
Totals $2,560 $816 TOTAL JOB COST.......….. $4,300
Req. 1
a
Predetermined $396,000
= = $22 per direct labor hour
mfg. overhead rate 18,000

Overhead allocated = (12 hrs + 30 hrs) × $22 per DL hour = $924

Req. 2
Job 298
Sales ($50 × 100 tires) $ 5,000
Less cost of job (from Req. 1) 4,300
Total profit on job $ 700
Divide by number of tires ÷ 100
Per-unit profit $ 7.00

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Managerial Accounting 4e Solutions Manual

(30-45 min.) P3-48A

Req 1
Journal
Accounts Debit Credit
$ $
(a) Raw Materials Inventory 420,000
Account Payable 420,000

(b) Work in Process Inventory 230,000

Manufacturing Overhead 90,000
Raw Materials Inventory 320,000

(c) Manufacturing Overhead 66,000

Accumulated Depreciation - equipment 66,000

(d) Work in Process Inventory 120,000

Manufacturing Overhead 80,000
Cash 200,000

(e) Manufacturing Overhead 49,000

Cash 49,000

(f) Work in Process Inventory 156,000

Manufacturing Overhead 156,000

(g) Finished Goods Inventory 380,000

Work in Process Inventory 380,000

(h) Cost of Goods Sold 230,000

Finish Goods Inventory 230,000

Cash 345,000
Sale Revenue 345,000

Req. 2
Ending balance:
Raw Materials 33,500 + 420,000 – 320,000
= $133,500
Work in Process Inventory 73,000 +230,000 +120,000 + 156,000 – 280,000
= $299,000
Finish Goods Inventory 99,000 + 380,000 – 230,000
= $249,000

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 Chapter 3 Job Costing

(25-35 min.) P3-49A

Req. 1
Gibbs Engine, Inc.
Computation of Work in Process Inventory, Finished Goods
Inventory, and Cost of Goods Sold for March and April
(a) Work in Process Inventory (b) Finished Goods (c) Cost of Goods
Date Inventory Sold
Job Cost Job Cost Job Cost
March 31 4 $ 400 3 $1,000 1 $1,900
2 1,500
Total $3,400

April 30 6 $1,100 None 3 $1,000

4 800
5 800
Total $2,600

Req. 2
Journal
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Finished Goods Inventory 4,400
Work in Process Inventory 4,400
To record completion of Jobs 1, 2,
and 3 in March. ($1,900 + $1,500 + $1,000)

Finished Goods Inventory 1,600

Work in Process Inventory 1,600
To record completion of Jobs 4
and 5 in April. ($800 + $800)

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Managerial Accounting 4e Solutions Manual

(continued) P3-49A

Req. 3
Journal
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Accounts Receivable 2,200

Sales Revenue 2,200

To record the sale of Job 5.

Cost of Goods Sold 800

Finished Goods Inventory 800

To record the cost of goods sold

for Job 5.

Req. 4
The gross profit for Job 5 is:

Sales revenue............……….. $ 2,200

Cost of goods sold......……... (800)
Gross profit....................….... $ 1,400

The gross profit must be high enough to these types of costs:

 Administration
 Customer Service
 Design
 Distribution
 Marketing
 Other costs (interest expense and income taxes)
 Research & Development

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 Chapter 3 Job Costing

Problems (Group B)

(25-30 min.) P3-50B

Req 1.
Total budgeted overhead cost = 54,000 + 110,000 + 48,000 + 20,000 + 60,000
= $292,000
Estimated overhead rate = $292,000 / 8,200 hours = $35.61

Req. 2
Manufacturing overhead allocated = 8,000 hours x $35.61 = $284,880

Req 3.
Actual overhead cost = 54,000 + 120,000 + 45,000 + 20,000 + 60,000
= $299,000
Underallocated overhead cost = 299,000 – 284,880 = $14,120

Debit Cost of goods sold $14,120

Credit Manufacturing Overhead $14,120

Req 4.
Yes, it is useful to the manager as the manager can compare the actual manufacturing overhead cost
amounts with the budgeted overhead amounts. The manager can also investigate cost items with
large differences between actual and budgeted amounts to identify the reasons and consider possible
actions to reduce costs in the future.

