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Managerial Accounting - Decision Making and Motivating Performance

Srikant M. Datar, Madhav V. Rajan

Chapter 4

Job Costing - all with Video Answers

Educators

Chapter Questions

02:16

Problem 1

How does a job-costing system differ from a process-costing system?

Ameer Said
Ameer Said
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02:32

Problem 2

Why might an advertising agency use job costing for an advertising campaign by Pepsi, whereas a bank might use process costing to determine the cost of checking account deposits?

Jennifer Stoner
Jennifer Stoner
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03:01

Problem 3

Give two reasons why most organizations use an annual period rather than a weekly or monthly period to compute budgeted indirect-cost rates.

Ameer Said
Ameer Said
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04:11

Problem 4

Distinguish between actual costing and normal costing.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
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02:18

Problem 5

Describe two ways in which a house construction company may use job-cost information.

Ameer Said
Ameer Said
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04:28

Problem 6

Comment on the following statement: "In a normal-costing system, the amounts in the Manufacturing Overhead Control account will always equal the amounts in the Manufacturing Overhead Allocated account."

Ameer Said
Ameer Said
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01:19

Problem 7

Describe three different debit entries to the Work-in-Process Control T-account under normal costing.

Ameer Said
Ameer Said
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05:12

Problem 8

Describe three alternative ways to dispose of under- or overallocated overhead costs.

Ameer Said
Ameer Said
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00:49

Problem 9

When might a company use budgeted costs rather than actual costs to compute direct-labor rates?

Ameer Said
Ameer Said
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05:36

Problem 10

Distinguish among the three methods of allocating the costs of support departments to operating departments.

Ameer Said
Ameer Said
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00:00

Problem 11

Job costing, process costing. In each of the following situations, determine whether job costing or process costing would be more appropriate.
a. A CPA firm
1. A landscaping company
b. An oil refinery
m. A cola-drink-concentrate producer
c. A custom furniture manufacturer
n. A movie studio
d. A tire manufacturer
o. A law firm
e. A textbook publisher
p. A commercial aircraft manufacturer
f. A pharmaceutical company
q. A management consulting firm
g. An advertising agency
r. A breakfast-cereal company
h. An apparel manufacturing plant
s. A catering service
i. A flour mill
t. A paper mill
j. A paint manufacturer
u. An auto repair shop
k. A medical care facility

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
01:23

Problem 12

Actual costing, normal costing, accounting for manufacturing overhead. Desert Products uses a job-costing system with two direct-cost categories (direct materials and direct manufacturing labor) and one manufacturing overhead cost pool. Desert allocates manufacturing overhead costs using direct manufacturing labor costs. Desert provides the following information:
$$
\begin{array}{l|r|r}
\hline & \text { Budget for } 2012 & \text { Actual Results for } 2012 \\
\hline \text { Direct material costs } & \$ 2,250,000 & \$ 2,100,000 \\
\text { Direct manufacturing labor costs } & 1,700,000 & 1,650,000 \\
\text { Manufacturing overhead costs } & 2,975,000 & 2,970,000 \\
\hline
\end{array}
$$
1. Compute the actual and budgeted manufacturing overhead rates for 2012 .
2. During March, the job-cost record for Job 626 contained the following information:

Direct materials used & $$\$ 55,000$$ \\
Direct manufacturing labor costs & $$\$ 40,000$$

Compute the cost of Job 626 using (a) actual costing and (b) normal costing.
3. At the end of 2012 , compute the under- or overallocated manufacturing overhead under normal costing. Why is there no under- or overallocated overhead under actual costing?
4. Why might managers at Desert Products prefer to use normal costing?

Anand Jangid
Anand Jangid
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09:38

Problem 13

Job costing, normal and actual costing. Acre Construction assembles residential houses. It uses a job-costing system with two direct-cost categories (direct materials and direct labor) and one indirect-cost pool (assembly support). Direct labor-hours is the allocation base for assembly support costs. In December 2011, Acre budgets 2012 assembly-support costs to be $$\$ 8,700,000$$ and 2012 direct labor-hours to be 145,000 .$$
\begin{aligned}
&\text { At the end of 2012, Acre is comparing the costs of several jobs that were started and completed in } 2012 .\\
&\begin{array}{l|c|c}
\hline & \text { Laguna Model } & \text { Mission Model } \\
\hline \text { Construction period } & \text { Feb-June 2012 } & \text { May-Oct 2012 } \\
\text { Direct material costs } & \$ 106,440 & \$ 127,625 \\
\text { Direct labor costs } & \$ 36,325 & \$ 41,750 \\
\text { Direct labor-hours } & 980 & 1,000 \\
\hline
\end{array}
\end{aligned}
$$
Direct materials and direct labor are paid for on a contract basis. The costs of each are known when direct materials are used or when direct labor-hours are worked. The 2012 actual assembly-support costs were $\$ 7,470,000$, and the actual direct labor-hours were 166,000 .
1. Compute the (a) budgeted indirect-cost rate and (b) actual indirect-cost rate. Why do they differ?
2. What are the job costs of the Laguna Model and the Mission Model using (a) normal costing and (b) actual costing?
3. Why might Acre Construction prefer normal costing over actual costing?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator

