7
Job Costing
Solutions to Review Questions
7-1.
Companies using a job order cost system are likely to be performing services or
7-2.
There are two primary reasons that cost allocation bases using direct labor are common.
7-3.
The Manufacturing Overhead account is used to accumulate the actual manufacturing
7-4.
A materials requisition is used to document the authorization for issuances of materials
7-5.
The job costing procedure is basically the same in both types of organizations, except that
7-6
The costs of a product using normal costing are:
7-7.
Mega has choices to make about the allocation base and the cost pools used to
7-8.
Improprieties in job costing are generally caused by one or more of the following: (1)
7-9.
Solutions to Critical Analysis and Discussion Questions
7-10.
Actual costing requires knowing the actual costs of overhead as well as the actual direct
7-11.
If materials costs are not properly assigned to jobs, management may later be misled in
7-12.
The allocation of overhead matters because decisions are made about individual
7-14.
Answers will vary.
7-15.
7-16.
7-17.
7-18.
Answers will vary. The steps might include:
7-19.
Answers will vary. Common responses are (labor) time, materials cost, wall area, and so
on.
7-20.
Answers will vary. In general, the answer is that this is not ethical. Although the “correct”
Solutions to Exercises
7-21. (30 min.) Assigning Costs to Jobs: Steve’s Cabinets.
a.
1.
Materials Inventory ………………………………………………….
80,000
Accounts Payable ………………………………………………..
80,000
Manufacturing Overhead Control ……………………………….
Materials Inventory ………………………………………………….
Accounts Payable ………………………………………………..
4.
Accounts Payable ……………………………………………………
80,000
Cash …………………………………………………………………..
80,000
Wages Payable ……………………………………………………
7.
Manufacturing Overhead Control ……………………………….
Cash …………………………………………………………………..
Manufacturing Overhead Control ……………………………….
Equipment ……………………………………………………….
7-21. (continued)
b.
Materials Inventory
Balance 4/1
148,200
4,000
(2) Ind. materials
*
Per Finished
(8) Overhead applied
Manufacturing Overhead Control
(2)
4,000
(7)
Applied Manufacturing Overhead
(8)
(4)
(4)
(7)
(6)
7-21. (continued)
Accumulated Depreciation—
Property, Plant, and Equipment
Finished Goods Inventory
Balance 4/1
166,000
of Goods Sold
7-22. (20 min.) Assigning Costs to Jobs: Sunset Products.
a.
1.
Materials Inventory …………………………………………………..
30,000
Accounts Payable …………………………………………………
30,000
2.
Manufacturing Overhead Control ……………………………….
1,500
Materials Inventory ……………………………………………….
1,500
Materials Inventory …………………………………………………..
Accounts Payable …………………………………………………
4.
Accounts Payable …………………………………………………….
30,000
Cash …………………………………………………………………..
30,000
5.
Materials Inventory ……………………………………………….
Wages Payable …………………………………………………….
7.
Manufacturing Overhead Control ……………………………….
Cash …………………………………………………………………..
8.
52,500
Applied Manufacturing Overhead …………………………..
52,500
Manufacturing Overhead Control ……………………………….
Equipment ……………………………………………………….
7-22. (continued)
b.
Materials Inventory
Balance 3/1
13,500
1,500
(2) Ind. materials
45,000
*
Work-in-process inventory
Balance 3/1
24,750
(5) Direct materials
45,000
77,250
Per Finished
82,500
52,500
(8)
(4)
42,250
(7)
(6)
7-22. (continued)
Accumulated Depreciation—
Property, Plant, and Equipment
7,500
(9)
Balance 3/1
of Goods Sold
7-23. (20 min.) Assigning Costs to Jobs: Forest Components.
a.
1.
Materials Inventory ………………………………………………….
119,000
Accounts Payable ………………………………………………..
119,000
2.
Work-in-Process—Direct Materials …………………………….
117,600
Materials Inventory ……………………………………………….