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Managerial Accounting 4e Solutions Manual

(20-25 min.) P3-51B

Req. 1
Predetermined indirect cost allocation rate:

Estimated indirect costs:

Support staff salaries...............…….. $170,000
Rent and utilities..................………… 46,000
Supplies.......................................…… 459,300
Leased computer hardware………… 60,000
Total estimated indirect costs.......…… $735,300

Estimated indirect costs $735,300

=
Direct labor hours 17,100

Predetermined indirect cost allocation rate = $43 per hour

Req. 2
Walker & Janosko
Estimated Cost of DreamTrips.com
and Port Albany Jobs
DreamTrips.com Port Albany
Golf Resort
Direct Costs:
Direct labor
740 hours × $120* per hour $ 88,800
50 hours × $120* per hour $ 6,000
Software licensing costs 2,400 200
Travel 8,000 0
Total Direct Costs 99,200 6,200
Indirect Costs:
$43 per hour × 740 hours 31,820
$43 per hour × 50 hours 2,150
Total Costs $ 131,020 $ 8,350
* $2,052,000 / 17,100 = $120 per hour

Req. 3
Sales revenue − Total cost = Profit
Sales revenue − Total cost = 0.20 × Sales revenue
0.80 × Sales revenue = Total cost

Sales revenue = Total cost

0.80

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 Chapter 3 Job Costing

(continued) P3-51B

DreamTrips.com:

$131,020
= $163,775
0.80

Port Albany Golf Resort:

$8,350
= $10,437.50
0.80

Req. 4
Walker & Janosko assigns costs to jobs to help the company set fees that cover all costs and contribute to profit.
Assigning costs to individual clients can also help the company control costs.

(20-25 min.) P3-52B

Req. 1
Predetermined indirect cost allocation rate:

Estimated indirect costs:

Support staff salaries................………. $ 190,000
Computer leases…………………….…... 41,000
Office supplies.......................………….. 23,000
Office rent..........................................…. 66,000
Total estimated indirect costs........……… $ 320,000

Estimated indirect costs $ 320,000

= = 20%
Estimated direct labor cost $1,600,000

Req. 2
Raven Design
Estimated Cost of Organic Delight and AllFood.com Jobs
Organic Delight AllFood.com
Direct Costs:
Direct labor*
770 hours × $200 per hour $ 154,000
60 hours × $200 per hour $ 12,000
Licensing costs 2,000 350
Travel 9,000 0
Total Direct Costs 165,000 12,350
Indirect Costs:
20% × $154,000 30,800
20% × $ 12,000 2,400
Total Cost $ 195,800 $ 14,750
* $1,600,000 / 8000 = $200 per hour

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Managerial Accounting 4e Solutions Manual

(continued) P3-52B

Req. 3

Sales revenue − Total cost = Profit

Sales revenue − Total cost = 0.20 × Sales revenue
0.80 × Sales revenue = Total cost

Sales revenue = Total cost

0.80

Organic Delight:

$195,800
= $244,750
0.80

AllFood.com:

$14,750
= $18,437.50
0.80

Req. 4
Raven Design assigns costs to jobs to help the company set fees that cover all costs and contribute to profit. Assigning
costs to individual clients can also help the company control costs.

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 Chapter 3 Job Costing

(30-35 min.) P3-53B

Req. 1
Job Cost Record
JOB NO. 298
CUSTOMER NAME AND ADDRESS ATV Corporation
JOB DESCRIPTION 100 TX tires
DATE PROMISED 12-10 DATE STARTED 11-30 DATE COMPLETED 12-3
DIRECT MATERIALS DIRECT LABOR MANUFACTURING OVERHEAD ALLOCATED
REQUISITION LABOR TIME RECORD
DATE NO. AMOUNT NO. AMOUNT DATE RATE AMOUNT
20 XX
11 30 437 $600 1896 $240 12 3 $28 per direct
12 2 439 560 labor houra $1,176
3 501 1,200 1904 540
OVERALL COST SUMMARY
DIRECT MATERIALS.………... $2,360
DIRECT LABOR............……… 780
MANUFACTURING OVERHEAD
ALLOCATED…... 1,176
Totals $2,360 $780 TOTAL JOB COST.......….. $3,132

a
Predetermined $490,000
= = $28 per direct labor hour
mfg. overhead rate 17,500

Overhead allocated = (12 hrs + 30 hrs) × $28 per DL hour = $1,176

Req. 2
Job 298
Sales ($70 × 190 tires) $ 13,300
Less cost of job (from Req. 1) 3,132
Total profit on job $ 10,168
Divide by number of tires ÷ 190
Per-unit profit $ 53.52