Problem 14

Budgeted manufacturing overhead rate, allocated manufacturing overhead. Rovet Company uses normal costing. It allocates manufacturing overhead costs using a budgeted rate per machine-hour. The following data are available for 2012 :$$
\begin{array}{lr}
\text { Budgeted manufacturing overhead costs } & \$ 4,250,000 \\
\text { Budgeted machine-hours } & 250,000 \\
\text { Actual manufacturing overhead costs } & \$ 4,120,000 \\
\text { Actual machine-hours } & 245,000
\end{array}
$$
Taylor has a single direct-cost category (professional labor) and a single indirect-cost pool (client support). Indirect costs are allocated to jobs on the basis of professional labor costs.
1. Prepare an overview diagram of the job-costing system. Calculate the 2012 budgeted indirect-cost rate for Taylor \& Associates.
2. The markup rate for pricing jobs is intended to produce operating income equal to $10 \%$ of revenues. Calculate the markup rate as a percentage of professional labor costs.
3. Taylor is bidding on a consulting job for Tasty Chicken, a fast-food chain specializing in poultry meats. The budgeted breakdown of professional labor on the job is as follows:
(TABLE CAN'T COPY)
Calculate the budgeted cost of the Tasty Chicken job. How much will Taylor bid for the job if it is to earn its target operating income of $10 \%$ of revenues?

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Problem 16

Time period used to compute indirect-cost rates. Splunge Manufacturing produces outdoor wading and slide pools. The company uses a normal-costing system and allocates manufacturing overhead on the basis of direct manufacturing labor-hours. Most of the company's production and sales occur in the first and second quarters of the year. The company is in danger of losing one of its larger customers, Solar Wholesale, due to large fluctuations in price. The owner of Splunge has requested an analysis of the manufacturing cost per unit in the second and third quarters. You have been provided the following budgeted information for the coming year:
(TABLE CAN'T COPY)
It takes 1 direct manufacturing labor-hour to make each pool. The actual direct material cost is $$\$ 15$$ per pool. The actual direct manufacturing labor rate is $$\$ 29$$ per hour. The budgeted variable manufacturing overhead rate is $$\$ 22$$ per direct manufacturing labor-hour. Budgeted fixed manufacturing overhead costs are $$\$ 15,000$$ each quarter.
1. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company allocates manufacturing overhead costs based on the budgeted manufacturing overhead rate determined for each quarter.
2. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company allocates manufacturing overhead costs based on an annual budgeted manufacturing overhead rate.
3. Splunge Manufacturing prices its pools at manufacturing cost plus $30 \%$. Why might Solar Wholesale be seeing large fluctuations in the prices of pools? Which of the methods described in requirements 1 and 2 would you recommend Splunge use? Explain.

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Problem 17

Accounting for manufacturing overhead. Consider the following selected cost data for the All-In Company for 2012.$$
\begin{array}{lr}
\text { Budgeted manufacturing overhead costs } & \$ 4,520,000 \\
\text { Budgeted labor-hours } & 226,000 \\
\text { Actual manufacturing overhead costs } & \$ 4,388,000 \\
\text { Actual labor-hours } & 217,000
\end{array}
$$
The company uses normal costing. Its job-costing system has a single manufacturing overhead cost pool. Costs are allocated to jobs using a budgeted labor-hour rate. Any amount of under- or overallocation is written off to Cost of Goods Sold.
1. Compute the budgeted manufacturing overhead rate.
2. Prepare T-accounts to record the allocation of manufacturing overhead.
3. Compute the amount of under- or overallocation of manufacturing overhead. Is the amount large enough to require the manager to prorate overhead costs between cost of goods sold, work-in-process inventory, and finished goods inventory? Explain. Record entries in T-accounts to dispose of this amount.