117,600
Manufacturing Overhead Control ……………………………….
Materials Inventory ……………………………………………….
4.
Accounts Payable ……………………………………………………
119,000
Cash …………………………………………………………………..
119,000
5.
Materials Inventory ………………………………………………….
Work-in-Process—Direct Materials ………………………..
Cash …………………………………………………………………..
217,000
7.
Manufacturing Overhead Control ……………………………….
Accounts Payable ………………………………………………..
8.
Manufacturing Overhead Control ……………………………….
245,000
Accumulated Depreciation—Plant …………………………..
245,000
9.
Applied Manufacturing Overhead …………………………..
201,810
7-23. (continued)
b.
Materials Inventory
Balance 7/1
79,800
*
15,400
(3) Indirect materials
Work-in-process inventory
Balance 7/1
105,490*
(2) Direct materials
117,600
15,400
(5)
Finished Goods
120,400
Applied Manufacturing Overhead
Accounts Payable
120,400
(4)
(6)
7-23. (continued)
Accumulated Depreciation—
Property, Plant, and Equipment
Finished Goods Inventory
7-24. (25 min.) Assigning Costs to Jobs: Cardinals, Inc.
7-25. (25 min.) Assigning Costs to Jobs: Blake Corporation.
e.
7-26. (25 min.) Assigning Costs to Jobs: Pine Ridge Corporation.
7-27. (10 min.) Predetermined Overhead Rates: Dixboro Company.
Direct material used …………………………………….
$5,500,000c
Manufacturing overhead applied …………………..
7-28. (15 min.) Predetermined Overhead Rates: Southern Rim Parts.
a.
Job 301:
Job 303:
7-29. (10 Min.) Prorate Under- or Overapplied Overhead: Southern Rim Parts.
First, determine the percentage of overhead applied is in each account:
Applied
Overhead
% of Total
Applied
Finished goods ……………………..
(= $102,850 ÷ $467,500)
Cost of goods sold…………………
(= $327,250 ÷ $467,500)
7-30. (15 min.) Predetermined Overhead Rates: Aspen Company.
a.
$812,500
7-31. (10 Min.) Prorate Over- or Underapplied Overhead: Aspen Company.
First, determine the percentage of overhead applied in each account:
Applied
Overhead
% of
Total
Applied
Work in process inventory (Job 2–3) ..
$162,500
20%
(= $162,500 ÷ $812,500)
Finished goods (Job 2-2) ……………….
50
(= $406,250 ÷ $812,500)
7-32. (20 min.) Applying Overhead Using a Predetermined Rate: Mary’s
Landscaping.
Since Job No. 3318 is the only job in the account, the ending balance of the account must
equal the total cost of the job. We can find the account’s ending balance using the basic
cost equation:
BB + TI – TO = EB
=
=
Total cost
=
direct materials + direct labor + factory overhead
Direct materials
=
$28,700 – $3,375 – $2,700
7-33. (10 min.) Applying Overhead Using a Predetermined Rate: Turco Products.
The ending balance in Work in Process can be determined from the following T-acocunt:
Work-in-process inventory
Balance 9/1
70,200
Direct materials
421,200
832,000
To Finished Goods Inventory
*
7-34. (10 min.) Calculating Over- or Underapplied Overhead: Tom’s Tool & Die.
Application rate:
$714,000
= $10.50 per machine hour
68,000 hours
7-35. (20 min.) Predetermined Overhead Rates: Ethical Issues: Marine
Components.
a.
c. Using direct-labor cost as the base for applying overhead will lead to higher income for
7-36. (20 min.) Predetermined Overhead Rates: Ethical Issues: Marine
Components.
a.
c. Using machine hours as the base for applying overhead will lead to higher income for
7-37. (20 min.) Job Costing in a Service Organization: Arthur’s Olde Consulting
Corporation.
a. Beginning of month
Direct
Labor
Applied
Overhead
(@60%)
Total
b.