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Managerial Accounting 4e Solutions Manual

(30-45 min.) P3-54B

Req 1.
Journal
Accounts Debit Credit
$ $
(a) Raw Materials Inventory 82,000
Cash 82,000
(purchases of raw materials)

(b) Work in Process Inventory 70,000

Manufacturing Overhead 7,500
Raw Materials Inventory 77,500
(use of direct materials and indirect materials)

(c) Manufacturing Overhead 125,000

Accumulated depreciation 125,000
(other indirect manufacturing overhead cost incurred during the
month)

(d) Work in Process Inventory 70,000

Manufacturing Overhead 30,000
Cash 100,000
(use of direct and indirect labor of the job)

(e) Work in Process Inventory 140,000

Manufacturing Overhead 140,000
(to allocated manufacturing overhead to the job)

(f) Administrative expenses 10,000

Cash 10,000
(finance manager’s salary was paid)

(g) Finished Goods Inventory 280,000

Work in Process Inventory 280,000
(to move the completed jobs out of factory into finish goods)

Cost of Goods Sold 280,000

Finish Goods Inventory 280,000
(to record cost of goods sold)

(h) Cost of Goods Sold 22,500

Manufacturing Overhead 22,500
(to close the manufacturing overhead account)

Req 2.
No work in process inventory in hand since all jobs in progress at the end of the month were completed and
shipped to customers as stated in (g)

Req 3.
Cost of goods sold = 280,000 + 25,000 = $305,000

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 Chapter 3 Job Costing

(25-35 min.) P3-55B

Req. 1
Engine Pro, Inc.
Computation of Work in Process Inventory, Finished Goods
Inventory, and Cost of Goods Sold for May and June
(a) Work in Process Inventory (b) Finished Goods (c) Cost of Goods
Date Inventory Sold
Job Cost Job Cost Job Cost
April 30 4 $400 3 $1,300 1 $1,200
2 1,500
Total $2,700

May 31 6 $1,100 None 3 $1,300

4 1,000
5 400
Total $2,700

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(continued) P3-55B

Req. 2
Journal
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Finished Goods Inventory 4,000
Work in Process Inventory 4,000
To record completion of Jobs 1, 2,
and 3 in May. ($1,200 + $1,500 + $1,300)

Finished Goods Inventory 1,400

Work in Process Inventory 1,400
To record completion of Jobs 4
and 5 in June. ($1,000 + $400)

Req. 3
Journal
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Accounts Receivable 2,200
Sales Revenue 2,200
To record the sale of Job 5.

Cost of Goods Sold 400

Finished Goods Inventory 400
To record the cost of goods sold
for Job 5.

Req. 4
The gross profit for Job 5 is:

Sales revenue............……….. $2,200

Cost of goods sold......……... (400)
Gross profit....................….... $ 1,800

The gross profit must be high enough to cover these types of costs:
 Administration
 Customer Service
 Design
 Distribution
 Marketing
 Other costs (interest expense and income taxes)
 Research and Development

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 Chapter 3 Job Costing

Discussion & Analysis

A3-56

1. Why would it be inappropriate for a custom home builder to use process costing?

Process costing is used to assign costs to a large number of identical units. Since each custom home is unique, this
system would not be appropriate.

2. For what types of products is job costing appropriate? Why? For what types of products is process costing
appropriate? Why?

Job costing is used by companies that produce unique, custom-ordered products, or relatively small batches of
different products. Different jobs can vary considerably in direct materials, direct labor, and manufacturing
overhead costs, so job costing accumulates these costs separately for each individual job.

Process costing is used for products that are made in large numbers of identical units through a series of uniform
production steps or processes. Process costing averages manufacturing costs across all units so that each identical
unit bears the same cost.

