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basis of $15,000 of direct labour cost, the companys predetermined overhead rate must be
50% of direct labour cost. Thus, $2,000 of overhead should be applied to Job B at year-end:
$4,000 direct labour cost 50% = $2,000 applied
overhead cost.
3-15
Direct material ..................................
Direct labour.....................................
Manufacturing overhead:
$16,000 150% ...........................
Total manufacturing cost ...................
Unit product cost:
$52,000 750 units ......................
$12,000
16,000
24,000
$52,000
$69.33
Job-order costing
b.
Job-order costing
c.
Job-order costing
d.
Job-order costing
e.
Process costing
f.
Process costing
g.
Job-order costing
h.
Job-order costing
i.
Job-order costing
j.
Process costing
k.
Job-order costing
l.
Process costing
Quantity
8
8
Unit Cost
$25.00
$9.20
Total Cost
$200.00
73.60
$273.60
Started
Ended
9:00 AM 12:15 PM
Time
Completed
3.25
Rate
$18.00
Amount
Job
Number
Amount
Job
Number
$58.50
Started
2:15 PM
Ended
4:30 PM
Time
Completed
2.25
Rate
$19.00
$42.75
ES34
ES34
$586,000
40,000 DLHs
$14.65 per DLH
Actual Overhead
$713,400
$600,650
45,000
70,000
55,000
45,000
125,000
12,600
$23.10
$291,060
$ 48,000
50,000
$ 2,000
2. Direct materials:
Raw materials inventory, beginning .............. $ 8,000
Add purchases of raw materials .................... 32,000
Raw materials available for use .................... 40,000
Deduct raw materials inventory, ending ........
7,000
Raw materials used in production .................
$ 33,000
Direct labour ..................................................
40,000
Manufacturing overhead cost applied to work
in process ...................................................
50,000
Total manufacturing cost ................................
123,000
Add: Work in process, beginning .....................
6,000
129,000
Deduct: Work in process, ending .....................
7,500
Cost of goods manufactured ...........................
$121,500
(b)
(c)
(e)
75,000
152,000
126,000
Work in Process
67,000
134,000
178,000
379,000 (f)
379,000
Manufacturing Overhead
(b)
6,000 (e)
178,000
(c)
18,000
(d)
126,000
(g)
28,000
28,000
(a)
Raw Materials
75,000 (b)
73,000
(f)
Finished Goods
379,000
379,000 (f)
379,000
(f)
16,500
$21.40
$353,100
345,000
$ 8,100
$8,100
11
$37,000
68,000
96,000
201,000
52,000
253,000
71,000
$182,000
$27,000
182,000
209,000
32,000
177,000
6,500
$170,500
13
Designer-hours ...........................
Predetermined overhead rate .......
Overhead applied ........................
Williams
200
$45
$9,000
Chandler
80
$45
$3,600
Nguyen
120
$45
$5,400
2.
Williams
$ 4,800
2,400
9,000
$16,200
22,600*
Chandler
$1,800
1,000
3,600
$6,400
22,600*
3. The balance in the Work in Process account consists entirely of the costs
associated with the Nguyen project:
Direct materials cost ...............................
Direct labour cost ...................................
Overhead applied ...................................
Total cost in work in process ...................
$ 3,600
1,500
5,400
$10,500
Overhead
16,000 18,000 Applied overhead costs
2,000 Overapplied overhead
$840,000*
200,000 units
15
$840,000**
$600,000* direct materials cost
First
Quarter
Second
Third
Fourth
30,000
30,000
$ 32,800
41,000
336,200
$410,000
8%
10
82
100 %
30,000
2,400
3,000
24,600
17
$2,550,000
=$8.50 per machine-hour
300,000 machine-hours
Assembly Department:
Predetermined = Estimated total manufacturing overhead cost
Overhead rate
Estimated total amount of the allocation base
=
$4,000,000
$3,200,000 direct labour cost = 125% Direct labour cost
2.
Stamping Department: 450 MHs $8.50 per
MH ............................................................
Assembly Department: $800 125%.............
Total overhead cost applied ...........................
Overhead
Applied
$3,825
1,000
$4,825
3. Yes; if some jobs require a large amount of machine time and little
labour cost, they would be charged substantially less overhead cost if a
plantwide rate based on direct labour cost were used. It appears, for
example, that this would be true of Job 407 which required considerable
machine time to complete, but required only a small amount of labour
cost.
