4-1
SOLUTION
1. An overview of the product costing system is
COST OBJECT:
PRODUCT
COST
ALLOCATION
BASE
DIRECT
COST
Machining Department
Manufacturing Overhead
Machine-Hours
Direct
Materials
INDIRECT
COST
POOL
Direct
Manufacturing
Labor
Indirect Costs
Direct Costs
Assembly Department
Manufacturing Overhead
Direct Manuf.
Labor Cost
Budgeted manufacturing overhead divided by allocation base:
Machining Department overhead:
000,50
000,800,1$
= $36 per machine-hour
Assembly Department overhead:
000,000,2$
000,600,3$
= 180% of direct manuf. labor costs
2. Machining department overhead allocated, 2,000 hours $36 $72,000
Assembly department overhead allocated, 180% $15,000 27,000
Total manufacturing overhead allocated to Job 494 $99,000
3. Machining Dept. Assembly Dept.
Actual manufacturing overhead $2,100,000 $ 3,700,000
Manufacturing overhead allocated,
$36 55,000 machine-hours 1,980,000 —
180% $2,200,000 — 3,960,000
Underallocated (Overallocated) $ 120,000 $ (260,000)
4-2
COST OBJECT:
PRODUCT
COST
ALLOCATION
BASE
DIRECT
COST
Machining Department
Manufacturing Overhead
Machine-Hours
Direct
Materials
INDIRECT
COST
POOL
Direct
Manufacturing
Labor
Indirect Costs
Direct Costs
Assembly Department
Manufacturing Overhead
Direct Manuf.
Labor Cost
4-21 (20−25 min.) Job costing, consulting firm.
Taylor & Associates, a consulting firm, has the following condensed budget for 2014:
Revenues $20,000,000
Total costs:
Direct costs
Professional Labor $ 5,000,000
Indirect costs
Client support 13,000,000 18,000,000
Operating income $2,000,000
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.
Required:
1. Prepare an overview diagram of the job-costing system. Calculate the 2014 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:
Professional Labor Category
Budgeted Rate per Hour
Budgeted Hours
Director
$200
3
Partner
100
16
Associate
50
40
Assistant
30
160
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?
SOLUTION
1. Budgeted indirect-cost rate for client support can be calculated as follows:
Budgeted indirect-cost rate = $13,000,000 ÷ $5,000,000 = 260% of professional labor costs
2. At the budgeted revenues of $20,000,000 Taylor’s operating income of $2,000,000 equals
10% of revenues.
COST
ALLOCATION
BASE
Consulting
Support
Consulting
Support
COST OBJECT:
JOB FOR
CONSULTING
CLIENT
DIRECT
COSTS
Indirect Costs
Direct Costs
INDIRECT
COST
POOL
Professional
Labor Costs
Professional
Labor Costs
Professional
Labor
Client
Support
4-4
Markup rate = $20,000,000 ÷ $5,000,000 = 400% of direct professional labor costs
3. Budgeted costs
Direct costs:
Director, $200 3 $ 600
Partner, $100 16 1,600
Associate, $50 40 2,000
Assistant, $30 160 4,800 $ 9,000
Indirect costs:
Consulting support, 260% $9,000 23,400
Total costs $32,400
As calculated in requirement 2, the bid price to earn a 10% income–to–revenue margin is 400% of
direct professional costs. Therefore, Taylor should bid 4 $9,000 = $36,000 for the Tasty Chicken
job.
Bid price to earn target operating income-to–revenue margin of 10% can also be calculated
as follows:
Let R = revenue to earn target income
R – 0.10R = $32,400
0.90R = $32,400
R = $32,400 ÷ 0.90 = $36,000
Or
Direct costs $ 9,000
Indirect costs 23,400
Operating income (0.10 $36,000) 3,600
Bid price $36,000
4-22 (15–20 min.) Time period used to compute indirect cost rates.
Plunge 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, Socha Wholesale, due to
large fluctuations in price. The owner of Plunge 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:
Quarter________
1 2 3 4_
Pools manufactured and sold 565 490 245 100
It takes 1 direct manufacturing labor-hour to make each pool. The actual direct material cost is
$14.00 per pool. The actual direct manufacturing labor rate is $20 per hour. The budgeted variable
manufacturing overhead rate is $15 per direct manufacturing labor-hour. Budgeted fixed
manufacturing overhead costs are $12,250 each quarter.
Required:
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
COST
ALLOCATION
BASE
Consulting
Support
Consulting
Support
COST OBJECT:
JOB FOR
CONSULTING
CLIENT
DIRECT
COSTS
Indirect Costs
Direct Costs
INDIRECT
COST
POOL
Professional
Labor Costs
Professional
Labor Costs
Professional
Labor
Client
Support
overhead rate.
3. Plunge Manufacturing prices its pools at manufacturing cost plus 30%. Why might Socha
Wholesale be seeing large fluctuations in the prices of pools? Which of the methods described
in requirements 1 and 2 would you recommend Plunge use? Explain.
SOLUTION
1.