3. What product costs must be allocated to jobs? Why must these costs be allocated rather than assigned?

Manufacturing overhead must be allocated to jobs.

Manufacturing overhead is an indirect cost and as such is not traceable to individual jobs and must therefore be
allocated.

4. When the predetermined manufacturing overhead rate is calculated, why are estimated costs and cost driver
levels used instead of actual dollars and amounts?

The predetermined manufacturing overhead rate is calculated at the beginning of the year to be used throughout
the year. Since the actual amount of overhead will not be known until the end of the year, estimates are used so
that overhead can be allocated to products as they completed throughout the year.

5. Why should manufacturing overhead be allocated to a job even though the costs cannot be directly traced to a
job? Give at least two reasons.

Manufacturing overhead must be allocated to a job because it is one of the essential costs of converting raw
materials into a finished product. If the cost of overhead were not allocated to a job, the cost of the job would be
recorded incorrectly in the company’s accounting records, which would violate GAAP. Since the selling price of a
product is determined in part by the cost of the product, the selling price could be too low and not provide a profit.

6. Why does management need to know the cost of a job? Discuss at least five reasons.

Management needs to know the cost of a job for many reasons:

The cost of a job determines if it is feasible to continue.
Management uses the costs of a job to help control costs.
GAAP requires that companies keep accurate records of their costs.
The costs of a job are used for planning purposes, such as budgeting. Management needs to know the cost of a job
to remain competitive in the market.

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Managerial Accounting 4e Solutions Manual
7. Why is it acceptable to close overallocated or underallocated manufacturing overhead to Cost of goods sold
rather than allocating it proportionately to Work in process inventory, Finished goods inventory, and Cost of
goods sold? Under what circumstances would it be advisable to allocate the overallocated or underallocated
manufacturing overhead to Work in process inventory, Finished goods inventory, and Cost of goods sold?

The amount of overallocated or underallocated manufacturing overhead is typically insignificant in relation to the
total costs of manufacturing. Since the largest balance of the three accounts is by far the Cost of goods sold, it is
acceptable to close the entire amount to Cost of goods sold.

If the overallocated or underallocated manufacturing overhead is a significant amount, it should be distributed

among the three accounts according to their balances.

8. Describe a situation that may cause manufacturing overhead to be overallocated in a given year. Also describe a
situation that may cause manufacturing overhead to be underallocated in a given year.

Let’s say a company has underestimated the amount of the base for allocating overhead, such as direct labor
hours, when computing the predetermined overhead rate. During the year, if they have more jobs than they
anticipated, the overhead could be overallocated due to the increase in direct labor hours.

A company could experience an unanticipated increase in the costs of manufacturing overhead, which means that
their predetermined rate could be too low. In that case, the amount of allocated overhead at the end of the year
would be underallocated, meaning their actual costs of overhead were greater than their allocated costs of
overhead.

9. Explain why cost of goods sold should be lower if manufacturing overhead is overallocated. Should operating
income be higher or lower if manufacturing overhead is overallocated? Why?

If manufacturing overhead is overallocated it means that the company charged more overhead to jobs than they
incurred. In this case, those overallocated costs were passed along to the Cost of goods sold when the jobs were
sold to customers. When the Manufacturing overhead account is closed, it will lower the balance in Cost of goods
sold.

Until the overallocated balance in Manufacturing overhead is closed to Cost of goods sold, the operating income
for the company will be lower than it should be because Cost of goods sold is too high.

10. What account is credited when manufacturing overhead is allocated to jobs during the period? What account is
debited when manufacturing overhead costs are incurred during the period? Would you expect these two
amounts (allocated and incurred manufacturing overhead) to be the same? Why or why not?

Actual costs of overhead are debited to the Manufacturing overhead account and allocated costs of overhead are
credited to the Manufacturing overhead account.

These two amounts are not expected to be the same, in other words, a zero balance in the Manufacturing
overhead account at the end of the year. The reason is that the allocated overhead is based on two estimates that
are made at the beginning of the year. It would be quite unusual for those two estimates to result in a perfect
allocation of the actual costs.

