CHAPTER 17
JOB ORDER COST SYSTEMS
AND OVERHEAD ALLOCATIONS
Brief Learning
Exercises Topic Objectives Skills
B. Ex. 17.1 Accounting for overhead 17-5 Analysis
B. Ex. 17.2 Transferring costs 17-5 Analysis
B. Ex. 17.3 Overhead application rates 17-3 Analysis
B. Ex. 17.4 Actual and applied overhead 17-3, 17-5 Analysis
B. Ex. 17.5 Selecting a cost system 17-1, 17-2 Analysis
B. Ex. 17.6 Applying direct labor 17-5 Analysis
B. Ex. 17.7 Applying direct materials 17-5 Analysis
B. Ex. 17.8 Recording manufacturing costs 17-5 Analysis
B. Ex. 17.9 Selecting activity bases 17-6 Analysis
B. Ex. 17.10 Activity-based costing 17-6 Analysis
Learning
Exercises Topic Objectives Skills
17.1 Accounting terminology
17-1–4, 17-6,
17-7
Analysis
17.2 Understanding cost flows 17-1–17-5 Analysis
17.3 Job costing journal entries 17-1–17-5 Analysis
17.4 Overhead cost drivers 17-3, 17-6 Analysis, communication
17.5 Real World: Granite Construction, Inc. 17-2 Analysis
Cost classifications Analysis
17.6 Cost flow and financial statements 17-3–17-5 Analysis
17.7 Journalizing and reporting 17-3–17-5 Analysis
17.8 Journalizing and reporting 17-3–17-5 Analysis
17.9 Journalizing and reporting 17-3–17-5 Analysis
17.10 Journalizing and reporting 17-3–17-5 Analysis
17.11 Solving for missing information 17-3–17-5 Analysis
17.12 Solving for missing information 17-3–17-5 Analysis
17.13 Financial reporting 17-3–17-5 Analysis
17.14 Activity-based costing 17-6, 17-7 Analysis
17.15 Using ABC for bidding 17-6, 17-7 Analysis
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Problems Learning
Topic
Objectives Skills
17.1 A,B Job order computations and journal entries 17-1–17-5
Analysis
17.2 A,B Job order computations and journal 17-1–17-5
Analysis
entries 17-1–17-5
17.3 A,B Comprehensive job order problem 17-1–17-5
Analysis
17.4 A,B Comprehensive job order problem 17-1–17-5
Analysis
17.5 A,B Analyzing cost drivers 17-1–17-5
Analysis,
communication,
judgment
17.6 A,B Activity-based costing 17-6, 17-7
Analysis, communication
17.7 A,B ABC versus single cost driver 17-6, 17-7
Analysis, communication
17.8 A,B ABC versus single cost driver 17-6, 17-7
Analysis,
communication,
judgment
Critical Thinking Cases
17.1
Overhead assignment and performance
evaluation
17-1, 17-3,
17-6, 17-7
Analysis, judgment,
communication
17.2 Implementing ABC 17-6, 17-7
Communication,
judgment, analysis
17.3 Bidding wars 17-1, 17-2, 17-4
Analysis, judgment,
(Ethics, fraud & corporate governance)
communication
17.4
Real World: C. Erickson & Sons, Inc.
Reducing overhead (Internet)
17-1, 17-2,
17-4, 17-7
Communication,
technology, judgment,
research
Sets A, B
DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES
Problems (Sets A and B)
17.1 A,B Jensen Fences/Winona Enterprises 20 Easy
Prepare journal entries to record the flow of costs when using job order
costing. Also compute the amount of each cost element which has been
assigned to jobs still in process.
17.2 A,B O’Shaughnessy Mfg./Fargo Development 15 Easy
Prepare journal entries to summarize the flow of costs when using job
order costing.
17.3 A,B Georgia Woods, Inc./Lincoln Estates 30 Medium
Under job order costing with two production departments, compute the
overhead application rate used in each department and the under- or
overapplied overhead for the year. Also determine the cost of a large
order of custom furniture and record the sale of the finished goods.