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Problem 18

Job costing, T-accounts. The University of Chicago Press is wholly owned by the university. It performs the bulk of its work for other university departments, which pay as though the press were an outside business enterprise. The press also publishes and maintains a stock of books for general sale. The press uses normal costing to cost each job. Its job-costing system has two direct-cost categories (direct materials and direct manufacturing labor) and one indirect-cost pool (manufacturing overhead, allocated on the basis of direct manufacturing labor costs).
The following data (in thousands) pertain to 2012:$$
\begin{array}{lr}
\text { Direct materials and supplies purchased on credit } & \$ 820 \\
\text { Direct materials used } & 750 \\
\text { Indirect materials issued to various production departments } & 120 \\
\text { Direct manufacturing labor } & 1,360 \\
\text { Indirect manufacturing labor incurred by various production departments } & 930 \\
\text { Depreciation on building and manufacturing equipment } & 440
\end{array}
$$
$$
\begin{array}{lr}
\text { Miscellaneous manufacturing overhead* incurred by various production departments } & 540 \\
\text { (ordinarily would be detailed as repairs, photocopying, utilities, etc.) } & ? \\
\text { Manufacturing overhead allocated at } 150 \% \text { of direct manufacturing labor costs } & 4,100 \\
\text { Cost of goods manufactured } & 8,200 \\
\text { Revenues } & 4,030 \\
\text { Cost of goods sold (before adjustment for under- or overallocated manufacturing overhead) } & 150 \\
\text { Inventories, December 31, 2011 (not 2012): } & 80 \\
\text { Materials Control } & 540
\end{array}
$$
"The term manufacturing overhead is not used uniformly. Other terms that are often encountered in printing companies include job overhead and shop overhead.
1. Prepare an overview diagram of the job-costing system at the University of Chicago Press.
2. Prepare T-accounts to record the 2012 transactions for inventories, revenues, and costs. As your final entry, dispose of the year-end under- or overallocated manufacturing overhead as a writeoff to Cost of Goods Sold. Number your entries.
3. How did the University of Chicago Press perform in 2012?

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00:01

Problem 19

Job costing, T-accounts. Construction Company produces gadgets for the coveted small appliance market. The following data shows activity for the year 2012:
(TABLE CAN'T COPY)
$$
\begin{array}{l|r|r}
\hline & \text { January } 1,2012 & \text { December } 31,2012 \\
\hline \text { Direct materials } & \$ 9,900 & \$ 11,000 \\
\text { Work in process } & 6,100 & 28,000 \\
\text { Finished goods } & 61,000 & 32,000 \\
\hline
\end{array}
$$
Construction Co. uses a normal-costing system and allocates overhead to work in process at a rate of $$\$ 2.90$$ per direct manufacturing labor dollar. Indirect materials are insignificant, so there is no inventory account for indirect materials.
Prepare T-accounts for inventories and costs to record the transactions for 2012 including an entry to close out over- or underallocated overhead to cost of goods sold.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator

Problem 20

Job costing, T-accounts. Docks Transport assembles prestige manufactured homes. Its job-costing system has two direct-cost categories (direct materials and direct manufacturing labor) and one indirect-cost pool (manufacturing overhead allocated at a budgeted $$\$ 25$$ per machine-hour in 2012). The following data (in millions) show operation costs for 2012 :
$$
\begin{array}{lr}
\text { Materials Control, beginning balance, January 1, 2012 } & \$ 15 \\
\text { Work-in-Process Control, beginning balance, January 1, 2012 } & 8 \\
\text { Finished Goods Control, beginning balance, January 1, 2012 } & 8 \\
\text { Materials and supplies purchased on credit } & 158 \\
\text { Direct materials used } & 151 \\
\text { Indirect materials (supplies) issued to various production departments } & 15 \\
\text { Direct manufacturing labor } & 91 \\
\text { Indirect manufacturing labor incurred by various production departments } & 39 \\
\text { Depreciation on plant and manufacturing equipment } & 29
\end{array}
$$
$$
\begin{array}{lr}
\text { Miscellaneous manufacturing overhead incurred (ordinarily would be detailed as repairs, utilities, } & 14 \\
\text { etc., with a corresponding credit to various liability accounts) } & ? \\
\text { Manufacturing overhead allocated, 2,400,000 actual machine-hours } & 298 \\
\text { Cost of goods manufactured } & 402 \\
\text { Revenues } & 298
\end{array}
$$
1. Prepare an overview diagram of Docks Transport's job-costing system.
2. Prepare T-accounts. What is the ending balance of Work-in-Process Control?
3. Dispose of under- or overallocated manufacturing overhead directly as a year-end writeoff to Cost of Goods Sold.
4. How did Docks Transport perform in 2012?