$170,000
=$2.00 per machine-hour
85,000 machine-hours
2. The amount of overhead cost applied to Work in Process for the year
would be: 80,000 machine-hours $2.00 per machine-hour =
$160,000. This amount is shown in entry (a) below:
(Utilities)
(Insurance)
(Maintenance)
(Indirect materials)
(Indirect labour)
(Depreciation)
Balance
Manufacturing Overhead
14,000 (a) 160,000
9,000
33,000
7,000
65,000
40,000
8,000
Work in Process
(Direct materials)
530,000
(Direct labour)
85,000
(Overhead)
(a) 160,000
3. Overhead is underapplied by $8,000 for the year, as shown in the Manufacturing Overhead account above. The entry to close out this balance
to Cost of Goods Sold would be:
Cost of Goods Sold ......................................
Manufacturing Overhead ...........................
8,000
8,000
19
$9.04 per MH
$0.91 per DL$
21
160,000
120,000
20,000
90,000
60,000
20,000
50,000
13,000
5,000
10,000
15,000
20,000
5,000
110,000
160,000
140,000
220,000
18,000
10,000
15,000
25,000
110,000
310,000
498,000
2.
Bal.
(a)
Bal.
Bal.
(i)
Bal.
(j)
Raw Materials
10,000 (b) 140,000
160,000
30,000
Finished Goods
8,000 (j) 308,000
310,000
10,000
Bal.
(b)
(c)
(h)
Bal.
308,000
310,000
498,000
308,000
Work in Process
4,000 (i)
310,000
120,000
90,000
110,000
14,000
Manufacturing Overhead
(b)
20,000 (h)
110,000
(c)
60,000
(d)
13,000
(e)
10,000
(g)
20,000
Bal.
13,000
13,000
13,000
23
Problem 3-17(continued)
4.
Additional Notes:
You may wish to have the student prepare a statement of Cost of Goods
manufactured as follows:
Raw Materials, B.I.
$ 10,000
Purchase of RM
160,000
R.M. Available
170,000
Less: Raw Material, E.I.
30,000
Raw Materials Used
140,000
Less: Indirect Material
20,000
Direct Material Used
$ 120,000
Direct Labour
90,000
Manufacturing Overhead Applied
110,000
Manufacturing Costs for the year
320,000
Add: WIP B.I.
4,000
Less: WIP E.I.
14,000
Cost of Goods Manufactured
$310,000
Remind the student that this statement is just a detailed explanation of what is in the WIP t-account.
McGraw-Hill Ryerson Ltd. 2012. All rights reserved.
24
42,000
9,000
1,000
50,000
51,000
9,000
42,000
10,000
50,000
60,000
25
Raw Materials
Bal. 16,000 (b) 190,000
(a) 200,000
Bal. 26,000
Manufacturing Overhead
(b) 38,000 (h)
170,000
(c)
27,000
(d) 42,000
(e)
9,000
(g) 51,000
Bal.
3,000
Work in Process
Bal. 10,000 (i)
480,000
(b) 152,000
(c) 160,000
(h) 170,000
Bal. 12,000
(j)
Finished Goods
Bal. 30,000 (j)
475,000
(i)
480,000
Bal. 35,000
3. Manufacturing overhead is overapplied by $3,000. The journal entry to
close this balance to Cost of Goods Sold is:
Manufacturing Overhead .............................
Cost of Goods Sold ................................
3,000
3,000
Ravsten Company
Income Statement
For the Year Ended December 31
Sales ...........................................................
$700,000
Cost of goods sold ($475,000 $3,000).........
472,000
Gross margin................................................
228,000
Selling and administrative expenses:
Sales commissions ..................................... $36,000
Administrative salaries................................ 80,000
Insurance ..................................................
1,000
Advertising ................................................ 50,000
Depreciation ..............................................
9,000 176,000
Operating income .........................................
$ 52,000
27
Bal.
(i)
Bal.
Bal.
(b)
(c)
(d)
(e)
(f)
Bal.
Cash
8,000 (l)
197,000
15,000
Raw Materials
7,000 (b)
45,000
12,000
190,000
40,000
Finished Goods
20,000 (j)
120,000
130,000
30,000
Bal.
(j)
Bal.
Accounts Receivable
13,000 (k)
197,000
200,000
16,000
Bal.
(b)
(e)
(h)
Bal.
Work in Process
18,000 (i)
130,000
32,000
40,000
60,000
20,000
Bal.
Prepaid Insurance
4,000 (f)
3,000
Bal.
Manufacturing Overhead
8,000 (h)*
60,000
14,600
21,000
18,000
2,400
4,000 (m)
4,000
1,000
Accumulated Depreciation
Bal.
