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SOLUTION
Although not required, the following overview diagram is helpful to understand Kidman’s
job-costing system.
Professional
Labor-Hours
General
Support
COST OBJECT:
JOB FOR
CLIENT
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
}
DIRECT
COST
Indirect Costs
Direct Costs
Partner
Labor-Hours
Secretarial
Support
Professional
Associate Labor
Professional
Partner Labor
1. Professional
Partner Labor
Professional
Associate Labor
Budgeted compensation per professional
Divided by budgeted hours of billable
time per professional
Budgeted direct-cost rate
$ 210,000
÷1 ,500
$140 per hour*
$75,000
÷1 ,500
$50 per hour†
*Can also be calculated as
Total budgeted partner labor costs
Total budgeted partner labor - hours
=
´
´
=
†Can also be calculated as
Total budgeted associate labor costs
Total budgeted associate labor - hours
=
= $50
2. General
Support
Secretarial
Support
Budgeted total costs
Divided by budgeted quantity of allocation base
Budgeted indirect cost rate
$2,025,000
3. Richardson Punch
Direct costs:
Professional partners,
$140 48 hr.; $140 32 hr.
Professional associates,
$50 72 hr.; $50 128 hr.
Direct costs
Indirect costs:
General support,
$45 120 hr.; $45 160 hr.
Secretarial support,
$60 48 hr.; $60 32 hr.
Indirect costs
Total costs
$6,720
4. Richardson Punch
Single direct – Single indirect
(from Problem 4-32)
Multiple direct – Multiple indirect
(from requirement 3 of Problem 4-33)
Difference
$14,400
The Richardson and Punch jobs differ in their use of resources. The Richardson job has a
mix of 40% partners and 60% associates, while Punch has a mix of 20% partners and 80%
5. I would recommend that Kidman & Associates use the job costing system in this problem
with two direct- and two indirect- cost categories.
Kidman & Associates should use multiple categories of direct costs (partner labor and
professional labor) because the costs of the different categories of labor are very different and
Kidman should use multiple indirect cost pools because partners use additional secretarial
The job costing system in this problem more accurately represents the costs incurred on
different jobs and therefore helps managers make better decisions.
Professional
Labor-Hours
General
Support
COST OBJECT:
JOB FOR
CLIENT
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
}
DIRECT
COST
Indirect Costs
Direct Costs
Partner
Labor-Hours
Secretarial
Support
Professional
Associate Labor
Professional
Partner Labor
*Can also be calculated as
Total budgeted partner labor costs
Total budgeted partner labor - hours
=
´
´
=
†Can also be calculated as
Total budgeted associate labor costs
Total budgeted associate labor - hours
=
4-34 (2025 min.) Proration of overhead.
(Z. Iqbal, adapted) The Zaf Radiator Company uses a normal-costing system with a single
manufacturing overhead cost pool and machine-hours as the cost-allocation base. The
following data are for 2014:
Budgeted manufacturing overhead costs $4,800,000
Overhead allocation base Machine-hours
Budgeted machine-hours 80,000
Manufacturing overhead costs incurred $4,900,000
Actual machine-hours 75,000
Machine-hours data and the ending balances (before proration of under- or overallocated
overhead) are as follows:
Actual Machine-Hours 2014 End-of-Year Balance
Cost of Goods Sold 60,000 $8,000,000
Finished Goods Control 11,000 1,250,000
Work-in-Process Control 4,000 750,000
Required:
1. Compute the budgeted manufacturing overhead rate for 2014.
2. Compute the under- or overallocated manufacturing overhead of Zaf Radiator in 2014.
Dispose of this amount using the following:
a. Writeoff to Cost of Goods Sold
b. Proration based on ending balances (before proration) in Work-in-Process Control,
Finished Goods Control, and Cost of Goods Sold
c. Proration based on the overhead allocated in 2014 (before proration) in the ending
balances of Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold
3. Which method do you prefer in requirement 2? Explain.
SOLUTION
2.
Manufacturing overhead
underallocated
=
Manufacturing overhead
incurred
–
Manufacturing overhead
allocated
a. Write-off to Cost of Goods Sold
Account
(1)
Dec. 31, 2014
Account
Balance
(Before Proration)
(2)
Write-off
of $400,000
Underallocated
Manufacturing
Overhead
(3)
Dec. 31, 2014
Account
Balance
(After Proration)
(4) = (2) + (3)
Work in Process
Finished Goods
Cost of Goods Sold
Total
$ 750,000
b. Proration based on ending balances (before proration) in Work in Process, Finished
Goods, and Cost of Goods Sold.
