Exercise 2-5 (10 minutes)
1 and 2.
The total direct labor-hours required in Finishing for Job 700:
Finishing
Direct labor cost (a) ……………………………….
$128
Direct labor wage rate per hour (b) ……………
$16
Total direct labor hours (a) ÷ (b) ………………
8
The total manufacturing cost and unit product cost for Job 700 is computed
as follows:
Exercise 2-6 (10 minutes)
1. The estimated total overhead cost is computed as follows:
Y = $680,000 + ($0.50 per DLH)(80,000 DLHs)
Estimated fixed overhead cost …………………………..
$680,000
Estimated variable overhead cost: $0.50 per DLH ×
80,000 DLHs ……………………………………………….
40,000
Estimated total overhead cost …………………………..
$720,000
DLHs
per DLH
2. Total manufacturing cost assigned to Xavier:
Direct materials ……………………………………………….
$38,000
Direct labor …………………………………………………….
21,000
Overhead applied ($9.00 per DLH × 280 DLHs) ………
2,520
Total manufacturing cost ……………………………………
$61,520
Exercise 2-7 (20 minutes)
1. Step 1: The total direct labor-hours required for Job Omega:
Direct labor cost (a) ……………………………….
$345,000
Direct labor wage rate per hour (b) ……………
$15
Total direct labor hours worked (a) ÷ (b) ……
23,000
Step 2: Derive the plantwide predetermined overhead rate:
Direct labor hours worked on Job Omega (b) .
23,000
2. The job cost sheet for Job Alpha is derived as follows: (note that direct
materials is the plug figure)
Direct materials (plug figure) …………………………...
$ 280,000
Direct labor (54,500 DLHs × $15 per DLH) …………
817,500
Manufacturing overhead applied ($8 per DLH ×
54,500 DLHs) …………………………………………….
436,000
Total job cost (given) ……………………………………..
$1,533,500
Exercise 2-8 (10 minutes)
Direct material …………………………..
$10,000
Direct labor ………………………………
12,000
Manufacturing overhead applied:
$12,000 × 125% …………………….
15,000
Total manufacturing cost …………….
$37,000
Total manufacturing cost (a) ………..
$37,000
Number of units in job (b) ……………
Exercise 2-9 (30 minutes)
1. The estimated total overhead cost is computed as follows:
Y = $1,980,000 + ($2.00 per MH)(165,000 MHs)
Estimated fixed overhead …………………………………
$1,980,000
Estimated variable overhead: $2.00 per MH ×
165,000 MHs ………………………………………………
330,000
Estimated total overhead cost …………………………..
$2,310,000
per MH
2. Total manufacturing cost assigned to Job P90:
Direct materials ……………………………………………….
$1,150
Direct labor …………………………………………………….
830
Overhead applied ($14 per MH × 72 MHs) …………….
1,008
Total manufacturing cost ……………………………………
$2,988
3a. Given that the company is operating at 50% of its manufacturing ca-
pacity, an argument can be made that the company should pursue any
business opportunities that generate a positive a contribution margin.
Based on the information provided, it appears that Job P90 does gen-
erate a positive contribution margin as shown below:
Direct labor ……………………………………………..
Variable overhead applied ($2.00 per MH × 72
Contribution margin …………………………………..
$ 376
Exercise 2-9 (continued)
3b. The CFO’s argument is based on the assertion that Job P90 does not
generate enough revenue to cover the cost of the manufacturing re-
sources that it consumes. However, given that the company is operat-
ing at 50% of its manufacturing capacity, the overhead costs applied
to Job P90 in requirement 2 do not represent the cost of the overhead
resources consumed making Job P90. In other words, the overhead
Y = $1,980,000 + ($2.00 per MH)(330,000 MHs)
Estimated fixed overhead …………………………………
$1,980,000
Estimated variable overhead: $2.00 per MH ×
330,000 MHs ………………………………………………
660,000
Estimated total overhead cost …………………………..
$2,640,000
The predetermined capacity-based overhead rate is computed as follows:
Estimated total overhead (a) ………………….
