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Group 9:
Case 4-1
COMPANY OVERVIEW
Constructo is a manufacturer of furnishings for infants and children. The company uses a job cost system and employs a full absorption accounting method for cost accumulation.
Q1: Describe when it is appropriate for a company to use a job cost system?
Job cost system is used in situations where the organization offers many different products or services, such as in furniture manufacturing, commercial aircraft manufacturing, hospitals, and law firms. In a job cost system, costs are traced and allocated to jobs.
Sales order
Production order
Work in Process
Direct materials Direct labor Cost of goods manufactured
Overhead applied
Finished Goods
Cost of goods manufactured Cost of goods sold
Manufacturing Overhead
Actual overhead Applied overhead
Accumulated Cost
$900,000
PLP086
Playpens
25,000
$420,000
DRS114
Dressers
25,000
$250,000
TOTAL
$1,570,000
The Companys finished goods inventory, using the FIFO method on April 30, 2001
Additions to and requisitions from the inventory during the month of May
Raw Materials Additions Requisitions Job CBS102 Job PLP086 Job DRS114 Job STR077 (10,000 strollers) Job CRG098 (5,000 carriages) 65,000 187,000 51,000 3,000 124,000 62,000 104,000 10,800 87,000 81,000 242,000 Purchased Parts 396,000
OVERHEAD COST
Constructo applies factory overhead on the basis of direct labor hours. The companys factory overhead budget for the fiscal year ending May 31, 2001 total $4,500,000 The company plans to expend 600,000 Direct Labor Hours (DLH) during the period Predetermined overhead rate = $4,500,000 / 600,000 DHL = $7.5 per DLH
The flow of costs through the accounts presented in T-account form (1)
Raw Materials
Bal. 668,000 Requisitions: Cribs: 51,000+104,000=155,000 Playpens: 3,000+10,800=13,800 Dressers: 124,000+87,000=211,000 Strollers: 62,000+81,000=143,000 Carriages: 65,000+187,000=252,000
Bal.
531,200
The flow of costs through the accounts presented in T-account form (2)
Work in Process
Bal. 1,570,000 Finished Goods: Cribs: 1,267,400 900,000+51,000+104,000+122,400+12,000*7.5 Playpens: 336,480 (420,000+3,000+10,800)*15,000/25,000+43,200 +4,400*7.5 Strollers: 199,250 62,000+81,000+30,000+3,500*7.5 Direct Materials: 774,800 (155,000+13,800+211,000+ 143,000+252,000) Direct labor: 534,100 (621,100-29,400-57,600) Overhead Applied: 400,500 ((12,000+4,400+19,500+3,500 +14,000)*7.5)
Bal.
981,270
(Answer to Q2)
The flow of costs through the accounts presented in T-account form (3) Finished Goods
Bal. 3,755,400
Cost of Goods Sold: Cribs: 1,113,700 7,500*64+(17,500-7,500)*1,267,400/20,000 Playpens: 714,891 19,400*35+(21,000-19,400)*336,480/15,000 Strollers: 318,925 13,000*23+(14,000-13,000)*199,250/10,000 Dressers: 990,000 18,000*55 Carriages: 612,000 6,000*102
Bal.
2,304,014
The flow of costs through the accounts presented in T-account form (4)
Cost of Goods Sold
3,749,516 (1,113,700+714,891 +318,925+990,000+612,000)
The flow of costs through the accounts presented in T-account form (5)
Manufacturing Overhead
Actual Overhead Costs: Indirect materials: ? Indirect labor: 29,400 Supervision: 57,600 Utilities: ? Rent on factory equipment: ? Miscellaneous factory costs: ? Depreciation on factory equipment: ? Bal. ? (underapplied overhead) ? (overapplied overhead) Applied Overhead Costs: 400,500 (12,000+4,400+19,500+3,500 +14,000)*7.5
Q3: The dollar amount related to the playpens in Constructos finished goods inventory as of May 31,2001
Playpens in Finished Goods
Bal. 679,000 336,480 714,891
Bal. 300,589
Answer to Q3: The dollar amount related to the playpens in Constructos finished goods inventory as of May 31,2001 was $300,589.
Beginning Inventory + Quantity Added = Quantity shipped + Ending Inventory 19,400 + 15,000 = 21,000 + Ending Inventory Ending Inventory = 34,400 21,000 = 13,400 Dollar amount = 13,400 * 22.432 = $300,589
2. Allocated between Work in Process, Finished Goods, and Cost of Goods Sold in proportion to the overhead applied during the current period in the ending balances of these accounts.
Q4: Explain the proper accounting treatment for overapplied or underapplied overhead balances when using a job cost system
Since actual production costs should be reported in the period they were incurred, total product costs at the accounting period should be based on actual rather than applied overhead. Underapplied or Overapplied overhead can be disposed of in 2 ways
Proration: the process of allocating Underapplied or overapplied overhead to Work-In-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts at the end of period.
