CHAPTER PRODUCT AND SERVICE COSTING: JOB-ORDER SYSTEM DISCUSSION QUESTIONS Cost measurement is the process of determining the dollar amounts of direct materials, direct labor, and overhead that should be assigned to production Cost accumulation (or assignment) is the process of associating costs with the units produced Essentially, cost measurement is concerned with whether actual or estimated costs should be used, and cost assignment is concerned with whether costs should be assigned to jobs or processes used to assign overhead costs to individual jobs Additional source documents must be developed to track use of multiple drivers in an activity-based costing system Thus, if a purchasing rate is developed based on number of purchase orders, then a source document tracing the use of purchase orders by individual jobs must be created Activity drivers are those factors that drive or cause the consumption of overhead Knowing what drives overhead costs allows a more accurate assignment of overhead costs to products Actual costing is rarely used because managers cannot wait until the end of the year to obtain product costs Information on product costs is needed as the year unfolds for planning, control, and decision making Expected actual activity is the level of production activity expected for the coming year Normal activity is the long-run average activity level Practical activity is the level of activity achievable under efficient operating conditions Theoretical activity is the level of activity achievable under ideal operating conditions Job-order costing accumulates costs by jobs, and process costing accumulates costs by processes Job-order costing is suitable for operations that produce custom-made products that receive different doses of manufacturing costs Process costing, on the other hand, is suitable for operations that produce homogeneous products that receive equal doses of manufacturing costs in each process Assignment using normal less fluctuation in overhead assignments assigning the costs of products when production The principal difference between a manual and an automated system is the nature of the records In an automated system, terminals can be used to input data directly to the job, thus eliminating the need for many source documents such as time tickets and requisition forms Even if these forms are used and the data are entered on a batch basis, the job-order cost sheet has been replaced with an electronic record Instead of cabinets with collections of joborder cost sheets, files are collections of job records located on disk or tape activity produces period-to-period It also avoids idle capacity to is down 10 When normal costing is used, the actual use of overhead is not assigned to jobs Instead, applied overhead is assigned 11 Unit cost: Direct materials Direct labor Overhead ($5 × 1,000) Total $ 7,500 10,000 5,000 $22,500 Unit cost = $22,500/500 = $45 12 Materials requisition forms serve as the source document for posting materials usage and costs to individual jobs Time or work tickets serve a similar function for labor Predetermined overhead rates are 5-1 More paperwork is required Labor and materials are assigned to departments in a process-costing system In a job-order system, labor and materials must be tracked to each job, requiring time tickets and more use of materials requisitions Additionally, a job-order system requires a separate job sheet for each job © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 13 The normal cost of goods sold uses applied overhead only Adjusted cost of goods sold is the normal cost of goods sold adjusted for an overhead variance (increased for underapplied and decreased for overapplied) 14 The cost of spoilage in this case is charged to Overhead Control, because the demands of the job itself did not lead to the spoilage 15 In this case, the spoilage was due to the demands of this particular job and would be charged to the job 5-2 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CORNERSTONE EXERCISES Cornerstone Exercise 5.1 Budgeted direct labor cost = $25 × 20,000 direct labor hours = $500,000 Overhead rate = $260,000/$500,000 = 0.52, or 52% of direct labor cost Balance, June Direct materials Direct labor Applied overhead Total Job 39 $23,700 18,900 10,000 5,200 $57,800 Job 40 $34,600 21,400 18,500 9,620 $84,120 Job 41 $17,000 8,350 3,000 1,560 $29,910 Job 42 $ 12,000 2,900 1,508 $16,408 New budgeted direct labor cost = $20 × 20,000 direct labor hours = $400,000 New overhead rate = $260,000/$400,000 = 0.65, or 65% of direct labor cost The applied overhead for all jobs would be higher since the new rate is higher and the costs would be higher (This assumes that there is no change in actual direct labor hours Actual direct labor hours were not given in the problem.) Cornerstone Exercise 5.2: Ending Work in Process consists of Jobs 41 and 42: Job 41 Job 42 Ending Work in Process $29,910 16,408 $46,318 Ending balance in Finished Goods is Job 40 at $84,120 Cost of goods sold = Job 39 = $57,800 Price of Job 39 = $57,800 × 1.3 = $75,140 If the customer for Job 40 was able to pay for it by June 30, the balance in Finished Goods would be zero and Cost of Goods Sold would consist of Jobs 39 and 40 and would total $141,920 ($57,800 + $84,120) 5-2 