$2,640,000
Estimated total machine-hours (b) ………….
330,000
MHs
Predetermined overhead rate (a) ÷ (b) …….
$8.00
per MH
The total manufacturing cost assigned to Job P90 (using a capacity-based
overhead rate):
Direct materials ……………………………………………….
Direct labor …………………………………………………….
Exercise 2-10 (10 minutes)
1. Yes, overhead should be applied to Job W at year-end.
Because $6,000 of overhead was applied to Job V on the basis of
2. The direct materials ($2,500), direct labor ($4,000), and applied over-
head ($3,000) for Job W will be included in Work in Process on Sigma
Corporation’s balance sheet.
Exercise 2-11 (30 minutes)
Note to the instructor: This exercise can be used as a launching pad for
a discussion of Appendix 2B.
1. The estimated total fixed manufacturing overhead can be computed us-
ing the data from any of quarters 1-3. For illustrative purposes, we’ll use
the first quarter as follows:
Total overhead cost (First quarter) ………………………
Variable cost element ($2.00 per unit × 80,000 units)
Fixed cost element …………………………………………..
2. The fixed and variable cost estimates from requirement 1 can be used
to estimate the total manufacturing overhead cost for the fourth quarter
as follows:
Y = $140,000 + ($2.00 per unit)(60,000 units)
Estimated fixed manufacturing overhead ………………
$140,000
Estimated variable manufacturing overhead
$2.00 per unit × 60,000 units …………………………..
120,000
Estimated total manufacturing overhead cost …………
$260,000
The estimated unit product cost for the fourth quarter
is computed as follows:
Exercise 2-11 (continued)
3. The fixed portion of the manufacturing overhead cost is causing the unit
product costs to fluctuate. The unit product cost increases as the level
of production decreases because the fixed overhead is spread over
fewer units.
4. The unit product cost can be stabilized by using a predetermined over-
head rate that is based on expected activity for the entire year. The cost
formula created in requirement 1 can be adapted to compute the annual
Estimated total manufacturing overhead cost …………
The annual predetermined overhead rate is computed as follows:
Estimated total manufacturing overhead (a)
$960,000
Estimated total units produced (b) …………..
200,000
Predetermined overhead rate (a) ÷ (b) …….
$4.80
per unit
Using a predetermined overhead rate of $4.80 per unit, the unit product
costs would stabilize as shown below:
Quarter
First
Second
Third
Fourth
Direct materials ……………..
$240,000
$120,000
$ 60,000
$180,000
Direct labor …………………..
128,000
64,000
32,000
96,000
Exercise 2-12 (20 minutes)
1. The estimated total manufacturing overhead cost is computed as fol-
lows:
Y = $650,000 + ($3.00 per MH)(100,000 MHs)
Estimated fixed manufacturing overhead ……………..
$650,000
Estimated variable manufacturing overhead: $3.00
per MH × 100,000 MHs …………………………………
300,000
Estimated total manufacturing overhead cost ……….
$950,000
Estimated total manufacturing overhead (a)
Estimated total machine-hours (b) ………….
MHs
Predetermined overhead rate (a) ÷ (b) …….
per MH
2. Total manufacturing cost assigned to Job 400:
Direct materials ……………………………………………….
$ 450
Direct labor …………………………………………………….
210
Manufacturing overhead applied ($9.50 per MH × 40
MHs) …………………………………………………………..
380
Total manufacturing cost ……………………………………
$1,040
3. The unit product cost of Job 400 is computed as follows:
Total manufacturing cost (a) ………………….
$1,040
Number of units in the job (b) ………………..
52
Unit product cost (a) ÷ (b) ……………………
$20
4. The selling price per unit is computed as follows:
Total manufacturing cost ………………………
$1,040
Markup (120% of manufacturing cost) …….
Selling price for Job 400 (a) …………………..
Number of units in Job 400 (b) ………………
Selling price per unit (a) ÷ (b) ……………….