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00:00

Problem 21

Job costing, unit cost, ending work in process. Ronald Company produces pipes for concert-quality organs. Each job is unique. In April 2012, it completed all outstanding orders, and then, in May 2012, it worked on only two jobs, M1 and M2:
(TABLE CAN'T COPY)

Direct manufacturing labor is paid at the rate of $$\$ 25$$ per hour. Manufacturing overhead costs are allocated at a budgeted rate of $$\$ 16$$ per direct manufacturing labor-hour. Only Job M1 was completed in May.
1. Calculate the total cost for Job M1.
2. 1,600 pipes were produced for Job M1. Calculate the cost per pipe.
3. What is the ending balance in the Work-in-Process Control account?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator

Problem 22

Job costing; actual, normal, and variation from normal costing.
Kirac \& Partners, a Quebec-based public accounting partnership, specializes in audit services. Its job-costing system has a single direct-cost category (professional labor) and a single indirect-cost pool (audit support, which contains all costs of the Audit Support Department). Audit support costs are allocated to individual jobs using actual professional labor-hours. Kirac \& Partners employs 10 professionals to perform audit services.
Budgeted and actual amounts for 2012 are as follows:
(TABLE CAN'T COPY)
1. Compute the direct-cost rate and the indirect-cost rate per professional labor-hour for 2012 under (a) actual costing, (b) normal costing, and (c) the variation from normal costing that uses budgeted rates for direct costs.
2. Which job-costing system would you recommend Kirac \& Partners use? Explain.
3. Kirac's 2012 audit of Pierre \& Co. was budgeted to take 170 hours of professional labor time. The actual professional labor time spent on the audit was 190 hours. Compute the cost of the Pierre \& Co. audit using
(a) actual costing, (b) normal costing, and (c) the variation from normal costing that uses budgeted rates for direct costs. Explain any differences in the job cost.

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09:38

Problem 23

Job costing; actual, normal, and variation from normal costing. Braun Brothers, Inc., is an architecture firm specializing in high-rise buildings. Its job-costing system has a single direct-cost category (architectural labor) and a single indirect-cost pool, which contains all costs of supporting the office. Office support costs are allocated to individual jobs using architect labor-hours. Braun Brothers employs 15 architects.
Budgeted and actual amounts for 2012 are as follows:$$
\begin{aligned}
&\text { Braun Brothers, Inc. }\\
&\begin{array}{l|c}
\hline \text { Budget for } \mathbf{2 0 1 2} & \\
\text { Architect labor cost } & \$ 3,613,500 \\
\text { Office support costs } & \$ 2,226,500 \\
\text { Architect labor-hours billed to clients } & 36,500 \text { hours } \\
\text { Actual results for } \mathbf{2 0 1 2} & \\
\text { Office support costs } & \$ 2,340,000 \\
\text { Architect labor-hours billed to clients } & 39,000 \text { hours } \\
\text { Actual architect labor cost rate } & \$ 103 \text { per hour } \\
\hline
\end{array}
\end{aligned}
$$
1. Compute the direct-cost rate and the indirect-cost rate per architectural labor-hour for 2012 under (a) actual costing, (b) normal costing, and (c) the variation from normal costing that uses budgeted rates for direct costs.
2. Which job-costing system would you recommend Braun Brothers use? Explain.
3. Braun Brothers' architectural sketches for Champ Tower in Houston was budgeted to take 380 hours of architectural labor time. The actual architectural labor time spent on the job was 340 hours. Compute the cost of the Champ Tower sketches using (a) actual costing, (b) normal costing, and (c) the variation from normal costing that uses budgeted rates for direct costs.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator

Problem 24

Proration of overhead. The Ride-On-Wonder Company (ROW) produces a line of nonmotorized boats. ROW uses a normal-costing system and allocates manufacturing overhead using direct manufacturing labor cost. The following data are for 2012:
$$
\begin{aligned}
&\begin{array}{l|l}
\hline \text { Budgeted manufacturing overhead cost } & \$ 127,050 \\
\text { Budgeted direct manufacturing labor cost } & \$ 231,000 \\
\text { Actual manufacturing overhead cost } & \$ 123,000 \\
\text { Actual direct manufacturing labor cost } & \$ 220,000 \\
\hline
\end{array}\\
&\text { Inventory balances on December 31, 2012, were as follows: }
\end{aligned}
$$
(TABLE CAN'T COPY)
$$
\begin{aligned}
&\\
&\text { 1. Calculate the budgeted manufacturing overhead allocation rate. }
\end{aligned}
$$
2. Compute the amount of under- or overallocated manufacturing overhead.
3. Calculate the ending balances in work in process, finished goods, and cost of goods sold if under- and overallocated manufacturing overhead is as follows:
a. Written off to cost of goods sold
b. Prorated based on the overhead allocated in 2012 in the ending balances (before proration) in each of the three accounts
4. Which method makes the most sense? Justify your answer.