For Example: Assume that a companys accounts has the following applied overhead balances for the end of period: Ending W-I-P Inventory $20,000 Ending Finished goods Inventory $30,000 Cost of Goods Sold $150,000 Total Manufactory Overhead applied $200,000 Actual Manufactory Overhead $205,000
The proration of the $5,000 underapplied factory overhead among the W-I-P Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts is computed as follows:
Amount Work In process Inventory Finished Goods Inventory Cost of Goods Sold TOTAL
Underapplied % of Total Applied Overhead $20,000 $30,000 $150,000 $200,000 10% 15% 75% 100%
Factory Overhead Applied W-I-P Inventory Finished Goods Inventory Cost of Goods Sold Factory Overhead
Industrial manufacturer of power-generating equipment since 1907 PSI also produces after market and original-equipment parts East River Plant one of three manufacturing firms, located in Illinois Major products: coal-fired boilers
Competitive Environment
Pre-1980s era high demand for electricity low # of competitors low # of manufacturers for OEM and replacement parts low fuel price
Original-equipment market (OEM) made up 60% of East Rivers revenues Replacement orders made up about 40% of revenues
Early 1990s constant growth for electricity, significant decrease in orders government regulations environmental concerns more manufacturers of replacement parts, raising market standard: a. faster delivery b. lower prices c. higher quality fuel price/interest rate increase
Decrease
OEM Market
OEM Market
Increase
+
Total Market Demand
+
Decrease
equipment > 29 years approx. machine downtime bottlenecks plant usage = 45-50% equipment layout = unnecessary manual process 40% manhours material handling High Inventory $7 Million
As-sold cost based on historical data which from early seventies Cost of material has been changed the actual contract cost more than estimate As-sold cost estimation didnt contain defects and other material waste
Order
Order
Order
Direct Costs
Overhead
Direct materials Direct labor Product design engineering Machine set up Materials handling
Job cost system since 1950s Materials and labor costs charged directly to contracts Overhead costs applied with predetermined % of direct labor costs performance compare monthly ratio Estimate Man to Actual Man Hours (E/A) If E/A below 100% = not good
Labor cost is not majority of costs Not all costs are driven by man hours Example increase in man hours in welding one product does not equal increase in cost for testing (QA) ABC yes! Why? Inaccurate costing structure, complex manufacturing process
update historically determined overhead/burden rate Incorporate probability of machine downtime Use actual costs from previous jobs of similar size for estimates vs. querying by parts Remove period costs in product costing Implement ABC
Direct materials, direct labor, and factory overhead are only costs involved in product costing All costs can be accurately traced to cost driver(s) Accounting software used to accurately track accumulation and classify costs
Chapter 4 Reading
HOW I REENGINEERED A SMALL BUSINESS
The Company
James Street Fashions dba Latt-Greene A Knitting and Converting Operation Located in Vernon, California Knits Textiles for the Womens and Childrens Apparel Market Dyes and Prints Designs on the Textiles According to Customer Instructions Delivers the Product to the Customer Ready for Cutting and Sewing into Clothing Customers Consist of Clothing Manufacturers who Sell to Clothing Retailers
The Problems
Severe Negative Cash Flow A Belief that Not All Sales to Customers were being Billed or Collected A Paper-Heavy System that was being Crushed by its Own Weight A One-Write Accounting System No Computer or Data Processing
One-Write System Only Prepares General Ledger, Cash Receipts Journal and Customer Ledgers, and a Cash Disbursement Journal. Does Not Attempt to Cost the Greige Goods. Customer were Billed as per the Purchase Order. Weaknesses Unable to Cost Goods Accurately. No Matching Print-Sales Invoices. Purchase Orders with No Shipment Record. Late Delivery of Orders. Over-Filling Goods and Under-Charging the Customers.
Hardware Changes A PC as Central Server. 10 Stations Using Novell System. Software Changes Quattro Pro Spreadsheet Program. Develops Spreadsheet Automated Scripts. System Changes Manual Costing System Requires a Tremendous Amount of Time to Maintain and Keep Current. Computerized Costing System Refines Cost Data as They Becomes Available. Workforce Changes Trains Willing Employees and Dispatch Unwilling Employees.
Operation Improved Services to Customers. Delivery Schedules were Met More Consistently. More Time Spent on Product Consistency and Quality. Less Time Spent on Paperwork and Trying to Track Down Product Location. Problem Uncovered and Fixed in a More Timely and Efficient Manner. Product Prices and Quality Improved Product Consistency and Quality. Raised Price Caused Some Customer to Leave but Covered the Cost of the Product.
Be Open with All Employees Regarding the Reengineering Process. Solicit Input from All Employees. Involve Everyone in the Implementation of the New System. Understand the System Yourself because This Understanding is More Important than Bringing in Consultants and Helps to Ensure that Costs are Kept Under Control.