Quarter
1
2
3
4
Annual
(1) Pools sold
565
490
245
100
1,400
(2) Direct manufacturing labor
hours (1 Row 1)
565
490
245
100
1,400
(3) Fixed manufacturing
overhead costs
$12,250
$12,250
$12,250
$12,250
$49,000
(4) Budgeted fixed
manufacturing overhead
rate per direct
manufacturing labor hour
($12,250 Row 2)
$21.68
$25
$50
$122.50
$35
Budgeted Costs Based on
Quarterly Manufacturing
Overhead Rate
2nd Quarter
3rd Quarter
Direct material costs ($14 490 pools; 245 pools)
$ 6,860
$ 3,430
Direct manufacturing labor costs
($20 490 hours; 245 hours)
9,800
4,900
Variable manufacturing overhead costs
($15 490 hours; 245 hours)
7,350
3,675
Fixed manufacturing overhead costs
($25 490 hours; $50 × 245 hours)
12,250
12,250
Total manufacturing costs
$36,260
$24,255
Divided by pools manufactured each quarter
÷ 490
÷ 245
Manufacturing cost per pool
$ 74.00
$ 99.00
2.
Budgeted Costs Based on
Annual Manufacturing
Overhead Rate
2nd Quarter
3rd Quarter
Direct material costs ($14 490 pools; 245 pools)
$ 6,860
$ 3,430
Direct manufacturing labor costs
($20 490 hours; 245 hours)
9,800
4,900
Variable manufacturing overhead costs
($15 490 hours; 245 hours)
7,350
3,675
Fixed manufacturing overhead costs
($35 490 hours; 75 hours)
17,150
8,575
Total manufacturing costs
$41,160
$20,580
4-7
Divided by pools manufactured each quarter
490
245
Manufacturing cost per pool
$ 84.00
$84.00
3.
2nd Quarter
3rd Quarter
Prices based on quarterly budgeted manufacturing
overhead rates calculated in requirement 1
($74.00 130%; $99.00 130%)
$96.20
$128.70
Price based on annual budgeted manufacturing overhead
rates calculated in requirement 2
($84.00 130%; $84.00 130%)
$109.20
$109.20
Socha might be seeing large fluctuations in the prices of its pools because Plunge is determining
budgeted manufacturing overhead rates on a quarterly rather than an annual basis. Plunge should
use the budgeted annual manufacturing overhead rate because capacity decisions are based on
longer annual periods rather than quarterly periods. Prices should not vary based on quarterly
fluctuations in production. Plunge could vary prices based on market conditions and demand for
its pools. In this case, Plunge would charge higher prices in quarter 2 when demand for its pools
is high. Pricing based on quarterly budgets would cause Plunge to do the opposite—to decrease
rather than increase prices!
4-23 (10–15 min.) Accounting for manufacturing overzhead.
Jamison Woodworking uses normal costing and allocates manufacturing overhead to jobs based
on a budgeted labor-hour rate and actual direct labor-hours. Under- or overallocated overhead, if
immaterial, is written off to Cost of Goods Sold. During 2014, Jamison recorded the following:
Budgeted manufacturing overhead costs
$4,400,000
Budgeted direct labor-hours
200,000
Actual manufacturing overhead costs
$4,650,000
Actual direct labor-hours
212,000
Required:
1. Compute the budgeted manufacturing overhead rate.
2. Prepare the summary journal entry to record the allocation of manufacturing overhead.
3. Compute the amount of under- or overallocated manufacturing overhead. Is the amount
significant enough to warrant proration of overhead costs, or would it be permissible to write
it off to cost of goods sold? Prepare the journal entry to dispose of the under– or overallocated
overhead.
SOLUTION
1. Budgeted manufacturing overhead rate =
$4,400,000
200,000 labor-hours
= $22 per direct labor-hour
2. Work-in–Process Control 4,664,000
Manufacturing Overhead Allocated 4,664,000
(212,000 direct labor-hours $22 per direct labor-hour = $4,664,000)
3. $4,650,000– $4,664,000 = $74,000 overallocated, an insignificant amount of difference
compared to manufacturing overhead costs allocated $14,000 ÷ $4,664,000 = 0.3%. If the
quantities of work-in-process and finished goods inventories are small, the difference between
proration and write off to Cost of Goods Sold account would be very small compared to net
income.
Manufacturing Overhead Allocated 4,664,000
Manufacturing Department Overhead Control 4.650,000
Cost of Goods Sold 14,000
4-24 (35−45 min.) Job costing, journal entries.
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 2014:
Direct materials and supplies purchased on credit
$ 800
Direct materials used
710
Indirect materials issued to various production departments
100
Direct manufacturing labor
1,300
Indirect manufacturing labor incurred by various production departments
900
Depreciation on building and manufacturing equipment
400
Miscellaneous manufacturing overhead* incurred by various production departments
(ordinarily would be detailed as repairs, photocopying, utilities, etc.)
550
Manufacturing overhead allocated at 160% of direct manufacturing labor costs
?
Cost of goods manufactured
4,120
Revenues
8,000
Cost of goods sold (before adjustment for under- or overallocated manufacturing overhead)
4,020
Required:
1. Prepare an overview diagram of the job-costing system at the University of Chicago Press.
2. Prepare journal entries to summarize the 2014 transactions. 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. Explanations for each entry may be omitted.
3. Show posted T-accounts for all inventories, Cost of Goods Sold, Manufacturing Overhead
Control, and Manufacturing Overhead Allocated.
4. How did the University of Chicago Press perform in 2014?
*The term manufacturing overhead is not used uniformly. Other terms that are often encountered
in printing companies include job overhead and shop overhead.
Inventories, December 31, 2013 (not 2014):
Materials Control
100
Work-in–Process Control
60
Finished Goods Control
500