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Problem 25

Job costing, accounting for manufacturing overhead, budgeted rates. The Carlson Company uses a job-costing system at its Dover, Delaware, plant. The plant has a machining department and a finishing department. Carlson uses normal costing with two direct-cost categories (direct materials and direct manufacturing labor) and two manufacturing overhead cost pools (the machining department with machine-hours as the allocation base, and the finishing department with direct manufacturing labor costs as the allocation base). The 2012 budget for the plant is as follows:
$$
\begin{array}{l|r|r}
\hline & \text { Machining Department } & \text { Finishing Department } \\
\hline \text { Manufacturing overhead costs } & \$ 9,870,000 & \$ 7,644,000 \\
\text { Direct manufacturing labor costs } & \$ 980,000 & \$ 3,900,000 \\
\text { Direct manufacturing labor-hours } & 32,000 & 170,000 \\
\text { Machine-hours } & 210,000 & 33,000 \\
\hline
\end{array}
$$
1. Prepare an overview diagram of Carlson's job-costing system.
2. What is the budgeted manufacturing overhead rate in the machining department? In the finishing department?
3. During the month of January, the job-cost record for Job 431 shows the following:
$$
\begin{array}{l|r|r}
\hline & \text { Machining Department } & \text { Finishing Department } \\
\hline \text { Direct materials used } & \$ 13,000 & \$ 3,500 \\
\text { Direct manufacturing labor costs } & \$ 700 & \$ 1,450 \\
\text { Direct manufacturing labor-hours } & 20 & 60 \\
\text { Machine-hours } & 110 & 15 \\
\hline
\end{array}
$$
Compute the total manufacturing overhead cost allocated to Job 431 .
4. Assuming that Job 431 consisted of 100 units of product, what is the cost per unit?
5. Actual amounts at the end of 2012 are as follows:
$$
\begin{array}{l|r|r}
\hline & \text { Machining Department } & \text { Finishing Department } \\
\hline \text { Manufacturing overhead incurred } & \$ 11,380,000 & \$ 8,628,000 \\
\text { Direct manufacturing labor costs } & \$ 1,030,000 & \$ 4,300,000 \\
\text { Machine-hours } & 240,000 & 30,000 \\
\hline
\end{array}
$$
Compute the under- or overallocated manufacturing overhead for each department and for the Dover plant as a whole.
6. Why might Carlson use two different manufacturing overhead cost pools in its job-costing system?

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Problem 26

Service industry, job costing, law firm. Kahn \& Associates is a law firm specializing in labor relations and employee-related work. It employs 30 professionals ( 10 partners and 20 associates) who work directly with its clients. The average budgeted total compensation per professional for 2012 is $$\$ 105,000$$. Each professional is budgeted to have 1,500 billable hours to clients in 2012 . All professionals work for clients to their maximum 1,500 billable hours available. All professional labor costs are included in a single direct-cost category and are traced to jobs on a per-hour basis. All costs of Kahn \& Associates other than professional labor costs are included in a single indirect-cost pool (legal support) and are allocated to jobs using professional labor-hours as the allocation base. The budgeted level of indirect costs in 2012 is $$\$ 2,835,000$$.
1. Prepare an overview diagram of Kahn's job-costing system.
2. Compute the 2012 budgeted direct-cost rate per hour of professional labor.
3. Compute the 2012 budgeted indirect-cost rate per hour of professional labor.
4. Kahn \& Associates is considering bidding on two jobs:
a. Litigation work for Richardson, Inc., which requires 120 budgeted hours of professional labor
b. Labor contract work for Punch, Inc., which requires 145 budgeted hours of professional labor Prepare a cost estimate for each job.

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Problem 27

Service industry, job costing, two direct- and two indirect-cost categories, law firm (continuation of 4-26). Kahn has just completed a review of its job-costing system. This review included a detailed analysis of how past jobs used the firm's resources and interviews with personnel about what factors drive the level of indirect costs. Management concluded that a system with two direct-cost categories (professional partner labor and professional associate labor) and two indirect-cost categories (general support and secretarial support) would yield more accurate job costs. Budgeted information for 2012 related to the two direct-cost categories is as follows:
$$
\begin{array}{l|c|c}
\hline & \text { Professional Partner Labor } & \text { Prolessional Associate Labor } \\
\hline \begin{array}{l}
\text { Number of professionals } \\
\text { Hours of billable time per } \\
\text { professional }
\end{array} & 10 & 20 \\
\begin{array}{l}
\text { Total compensation (average per } \\
\text { professional) }
\end{array} & 1,500 \text { per year } & 1,500 \text { per year } \\
\hline
\end{array}
$$
$$
\begin{aligned}
&\text { Budgeted information for } 2012 \text { relating to the two indirect-cost categories is as follows: }\\
&\begin{array}{l|c|c}
\hline & \text { General Support } & \text { Secretarial Support } \\
\hline \text { Total costs } & \$ 2,250,000 & \$ 585,000 \\
\text { Cost-allocation base } & \text { Professional labor-hours } & \text { Partner labor-hours } \\
\hline
\end{array}
\end{aligned}
$$
1. Compute the 2012 budgeted direct-cost rates for (a) professional partners and (b) professional associates.
2. Compute the 2012 budgeted indirect-cost rates for (a) general support and (b) secretarial support.
3. Compute the budgeted costs for the Richardson and Punch jobs, given the following information:
$$
\begin{array}{l|c|c}
\hline & \text { Richardson, Inc. } & \text { Punch, Inc. } \\
\hline \text { Professional partners } & 48 \text { hours } & 29 \text { hours } \\
\text { Professional associates } & 72 \text { hours } & 116 \text { hours } \\
\hline
\end{array}
$$
4. Comment on the results in requirement 3 . Why are the job costs different from those computed in Problem 4-26?
5. Would you recommend Kahn \& Associates use the job-costing system in Problem 4-26 or the job-costing system in this problem? Explain.