Direct
Labor
Applied
Overhead
Total
c. Overhead applied during month:
SY–400 ………………………………………………………
$ 15,120
SY–403 ………………………………………………………
7-38. (30 min.) Job Costing In A Service Organization: RCMP.
a.
Wages Payable
Work in Process
Cost of
Services Billed
Service Overhead Control
Applied Service O.H.
60,000
60,000d
72,000d
72,000b
b.
Royal Consulting and Mediation Practice
Income Statement
For the Month Ended August 31
Sales revenue …………………………………………….
$1,200,000
a
Cost of services billed ………………………………….
Subtract: Overapplied service overhead …………
Gross margin ……………………………………………..
Marketing and administration ………………………..
7-39. (30 min.) Job Costing In A Service Organization: Allocation Busters.
a.
Wages Payable
Work in Process
Cost of
Services Billed
Service Overhead Control
Applied Service O.H.
b.
Allocation Busters
Income Statement
For the Month Ended March 31
Sales revenue …………………………………………….
$550,000
a
Cost of services billed ………………………………….
Gross margin ………………………………………………
Marketing and administration ………………………..
7-40. (30 min.) Job Costing In A Service Organization: TechMaster.
a.
Wages Payable
Work in Process
Cost of
Services Billed
b.
TechMaster
Income Statement
For the Month Ended August 31
Sales revenue …………………………………………….
$175,000
a
Gross margin ……………………………………………..
Solutions to Problems
7-41. (15 min.) Estimate Machine-Hours Worked From Overhead Data: Melbourne
Company.
With $320,000 in fixed costs expected and 40,000 machine hours expected, the
application rate for the fixed costs was $8.00 per machine hour (= $320,000 ÷ 40,000
hours).
7-42. (25 min.) Estimate Hours Worked From Overhead Data: Capitol, Inc.
115,050 direct labor-hours were worked. With $702,000 in fixed costs expected and
117,000 direct-labor-hours expected, the application rate for the fixed costs was $6.00 per
7-43. (40 min.) Assigning Costs—Missing Data.
7-44. (50 min.) Assigning Costs—Missing Data.
Materials Inventory
Balance 11/1
45,400
(a)
86,200
Direct materials
(a)
16,400
Indirect materials
56,400
Work-in-Process Inventory
Balance 11/1
32,600
(given)
(b)
(b)
Overhead applied
(h)
Finished Goods Inventory
Balance 11/1
129,600
(c)
Balance 11/30
(h)
Cost of Goods Sold
(h)
15,048
Manufacturing Overhead Control
(a)
16,400
(e)
26,000
48,200
(g)
(h)
(given)
(h)
7-44. (continued)
Wages Payable
(b)
(e)
Sales Revenue
(given)
(a) From the work in process account, we obtain the $86,200 in direct materials issued.
The beginning balance equals the ending balance of $56,400 minus the increase of
$11,000 equals $45,400. The unaccounted balance represents indirect materials and is
determined as:
(b) Let X = Direct labor costs
150% X
150% X
=
180% X
=
180% X
=
101,000 + 28,600
Finished Goods BB
=
$101,000 + $403,000 – $129,600
Work in process EB
=
$32,600 + $86,200 + $176,000 + $264,000 – $374,400
(e)
Indirect labor
=
=
$202,000 – $176,000
7-44. (continued)
7-45. (40 min.) Analysis Of Overhead Using A Predetermined Rate: Kansas
Company.
Direct materials …………………………………………..
Direct labor …………………………………………………
*
$220,500.
Supplies …………………………………………………….
Indirect labor wages ……………………………………
Factory facilities ………………………………………….
f. Credit it to cost of goods sold. The amount is clearly not material (0.1% of cost of
goods sold), so it is not worth the effort involved in prorating.
Overapplied Overhead …………….
$0
Cost of Goods Sold…………………
*$2,940,000 – $3,000
7-46. (40 min.) Analysis Of Overhead Using A Predetermined Rate: Script
Company.
b.