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Cornerstone Exercise 5.3 Materials handling rate = $72,000/3,000 = $24 per move Engineering rate = $165,000/10,000 = $16.50 per change order Other overhead rate = $280,000/50,000 = $5.60 per direct labor hour Job 13-43 Balance, July Direct materials Direct labor cost Materials handling Engineering Other overhead Total $13,322 Job 13-44 $20,300 6,500 18,000 1,056 495 5,040 $51,391 Job 13-45 $19,800 8,900 20,000 1,248 660 5,600 $56,208 Job 13-46 $ 2,300 12,700 32,000 696 330 8,960 $ 56.986 $ 9,800 2,400 120 330 672 Ending Work in Process consists of Jobs 13-45 and 13-46 = $70,308 Cost of goods sold = Job 13-43 + Job 13-44 = $107,599 If Job 13-46 required no engineering changes, the cost of that job would be $330 lower and no other job would be affected Cornerstone Exercise 5.4 Cost of the Tramel job with normal spoilage: Direct materials Direct labor Applied overhead ($500 × 1.4) Total job cost $1,900 500 700 $3,100 Cost of rework: Direct materials Direct labor Applied overhead ($100 × 1.4) Total rework cost $400 100 140 $640 Journal entry: Overhead Control Materials Payroll 5-3 500 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 400 100 Cornerstone Exercise 5.4 (Concluded) If the rework required $200 of direct labor cost rather than $100, the cost of the Tramel job would not be affected since the rework was not included Instead, $600 would be debited to Overhead Control and $200 would be credited to Payroll Cornerstone Exercise 5.5 Cost of the Tramel job with spoilage: Direct materials ($1,900 + $400) Direct labor ($500 + $100) Applied overhead ($600 × 1.4) Total job cost $2,300 600 840 $3,740 No journal entry is needed If the additional rework required $200 of direct labor rather than $100, then the total cost of the Tramel job would increase by $240 to $3,980 [$3,740 + $100 + ($100 ì 1.4)] 5-4 â 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part EXERCISES Exercise 5.6 a Bicycle production is manufacturing The product is tangible and fairly homogeneous (One bicycle model is much the same as another.) Production is separate from consumption b Pharmaceuticals are manufacturing A drug is tangible, and consumption is separate from production The product is not heterogeneous in that variation is minimized (Drug companies must meet certain standards regulating allowable variation in the chemical composition of each tablet or dose.) c Income tax preparation is a service It is heterogeneous in that the quality of work varies from preparer to preparer and also to various returns prepared by the same preparer While the printed return is tangible, the knowledge required for it is not In addition, the return cannot be prepared without the assistance of the taxpayer Production and consumption are intertwined d The application of artificial nails is a service It is heterogeneous in that the quality of work varies from manicurist to manicurist Additionally, the same manicurist may a better job with some customers than with others The production and consumption process are overlapping While the nails are tangible, the application process is not and cannot be inventoried e Glue production is manufacturing The product is tangible and fairly homogeneous (One bottle of glue is much the same as another produced by the same firm.) Production is separate from consumption f Child care is a service The services rendered are not tangible and cannot be inventoried They are heterogeneous One caregiver differs from another, and the same caregiver may vary in quality (e.g., patience, creativity) throughout the day and/or with different children Production and consumption take place simultaneously 5-5 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Exercise 5.7 EcoScape Company should use job-order costing because each installation is unique and made to order Materials may differ from job to job, as may direct labor Predetermined overhead rate = $50,400/6,720 = $7.50 per direct labor hour Average wage rate = $66,495/6,045 = $11 per direct labor hour Direct materials Direct labor ($11 × 20) Overhead ($7.50 × 20) Total cost $3,500 220 150 $3,870 The company cannot use an actual cost system; it needs to know the cost of each installation as it is completed Since overhead is incurred unevenly throughout the year, and certain overhead bills arrive after the need for unit costs occur, overhead must be applied to production using a predetermined rate Exercise 5.8 Irrigation Specialties should use a process-costing system because each watering system is like every other so the cost of direct materials, direct labor, and overhead stays constant from job to job If Irrigation Specialties uses an actual costing system, the average amounts for actual direct materials, actual direct labor, and actual overhead must be calculated for each month Average Amounts June Direct materials $18,000 Direct labor 12,000 Overhead 10,900 Total cost $40,900 ÷ number of installations 60 Total cost $ 682 July $24,000 16,000 12,340 $52,340 80 $ 654 August $36,000 24,000 14,500 $74,500 120 $ 621 Predetermined overhead rate = $54,000/600 = $90 per system installed Unit cost per system = $300 + $200 + $90 = $590 The cost of the basic system does not change from month to month 5-6 