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Problem 28

Proration of overhead. (Z. Iqbal, adapted) The Solar Radiator Company uses a normalcosting system with a single manufacturing overhead cost pool and machine-hours as the cost-allocation base. The following data are for 2012 :$$
\begin{array}{l|c}
\hline \text { Budgeted manufacturing overhead costs } & \$ 4,875,000 \\
\text { Overhead allocation base } & \text { Machine-hours } \\
\text { Budgeted machine-hours } & 75,000 \\
\text { Manufacturing overhead costs incurred } & \$ 5,125,000 \\
\text { Actual machine-hours } & 80,000 \\
\hline
\end{array}
$$
Machine-hours data and the ending balances (before proration of under- or overallocated overhead) are as follows:
$$
\begin{array}{l|c|c}
\hline & \text { Actual Machine-Hours } & \text { 2012 End-of-Year Balance } \\
\hline \text { Cost of Goods Sold } & 60,000 & \$ 8,500,000 \\
\text { Finished Goods Control } & 12,000 & 1,000,000 \\
\text { Work-in-Process Control } & 8,000 & 500,000 \\
\hline
\end{array}
$$
1. Compute the budgeted manufacturing overhead rate for 2012 .
2. Compute the under- or overallocated manufacturing overhead of Solar Radiator in 2012. Dispose of this amount using the following:
a. Writeoff to Cost of Goods Sold
b. Proration based on the overhead allocated in 2012 (before proration) in the ending balances of Work-inProcess Control, Finished Goods Control, and Cost of Goods Sold
3. Which method do you prefer in requirement 2? Explain.

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01:23

Problem 29

Normal costing, overhead allocation, working backward. Garven Manufacturing uses normal costing for its job-costing system, which has two direct-cost categories (direct materials and direct manufacturing labor) and one indirect-cost category (manufacturing overhead). The following information is obtained for 2012:
- Total manufacturing costs, $$\$ 8,350,000$$
- Manufacturing overhead allocated, $$\$ 3,900,000$$ (allocated at a rate of $250 \%$ of direct manufacturing labor costs)
- Work-in-process inventory on January $$1,2012, \$ 390,000$$
- Cost of finished goods manufactured, $$\$ 8,040,000$$
1. Use information in the first two bullet points to calculate (a) direct manufacturing labor costs in 2012 and (b) cost of direct materials used in 2012.
2. Calculate the ending work-in-process inventory on December $31,2012$.

Anand Jangid
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Numerade Educator

Problem 30

General ledger relationships, under- and overallocation. (S. Sridhar, adapted) Southwick Company uses normal costing in its job-costing system. Partially completed T-accounts and additional information for Southwick for 2012 are as follows:
(TABLE CAN'T COPY)
(TABLE CAN'T COPY)
Additional information follows:
a. Direct manufacturing labor wage rate was $$\$ 12$$ per hour.
b. Manufacturing overhead was allocated at $$\$ 16$$ per direct manufacturing labor-hour.
c. During the year, sales revenues were $$\$ 1,050,000$$, and marketing and distribution costs were $$\$ 125,000$$.
1. What was the amount of direct materials issued to production during 2012 ?
2. What was the amount of manufacturing overhead allocated to jobs during 2012?
3. What was the total cost of jobs completed during 2012?
4. What was the balance of work-in-process inventory on December 31,2012 ?
5. What was the cost of goods sold before proration of under- or overallocated overhead?
6. What was the under- or overallocated manufacturing overhead in 2012 ?
7. Dispose of the under- or overallocated manufacturing overhead by writing off to Cost of Goods Sold.
B. Calculate Southwick's operating income for 2012.
9. What alternative method could Southwick have used to dispose of the under- or overallocated manufacturing overhead? Without doing any further calculations, explain how this alternative method would have affected Southwick's operating income. Which method would you recommend Southwick use? Explain your answer briefly.