17.4 A,B Precision Instruments, Inc./Monark Electronics 30 Medium
Under job order costing, compute the overhead application rates used
and the over- or underapplied overhead for the year in each of two
departments. Also, determine the cost of a particular job and record the
sale of some of the finished goods.
17.5 A,B Ye Olde Bump & Grind, Inc./Big Boomers 35 Medium
A service business (an automobile body and fender repair shop), rather
than a manufacturing company, illustrates the use and computation of an
overhead application rate and the importance of selecting an appropriate
overhead “cost driver.”
17.6 A,B Norton Chemical/Logan Pharmaceutical 30 Medium
Using ABC, students are asked to identify ways in which overhead costs
might be better controlled. For one product line, supplier relations need
to be improved. For the other product line, inventory needs to be ordered
less frequently.
Below are brief descriptions of each problem, case, and the first Internet assignment. These descriptions are
accompanied by the estimated time (in minutes) required for completion and by a difficulty rating. The time
estimates assume use of the partially filled-in working papers.
17.7 A,B Dixon Robotics/Downhill Fast 45 Strong
A comprehensive ABC problem that requires students to allocate
several cost pools to multiple products. Students are also required to
allocate overhead to the same product lines using machine hours as a
single activity base. A comparison of results is also required.
17.8 A,B Healthy Hound, Inc./Happy Cat 45 Strong
A comprehensive ABC problem that requires students to allocate
several cost pools to multiple products. Students are also required to
allocate overhead to the same product lines using machine hours as a
single activity base. A comparison of results is also required.
Critical Thinking Cases
17.1 Classic Cabinets 35 Medium
Student is asked to analyze the impact of an investment decision on the
performance evaluation of two managers and to decide whether the
evaluations are true representations of performance. Also, the
information needed to make the investment decision and who should
make the decision are considered.
17.2 Mica Corporation 10 Easy
Students are asked to identify ethical issues involving the selection of
an activity base to allocate costs to production managers. Students are
also asked to propose a solution to the current problem.
17.3 Bidding Wars 25
Medium
Ethics, Fraud and Corporate Governance
A practical ethics problem. Should a company underbid jobs if that is
the industry practice, or just close its doors? Interesting group
assignment.
17.4 Identifying Accounts 30
Medium
Internet
Students consider three types of construction products and/or other
services offered by a large Philadelphia-based construction company.
For these products or services students describe how cost accounting
information can be helpful in planning and managing the construction
work and whether job order or activity-based costing would be useful.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1.
2.
3.
4.
5.
6.
A cost accounting system consists of the procedures and techniques used by enterprises to track
The objectives of a cost accounting system are to: 1) provide employees with information useful in
A manufacturing company should choose job order costing depending upon the nature of the company’s
manufacturing operations. Job order costing is used when each unit of product (or batch of products)
Underapplied overhead refers to the debit balance that results in the Manufacturing Overhead account
when the amount of overhead applied to production of the period is less than the total amount of
An overhead cost driver is a measurement that (1) can be traced directly to units of manufactured
An overhead application rate is a device used to assign appropriate amounts of manufacturing overhead
to specific units of manufactured products. Although overhead is part of the total cost of manufacturing
7.
8.
9.
11.
12.
13.
14.
15.
There are many potential benefits associated with the use of ABC: (1) more accurate cost allocations lead
to more realistic pricing decisions, (2) the use of multiple activity bases improves management’s
labor hours, etc.) used as a basis in applying manufacturing overhead costs to products. For instance, if
An activity base is a measurable component of the manufacturing process (such as machine hours, direct
The credit balance indicates that a greater amount of manufacturing overhead has been applied to
production than has been incurred during the year. This may be caused by the fact that the production for
the year exceeded the estimate used in arriving at the overhead application rate. It may stem from the fact
Job order concepts are appropriate to the operations of a law firm. The law firm should view each client
The use of a single activity base may be inappropriate for companies that manufacture a diverse line of
products. Problems associated with a single activity base stem from the fact that each product line is
Activity-based costing uses multiple activity bases to assign manufacturing overhead costs to multiple
product lines. In doing so, management can assign overhead costs to a diverse group of products using
An activity cost pool is a specific aspect of the production process to which manufacturing overhead costs
In a highly automated facility, manufacturing overhead costs may not change in proportion to changes in
