SOLUTION
(15 min.) Job costing, unit cost, ending work in progress.
1.
Direct manufacturing labor rate per hour $25
Manufacturing overhead cost allocated
per manufacturing labor-hour $22
Job M1 Job M2
¸
¸
11,000 8,360
Manufacturing overhead cost allocated
(11,000
´
$22; 8,360
´
$22)
Job Costs May 2011 Job M1 Job M2
Direct materials $ 75,000 $ 56,000
Direct manufacturing labor 275,000 209,000
2.
Number of pipes produced for Job M1 1,600
3.
Finished Goods Control 592,000
4. Rafael Company began May 2016 with no work-in-process inventory. During May, it started
and finished M1. It also started M2, which is still in work-in-process inventory at the end of
4-33 Job costing; actual, normal, and variation from normal costing. Cheney & 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. Cheney &
Partners employs 10 professionals to perform audit services.
Budgeted and actual amounts for 2017 are as follows:
Required:
1. Compute the direct-cost rate and the indirect-cost rate per professional labor-hour for 2017
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 Cheney & Partners use? Explain.
3. Cheney’s 2017 audit of Pierre & Co. was budgeted to take 170 hours of professional labor
time. The actual professional labor time spent on the audit was 185 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.
SOLUTION
(2030 min.) Job costing; actual, normal, and variation from normal costing.
1. Actual direct cost rate for professional labor = $53 per professional labor-hour
$744,000
15,500 hours
Budgeted direct cost rate
for professional labor
=
$960,000
16,000 hours
= $60 per professional labor-hour
Budgeted indirect cost rate =
$720,000
16,000 hours
= $45 per professional labor-hour
(a)
Actual
Costing
(b)
Normal
Costing
(c)
Variation of
Normal Costing
Direct-Cost Rate $53
(Actual rate)
$53
(Actual rate)
$60
(Budgeted rate)
2. Cheney & Partners should choose a job-costing system based on the direct cost
information available to them. If Cheney knows direct costs as the jobs are being done, I would
recommend Cheney use normal costing over actual costing by calculating a budgeted indirect
If Cheney does not know direct costs as the jobs are being completed, I would
recommend that Cheney use the variation of normal costing that calculates a budgeted direct cost
rate. This would allow Cheney to estimate costs on a more-timely basis and gain all the benefits
3.
(a)
Actual
Costing
(b)
Normal
Costing
(c)
Variation of
Normal Costing
Direct Costs
$53 185 = $ 9,805
$53 185 = $ 9,805
$60 185 = $11,100
All three costing systems use the actual professional labor time of 185 hours. The budgeted 170
Although not required, the following overview diagram summarizes Cheney’s job-costing
system.
Audit
Support
Professional
Labor-Hours
Indirect Costs
Direct Costs
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
COST OBJECT:
JOB FOR
AUDITING
PIERRE
& CO.
DIRECT
COST
Professional
Labor
4-34 Job costing; variation on actual, normal, and variation from normal costing. Creative
Solutions designs Web pages for clients in the education sector. The company’s job-costing
system has a single direct cost category (Web-designing labor) and a single indirect cost pool
composed of all overhead costs. Overhead costs are allocated to individual jobs based on direct
labor-hours. The company employs six Web designers. Budgeted and actual information
regarding Creative Solutions follows:
Required:
1. Compute the direct-cost rate and the indirect-cost rate per Web-designing labor-hour for 2017
under (a) actual costing, (b) normal costing, and (c) the variation from normal costing that
uses budgeted rates for direct costs.
2. Which method would you suggest Creative Solutions use? Explain.
3. Creative Solutions’ Web design for Greenville Day School was budgeted to take 86 direct
labor-hours. The actual time spent on the project was 79 hours. Compute the cost of the
Greenville Day School job using (a) actual costing, (b) normal costing, and (c) the variation
from normal costing that uses budgeted rates for direct costs.
$157,500
10,500
(a)
Actual
Costing
(b)
Normal
Costing
(c)
Variation of
Normal Costing
Direct-Cost Rate $25
$25
$26
2. Creative Solutions should choose a job-costing system based on the direct cost
information available to them. If Creative Solutions knows direct costs as the jobs are being
done, I would recommend Creative Solutions use normal costing over actual costing by
calculating a budgeted indirect cost rate to cost jobs. Normal costing enables Creative Solutions
If Creative Solutions does not know direct costs as the jobs are being completed, I would
recommend that Creative Solutions use the variation of normal costing that calculates a budgeted
3. (a)
Actual
Costing
(b)
Normal
Costing
(c)
Variation of
Normal Costing
Direct Costs
$25 79 = $1,975
$25 79 = $1,975
$26 79 = $2,054
Proration of overhead. The Ride-On-Wave Company (ROW) produces a line of non-motorized
boats. ROW uses a normal-costing system and allocates manufacturing overhead using direct
manufacturing labor cost. The following data are for 2017:
Inventory balances on December 31, 2017, were as follows:
Required:
1. Calculate the manufacturing overhead allocation rate.
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 or overallocated manufacturing overhead is as follows:
a. Written off to cost of goods sold
b. Prorated based on ending balances (before proration) in each of the three accounts
c. Prorated based on the overhead allocated in 2017 in the ending balances (before
proration) in each of the three accounts
4. Which method would you choose? Justify your answer.
SOLUTION
(30 min.) Proration of overhead.
overhead rate
1. Budgeted manufacturing
=
Budgeted manufacturing overhead cost
Budgeted direct manufacturing labor cost
$125, 000 50% of direct manufacturing labor cost
$250, 000
= =
3a. All underallocated manufacturing overhead is written off to cost of goods sold.