42,000
(d)
28,000
Bal.
70,000
(l)
Accounts Payable
100,000 Bal.
30,000
(a)
45,000
(c)
14,600
(g)
18,000
Bal.
7,600
Retained Earnings
Bal.
78,000
150,000
Insurance Expense
600
(j)
(m)
Depreciation Expense
7,000
(g)
Miscellaneous Expense
18,000
Sales
(j)
200,000
3. Overhead is underapplied by $4,000. Entry (m) above records the closing of this underapplied overhead balance to Cost of Goods Sold.
4.
Durham Company
Income Statement
For the Year Ended December 31
Sales ............................................................
$200,000
Cost of goods sold ($120,000 + $4,000) .........
124,000
Gross margin.................................................
76,000
Selling and administrative expenses:
Depreciation expense .................................. $ 7,000
Sales commissions expense ......................... 10,400
Administrative salaries expense ................... 25,000
Insurance expense ......................................
600
Miscellaneous expense ................................ 18,000
61,000
Operating income ..........................................
$ 15,000
29
Cash
15,000 (c)
445,000 (m)
85,000
Bal.
(a)
Raw Materials
25,000 (b)
80,000
Bal.
15,000
Bal.
(j)
Bal.
Bal.
225,000
150,000
90,000
Finished Goods
45,000 (k)
300,000
310,000
55,000
Bal.
(b)
(c)
(i)
Bal.
Work in Process
30,000 (j)
310,000
85,000
120,000
96,000
21,000
Bal.
Prepaid Insurance
5,000 (f)
Bal.
Manufacturing Overhead
5,000 (i)*
96,000
30,000
12,000
25,000
4,000
17,000
Bal.
3,000
(b)
(c)
(d)
(e)
(f)
(h)
Bal.
(k)
Bal.
Accounts Receivable
40,000 (l)
445,000
450,000
45,000
4,800
200
Accumulated Depreciation
Bal.
210,000
(e)
30,000
Bal.
240,000
(m)
Accounts Payable
150,000 Bal.
(a)
(d)
(g)
(h)
Bal.
75,000
80,000
12,000
40,000
17,000
74,000
$80,000
= 80% of direct labour cost; $120,000 0.80 = $96,000.
$100,000
Retained Earnings
Bal.
125,000
Capital Stock
Bal.
250,000
Salaries Expense
75,000
(f)
Insurance Expense
800
(k)
(e)
Depreciation Expense
5,000
(g)
Shipping Expense
40,000
Sales
(k)
450,000
PQB Inc.
Income Statement
For the Year Ended December 31
Sales ............................................................
$450,000
Cost of goods sold ($300,000 $2,394)..........
297,606
Gross margin.................................................
152,394
Selling and administrative expenses:
Salaries expense ......................................... $75,000
Depreciation expense ..................................
5,000
Insurance expense ......................................
800
Shipping expense ........................................ 40,000 120,800
Operating income ..........................................
$ 31,594
31
Raw Materials
40,000 (a)
33,500
Finished Goods
Bal. 85,000
(e) 60,700
Bal.
(a)
(b)
(d)
Bal.
(a)
(b)
(c)
Work in Process
77,800* (e)
29,500
20,000
32,000
98,600
60,700
Manufacturing Overhead
4,000 (d)
32,000
8,000
19,000
Accounts Payable
(c)
29,500 *
4,000
19,000
$50,300
27,500
$77,800
33,500
20,000 *
8,000
28,000
19,000
19,000
$ 6,400
9,600
16,000
$32,000
32,000
32,000
60,700
60,700
33
Total
$700,000
=$35 per hour
20,000 hours
Departments
Research &
Documents
Litigation
$
50
410
630
$1,090
30
2,100
840
$2,970
Total
80
2,510
1,470
$4,060
35
Department
Research &
Documents Litigation
$300,000
290,000
$ 10,000
38,000
39,400
600
38,000
40,000
28,000
12,000
12,600
40,000
12,600
$135,000
=$7.50 per DLH; 20,800 DLH $7.50 per DLH = $156,000.
18,000 DLH
37
Cash
9,000 (e)
1,415,000 (m)
68,000
Raw Materials
16,000 (b)
820,000
38,000
1,318,000
830,000
6,000
Finished Goods
38,000 (k)
1,120,000
1,106,000
24,000
970,000
348,000
1,318,000
Bal.
(k)
Bal.
Accounts Receivable
30,000 (l)
1,415,000
1,420,000
35,000
Bal.
(b)
(c)
(i)
Bal.