SOLUTIONS TO BRIEF EXERCISES
B. Ex. 17.1 a.
Work in Process Inventory ……………………………
20,000
Manufacturing Overhead ……………..………… 20,000
B. Ex. 17.2 a. 6/1
Finished Goods Inventory ………………………………….
Cash …………………………………………………………
Cost of Goods Sold ………………………………………….
7,000
Work In Process Inventory …………………… 7,000
c.
There are three obvious shortcomings of the overhead application rate:
Manufacturing Overhead …………………………….
Manufacturing Overhead …………………………………
B. Ex. 17.4 a.
Manufacturing Overhead ……………………………………..
10,000
Cost of Goods Sold …………………………… 10,000
b.
Overhead was overapplied during the period by $10,000:
B. Ex. 17.5 a.
Job order costing is appropriate because most costs can be traced to individual
Job order costing is appropriate because costs can be traced to individual customer
orders.
B. Ex. 17.6 a. Work in Process Inventory ………………….. 10,000
Direct Labor ………………………… 10,000
B. Ex. 17.7 a. Materials Inventory …………………………… 900,000
Accounts Payable ……………………… 900,000
B. Ex. 17.8 a. (1)
Materials Inventory ………………………………………….
XXX
Accounts Payable ……………………….
XXX
To record the purchase of direct materials.
Work in Process Inventory ……………………………..
XXX
XXX
Direct Labor …………………………………………..
XXX
XXX
Work in Process Inventory ……………………………………….
XXX
XXX
B. Ex. 17-8 c. (1)
Manufacturing Overhead …………………………….
XXX
(continued) Cash (or Accounts Payable) ……………. XXX
B. Ex. 17.9
Suggested activity bases for allocating the company’s activity-cost pools are listed
below:
Materials warehouse costs: The percent of total square feet in the materials
B. Ex. 17.10 a.
Machine Percent
Hours of Total
Deluxe …………………………… 6,400 80%
b.
Work Percent
Orders of Total
Deluxe …………………………… 50 25%
c.
Production Percent
Runs of Total
Deluxe …………………………… 30 30%
SOLUTIONS TO EXERCISES
Ex. 17.1 a.
Ex. 17.2 a.
$19,300 ($5,500 + $4,400 + $9,400 = jobs no. 101, 102, and 104)
$3,800 (job no. 103)
$4,200 ($800 + $3,400 = jobs no. 103 and 104)
$8,900 ($7,000 + $1,900 = jobs no. 105 and 106)
$9,900 ($5,500 + $4,400 = jobs no. 101 and 102)
Ex. 17.3 a. 20,000
Materials Inventory ………………………… 8,000
Direct Labor …………………………………. 2,600
Manufacturing Overhead …………………… 9,400
Work in Process Inventory ………………….. 20,000
Sales ……………………………………………. 40,000
Finished Goods Inventory …………………… 16,000
To record credit sale of 4,000 units from job no. 321
(4,000 @ $4 per unit).
To record cost of sales of 4,000 units from job no. 321
Cost of Goods Sold ………………………………………
Finished Goods Inventory ………………………………
To record completion of job no. 321.
Accounts Receivable …………………………………….
Manufacturing costs incurred on job no. 321.
Work in Process Inventory …………………………….
Cost driver
Job order costing
Overhead application rate
Activity-based costing
Cost of finished goods manufactured
None (this statement describes underapplied overhead)
c.
d.
e.
f.
Cost of goods sold (6,000 units × $20 per part b) …………..