$890,300.
Beginning balance ………………………………………
Overhead applied ………………………………………..
*The wage rate for direct labor is $48.00 per hour. $48.00 x 8,400 hours = $403,200.
**$100.00 x 8,400 direct labor-hours.
e.
$826,800.
Supplies …………………………………………………….
$ 184,080
Factory facilities ………………………………………….
Underapplied Overhead ………….
f. In this case, the underapplied overhead is relatively large (it is greater than 10% of
cost of goods sold, so the company might consider it material and decide to prorate
Direct Labor ……………………………………………….
($36 per hour x 300 hours)
Manufacturing Overhead ……………………………..
($18 per hour x 300 hours)
Total Cost of Ending Work in
7-47. (30 min.) Finding Missing Date: BackupsRntUs
a. March 31: Ending Work-in-process inventory:
—only one job is remaining in ending Work-in-process inventory.
b. Direct materials purchased during March:
Since the accounts payable account is used only for direct material purchases, the
month’s purchases can be determined from analyzing the accounts payable account:
d. Cost of goods sold during March:
Beginning Finished
Goods Inventory
+
Cost of Goods
Manufactured
–
Cost of
Goods Sold
=
Ending Finished
Goods Inventory
+
–
=
Cost of Goods Sold
Cost of
7-48. (30 min.) Cost Accumulation—Service: Youth Athletic Services.
T-accounts (Not required—see next page for income statement)
Wages, Salaries,
and Accounts
Payable
Managing Direct
Labor Cost
Officiating
Direct Labor Cost
Training Direct
Labor Cost
Dispute
Resolution
Direct Labor Cost
Unassigned
Labor Cost
4,800
1,200
1,875
1,350
375
Cost
7-48. (continued)
Income Statement
Youth Athletic Services
Income Statement
For Month Ending July 31
Managing
Officiating
Training
Dispute
Resolution
Total
Revenue …………………………………………………….
$6,950
$7,900
$3,000
$1,000
$18,850
Cost of Services:
$4,800
$1,200
$1,875
$1,350
1,525
2,175
$6,709
$3,471
$3,125
$1,718
Department margin ……………………………………..
$ 241
$4,429
$(125)
Less other costs:
Operating profit …………………………………………..
Total hours
640 hours worked
(including idle time)
7-48. (continued)
7-49. (25 min.) Job Costs—Service Company: UP Payroll Services.
a.
Dune Motors
Jake’s Charters
Mission Hospital
Unassigned
Costs (not
required)
Total
Revenue ……………………………………………………….……….
$384,000
$115,200
$192,000
$691,200
(= 3,000 x $128)
(= 900 x $128)
(= 1,500 x $128)
(= 3,000 x $48)
(= 900 x $48)
(= 1,500 x $48)
(= 600 x $48)
7-49. (continued)
b.
UP Payroll Services
Income Statement
For Month Ending July 31
Revenue from clients …………………………………….
$691,200
Less cost of services to clients:
Less other costs:
7-50. (50 min.) Job Costs In A Service Company: Pete’s Patios.
Materials Inventory
Balance 9/1 (given)
11,040
192
Indirect Materials
Requisition
Job PP–24
(c)
Job PP–30
(e)
10,872
Finished Goods Inventory
19,616
26,886
=
$2,038 + $1,280 + $768 + $3,360 + [50% ($768 + $3,360)]
$2,720 Direct Labor + ($2,720 x 50%) Applied Overhead
=
$4,080.
=
$3,190 + $2,720 + 50%($2,720)
=
$1,296 + $8,000 + $4,000
Transfer of Job PP-30: Beginning Inventory Cost + Current Cost
=
Balance 1/1 ($4,704 +
6,600
7-50. (continued)
f.
New Job Cost = Current Charges to WIP less Current Charges for Jobs PP-24 and
PP–30:
=
Current Materials + Direct Labor + Overhead – Job PP-24 Current Cost
7-51. (55 min.) Tracing Costs In A Job Company: Apex Manufacturing.
a.