Work in Process
21,000 (j)
1,106,000
817,000
140,000
156,000
28,000
Bal.
(e)
Bal.
Prepaid Insurance
7,000 (e)
40,000
38,000
5,000
Accumulated Depreciation
Bal.
128,000
(g)
40,000
Bal.
168,000
Manufacturing Overhead
13,000 (i)
156,000
60,000
39,400
28,000
12,600
Bal.
3,000
(m)
5,000
Retained Earnings
Bal.
30,000
(f)
Marketing Expense
100,000
(e)
Insurance Expense
600
(k)
Accounts Payable
970,000 Bal.
(a)
(f)
(h)
Bal.
60,000
820,000
100,000
12,600
22,600
Capital Stock
Bal.
200,000
(g)
Depreciation Expense
12,000
(d)
Salaries Expense
150,000
Sales
(k)
1,420,000
39
3,000
3,000
$1,420,000
1,117,000
303,000
$150,000
600
100,000
12,000
262,600
$ 40,400
$416,000
=$5.20 per machine-hour
80,000 machine-hours
$720,000
=180% of materials cost
$400,000 materials cost
Preparation Fabrication
$ 940
710
1,820
$3,470
$1,200
980
2,160
$4,340
Total
$2,140
1,690
3,980
$7,810
$7,810
= $312.40 per unit
25 units
41
Preparation Fabrication
$390,000
$740,000
379,600
$ 10,400
756,000
$(16,000)
$400,000
=125% of direct materials cost
$320,000
McGraw-Hill Ryerson Ltd. 2012. All rights reserved.
43
$90,000
(32,000)
(40,000)
$18,000
$126,000
$84,000 direct labour cost
= 150% Direct labour cost
b. Actual manufacturing overhead costs:
Insurance, factory ......................................
Depreciation of equipment..........................
Indirect labour ...........................................
Property taxes ...........................................
Maintenance ..............................................
Rent, building ............................................
Total actual costs .........................................
Applied manufacturing overhead costs:
$80,000 150% .......................................
Underapplied overhead .................................
2.
$ 7,000
18,000
42,000
9,000
11,000
36,000
123,000
120,000
$ 3,000
$ 21,000
133,000
154,000
16,000
$138,000
80,000
120,000
338,000
44,000
382,000
40,000
$342,000
45
$1,530,000
=$18 per computer hour
85,000 computer hours
$1,350,000
1,080,000
$ 270,000
270,000
270,000
4%
26
70
100 %
10,800
70,200
189,000
270,000
47
21,000
21,000
15,000
15,000
45,000
5,000
72,000
18,000
17,000
50,000
90,000
17,000
49
590,000
590,000
Bal.
(b)
(d)
(j)
Bal.
Accounts Receivable
1,000,000
Work in Process
24,000 (k)
590,000
150,000
216,000
240,000
40,000
Bal.
(a)
Bal.
Raw Materials
18,000 (b)
142,000
10,000
Bal.
(k)
Finished Goods
35,000 (l)
600,000
590,000
Bal.
Manufacturing Overhead
(c)
21,000 (j)
240,000
(d)
90,000
(e)
15,000
(g)
45,000
(h)
72,000
Bal.
3,000
Accumulated Depreciation
(g)
50,000
Salaries & Wages Payable
(d)
451,000
(i)
Miscellaneous Expense
17,000
150,000
25,000
Accounts Payable
(a)
(c)
(e)
(f)
(h)
(i)
142,000
21,000
15,000
130,000
90,000
17,000
(g)
Depreciation Expense
5,000
(d)
Salaries Expense
145,000
(f)
Advertising Expense
130,000
Rent Expense
18,000
Sales
(l)
3.
(l)
1,000,000
Southworth Company
Schedule of Cost of Goods Manufactured
Direct materials:
Raw materials inventory, beginning ................... $ 18,000
Purchases of raw materials ................................ 142,000
Materials available for use ................................. 160,000
Raw materials inventory, ending ........................
10,000
Materials used in production ..............................
Direct labour .......................................................
Manufacturing overhead applied to work in
process ............................................................
Total manufacturing cost .....................................
Add: Work in process, beginning ..........................
Deduct: Work in process, ending ..........................
Cost of goods manufactured ................................
4.
3,000
$150,000
216,000
240,000
606,000
24,000
630,000
40,000
$590,000
3,000
51
Southworth Company
Income Statement
Sales ..........................................................
Cost of goods sold .......................................
Gross margin ..............................................
Selling and administrative expenses:
Salaries expense .......................................