11. How can job cost records help to promote sustainability efforts within a company?

Job cost records serve a vital role for manufacturers who embrace sustainability. Since job cost records contain
information about the direct materials, direct labor, and manufacturing overhead assigned to each job, they
capture the essential resources required to manufacture a product. The summary information on the job cost
records can be enhanced to provide management with further information about how the product or production
process may affect the environment, employees involved in the manufacturing process, future consumers of the
product, and future disposal of the packaging materials and product itself. Only by separately measuring these

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costs, will management have the information it needs to adequately weigh the costs and benefits associated with
environmental and social responsibility initiatives.

12. Why should companies estimate the environmental cost of a given job? Why have EPR laws come into
existence?

Job cost records should contain a section estimating the future environmental costs associated with each job to
provide managers with better information from which to make decisions. Extended Producer Responsibility (EPR)
laws are more commonly known as “take-back” laws and create future costs associated with each job. The goal of
EPR laws is to reduce the amount of potentially dangerous e-waste (electronic waste) in landfills by shifting the
end-of-life disposal cost back to the manufacturer. By bearing the disposal cost, manufacturers should be
motivated to design greener products that are repairable, more easily recyclable, and have a longer life-cycle.

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Managerial Accounting 4e Solutions Manual

Application & Analysis

A3-57

Basic Discussion Questions

1. Describe the product that is being produced and the company that makes it.

The product selected was Kettle Brand Potato Chips. Kettle Foods is based in Salem, Oregon and have been in
business for over 28 years.

2. Summarize the production process that is used in making this product.

Truckloads of russet potatoes arrive at the manufacturing plant where they are first scrubbed, then crinkle sliced
unpeeled, and dropped into bubbling hot oil. A chip chef keeps the chips moving in the oil so the chips don’t stick
together. Once they are cooked, they ride out of the oil on a conveyor belt and pass through an “optisort”
machine that dumps out the overcooked chips. The last process is adding seasonings in a drum.

3. What raw materials are used to make this product?

Potatoes, oil, and seasoning are the raw materials used to make this product.

4. What indirect materials are used to make this product?

The video did not show any indirect materials used in making the potato chips.

5. Describe the jobs of the workers who would be considered “direct labor” in the making this product.

The chip chef keeps the chips moving in the oil so they don’t stick together.

6. Describe the jobs of the workers who would be considered “indirect labor” in the making this product.

The video clip did not show any indirect labor in the process.

7. Define manufacturing overhead. In addition to the indirect materials and indirect labor previously described,
what other manufacturing overhead costs would be incurred in this production process? Be specific and
thorough. Make reasonable “guesses” if you do not know for sure.

Manufacturing overhead are all the costs of production other than direct materials and direct labor. In addition to
the cost of indirect materials and indirect labor, manufacturing overhead for Kettle Foods would be depreciation of
the factory and equipment, taxes and insurance for the factory, utilities and other miscellaneous costs of keeping
the factory operating.

8. Would a job-order costing system or a process costing system be used for this production process? Give specific
reasons for your choice of which costing system would be most appropriate for this manufacturer.

Kettle Brand would use a process costing system because they have a series of steps that make large quantities of
identical units.

Note: Student answers will vary.

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 Chapter 3 Job Costing

(15-30 min.) A3-58

Ethics Mini-Case
1.
a. If Molly were to change the change the allocation method to grant the employees their holiday bonuses, the
following ethical principles would be violated:
i. Competence: “Perform professional duties in accordance with relevant laws, regulations, and technical
standards.” By changing the allocation method used, Molly would be violating technical standards.
ii. Competence: “Provide decision support information and recommendations that are accurate, clear,
concise, and timely.” By changing the allocation method, Molly would be adding information which is not
accurate or clear.
iii. Integrity: “Mitigate actual conflicts of interest, regularly communicate with business associates to avoid
apparent conflicts of interest. Advise all parties of any potential conflicts.” Molly would violate this
principle by making a decision which results in her own bonus; she has a clear conflict of interest which
she did not disclose.
iv. Credibility: “Disclose all relevant information that could reasonably be expected to influence an intended
user's understanding of the reports.” Since the allocations would no longer correspond to the reality, the
user’s understanding would be lessened.
b. McDale’s responsibilities as a management accountant are to make the correct ethical decisions by reporting
information accurately and disclosing all potential conflicts of interest.
2. First, Molly should report her findings to the owner and CEO, Franklin Roberts. Second, if there is still a conflict, she
should approach the audit committee or equivalent who can engage with her to gain a clear understanding of the
situation.