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Problem 31

Allocation and proration of overhead. InStep Company prints custom training material for corporations. The business was started January 1,2012 . The company uses a normal-costing system. It has two direct cost pools, materials and labor, and one indirect cost pool, overhead. Overhead is charged to printing jobs on the basis of direct labor cost. The following information is available for 2012.
$$
\begin{array}{ll}
\hline \text { Budgeted direct labor costs } & \$ 225,000 \\
\text { Budgeted overhead costs } & \$ 315,000 \\
\text { Costs of actual material used } & \$ 148,500 \\
\text { Actual direct labor costs } & \$ 213,500 \\
\text { Actual overhead costs } & \$ 302,100 \\
\hline
\end{array}
$$
There were two jobs in process on December 31, 2012: Job 11 and Job 12. Costs added to each job as of December 31 are as follows:
$$
\begin{array}{c|c|c}
\hline & \text { Direct materials } & \text { Direct labor } \\
\hline \text { Job 11 } & \$ 4,870 & \$ 5,100 \\
\text { Job 12 } & \$ 5,910 & \$ 6,800 \\
\hline
\end{array}
$$
InStep Company has no finished goods inventories because all printing jobs are transferred to cost of goods sold when completed.
1. Compute the overhead allocation rate.
2. Calculate the balance in ending work in process and cost of goods sold before any adjustments for under- or overallocated overhead.
3. Calculate under- or overallocated overhead.
4. Calculate the ending balances in work in process and cost of goods sold if the under- or overallocated overhead amount is as follows:
a. Written off to cost of goods sold
b. Prorated using the overhead allocated in 2012 (before proration) in the ending balances of cost of goods sold and work-in-process control accounts
5. Which of the methods in requirement 4 would you choose? Explain.

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00:01

Problem 32

Support-department cost allocation; direct, step-down, and reciprocal methods. Phoenix Partners provides management consulting services to government and corporate clients. Phoenix has two support departments-administrative services (AS) and information systems (IS)- and two operating departments- government consulting (GOVT) and corporate consulting (CORP). For the first quarter of 2012, Phoenix's cost records indicate the following:
(TABLE CAN'T COPY)

1. Allocate the two support departments' costs to the two operating departments using the following methods:
a. Direct method
b. Step-down method (allocate AS first)
c. Step-down method (allocate IS first)
2. Compare and explain differences in the support-department costs allocated to each operating department.
3. What approaches might a manager use to decide the sequence in which to allocate support departments when using the step-down method?
4. Allocate the two support departments' costs to the two operating departments using the reciprocal method. Use (a) linear equations and (b) repeated iterations.
5. Which of the methods described in requirements 1 and 4 do you prefer? Explain briefly.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
00:01

Problem 33

Support-department cost allocations; single-department cost pools; direct, step-down, and reciprocal methods. The Arrow Company has two products. Product 1 is manufactured entirely in department X. Product 2 is manufactured entirely in department Y. To produce these two products, the Arrow Company has two support departments: A (a materials-handling department) and $B$ (a power-generating department).
An analysis of the work done by departments $A$ and $B$ in a typical period follows:
(TABLE CAN'T COPY)
The work done in department $A$ is measured by the direct labor-hours of materials-handling time. The work done in department $B$ is measured by the kilowatt-hours of power. The budgeted costs of the support departments for the coming year are as follows:
(TABLE CAN'T COPY)
The budgeted costs of the operating departments for the coming year are $$\$ 1,250,000$$ for department $X$ and $$\$ 950,000$$ for department $Y$.

Supervision costs are salary costs. Depreciation in department $B$ is the straight-line depreciation of powergeneration equipment in its 19 th year of an estimated 25 -year useful life. The equipment is old but well maintained.
1. What are the allocations of costs of support departments $A$ and $B$ to operating departments $X$ and $Y$ using (a) the direct method, (b) the step-down method (allocate department A first), (c) the step-down method (allocate department B first), and (d) the reciprocal method?
2. An outside company has offered to supply all the power needed by the Arrow Company and to provide all the services of the present power department. The cost of this service will be $$\$ 80$$ per kilowatt-hour of power. Should Arrow accept? Explain.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
00:01