Both work-in-process (WIP) and finished goods inventory remain unchanged.
Account
Dec. 31, 2017
Balance
(Before Proration)
(1)
Proration of $3,000
Underallocated
Manuf. Overhead
(2)
Dec. 31, 2017
Balance
(After Proration)
(3) = (1) + (2)
WIP $ 50,700 $ 0 $ 50,700
3b. Underallocated manufacturing overhead prorated based on ending balances:
Account
Dec. 31, 2017
Account Balance
(Before Proration)
(1)
Account
Balance as a
Percent of Total
(2) = (1) ÷ $845,000
Proration of $3,000
Underallocated
Manuf. Overhead
(3) = (2)
´
$3,000
Dec. 31, 2017
Account Balance
(After Proration)
(4) = (1) + (3)
WIP
$ 50,700 0.06
0.06
´
$3,000 = $ 180
$ 50,880
´
3c. Underallocated manufacturing overhead prorated based on 2017 overhead in ending
balances:
Account
Dec. 31, 2017
Account
Balance
(Before
Proration)
(1)
Allocated
Manuf.
Overhead in
Dec. 31, 2017
Balance
(Before
Proration)
(2)
Allocated Manuf.
Overhead in
Dec. 31, 2017
Balance as a
Percent of Total
(3) = (2) ÷ $114,000
Proration of $3,000
Underallocated
Manuf. Overhead
(4) = (3)
´
$3,000
Dec. 31, 2017
Account
Balance
(After
Proration)
(5) = (1) + (4)
WIP
$ 50,700 $ 10,260a0.09
0.09
´
$3,000 = $ 270
$ 50,970
´
0.65
´
$3,000 = 1 ,950
´
´
4. Writing off all of the underallocated manufacturing overhead to Cost of Goods Sold (COGS)
4-36 Job costing, accounting for manufacturing overhead, budgeted rates. The Solomon
Company uses a job-costing system at its Dover, Delaware, plant. The plant has a machining
department and a finishing department. Solomon 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 2017
budget for the plant is as follows:
Required:
1. Prepare an overview diagram of Solomon’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:
Compute the total manufacturing overhead cost allocated to Job 431.
4. Assuming that Job 431 consisted of 400 units of product, what is the cost per unit?
5. Amounts at the end of 2017 are as follows:
Compute the under- or overallocated manufacturing overhead for each department and for
the Dover plant as a whole.
6. Why might Solomon use two different manufacturing overhead cost pools in its job-costing
system?
SOLUTION
(2030 min) Job costing, accounting for manufacturing overhead,
budgeted rates.
1. An overview of the job-costing system is:
COST
ALLOCATI ON
BASE
DIRECT
COST
M achining Department
M anufacturing Overhead
M achine-H ours
in M achining Dept.
Direct
M aterials
IN DIRECT
COST
POOL
Direct
M anufacturing
Labor
Indi rect Costs
Di rect Costs
Finishing Department
M anufacturing Overhead
Direct M anufacturing
Labor Costs
in Finishing Dept.
2. Budgeted manufacturing overhead divided by allocation base:
a. Machining Department:
$10,660,000
205,000 machine-hours
= $52 per machine-hour
b. Finishing Department:
$8,000,000
$4,000,000
= 200% of direct manufacturing labor costs
3. Machining Department overhead, $52 150 machine-hours $ 7,800
4. Total costs of Job 431:
Direct costs:
5.
Machining Finishing
Manufacturing overhead incurred (actual) $13,250,000
$8,400,000
Manufacturing overhead allocated
6. A homogeneous cost pool is one where all costs have the same or a similar cause-and-effect
or benefits-received relationship with the cost-allocation base. Solomon likely assumes that all
4-37 Service industry, job costing, law firm. Kidman & Associates is a law firm specializing
in labor relations and employee-related work. It employs 30 professionals (5 partners and 25
associates) who work directly with its clients. The average budgeted total compensation per
professional for 2017 is $97,500. Each professional is budgeted to have 1,500 billable hours to
clients in 2017. 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 Kidman & 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 2017 is
$2,475,000.
Required:
1. Prepare an overview diagram of Kidman’s job-costing system.
2. Compute the 2017 budgeted direct-cost rate per hour of professional labor.
3. Compute the 2017 budgeted indirect-cost rate per hour of professional labor.
4. Kidman & 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 160 budgeted hours of professional
labor. Prepare a cost estimate for each job.