Account
(1)
Dec. 31, 2014
Account Balance
(Before Proration)
(2)
Proration of $400,000
Underallocated
Manufacturing
Overhead
(3)
Dec. 31, 2014
Account
Balance
(After Proration)
(4) = (2) + (3)
Work in Process
Finished Goods
Cost of Goods Sold
Total
$ 750,000
$ 780,000
c. Proration based on the allocated overhead amount (before proration) in the ending
balances of Work in Process, Finished Goods, and Cost of Goods Sold.
Account
(1)
Dec. 31, 2014
Account
Balance
(Before
Proration)
(2)
Allocated Overhead
Included in
Dec. 31, 2014
Account Balance
(Before Proration)
(3) (4)
Proration of $400,000
Underallocated
Manufacturing Overhead
(5)
Dec. 31, 2014
Account
Balance
(After
Proration)
(6) = (2) + (5)
Work in Process
$
750,000 $ 240,000a(5.33%) 0.0533$400,000 = $ 21,320 $ 771,320
3. Alternative (c) is theoretically preferred over (a) and (b) because the underallocated
Chapter 4 also discusses an adjusted allocation rate approach that results in the same
2.
Manufacturing overhead
underallocated
=
Manufacturing overhead
incurred
–
Manufacturing overhead
allocated
4-35 (15 min.) Normal costing, overhead allocation, working backward.
Gardi 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 2014:
Total manufacturing costs, $8,300,000
Manufacturing overhead allocated, $4,100,000 (allocated at a rate of 250% of direct
manufacturing labor costs)
Work-in-process inventory on January 1, 2014, $420,000
Cost of finished goods manufactured, $8,100,000
Required:
1. Use information in the first two bullet points to calculate (a) direct manufacturing labor
costs in 2014 and (b) cost of direct materials used in 2014.
2. Calculate the ending work-in-process inventory on December 31, 2014.
SOLUTION
Direct manufacturing labor costs =
b.
Total manufacturing
cost
=
Cost of direct
materials used
+
Direct manufacturing
labor cost
+
Manufacturing
overhead allocated
2.
Work in process
1/1/2014
+
Total
manufacturing cost
=
Cost of goods
manufactured
+
Work in process
12/31/2014
2.
Work in process
1/1/2014
+
Total
manufacturing cost
=
Cost of goods
manufactured
+
Work in process
12/31/2014
4-36 (15 min.) Proration of overhead with two indirect cost pools.
Premier Golf Carts makes custom golf carts that it sells to dealers across the Southeast. The carts
are produced in two departments, fabrication (a mostly automated department) and custom
finishing (a mostly manual department). The company uses a normal-costing system in which
overhead in the fabrication department is allocated to jobs on the basis of machine-hours and
overhead in the finishing department is allocated to jobs based on direct labor-hours. During
May, Premier Golf Carts reported actual overhead of $49,500 in the fabrication department and
$22,200 in the finishing department. Additional information follows:
Manufacturing overhead rate (fabrication department) $20 per machine-hour
Manufacturing overhead rate (finishing department) $16 per direct labor-hour
Machine-hours (fabrication department) for May 2,000 machine-hours
Direct labor-hours (finishing department) for May 1,200 labor-hours
Work in process inventory, May 31 $50,000
Finished goods inventory, May 31 $150,000
Cost of goods sold, May $300,000
Premier Golf Carts prorates under- and overallocated overhead monthly to work in process,
finished goods, and cost of goods sold based on the ending balance in each account.
Required:
1. Calculate the amount of overhead allocated in the fabrication department and the finishing
department in May.
2. Calculate the amount of under- or overallocated overhead in each department and in total.
3. How much of the under- or overallocated overhead will be prorated to (a) work in process
inventory, (b) finished goods inventory, and (c) cost of goods sold based on the ending
balance (before proration) in each of the three accounts? What will be the balance in work in
process, finished goods, and cost of goods sold after proration?
4. What would be the effect of writing off under- and overallocated overhead to cost of goods
sold? Would it be reasonable for Premier Golf Carts to change to this simpler method?