(15-30 min.) A3-59

Real Life Mini-Case

1. Do you think that Apple uses a process costing system or a job costing system?

Apple should use a process costing system, because every iPad mini will be produced exactly alike and it will be
making many of them using the same process.

2. The iPad mini is assigned a cost of $10 for “manufacturing cost.” What specific costs do you think are included in
that “manufacturing cost”?

The “manufacturing cost” of the iPad mini is probably due to the labor and manufacturing overhead involved in
making each iPad mini.

3. In accounting terminology, what would “Bill of Materials (BOM)” be when discussing product cost?

The accounting term used for the BOM would be the variable product costs. This situation is because these costs
are only incurred when an iPad mini is produced.

4. The gross profit per iPad mini is approximately $131, which is the difference between the retail price of $329
and its estimated cost (BOM) + Manufacturing) of $198. Is Apple really making $131 for each iPad mini sold? If
not, what other types of costs would that gross profit of $131 have to go toward covering?

The gross profit per iPad mini would also have to cover the fixed manufacturing overhead costs which are not
included in the manufacturing cost and BOM. This manufacturing overhead might be due to the building overhead
or administrative overhead. There also would be shipping costs related to the products. In addition, there are
administrative costs of Apple to cover (i.e., CEO salary, marketing campaigns, etc.)

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Managerial Accounting 4e Solutions Manual
5. The BOM costs for the units sold would appear on Apple’s income statement. In which income statement
component would these BOM costs appear?

The BOM costs would be accounted for as cost of goods sold on the income statement.

6. Late in 2012, Apple announced that it was going to start manufacturing some products in the United States
rather than in China. If the iPad mini were to be manufactured in the U.S., which cost components would you
expect to increase? Which cost components might you expect to decrease? What other factors would Apple
consider when deciding where to manufacture its products.

If Apple started producing the iPad mini in the United States there are a few things that one may need to assume
before answering this question. Student responses for this question are likely to vary greatly. One assumption is
that the components that make up the BOM are made in the U.S. and are therefore cheaper to produce per
material. However, some may make the assumption that the labor cost and overhead due to the building and
administration would be more expensive. Therefore the overall manufacturing cost could increase because of the
increased cost of labor. Overhead would increase because building upkeep would be greater, and administrative
expenses would also be higher. The only item that would decrease might be the cost of materials in the BOM, but
that would be unlikely to drop enough to make the change to manufacture in the U.S. fiscally responsible. That is
probably why Apple started manufacturing in China in the first place. However, there are social factors to consider
when looking at this issue. Americans are more willing to buy products that are made in the United States. This
willingness to buy American could increase sales of the iPad mini, therefore the reduced gross profit on the
product may be worth the trade-off.

(15-30 min.) A3-60

Req. 1
Custom Cookies allocates overhead costs to orders at the rate of 180% of direct labor cost ($0.90 / $0.50 = 180%; $1.17
/ $1.10 = 180%). But direct labor cost does not drive overhead cost—direct labor cost has increased in recent months,
but overhead cost has remained the same. Although actual overhead costs haven’t changed, allocated overhead has
been artificially inflated because of the increase in direct labor cost, which is the overhead allocation base. Because
actual overhead hasn’t changed, the same per-box overhead cost should be used for each order. If $$0.90 overhead
per box was appropriate for the first order, then $0.90 per box is appropriate for the second order also.

Req. 2
Custom Cookies should account for each order as a separate job. The orders were received at different times, and the
costs per box of the orders are not the same.

Req. 3
The company has a tough decision. It can price the second order at $7.25 and keep the customer happy. But the gross
profit will be less. It can raise the price to keep the profit margin intact. But this may anger the customer. The customer
may think Custom Cookies is price gouging because the car dealer is in a bind.

We would recommend pricing the second order at $7.25 per box and raising the sales price beginning with the new
year.

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