SOLUTION
Requirement 1
Predetermined
Requirement 2
49,000
86,000
Bal.
60,350
Requirement 3
Date
Debit
Credit
Dec 31
60,350
60,350
Requirement 4
Manufacturing Overhead
29,500
246,000*
48,000
P17-38B Preparing comprehensive accounting for manufacturing transactions
Learning Objectives 2, 3, 4, 5
4. COGM $46,750
5. NI $19,150
Student Stars produces stars for elementary teachers to reward their students. Student Stars’ trial balance
on June 1 follows:
June 1 balances in the subsidiary ledgers were as follows:
• Raw Materials Inventory subsidiary ledger: Paper, $4,300; indirect materials, $1,400
June transactions are summarized as follows:
a. Collections on account, $154,000.
b. Selling and administrative expenses incurred and paid, $30,000.
c. Payments on account, $41,000.
f. Wages incurred during June, $35,000. Labor time records for the month: Job 120,
$3,250; Job 121, $18,500; indirect labor, $13,250.
g. Wages paid in June include the balance in Wages Payable at May 31 plus $33,000 of wages incurred
during June.
Requirements
1. Journalize the transactions for the company.
2. Open T-accounts for the general ledger, the Raw Materials Inventory subsidiary ledger, the Work-in–
Process Inventory subsidiary ledger, and the Finished Goods Inventory subsidiary ledger. Insert each
account balance as given, and use the reference Bal. Post the journal entries to the T-accounts using
the transaction letters as a reference.
3. Prepare a trial balance at June 30, 2016.
4. Use the Work-in-Process Inventory T-account to prepare a schedule of cost of goods manufactured
for the month of June.
5. Prepare an income statement for the month of June.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
June 30
a.
Cash
154,000
Accounts Receivable
154,000
b.
Selling and Administrative Expenses
30,000
Cash
30,000
c.
Accounts Payable
41,000
Cash
41,000
d.
Raw Materials Inventory ($21,600 + $4,000)
25,600
Accounts Payable
25,600
e.
Work-in-Process Inventory ($550 + $7,850)
8,400
Manufacturing Overhead
1,200
Raw Materials Inventory
9,600
f.
Work-in-Process Inventory ($3,250 + $18,500)
21,750
Manufacturing Overhead
13,250
Wages Payable
35,000
g.
Wages Payable ($2,000 + $33,000)
35,000
Cash
35,000
h.
Manufacturing Overhead
2,700
Accumulated Depreciation—plant and equipment
2,700
i.
Work-in-Process Inventory
13,050
Manufacturing Overhead ($21,750 × 60%)
13,050
j.
Finished Goods Inventory
46,750
Work-in-Process Inventory
46,750
k.
Accounts Receivable
100,000
Sales Revenue
100,000
Cost of Goods Sold
46,750
46,750
l.
Cost of Goods Sold
4,100
Manufacturing Overhead
4,100
P17-38B, cont.
Requirement 2
Cash
Accounts Receivable
Bal.
24,000
30,000
(b)
Bal.
175,000
154,000
(a)
(a)
154,000
41,000
(c)
(k)
100,000
35,000
(g)
Bal.
121,000
Bal.
72,000
Raw Materials Inventory
Bal.
5,700
9,600
(e)
Bal.
41,000
(j)
(d)
25,600
(e)
8,400
Bal.
21,700
21,750
(i)
13,050
Bal.
37,450
Finished Goods Inventory
Plant Assets
Bal.
21,300
46,750
(k)
Bal.
220,000
(j)
46,750
Bal.
21,300
Accumulated Depreciation
Accounts Payable
73,000
Bal.
(c)
41,000
133,000
Bal.
2,700
(h)
25,600
(d)
75,700
Bal.
117,600
Bal.
(g)
35,000
2,000
Bal.
35,000
2,000
Bal.
100,000
(k)
Cost of Goods Sold
(k)
46,750
(l)
4,100
Bal.
50,850
Manufacturing Overhead
(e)
1,200
13,050
(b)
30,000
13,250
4,100
(h)
2,700
Bal.