SOLUTION
1. Fabrication department:
Finishing department:
2. Under- or overallocated overhead in each department and in total follows:
Fabrication department:
Finishing department:
3. Underallocated overhead prorated based on ending balances
Account
Account
Balance
(Before
Proration)
(1)
Account Balance
as a Percent of Total
(2) = (1) ÷ $500,000
Proration of $12,500
Underallocated Overhead
(3) = (2)
´
12,500
Account
Balance
(After
Proration)
(4) = (1) + (3)
Work in Process
$ 50,000 0.10
0.10
´
$12,500 = $ 1,250
$ 51,250
Finished Goods
Because Premier Golf Carts is disposing of underallocated costs based on the ending balance in
Work in Process, Finished Goods, and Cost of Goods Sold accounts, it does not have to allocate
4. The ending balance in Cost of Goods Sold would be $312,500 instead of $307,500 if the entire
4-37 (35 min.) 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 2014 are as follows:
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.
Required:
1. What was the amount of direct materials issued to production during 2014?
2. What was the amount of manufacturing overhead allocated to jobs during 2014?
3. What was the total cost of jobs completed during 2014?
4. What was the balance of work-in-process inventory on December 31, 2014?
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 2014?
7. Dispose of the under- or overallocated manufacturing overhead using the following:
a. Writeoff to Cost of Goods Sold
b. Proration based on ending balances (before proration) in Work-in-Process Control,
Finished Goods Control, and Cost of Goods Sold
8. Using each of the approaches in requirement 7, calculate Southwick’s operating income for
2014.
9. Which approach in requirement 7 do you recommend Southwick use? Explain your answer
briefly.
SOLUTION
The solution assumes all materials used are direct materials. A summary of the T-accounts for
Southwick Company before adjusting for under- or overallocation of overhead follows:
Work in process inventory
on
12/31/2014
Direct Materials Control Work-in-Process Control
1-1-2014 25,000
Purchases 240,000
Material used for
manufacturing 234,000
1-1-2014 44,000
Direct materials 234,000
Transferred to
finished goods 925,000
Finished Goods Control Cost of Goods Sold
1-1-2014 10,000
Manufacturing Overhead Control Manufacturing Overhead Allocated
Manufacturing
overhead
costs 514,000
Manufacturing
overhead
allocated to
work in
process 464,000
1. From Direct Materials Control T-account,
2. Direct manufacturing labor-hours =
Direct manufacturing labor costs
Direct manufacturing wage rate per hour
=
Manufacturing overhead
allocated
=
Direct manufacturing
labor hours
Manufacturing
overhead rate
3. From the debit entry to Finished Goods T-account,
4. From Work-in-Process T-account,
5. From the credit entry to Finished Goods Control T-account, Cost of goods sold (before
6.
Manufacturing overhead
underallocated
=
Debits to Manufacturing
Overhead Control
–
Credit to Manufacturing
Overhead Allocated
7. a. Write-off to Cost of Goods Sold will increase (debit) Cost of Goods Sold by $50,000.
Hence, Cost of Goods Sold = $880,000 + $50,000 = $930,000.
b. Proration based on ending balances (before proration) in Work in Process, Finished
Goods, and Cost of Goods Sold.
Account balances in each account after proration follows:
Account
(1)
Account Balance
(Before Proration)
(2)
Proration of $50,000
Underallocated
Manufacturing Overhead
(3)
Account Balance
(After Proration)
(4) = (2) + (3)
Work in Process $ 165,000
(15%)
0.15 $50,000 = $ 7,500 $ 172,500
8. Needham’s operating income using write-off to Cost of Goods Sold and Proration based on
ending balances (before proration) follows:
Write-off to Proration Based
Cost of Goods Sold on Ending Balances
Revenues $1,050,000 $1,050,000
Cost of goods sold 930 ,000 920 ,000
9. If the purpose is to report the most accurate inventory and cost of goods sold figures, the
preferred method is to prorate based on the manufacturing overhead allocated component in the
inventory and cost of goods sold accounts. Proration based on the balances in Work in Process,
Another consideration in Needham’s decision about how to dispose of underallocated
manufacturing overhead is the effects on operating income. The write-off to Cost of Goods Sold
The main merit of the write-off to Cost of Goods Sold method is its simplicity. However,