(1)
Materials Inventory ……………………………………………….
75,180
Accounts Payable ……………………………………………..
75,180
(2)
Manufacturing Overhead ……………………………………….
Materials Inventory …………………………………………….
(3)
Accounts Payable …………………………………………………
75,180
Cash …………………………..…………………………………..
75,180
(4)
Work in Process—Direct Materials ………………………….
Materials Inventory …………………………………………….
(5)
Payroll ……………………………………………………….……….
Payroll Taxes Payable ……………………………………….
18,900
Cash …………………………..…………………………………..
39,900
(6)
Payroll ……………………………………………………….……….
Fringe Benefits Payable ……………………………………..
29,400
(7)
Work in Process (60% x $88,200) …………………………..
52,920
Manufacturing Overhead (30% x $88,200) ……………….
26,460
Administrative and Marketing Costs (10% x $88,200) ..
Payroll ($29,400 + $58,800) ………………………………..
(8)
Manufacturing Overhead ……………………………………….
45,360
Cash …………………………..…………………………………..
(9)
Work in Process—Overhead ($52,920 x 175%) ………..
92,610
Applied Manufacturing Overhead………………………..
92,610
(10)
Manufacturing Overhead Control…………………………….
24,150
24,150
7-51. (continued)
b.
Materials Inventory
Balance 1/1
77,805
2,100
(2)
(1)
75,180
(4)
Balance 1/31
a
Goods
(4) Direct Materials
(9) Overhead Applied
Manufacturing Overhead Control
(2)
2,100
(7)
26,460
24,150
92,610
(9)
75,180
75,180
(1)
7-51. (continued)
Cash
75,180
(3)
39,900
(5)
45,360
(8)
Payroll
(5)
58,800
(6)
(7)
(5)
(6)
Administrative and Marketing Costs
(7)
8,820
Accumulated Depreciation—Property, Plant, and Equipment
24,150
(10)
Finished Goods
Balance 1/1
87,150
Goods Completed
a
Balance 1/31
Balance 1/31
7-52. (50 min.) Cost Flows Through Accounts: Brighton Services
a. T accounts.
Materials Inventory
137,200
(1a)
(1b)
(1c)
Wages Payable
490,000
(2a)
312,400
(2b)
197,600
(2c)
(Actual)
62,000
(3a)
(3b)
(3c)
(Actual)
104,000
(4a)
(4b)
(4c)
7-52. (continued)
Finished Goods Inventory
b. Total Direct Labor Costs = $4,000,000.
7-52. (continued)
c. T accounts
Materials Inventory
137,200
(1a)
(1b)
(1c)
Wages Payable
490,000
(2a)
312,400
(2b)
197,600
(2c)
Variable Manufacturing Overhead*
(Actual)
(Applied)
62,000
38,220
(3a)**
(3b)
(3c)
(Applied)
89,180
(4a)***
(4c)
27,200
(5) Underapplied
7-52. (continued)
Work-in-Process Inventory
(1)
324,200
754,600
(a)
(b)
(3)
(4)
182,000
(1) = the sum of the amounts (1a) + (1b) + (1c)
Finished Goods Inventory
(a)
(b)
(5)
d.
Actual
Normal
Sales Revenue ……………………………………………
$1,400,000
$1,400,000
Less Cost of Goods Sold ………………………………
Gross Margin ………………………………………………
Less:
(Under-) Overapplied Overhead ……………………
Marketing and Administrative Costs ………………
7-53. (60 min.) Show Flow Of Costs To Jobs: Kim’s Asphalt.
a.
1.
Payment received on account
Cash …………………………………………………………………………….
12,500
Accounts receivable ……………………………………………………
12,500
2.
Inventory purchase
Materials and equipment inventory …………………………………..
Accounts payable ……………………………………………………….
3.
Billing
Accounts receivable ……………………………………………………….