Advertising expense ..................................
Depreciation expense ................................
Rent expense ...........................................
Miscellaneous expense ..............................
Operating income ........................................
6.
$1,000,000
603,000
397,000
$145,000
130,000
5,000
18,000
17,000
315,000
$ 82,000
$ 3,600
4,400
5,760
13,760
10,320
$24,080
$1,440,000
$900,000 direct labour cost
= 160% Direct labour cost
Cutting
Machining
Assembly
Department Department Department
Estimated manufacturing
overhead cost (a) .......... $540,000
Estimated direct labour
cost (b)......................... $300,000
Predetermined overhead
rate (a) (b) ................ 180%
b.
$800,000
$100,000
$200,000
$400,000
400%
25%
Cutting Department:
$6,500 180% .................................. $11,700
Machining Department:
$1,700 400% ..................................
6,800
Assembly Department:
$13,000 25% ..................................
3,250
Total applied overhead .......................... $21,750
3. The bulk of the labour cost on the Hastings job is in the Assembly Department, which incurs very little overhead cost. The department has an
overhead rate of only 25% of direct labour cost as compared to much
higher rates in the other two departments. Therefore, as shown above,
use of departmental overhead rates results in a relatively small amount
of overhead cost charged to the job.
53
$ 18,500
21,200
21,750
61,450
1.5
$ 92,175
Note that if departmental overhead rates had been used, Prime Products
would have been the low bidder on the Hastings job since the competitor underbid Prime Products by only $10,000.
b.
Department
Cutting Machining Assembly Total Plant
55
63,000
6,000
57,000
$3,800,000
57,000 DLHs
The revised predetermined overhead rate is higher than the original rate
because the automated milling machine will increase the overhead for
the year (the numerator in the rate) and will decrease the direct labourhours (the denominator in the rate). This double-whammy effect increases the predetermined overhead rate.
2. Acquisition of the automated milling machine will increase the apparent
costs of all jobsnot just those that use the new facility. This is because
the company uses a plantwide overhead rate. If there were a different
overhead rate for each department, this would not happen.
3. The predetermined overhead rate is now considerably higher than it
was. This will penalize products that continue to use the same amount
of direct labour-hours. Such products will now appear to be less profitable and the managers of these products will appear to be doing a poorer
job. There may be pressure to increase the prices of these products
even though there has in fact been no increase in their real costs.
57
59
$200,000
76,000
178,450
$454,450
10,500
$43.28
$454,450.00
$295,392.50
5,250
$56.27
$159,057.50
5,250.00
$
30.30
$115.00
259.68
$374.68
$412.15
61
Maintain our market leadership by sharpening our customer orientation and innovating with value-added products and services.
Enhance our execution efficiency to secure our reputation as the rail
equipment supplier that delivers on time, on quality and at a competitive price.
Intensify our focus on efficient organizational structures and processes that facilitate internal collaboration on promising market opportunities.
Drive training, development and other initiatives to unlock the full potential of our people.
63
Appendix 3A
Question 3A-1 When the predetermined overhead rate is based on the
amount of the allocation base at capacity and the plant is operated at less
than capacity, overhead will ordinarily be underapplied. This occurs because actual activity is less than the activity the predetermined overhead
rate is based on.
Question 3A-2 Critics of current practice advocate disclosing underapplied overhead on the income statement as Cost of Unused Capacitya period expense. This would highlight the amount rather than burying it in
other accounts.
Exercise 3A-1 (30 minutes)
1. The overhead applied to Ms. Miyamis account would be computed as
follows:
2008
2009
2008
2009
65
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
67
PowerDrives, Inc.
Income Statement: New Approach
69
$160,000
$20 per unit
8,000 units
80,000 units
88,000 units
PowerDrives, Inc.
Income Statement: New Approach
Revenue (75,000 units $70 per unit) .................
$5,250,000
Cost of goods sold:
Variable manufacturing
(75,000 units $18 per unit) .......................... $1,350,000
Manufacturing overhead applied
(75,000 units $20 per unit) .......................... 1,500,000 2,850,000
Gross margin .......................................................
2,400,000
Cost of unused capacity
[(100,000 units - 88,000 units) $20 per unit] ...
240,000
Selling and administrative expenses ......................
1,950,000
Operating income ................................................
$ 210,000
3. Operating income is more volatile under the new method than under the
old method. The reason for this is that the reported profit per unit sold
is higher under the new method by $5, the difference in the predetermined overhead rates. As a consequence, swings in sales in either direction will have a more dramatic impact on reported profits under the new
method.
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