Problem 34

Support-department cost allocations; single-department cost pools; direct, step-down, and reciprocal methods. Mountain Extreme manufactures mountain biking clothes and shoes. The company has two product lines (clothing and shoes), which are produced in separate manufacturing facilities; however, both manufacturing facilities share the same support services for information technology and human resources. The following shows the total costs for each manufacturing facility and for each support department (in thousands):
$$
\begin{array}{l|c|c|c}
\hline & \text { Variable Costs } & \text { Fixed Costs } & \begin{array}{c}
\text { Total Costs by } \\
\text { Department }
\end{array} \\
\hline \text { Information technology (IT) } & \$ 600 & \$ 2,000 & \$ 2,600 \\
\text { Human resources (HR) } & \$ 400 & \$ 1,000 & \$ 1,400 \\
\text { Clothing } & \$ 2,500 & \$ 8,000 & \$ 10,500 \\
\text { Shoes } & \underline{\$ 3,000} & \$ 4,500 & \$ 7,500 \\
\text { Total costs } & \underline{\$ 6,500} & \underline{\$ 15,500} & \underline{\$ 22,000} \\
\hline
\end{array}
$$
The total costs of the support departments (IT and HR) are allocated to the production departments (clothing and shoes) using a single rate based on the following:
\begin{tabular}{ll}
Information technology: & Number of IT labor-hours worked by department \\
Human resources: & Number of employees supported by department
\end{tabular}

Data on the bases, by department, are given as follows:
$$
\begin{array}{ll}
\text { Information technology: } & \text { Number of II labor-hours worked by department } \\
\text { Human resources: } & \text { Number of employees supported by department }
\end{array}
$$
1. What are the total costs of the production departments (clothing and shoes) after the support department costs of IT and HR have been allocated using (a) the direct method, (b) the step-down method (allocate IT first), (c) the step-down method (allocate HR first), and (d) the reciprocal method.
2. Assume that all of the work of the IT department could be outsourced to an independent company for $$\$ 97.50$$ per hour. If Mountain Extreme no longer operated its own IT department, $30 \%$ of the fixed costs of the IT department could be eliminated. Should Mountain Extreme outsource its IT services? What other factors besides cost should managers consider in this decision?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
01:54

Problem 35

Job costing, contracting, ethics. Rand Company manufactures modular homes. The company has two main products that it sells commercially: a 1,000-square-foot, one-bedroom model and a 1,500-square-foot, two-bedroom model. The company recently began providing emergency housing (huts) to FEMA, the Federal Emergency Management Agency. The emergency housing is similar to the 1,000-square-foot model.

FEMA has requested Rand to create a bid for 150 emergency huts to be sent for wildfire victims in the west. Your manager has asked that you prepare this bid. In preparing the bid, you find a recent invoice to FEMA for 200 huts provided during the most recent hurricane season in the south. You also have a standard cost sheet for the 1,000-square-foot model sold commercially. Both are provided as follows:
(TABLE CAN'T COPY)
1. Calculate the total bid if you base your calculations on the standard cost sheet assuming a cost plus $20 \%$ government contract.
2. Calculate the total bid if you base your calculations on the September 15,2012 , invoice assuming a cost plus $20 \%$ government contract.
3. What are the main discrepancies between the bids you calculated in requirements 1 and 2 ?
4. What bid should you present to your manager? What principles from the IMA Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management, as described in Chapter 1, should guide your decision? As the manager, what would you do?

Muhammad Ahsan
Muhammad Ahsan
Numerade Educator

Problem 36

Job costing-service industry. Jordan Brady schedules gigs for local bands and creates CDs and t-shirts to sell at each gig. Brady uses a normal-costing system with two direct-cost pools, labor and materials, and one indirect-cost pool, general overhead. General overhead is allocated to each gig based on $120 \%$ of labor cost. Actual overhead equaled allocated overhead in March 2012. Actual overhead in April was $$\$ 1,980$$. All costs incurred during the planning stage for a gig and during the gig are gathered in a balance sheet account called "Gigs in Progress (GIP)." When a gig is completed, the costs are transferred to an income statement account called "Cost of Completed Gigs (CCG)." Following is cost information for April 2012:$$
\begin{aligned}
&\\
&\text { As of April 1, there were three gigs in progress: Irok, Freke Out, and Bottom Rung. The gigs for Dish Towel }
\end{aligned}
$$
and Rail Ride were started during April. The gigs for Freke Out and Dish Towe/ were completed during April.
1. Calculate GIP at the end of April.
2. Calculate CCG for April.
3. Calculate under/overallocated overhead at the end of April.
4. Calculate the ending balances in GIP and CCG if the under/overallocated overhead amount is as follows:
a. Written off to CCG
b. Prorated based on the overhead allocated in April in the ending balances of GIP and CCG (before proration)
5. Which method would you choose? Explain. Would your choice depend on whether overhead cost is underallocated or overallocated? Explain.

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