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SOLUTION
(20 -30 min.) Job costing, normal and actual costing.
1.
Budgeted indirect-
cost rate
=
Budgeted indirect costs (assembly support)
Budgeted direct labor-hours
=
$8,800,000
220,000 hours
= $40 per direct labor-hour
Actual indirect-
cost rate
=
Actual indirect costs (assembly support)
Actual direct labor-hours
=
$8,400,000
200,000 hours
= $42 per direct labor-hour
These rates differ because both the numerator and the denominator in the two calculations are
different—one based on budgeted numbers and the other based on actual numbers.
2a. Laguna
Model
Mission
Model
Normal costing
Direct costs
2b. Actual costing
Direct costs
3. Normal costing enables Atkinson to report a job cost as soon as the job is completed,
assuming that both the direct materials and direct labor costs are known at the time of use. Once
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
Direct
Materials
COST OBJECT:
RESIDENTIAL
HOME
DIRECT
COSTS
Direct
Manufacturing
Labor
Indirect Costs
Direct Costs
Assembly
Support
Direct
Labor-Hours
4-24 Budgeted manufacturing overhead rate, allocated manufacturing overhead. Taylor
Company uses normal costing. It allocates manufacturing overhead costs using a budgeted rate
per machine-hour. The following data are available for 2017:
Required:
1. Calculate the budgeted manufacturing overhead rate.
2. Calculate the manufacturing overhead allocated during 2017.
3. Calculate the amount of under- or overallocated manufacturing overhead. Why do Taylor’s
managers need to calculate this amount?
SOLUTION
(10 min.) Budgeted manufacturing overhead rate, allocated manufacturing overhead.
1. Budgeted manufacturing overhead rate =
Budgeted manufacturing overhead
Budgeted machine hours
=
$3,800,000
200,000 machine-hours
= $19 per machine-hour
2. Manufacturing
overhead
allocated
=Actual
machine-hours
Budgeted
manufacturing
overhead rate
3. Because manufacturing overhead allocated is greater than the actual manufacturing
overhead costs, Taylor calculates overallocated manufacturing overhead as follows:
Underallocation and overallocation of overheads arise because overhead costs are allocated based on
4-25 Job costing, accounting for manufacturing overhead, budgeted rates. The Matthew
Company uses a normal job-costing system at its Minneapolis plant. The plant has a machining
department and an assembly department. Its job-costing system has two direct-cost categories
(direct materials and direct manufacturing labor) and two manufacturing overhead cost pools (the
machining department overhead, allocated to jobs based on actual machine-hours, and the
assembly department overhead, allocated to jobs based on actual direct manufacturing labor
costs). The 2017 budget for the plant is as follows:
Required:
1. Present an overview diagram of Matthew’s job-costing system. Compute the budgeted
manufacturing overhead rate for each department.
2. During February, the job-cost record for Job 494 contained the following:
Compute the total manufacturing overhead costs allocated to Job 494.
3. At the end of 2017, the actual manufacturing overhead costs were $1,800,000 in machining
and $5,300,000 in assembly. Assume that 33,000 actual machine-hours were used in
machining and that actual direct manufacturing labor costs in assembly were $3,200,000.
Compute the over or underallocated manufacturing overhead for each department.
SOLUTION
(20-30 min.) Job costing, accounting for manufacturing overhead, budgeted rates.
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 the budgeted quantity of the allocation base:
Machining Department overhead:
$1,500,000
30,000
= $50 per machine-hour
Assembly Department overhead:
$5,100,000
$3,000,000
= 170% of direct manuf. labor costs
2. Machining department overhead allocated, 2,800 hours $50 $140,000
3. Machining Dept. Assembly Dept.
Actual manufacturing overhead $1,800,000 $ 5,300,000
Manufacturing overhead allocated,
4-26 Job costing, consulting firm. Frontier Partners, a management consulting firm, has the
following condensed budget for 2017:
Frontier 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 2017 budgeted
indirect-cost rate for Frontier Partners.
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. Frontier is bidding on a consulting job for Sentinel Communications, a wireless
communications company. The budgeted breakdown of professional labor on the job is as
follows:
Calculate the budgeted cost of the Sentinel Communications job. How much will Frontier bid for
the job if it is to earn its target operating income of 10% of revenues?
SOLUTION
(2025 min.) Job costing, consulting firm.
1. Budgeted indirect-cost rate for client support can be calculated as follows:
2. At the budgeted revenues of $50,000,000 Frontier’s operating income of $5,000,000 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
3. Budgeted costs
Direct costs:
Director, $200 9 $1,800
As calculated in requirement 2, the bid price to earn a 10% income-to-revenue margin is 250% of
direct professional costs. Therefore, Taylor should bid 250% $15,800 = $39,500 for the
Sentinel Communications job.
Bid price to earn target operating income-to-revenue margin of 10% can also be
calculated as follows:
4-27 Time period used to compute indirect cost rates. Capitola Manufacturing produces
surfboards. 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, Pacific Wholesale, due to large fluctuations in price. The owner of Capitola
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:
It takes 2 direct manufacturing labor-hours to make each board. The actual direct material cost is
$65.00 per board. The actual direct manufacturing labor rate is $20 per hour. The budgeted
variable manufacturing overhead rate is $16 per direct manufacturing labor-hour. Budgeted fixed
manufacturing overhead costs are $20,000 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 overhead rate.
3. Capitola Manufacturing prices its surfboards at manufacturing cost plus 20%. Why might
Pacific Wholesale be seeing large fluctuations in the prices of boards? Which of the methods
described in requirements 1 and 2 would you recommend Capitola use? Explain.
SOLUTION
(15–20 min.) Time period used to compute indirect cost rates.
1.
Quarter
1 2 3 4 Annual
(1) Surfboards sold 500 400 100 250 1,250
(2) Direct manufacturing
(3) Budgeted fixed
manufacturing overhead
(4) Budgeted fixed
manufacturing overhead
rate per direct
manufacturing labor hour
Budgeted Costs Based on
Quarterly Manufacturing
Overhead Rate
2nd Quarter 3rd Quarter
Direct material costs ($65 400 boards; 100 boards) $26,000 $ 6,500
Direct manufacturing labor costs
($20 800 hours; 200 hours) 16,000 4,000
Variable manufacturing overhead costs
($16 800 hours; 200 hours) 12,800 3,200
Fixed manufacturing overhead costs
2.
Budgeted Costs Based on
Annual Manufacturing
Overhead Rate
2nd Quarter 3rd Quarter
Direct material costs ($65 400 boards; 100 boards) $26,000 $ 6,500
Direct manufacturing labor costs
($20 800 hours; 200 hours) 16,000 4,000
Variable manufacturing overhead costs
($16 800 hours; 200 hours) 12,800 3,200
Fixed manufacturing overhead costs
3.
2nd Quarter 3rd Quarter
Prices based on quarterly budgeted manufacturing
overhead rates calculated in requirement 1
Price based on annual budgeted manufacturing overhead
rates calculated in requirement 2
Pacific Wholesale might be seeing large fluctuations in the prices of its boards because Capitola
is determining budgeted manufacturing overhead rates on a quarterly rather than an annual basis.
Capitola should use the budgeted annual manufacturing overhead rate because capacity decisions
4-28 Accounting for manufacturing overhead. Creative 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 2017, Creative recorded the following:
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
write it off to cost of goods sold? Prepare the journal entry to dispose of the under- or
overallocated overhead.