P17-38B, cont.
Requirement 2, cont.
Raw Materials Inventory subsidiary ledger:
Bal.
4,300
8,400
Bal.
1,400
1,200
(d)
21,600
(d)
4,000
Bal.
17,500
Bal.
4,200
Work-in-Process Inventory subsidiary ledger:
Job 120
Job 121
Bal.
41,000
46,750
(j)
Bal.
0
(e)
550
(e)
7,850
(f)
3,250
(f)
18,500
(i)
1,950
(i)
11,100
Bal.
0
Bal.
37,450
Balance equals balance of Work-in-Process Inventory, $37,450 ($0 + $37,450).
Finished Goods Inventory subsidiary ledger:
Bal.
9,100
46,750
Bal.
12,200
(j)
46,750
Bal.
12,200
Bal.
9,100
P17-38B, cont.
Requirement 3
STUDENT STARS
Trial Balance
June 30, 2016
Account Title
Debit
Credit
Cash
$ 72,000
Accounts Receivable
121,000
Inventories:
Raw Materials
21,700
37,450
Finished Goods
21,300
Plant Assets
220,000
Accumulated Depreciation
$ 75,700
Accounts Payable
117,600
Wages Payable
Common Stock
143,000
Retained Earnings
136,000
Sales Revenue
100,000
Cost of Goods Sold
50,850
Selling and Administrative Expenses
30,000
Totals
$ 574,300
$ 574,300
P17-38B, cont.
Requirement 4
STUDENT STARS
Schedule of Cost of Goods Manufactured
Month Ended June 30, 2016
Beginning Work-in-Process Inventory
$ 41,000
Direct Materials Used:
Raw Materials Inventory, Beginning
$ 5,700
Purchases
25,600
Raw Materials Available for Use
31,300
Raw Materials Inventory, Ending
Indirect Materials Used
Direct Materials Used (Trans. e)
Direct Labor (Trans. f)
Manufacturing Overhead Allocated
Total Manufacturing Costs Incurred during the Month
Total Manufacturing Costs to Account for
Ending Work-in-Process Inventory
Cost of Goods Manufactured
$ 46,750
Requirement 5
STUDENT STARS
Income Statement
Month Ended June 30, 2016
Sales Revenue
$ 100,000
Cost of Goods Sold:
Beginning Finished Goods Inventory
$ 21,300
Cost of Goods Manufactured
Cost of Goods Available for Sale
Ending Finished Goods Inventory
Cost of Goods Sold Before Adjustment
Cost of Goods Sold After Adjustment
Gross Profit
Selling and Administrative Expense
Net Income
P17-39B Using job order costing in a service company
Learning Objective 6
2. Food Co-op $277,600
Robin Design, Inc. is a Web site design and consulting firm. The firm uses a job order costing system in
which each client is a different job. Robin Design assigns direct labor, licensing costs, and travel costs
directly to each job. It allocates indirect costs to jobs based on a predetermined overhead allocation rate,
computed as a percentage of direct labor costs.
At the beginning of 2016, managing partner Judi Jacquin prepared the following budget estimates:
In November 2016, Robin Design served several clients. Records for two clients appear here:
Requirements
1. Compute Robin Design’s direct labor rate and its predetermined overhead allocation rate for 2016.
2. Compute the total cost of each job.
3. If Judi wants to earn profits equal to 20% of service revenue, what fee should she charge each of
these two clients?
4. Why does Robin Design assign costs to jobs?
SOLUTION
Requirement 1
Hourly rate
to the employer
=
$2,100,000 per year
=
$210 per hour
10,000 hours per year
=
Total estimated quantity of the overhead allocation base
=
*$706,000 + $49,000 + $25,000 + $60,000 = $840,000
Requirement 2
ROBIN DESIGN, INC.
Total Cost of Food Co-ops’ and Martin Chocolates’ Jobs
For the Month of November
Food
Co-op
Martin
Chocolates
Total Costs
P17-39B, cont.
