SOLUTION
(1520 min.) Service industry, job costing, law firm.
1.
Profession al
La bor-Hou rs
Lega l
Support
COST OBJECT:
JOB FOR
CLIENT
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
}
DIRECT
COST
Ind irect Costs
Direct Costs
Professional
Labor
2.
Budgeted professional
labor-hour direct cost rate
=
Budgeted direct labor compensation per professional
Budgeted direct labor-hours per professional
=
$97,500
1,500 hours
= $65 per professional labor-hour
Note that the budgeted professional labor-hour direct-cost rate can also be calculated by
Budgeted indirect
cost rate
=
Budgeted total costs in indirect cost pool
Budgeted total professional labor-hours
=
$2,475,000
1,500 hours per professional 30 professionals´
=
$2,475,000
45,000 hours
= $55 per professional labor-hour
3.
4. Richardson Punch
Direct costs:
Indirect costs:
4-38 Service industry, job costing, two direct- and two indirect-cost categories, law firm
(continuation of 4-37). Kidman has just completed a review of its job-costing system. This
review included a detailed analysis of how past jobs used the firm’s resources and interviews
with personnel about what factors drive the level of indirect costs. Management concluded that a
system with two direct-cost categories (professional partner labor and professional associate
labor) and two indirect-cost categories (general support and secretarial support) would yield
more accurate job costs. Budgeted information for 2017 related to the two direct-cost categories
is as follows:
Budgeted information for 2017 relating to the two indirect-cost categories is as follows:
Required:
1. Compute the 2017 budgeted direct-cost rates for (a) professional partners and (b) professional
associates.
2. Compute the 2017 budgeted indirect-cost rates for (a) general support and (b) secretarial
support.
3. Compute the budgeted costs for the Richardson and Punch jobs, given the following
information:
4. Comment on the results in requirement 3. Why are the job costs different from those
computed in Problem 4-37?
5. Would you recommend Kidman & Associates use the job-costing system in Problem 4-37 or
the job-costing system in this problem? Explain.
SOLUTION
(25–30 min.) Service industry, job costing, two direct- and indirect-cost categories,
law firm (continuation of 4-37).
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
$ 210,000
$75,000
Total budgeted associate labor costs
Total budgeted associate labor – hours
$75,000 25
1,500 25
´
´
$1,875,000
37,500
2. General
Support
Secretarial
Support
Budgeted total costs
$2,025,000
$450,000
Direct costs:
Professional partners,
$140 48 hr.; $140 32 hr.
Professional associates,
Indirect costs:
General support,
$45 120 hr.; $45 160 hr.
Secretarial support,
$6,720
5,400
$4,480
7,200
4. Richardson Punch
Single direct – Single indirect
(from Problem 4-37)
Multiple direct – Multiple indirect
$14,400
undercosted
$19,200
undercosted
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%
associates. Thus, the Richardson job is a relatively high user of the more costly partner-related
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
4-39 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 2017:
Machine-hours data and the ending balances (before proration of under- or overallocated
overhead) are as follows:
Required:
1. Compute the budgeted manufacturing overhead rate for 2017.
2. Compute the under- or overallocated manufacturing overhead of Zaf Radiator in 2017.
Dispose of this amount using the following:
a. Write-off 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 2017 (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
(2025 min.) Proration of overhead.
1. Budgeted manufacturing overhead rate is $4,800,000 ÷ 80,000 hours = $60 per machine-hour.
2.
Manufacturing overhead
underallocated
=
Manufacturing overhead
incurred
–
Manufacturing overhead
allocated
a. Write-off to Cost of Goods Sold
Account
(1)
Dec. 31, 2017
Account
Balance
(Before Proration)
(2)
Write-off
of $400,000
Underallocated
Manufacturing
Overhead
(3)
Dec. 31, 2017
Account
Balance
(After Proration)
(4) = (2) + (3)
Work in Process
Finished Goods
$ 750,000
1,250,000
$ 0
0
$ 750,000
1,250,000
b. Proration based on ending balances (before proration) in Work in Process, Finished
Goods, and Cost of Goods Sold.