Many types of factory supplies
Driven by machine-hours (two required):
Machinery repairs
Depreciation on machinery
Gross profit on sale of 6,000 keyboards at $30 per unit:
Examples of overhead costs:
Driven by direct labor (two required):
The purpose in using more than one application rate is to more precisely apply
Indirect labor
In part a, $120,000 in overhead costs were assumed driven by machine hours cost,
b.
$180,000 [($50,000 × 120%) + (400 machine hours × $300 per machine hour)]
$20 [($50,000 + $120,000 + $180,000) ÷ 17,500 units]
Ex. 17.6 a. Sales …………………………………………………………… 900,000$
Cost of Goods Sold …………………………………………… 610,000 *
b. Beginning Materials Inventory ………………………………. $ 0
Purchases……………………………………………………… 300,000
Ex. 17.7
a.
(1) Materials Inventory ………………………… 800,000
Accounts Payable ………………………… 800,000
(4) Work in Process Inventory …………………… 250,000
Manufacturing Overhead ………………….. 250,000
b. Cost of Goods Sold (unadjusted) …………………………….. 615,000$
c. Beginning Materials Inventory ………………………………… $ 0
Purchases ………………………………………………………. 800,000
Ex. 17.7 Beginning Finished Goods Inventory …………………………. $ 0
Ex. 17.8 a. 12/2
Materials Inventory ………………………………
Work in Process Inventory ………………………
Work in Process Inventory ……………………..
Work in Process Inventory ………………………
Work in Process Inventory ………………………
400,000
Accounts Payable ……….……………. 400,000
Purchased materials on account.
12/28
Work in Process Inventory ……………………..
75,000
12/29
Finished Goods Inventory ……………………….
330,000
12/30 Accounts Receivable …………………. 200,000
Sales …………………………………. 200,000
Sold job no. 100 on account.
b. Cost of Goods Sold (unadjusted) …………………………. 136,000$
Underapplied overhead ……………………………………… 3,000
Cost of Goods Sold, December 31 ……………………….. 139,000$
c. Beginning Materials Inventory ……………………………… $ 0
Materials Inventory, December 31 …………………………. 120,000$
Work in Process Inventory, December 31 ………………… 50,000$
Finished Goods Inventory, December 31 …………………. 194,000$
Beginning Work in Process Inventory …………………….. $ 0
Direct materials used on jobs 100, 101, & 102 ………….. 280,000
Ex. 17.8
d.
Ex. 17.9 a. 1/5
Materials Inventory ……………………………….
Work in Process Inventory ………………………
Work in Process Inventory ………………………
800,000
Accounts Payable ………………………. 800,000
Purchased materials on account.
1/18
Work in Process Inventory ………………………
100,000
Materials Inventory ……………………. 100,000
Used direct materials on job no. 1003.
1/25
Work in Process Inventory ………………………
Work in Process Inventory ……………………..
10,350
Manufacturing overhead applied to jobs totaled $75,000. Actual
1/29
Accounts Receivable …………………………….
725,000
Sales ………………………………………… 725,000
Sold job no. 1001 on account.
b.
Cost of Goods Sold (unadjusted) ………………………………………..
543,600$
Overapplied overhead ……………………………………………………..
c.
Beginning Materials Inventory ……………………………………………
$ 0
Purchases ………………………………………………………………….
Beginning Work in Process Inventory ……………………………………
Direct materials for jobs 1001, 1002, & 1003 …………………………..
Direct labor for jobs 1001, 1002, & 1003 ………………………………..
Overhead applied to jobs 1001, 1002, & 1003 ………………………….
Cost of jobs 1001 & 1002 transferred ……………………………………
Beginning Finished Goods Inventory …………………………………….
Cost of completed jobs 1001 & 1002 ……………………………………
Cost of job no. 1001 sold …………………………………………………
800,000
d.
Manufacturing overhead applied to jobs totaled $258,750. Actual
Cost of Goods Sold ………………………………
Manufacturing Overhead …………………………
Manufacturing Overhead …………………………