Requirement 3
If profits are 20% of sales, then total costs are 80% of sales. Therefore, Sales Revenue = Total Costs /
80%.
Continuing Problem
P17-40 Accounting for manufacturing overhead
This problem continues the Daniels Consulting situation from Problem P16-42 of Chapter 16. Daniels
Consulting uses a job order costing system in which each client is a different job. Daniels assigns direct
labor, meal per diem, and travel costs directly to each job. It allocates indirect costs to jobs based on a
predetermined overhead allocation rate, computed as a percentage of direct labor costs.
At the beginning of 2018, the controller prepared the following budget:
In November 2018, Daniels served several clients. Records for two clients appear here:
Requirements
2. Compute the total cost of each job.
3. If Daniels wants to earn profits equal to 25% of sales revenue, what fee should it charge each of
these two clients?
4. Why does Daniels assign costs to jobs?
SOLUTION
Requirement 1
Predetermined
Requirement 2
DANIELS CONSULTING
Total Cost of Tommy’s Trains and Marcia’s Cookies Jobs
For the Month of November
Tommy’s
Trains
Marcia’s
Cookies
Direct labor
$ 126,720
Meal per diem
Travel costs
$ 165,298
P17-40, cont.
Requirement 3
If profits are 25% of sales, then total costs are 75% of sales. Therefore, Sales Revenue = Total Costs /
75%.
Critical Thinking
Decision Case 17-1
Hiebert Chocolate, Ltd. is located in Memphis. The company prepares gift boxes of chocolates for
private parties and corporate promotions. Each order contains a selection of chocolates determined by
the customer, and the box is designed to the customer’s specifications. Accordingly, Hiebert uses a job
order costing system and allocates manufacturing overhead based on direct labor cost.
Ben Hiebert, president of Hiebert Chocolate, Ltd., priced the order at $20 per box.
In the past few months, Hiebert has experienced price increases for both dark chocolate and direct
labor. All other costs have remained the same. Hiebert budgeted the cost per box for the second order as
follows:
Requirements
1. Do you agree with the cost analysis for the second order? Explain your answer.
2. Should the two orders be accounted for as one job or two in Hiebert’s system?
3. What sale price per box should Ben Hiebert set for the second order? What are the advantages and
disadvantages of this price?
SOLUTION
Requirement 1
The cost analysis for the second order is correct. The problem tells us that overhead is allocated “based
on direct labor cost,” and we can see from the first order that the allocation rate is 50% of direct labor
Requirement 2
Hiebert should account for each order as a separate job. The orders were received at different times, for
different amounts, and the costs per box of the orders are not the same.
Requirement 3
Student responses will vary. Answers should make it clear that Hiebert is free to price his products any
Fraud Case 17-1
Jerry never imagined he’d be sitting there in Washington being grilled mercilessly by a panel of
congressmen. But a young government auditor picked up on his scheme last year. His company
produced high-tech navigation devices that were sold to both military and civilian clients. The military
contracts were “cost–plus,” meaning that payments were calculated based on actual production costs plus
a profit markup. The civilian contracts were bid out in a very competitive market, and every dollar
counted. Jerry knew that because all the jobs were done in the same factory, he could manipulate the
allocation of overhead costs in a way that would shift costs away from the civilian contracts and into the
military “cost–plus” work. That way, the company would collect more from the government and be able
to shave its bids down on civilian work. He never thought anyone would discover the alterations he had
made in the factory workers’ time sheets, but one of his accountants had noticed and tipped off the
government auditor. Now, as the congressman from Michigan rakes him over the coals, Jerry is trying to
figure out his chances of dodging jail time.
Requirements
1. Based on what you have read above, what was Jerry’s company using as a cost driver to allocate
overhead to the various jobs?
2. Why does the government consider Jerry’s actions fraudulent?
3. Name two ways that reducing costs on the civilian contracts would benefit the company and
motivate Jerry to commit fraud.
SOLUTION
Requirement 1
The company is using direct labor hours as a cost driver to allocate overhead. By showing more hours
spent on military jobs, more overhead would be allocated to these jobs over civilian contracts.