Exercise 2-12 (continued)
5. Possible critiques of Moody’s pricing tactics include (1) relying on a
plantwide overhead rate to allocate overhead costs to jobs may distort
the cost base used for cost-plus pricing, (2) relying on an absorption ap-
proach may allocate unused capacity costs to jobs thereby distorting the
Exercise 2-13 (20 minutes)
1. Cutting Department:
The estimated total manufacturing overhead cost in the Cutting Depart-
ment is computed as follows:
Y = $264,000 + ($2.00 per MH)(48,000 MHs)
Estimated fixed manufacturing overhead ………………
$264,000
Estimated variable manufacturing overhead
$2.00 per MH × 48,000 MHs …………………………...
96,000
Estimated total manufacturing overhead cost …………
$360,000
The predetermined overhead rate is computed as follows:
Estimated total manufacturing overhead (a) .
$360,000
Estimated total machine-hours (b) ……………
MHs
Predetermined overhead rate (a) ÷ (b) ………
per MH
Estimated fixed manufacturing overhead ………………
$366,000
Estimated variable manufacturing overhead
$4.00 per DLH × 30,000 DLHs …………………………
120,000
Estimated total manufacturing overhead cost …………
$486,000
The predetermined overhead rate is computed as follows:
Estimated total manufacturing overhead (a) ..
$486,000
Estimated total direct labor-hours (b) …………
30,000
DLHs
Predetermined overhead rate (a) ÷ (b) ……….
$16.20
per DLH
Exercise 2-13 (continued)
2.
Total manufacturing cost assigned to Job 203:
Direct materials ($500 + $310) …………………….
$ 810
Direct labor ($108 + $360) ………………………….
468
Cutting Department (80 MHs × $7.50 per MH) ..
$600
Finishing Department (20 DLH × $16.20 per
DLH) ……………………………………………………
324
924
Total manufacturing cost …………………………….
$2,202
3. Yes; if some jobs require a large amount of machine time and a small
amount of labor time, they would be charged substantially less overhead
Exercise 2-14 (10 minutes)
1. The estimated total overhead cost is computed as follows:
Y = $4,800,000 + ($0.05 per DL$)($8,000,000)
Estimated fixed overhead …………………………………
$4,800,000
Estimated total overhead cost …………………………..
per DL$
2. Total cost assigned to
You Can Say That Again
:
Direct materials ……………………………………………….
$1,259,000
Direct labor …………………………………………………….
2,400,000
Overhead applied ($0.65 per DL$ × $2,400,000) …….
1,560,000
Total job cost ………………………………………………….
$5,219,000
Exercise 2-15 (45 minutes)
1a. Molding Department:
Using the equation
Y
=
a
+
bX
, the estimated total manufacturing over-
head cost would be depicted as follows:
Y = $700,000 + ($3.00 per MH)(20,000 MHs)
Estimated fixed manufacturing overhead ……………….
$700,000
Estimated variable manufacturing overhead: $3.00
per MH × 20,000 MHs …………………………………….
60,000
Estimated total manufacturing overhead cost …………
$760,000
The predetermined overhead rate is computed as follows:
Estimated total manufacturing overhead (a) .
$760,000
Estimated total machine-hours (b) ……………
MHs
Predetermined overhead rate (a) ÷ (b) ……..
per MH
Estimated fixed manufacturing overhead ……………….
$210,000
Estimated variable manufacturing overhead: $1.00
per MH × 30,000 MHs …………………………………….
30,000
Estimated total manufacturing overhead cost …………
$240,000
The predetermined overhead rate is computed as follows:
Estimated total manufacturing overhead (a) .
$240,000
Estimated total direct labor-hours (b) ………..
30,000
MHs
Predetermined overhead rate (a) ÷ (b) ……..
$8.00
per MH
Exercise 2-15 (continued)
1b. Total manufacturing costs assigned to Jobs D-70 and C-200:
D-70
C-200
Direct materials …………………………………………
$ 700,000
$ 550,000
Direct labor ………………………………………………
360,000
400,000
Molding Department (14,000 MHs × $38 per
MH; 6,000 MHs × $38 per MH) …………………..
532,000
228,000
Fabrication Department (6,000 MH × $8 per
Total manufacturing cost …………………………….