Sales revenue ……………………………………………………………
Cash …………………………………………………………………………….
Accounts receivable ……………………………………………………
75,000
4.
Indirect labor
Manufacturing overhead—Indirect labor …………………………...
650
Wages payable …………………………………………………………..
650
5.
Indirect materials issued
Manufacturing Overhead …………………………………………………
155
Materials and equipment inventory ………………………………..
155
6.
Overhead and advertising
Selling costs—Advertising ……………………………………………….
600
Cash ………………………….. …………………………..………………..
Accumulated Depreciation ……………………………………………
450
7.
Charges to Work in Process
[$3,000 + $4,800 + $4,600 + $2,900] …………………………….
[$4,500 + $6,750 + $5,900 + $1,600] …………………………….
Work in process—overhead applied [30% x $18,750] …………
Materials inventory ……………………………………………………..
Wages payable …………………………………………………………..
18,750
Cost of installations completed and sold …………………………...
Note: No finished goods inventory account is required.
7-53. (continued)
b.
Overhead analysis:
Applied (Entry 7) ………………………………………
$5,625
Incurred
Entry 4 …………………………………………………
Entry 5 …………………………………………………
Entry 6 …………………………………………………
c. Inventory balances
Materials and Equipment Inventory
Balance 5/1
36,000
15,300
(7)
(2)
(5)
Balance 5/31
Work-in-process inventory
Balance 5/1
119,550
*
Current charges (7)
(8) Job 33
Balance 5/31
(8)
overhead
Balance 5/31
7-54. (70 min.) Reconstruct Missing Data: Toledo Farm Implements.
This is a challenging problem. We put the work in process account for May on the
board for the “big picture,” then solve for each item in the account as follows:
Work-in-Process
(a)
Balance, beginning
172,400
(b)
Direct materials
140,628
107,000
Transferred to
finished goods
(d)
(c)
Direct labor
135,400
408,028
Disaster loss
(f)
(e)
Overhead applied
66,600
Balance, ending
–0–
The calculations are shown below. We usually present these using both T-accounts
and the following formulas.
(a) Given
(b)
Direct materials
=
Beginning inventory + Purchases – Ending inventory – Indirect
materials
=
=
$140,628
*Purchases
=
Accounts payable, ending + Cash payments – Accounts
payable, beginning
=
=
$132,800
( c)
Direct labor
=
Payroll – Indirect labor
=
=
$135,400
=
=
$107,000
7-54. (continued)
(e)
Overhead applied
=
Ending manufacturing overhead – beginning
7-55. (70 min.) Find Missing Data: IYF Corporation.
The calculations are shown below. We usually present these using both T-accounts
and the following formulas.
(a)
Beginning inventory + Transfers in = Ending inventory + Transfers Out
=
=
$8,400
(e) $3,000.
and,
7-56. (70 min.) Find Missing Data: NIC Enterprises.
The calculations are shown below. We usually present these using both T-accounts
and the following formulas.
(a)
Beginning inventory + Transfers in = Ending inventory + Transfers Out
Ending inventory
=
Beginning inventory + Transfers in – Transfers Out
=
$148,000 + $1,520,000 – $1,460,000
=
$208,000
(c)
Overhead rate
=
(d)
Overhead incurred
=
Overhead applied – Underapplied overhead
=
=
$490,000
Work in process beginning + Manufacturing costs
= Work in process ending + Transfers to Finished Goods Inventory.
7-57. (45 min.) Incomplete Data—Job Costing: Chelsea Household
Renovations.
The following information should be included (in summary) in a report to management.