Account
(1)
Dec. 31, 2017
Account Balance
(Before Proration)
(2)
Proration of $400,000
Underallocated
Manufacturing
Overhead
(3)
Dec. 31, 2017
Account
Balance
(After Proration)
(4) = (2) + (3)
Work in Process
Finished Goods
$ 750,000
1,250,000
( 7.5%)
(12.5%)
0.075 $400,000 = $
30,000
$ 780,000
1,300,000
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, 2017
Account
Balance
(Before
Proration)
(2)
Allocated Overhead
Included in
Dec. 31, 2017
Account Balance
(Before Proration)
(3) (4)
Proration of $400,000
Underallocated
Manufacturing Overhead
(5)
Dec. 31, 2017
Account
Balance
(After
Proration)
(6) = (2) + (5)
Work in Process
$
750,000 $ 240,000a(5.33%) 0.0533$400,000 = $ 21,320 $ 771,320
Cost of Goods Sold
0 3,600,000c(80.00%) 0.8000$400,000 = 320,000
0
a$60 4,000 machine-hours; b$60 11,000 machine-hours; c$60 60,000 machine-hours
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
ending balances as in alternative (c). This approach operates via a restatement of the indirect
costs allocated to all the individual jobs worked on during the year using the actual indirect cost
rate.
4-40 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 2017:
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, 2017, $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 2017 and (b) cost of direct materials used in 2017.
2. Calculate the ending work-in-process inventory on December 31, 2017.
SOLUTION
(15 min.) Normal costing, overhead allocation, working backward.
1a. Manufacturing overhead allocated = 250% × Direct manufacturing labor costs
$4,100,000
2.50
b.
Total manufacturing
cost
=
Cost of direct
materials used
+
Direct manufacturing
labor cost
+
Manufacturing
overhead allocated
2.
Work in process
1/1/2017
+
Total
manufacturing cost
=
Cost of goods
manufactured
+
Work in process
12/31/2017
4-41 Proration of overhead with two indirect cost pools. Adventure Designs makes custom
backyard play structures that it sells to dealers across the Midwest. The play structures 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 manufacturing labor-hours. During May,
Adventure Designs reported actual overhead of $42,600 in the fabrication department and
$39,800 in the finishing department. Additional information follows:
Adventure Designs 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.
Calculate the amount of overhead allocated in the fabrication department and the finishing
department in May.
Required:
1. Calculate the amount of under- or overallocated overhead in each department and in total.
2. 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?
3. What would be the effect of writing off under- and overallocated overhead to cost of goods
sold? Would it be reasonable for Adventure Designs to change to this simpler method?
SOLUTION
(15 min.) Proration of overhead with two indirect cost pools.
1. Fabrication department:
Overhead allocated = $12 per machine-hour × 3,200 machine-hours = $38,400
2. Under- or overallocated overhead in each department and in total follows:
Fabrication 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 $8,000
Underallocated Overhead
(3) = (2)
´
8,000
Account
Balance
(After
Proration)
(4) = (1) + (3)
Work in Process
$ 60,000 0.10
0.10
´
$8,000 = $ 800
$ 60,800
Finished Goods
180,000 0.30
0.30
´
$8,000 = 2,400
182,400
Cost of Goods Sold 360 ,000 0.60
0.60
´
$8,000 = 4,800
364 ,800
Total $600 ,000 1.00 $8,000 $608 ,000
Because Adventure Designs is disposing of underallocated costs based on the ending balance in
4. The ending balance in Cost of Goods Sold would be $368,000 instead of $364,800 if the entire
4-42 General ledger relationships, under- and overallocation. (S. Sridhar, adapted) Keezel
Company uses normal costing in its job-costing system. Partially completed T-accounts and
additional information for Keezel for 2017 are as follows:
Additional information follows:
a. Direct manufacturing labor wage rate was $15 per hour.
b. Manufacturing overhead was allocated at $20 per direct manufacturing labor-hour.
c. During the year, sales revenues were $1,550,000, and marketing and distribution costs were
$810,000.
Required:
1. What was the amount of direct materials issued to production during 2017?
2. What was the amount of manufacturing overhead allocated to jobs during 2017?
3. What was the total cost of jobs completed during 2017?
4. What was the balance of work-in-process inventory on December 31, 2017?
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 2017?
7. Dispose of the under- or overallocated manufacturing overhead using the following:
a. Write-off 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 Keezel’s operating income for
2017.
9. Which approach in requirement 7 do you recommend Keezel use? Explain your answer
briefly.