1c. Bid prices for Jobs D-70 and C-200:
D-70
C-200
Total manufacturing cost (a) …………………..
$1,640,000
$1,370,000
Markup percentage (b) ………………………….
150%
150%
Bid price (a) × (b) ………………………………..
$2,460,000
$2,055,000
1d. Because the company has no beginning or ending inventories and
only Jobs D-70 and C-200 were started, completed, and sold during
the year, the cost of goods sold is equal to the sum of the manufac-
turing costs assigned to both jobs of $3,010,000 (= $1,640,000 +
$1,370,000).
MHs
per MH
Exercise 2-15 (continued)
2b. Total manufacturing cost assigned to Jobs D-70 and C-200:
D-70
C–200
Direct materials …………………………………..
$ 700,000
$ 550,000
Direct labor ………………………………………..
Total manufacturing cost ……………………….
2c. Bid prices for Jobs D-70 and C-200:
D-70
C-200
Total manufacturing cost (a) ………………….
$1,460,000
$1,550,000
Markup percentage (b) …………………………
150%
150%
Bid price (a) × (b) ……………………………….
$2,190,000
$2,325,000
2d. Because the company has no beginning or ending inventories and
only Jobs D-70 and C-200 were started, completed, and sold during
the year, the cost of goods sold is equal to the sum of the manufac-
turing costs assigned to both jobs of $3,010,000 (= $1,460,000 +
$1,550,000).
Exercise 2-15 (continued)
3. The plantwide and departmental approaches for applying manufacturing
overhead costs to products produce identical cost of goods sold figures.
However, these two approaches lead to different bid prices for Jobs D-
70 and C-200. The bid price for Job D-70 using the departmental ap-
proach is $270,000 (= $2,460,000 ‒ $2,190,000) higher than the bid
price using the plantwide approach. This is because the departmental
cost pools reflect the fact that Job D-70 is an intensive user of Molding
Whether a job-order costing system relies on plantwide overhead cost
allocation or departmental overhead cost allocation does not usually
have an important impact on the accuracy of the cost of goods sold re-
ported for the company as a whole. However, it can have a huge impact
on internal decisions with respect to individual jobs, such as establishing
bid prices for those jobs. Job-order costing systems that rely on plant-
wide overhead cost allocation are commonly used to value ending in-
Problem 2-16 (30 minutes)
1a. The estimated total overhead cost is computed as follows:
Y = $784,000 + ($2.00 per DLH)(140,000 DLHs)
Estimated fixed manufacturing overhead ……………..
$ 784,000
Estimated variable manufacturing overhead: $2.00
per DLH × 140,000 DLH …………………………..……
280,000
Estimated total manufacturing overhead cost ……….
$1,064,000
per DLH
1b. Total manufacturing cost assigned to Job 550:
Direct materials ……………………………………………….
$175
Direct labor …………………………………………………….
225
Manufacturing overhead applied ($7.60 per DLH ×
15 DLH) ………………………………………………………
114
Total manufacturing cost of Job 550 …………………….
$514
Total manufacturing cost ……………………………………
Markup (200%) ……………………………………………….
Selling price ……………………………………………………
Problem 2-16 (continued)
2a. The estimated total overhead cost is computed as follows:
Y = $784,000 + ($4.00 per MH)(70,000 MHs)
Estimated fixed manufacturing overhead ……………..
$ 784,000
Estimated variable manufacturing overhead: $4.00
per MH × 70,000 MHs …………………………………..
280,000
Estimated total manufacturing overhead cost ……….
$1,064,000
per MH
2b. Total manufacturing cost assigned to Job 550:
Direct materials ……………………………………………….
$175
Direct labor …………………………………………………….
225
Manufacturing overhead applied ($15.20 per MH × 5
MH) ……………………………………………………………
76
Total manufacturing cost of Job 550 …………………….
$476
2c. The selling price for Job 550 is computed as follows:
Job 550
Total manufacturing cost ……………………………………
$ 476
Markup (200%) ……………………………………………….
952
Selling price ……………………………………………………
$1,428