Work-in-Process
Cost of Goods Sold
Cash or Accounts Payable
Job No. 61
Job No. 61
18,400
*
M*
8,000
8,000
M*
8,000
L
6/1
*
6/30
Wages Payable
Job No. 62
Job No. 62
128,000
*
M5
12,000
12,000
M
12,000
L
24,000
24,000
O
24,000
6/30
84,000
Overhead
Job No. 63
Underapplied Overhead
Actual
Applied
M*
6,400
16,00010
80,000
*
6/30
7-57. (continued)
M refers to direct materials
1Labor to complete job is $76,800 since the beginning inventory was 50% complete
2Applied overhead
=
$123,200 – $8,000 – $76,800
=
=
of direct labor dollars
3Overhead in beginning inventory
=
0.50 x $38,400
=
4Overhead applied in June
=
0.50 x $38,400
=
$19,200
5Materials for Job No. 62
=
Purchases – materials for Job No. 63
=
$18,400 – $6,400
=
$12,000
for Job No. 63
=
$128,000 – $38,400 – $41,600
=
=
0.50 x $48,000
=
8Overhead for Job No. 63
=
0.50 x $41,600
=
7-57. (continued)
7-58. (25 min.) Job Costing and Ethics: Old Port Shipyards.
(This problem is based on actual experience.)
a.
Olde Town
Newton
Overhead cost ……………..
$20,000,000
$80,000,000
Direct labor-hours …………
200,000
200,000
Predetermined rate……….
7-59. (25 min.) Job Costing and Ethics: Price and Waters.
7-60. (25 min.) Job Costing and Ethics: Global Partners.
a. Because the choice is between direct labor hours and direct labor cost, the
Solutions to Integrative Case
7-61. (75 min.) Cost Estimation, Estimating Overhead Rates, Job Costing, and
Decision-Making: O’Leary Corporation.
This problem relates overhead allocation to cost estimation and decision making. It
uses some of the methods of Chapters 4 and 5.
a. $965,400 (Work-in-Process Inventory) and $637,500 (Finished Goods Inventory).
Job MC-275 is the only job in process. It has accumulated the following costs:
Direct materials ……………..
$495,000
(Given)
Direct labor ……………………
(= $17 x 3,200 hours)
Manufacturing overhead ….
(= $130 x 3,200 hours)
Job MC-270 is the only job in finished goods. It has accumulated the following
costs:
Direct materials ……………..
$270,000
(Given)
Direct labor ……………………
(= $17 x 2,500 hours)
Manufacturing overhead ….
(= $130 x 2,500 hours)
b. $1,069,500.
The predetermined overhead rate in year 3 is $140 per direct labor-hour. O’Leary
uses the actual rate from the previous year and $140 = $7,560,000 ÷ 54,000
hours).
Beginning costs …………….
$965,400
(From requirement (a))
Additional direct material …
(given)
Additional direct labor ……..
(= $17 x 300 hours)
c. $1,240,000 overapplied.
Overhead applied
$10,360,000
(= $140 x 74,000 hours)
Overhead incurred
(Given)
7-61. (continued)
d. A variety of allocations can be used. Because we know how many direct labor hours
are in each account from year 3, we will use this basis. Direct labor hours are the
basis for applying overhead. If this were unknown, we could use total account
balances. First, determine the number of direct labor-hours used in year 3 in each
account.
Direct labor hours, year 3
(Given)
In cost of goods, year 3
(74,000 – 11,840)
The allocation is then based on the relative amounts in each account:
Account
Percentage
Allocation
Work in process
10% (= 7,400 ÷ 74,000)
$124,000
(= .10 x $1,240,000)
Finished goods
6 (= 4,440 ÷ 74,000)
(= .06 x $1,240,000)
Cost of sales
84 (= 62,160 ÷ 74,000)
(= .84 x $1,240,000)
7-61. (continued)
e. $567,500.
This is a special order problem similar to those discussed in Chapter 4. The
minimum bid would be the variable cost of the job, ignoring strategic or other
considerations. The variable cost of the job (ignoring sales and administrative costs
as instructed in the problem) consists of direct material, direct labor, and variable
manufacturing overhead.
Applying the high-low method:
$9,120,000 – $7,560,000
=
$1,560,000
74,000 – 54,000
20,000
=
(5,772,000)