Chapter 04 – Job Costing
4-31 Cost Flows; Applying Overhead (20 min)
1. Predetermined Overhead Rate = $1,980,000 ÷ 66,000 machine hours
2. Journal Entries:
a. Materials Inventory 900,000
Accounts Payable 900,000
180,000 lbs x $5 = $900,000
b. Work-in-Process Inventory 525,000
c. Work-in-Process Inventory 240,000
Factory Overhead 40,000
Accrued Payroll 280,000
d. Factory Overhead 75,700
Accumulated Depreciation 75,700
e. Factory Overhead 3,500
Prepaid Insurance 3,500
f. Factory Overhead 8,500
Cash 8,500
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Chapter 04 – Job Costing
4-31 (continued -1)
i. Work-in-Process Inventory 231,000
Factory Overhead 231,000
$30 per machine hour x 7,700 machine hours = $231,000
3. Actual factory overhead:
4-32 Application of Overhead (20 min)
1. Calculation for Job G15: $6,000 ÷ $10,000 = 0.6 per direct labor dollar
= overhead rate
2. Applied Overhead for Job B10: $34,000 x 0.6= $20,400
Total applied overhead:
B10 $20,400
C44 20,750
G15 6,000
$47,150
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Chapter 04 – Job Costing
4-33 Application of Overhead (30 min)
1. Total cost of Job A:
Sept. Direct materials requisitioned $65,000
Sept. Direct labor cost: 4,200 hours x $8.50/hour 35,700
Sept. Applied overhead: 4,200 hours x $6.50/hour* 27,300
Sept. 1 Work-in-process 31,200
Total cost of Job A $ 159,200
*predetermined OH rate = $617,500 ÷ 95,000 direct labor hours
= $6.50
2. Total overhead cost applied during September:
Applied Overhead = total direct labor-hours x overhead rate
= (4,200 + 3,500) x $6.50 per hour = $50,050
3. Overapplied overhead for September:
Actual Overhead = $13,500 + $6,000 + $7,000 + $7,500 + $12,000
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Chapter 04 – Job Costing
4-34 Application of Overhead (20 min)
1., 2.
3. The seasonality should not affect Whitley’s job costs because Whitley
is using an annual overhead rate; the $22 rate would be used for
each job throughout the year The effect would be for higher
the winter.
4. As a construction company, Whitley has a lot of waste to dispose of,
most of which will end up in the local landfill. Whitley can reduce the
environmental effects of waste disposal by careful use of materials so
as to minimize the waste that occurs in the jobs. Environmentally
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Chapter 04 – Job Costing
4-34 (continued -1)
5. The possible cost drivers in this case include direct labor hours (used
by Whitley), direct labor cost, and materials cost. There is not likely
to be much difference between the rates based on direct labor hours
and dollars, but there could be a significant difference if there were a
change to materials cost as the cost driver. Materials cost might
associated with materials usage than labor usage.
4-35 Application of Overhead (20 min)
1. Predetermined Factory Overhead Rate
2. Applied Overhead = $8 x 71,500 = $572,000
Underapplied Overhead $10,250
3. Journal entry to transfer underapplied overhead to Cost of Goods Sold
4-36 Overhead Rate; Pricing (20 min)
1. Predetermined Overhead Rate = $325,000 ÷ 25,000 hours
= $13 per professional hour
2. Total Cost = $32,000 + ($50 x 1,200) + ($13 x 1,200)
= $32,000 + $60,000 + $15,600 = $107,600
Total billing for Central Texas Bank = $107,600 x 150% = $161,400
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Chapter 04 – Job Costing
4-37 Application of Overhead (15 min)
1.
2. The oil-based paint, because it required more clean-up time and
materials (harmful chemicals), increased direct labor hours and
increased materials costs (due to the purchase of the clean-up
chemicals), both of which are included in job cost. The disposal of the
clean-up waste is likely to be included in overhead and therefore not
charged to the Prevette job; it is also quite possible that the clean-up
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Chapter 04 – Job Costing
4-38 Spoilage and Scrap (20 Min)
Background Information:
Job X12 (specific normal spoilage for a particular job)
Cost of spoiled units $600
Disposal value of spoiled unit 300
Job Y34 (common normal spoilage, abnormal spoilage, and scrap)
Cost of spoiled units
Common normal spoilage $400
1. Journal entries to record spoilage costs:
a. To record the normal spoilage attributable to Job X12
Materials Inventory (disposal price of the spoiled goods) 300
Work-in-Process Inventory: Job X12 300
b. To record the normal and abnormal spoilages incurred in Job Y34
2. Journal entries to record scrap sold:
a. To record the scrap sold attributable to a specific job
Cash 80
Work-in-Process Inventory: Job Y34 80
b. To record the scrap sold common to all jobs
PROBLEMS
4-39 Overhead Rates Used for Each Machine in a Printing Plant
(Note: See also the Comments on Cost Management in Action at the end of the chapter regarding a similar costing situation)
This short case is intended as a basis for class discussion that could initiate the following topics and questions: application of job costing in the
printing industry; what are the factors driving the accuracy of product costing; how does the choice of job costing method affect pricing; what is
the effect of cost allocation methods on management behavior, performance evaluation, and how does a chosen cost method advance or hinder
the firm’s progress to its strategic goals? Some observations that I would bring out in this discussion include:
EFS uses a job costing system in which materials and direct labor are traced to the job, and overhead is traced to each machine and then applied
to the jobs based on machine usage
A strength would be that EFS has put a lot of effort into tracing the printing costs accurately and using an overhead allocation approach that
attempts to trace the costs of the machinery to the jobs that used that machinery
I would begin a discussion of the EFS approach to allocating other overhead costs – insurance, supervision, and office salaries – to the jobs based
on the capacity of the machines. That is, machines with more printing capacity (where capacity is the number of feet of forms produced per
minute of machine time) will receive a larger portion of this portion of overhead. This is very much like a volume based rate, which is OK, but
does not reflect the actual behavior of these costs. Suppose the total of other overhead is significant. Then small jobs on high capacity (fast)
4-39 (continued -1)
The strategic issue is the unknown impact of cost calculations on
competitive pricing, and therefore on the company’s competitiveness. The
success of the company depends on its ability to set a competitive price,
recognizing that the company has unused capacity (in a seasonal
business) in some periods of the year.
Source: Lisa Cross, “Benefiting from Costing and Pricing Tools,” Graphic
Arts Monthly, July 2004, pp 32-34.
4-40 Plantwide vs. Departmental Overhead Rate (30 Min)
1. Empco Inc. is currently using a plantwide overhead rate that is
applied on the basis of direct labor dollars. In general, a
plantwide factory overhead rate is acceptable only if a similar
relationship between overhead and direct labor exists in all
departments, or the company manufactures products, which
receive proportional services from each department.
In most cases, departmental overhead rates are
preferable to plantwide overhead rates because plantwide
overhead rates do not provide:
a framework for reviewing overhead costs on a
departmental basis, identifying departmental cost
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Chapter 04 – Job Costing
4-40 (continued -1)
2. Because Empco uses a plantwide overhead rate applied on the
basis of direct labor dollars, the elimination of direct labor in the
Drilling Department through the introduction of robots may
appear to reduce the overhead cost of the Drilling Department
to zero. However, this change will not reduce fixed factory
3. In order to improve the allocation of overhead costs ,Empco should:
establish separate overhead accounts (pools) and rates
for the Drilling Department.
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