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Exercise 5.9 The two measures of activity level considered by Reggie are expected actual activity and theoretical activity Predetermined overhead rate using expected actual activity: Predetermined overhead rate = $12,000/(100 × 25 hours) = $4.80 per hour Predetermined overhead rate using theoretical activity: Predetermined overhead rate = $12,000/(125 × 25 hours) = $3.84 per hour Reggie should use expected actual activity because it is unlikely that he will approach the theoretical activity level, especially with a new business The expected actual activity level will be more likely to spread the overhead over the actual jobs, without a large overhead variance Notice that Reggie cannot use normal activity level because he has not been in business for a number of years Exercise 5.10 Because the business is so small (Reggie is the only employee), all he really needs is a job-order cost sheet Actually, a folder for each job would He would file all receipts for materials purchased (these are source documents) —or prorate to the particular job the cost of lumber, etc.—in the folder He could also file notes recording his time spent on the job Of course, he will need a good system for accumulating costs, since he may need to refer to those to calculate actual overhead and direct materials purchases Now, the business is considerably larger Reggie will no longer be able to reconstruct job costs from memory, since he is not the only one working on the various jobs Now, he will need labor time tickets to help workers keep track of the time spent on the jobs A more formal job-order cost sheet will also be needed, and periodic entries must be made to assign costs to the jobs 5-7 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Exercise 5.11 Job 78: Direct materials Direct labor Overhead ($8.40 × 220) Total job cost $1,560 3,000 1,848 $6,408 Unit cost = $6,408/200 = $32.04 Job 79: Direct materials Direct labor Overhead ($8.40 × 200) Total job cost $ 990 3,000 1,680 $5,670 Unit cost = $5,670/180 = $31.50 Job 80: Direct materials Direct labor Overhead ($8.40 × 400) Ending Work in Process $2,400 3,300 3,360 $9,060 Finished Goods 12,078* Work in Process *Job 78 + Job 79 = $6,408 + $5,670 = $12,078 Cost of Goods Sold Finished Goods 5,670 Accounts Receivable (or Cash) Sales Revenue **$5,670 × 140% = $7,938 7,938** 5-8 12,078 5,670 7,938 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Exercise 5.12 Using Job 114 (any of the three jobs could be used, the overhead rate will be the same): Predetermined overhead rate = $1,170/$1,800 = 0.65, or 65% of direct labor cost Balance, April Direct materials Direct labor Applied overhead Total Job 114 $ 5,381 16,500 1,800 1,170 $ 24,851 Job 115 $ 5,214 12,200 3,080 2,002 $ 22,496 Job 116 $10,745 5,000 1,440 936 $18,121 Ending Work in Process consists of Jobs 114 and 116: Job 114 Job 116 Ending Work in Process Cost of goods sold = Job 115 = $22,496 Price of Job 115 = $22,496 × 1.25 = $28,120 5-9 $24,851 18,121 $42,972 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Exercise 5.19 a Materials Accounts Payable 113,300 b Work in Process Overhead Control Materials 82,500 8,800 c Work in Process Overhead Control Wages Payable 67,000 18,750 d Overhead Control Various Payables 46,200 e Work in Process Overhead Control *$67,000 × 110% = $73,700 73,700* 113,300 91,300 85,750 46,200 73,700 f Finished Goods Work in Process 230,000 g Cost of Goods Sold Finished Goods 215,000 Accounts Receivable Sales Revenue **140% × $215,000 = $301,000 230,000 215,000 301,000** 301,000 h Cost of Goods Sold 50*** Overhead Control ***Actual overhead = $8,800 + $18,750 + $46,200 = $73,750 Actual overhead Applied overhead Underapplied 5-15 $73,750 73,700 $ 50 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 50 Exercise 5.19 (Concluded) After underapplied overhead is charged to cost of goods sold: Overhead Control 8,800 73,700 18,750 46,200 50 50 Work in Process 10,000 82,500 67,000 73,700* 3,200 230,000 *No actual overhead costs were assigned to Work in Process as the company does not use an actual cost system The amount assigned to Work in Process was the applied overhead of $73,700 Exercise 5.20 Setup rate = $156,000/1,200 = $130 per setup Purchasing rate = $187,500/15,000 = $12.50 per part Other overhead rate = $420,000/50,000 = $8.40 per direct labor hour Balance, March Direct materials Direct labor Applied overhead: Setups Purchasing Other overhead Total cost Job 15 $34,500 28,000 10,000 Job 16 $39,890 37,900 8,500 Job 17 $24,090 25,350 23,000 Job 18 $ 11,000 12,900 Job 19 $ 13,560 8,000 2,600 1,875 5,460 $82,435 1,820 2,250 4,872 $95,232 4,550 2,500 13,440 $92,930 1,040 6,250 7,308 $38,498 1,950 3,750 4,368 $31,628 Ending balance in Work in Process = Job 18 + Job 19 = $38,498 + $31,628 = $70,126 Cost of goods sold = Job 15 + Job 16 + Job 17 = $82,435 + $95,232 + $92,930 = $270,597 5-16 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CPA-TYPE EXERCISES Exercise 5.21 c March 1, balance Direct materials Direct labor Applied overhead Less: transfer to Finished Goods Work-in-Process balance, March 31 $ 12,000 50,000 30,000 24,000 ( 100,000) $ 16,000 Job 83 = Direct materials + Direct labor + Applied overhead $16,000 = Direct materials + ($3,400/0.8) + $3,400 Direct materials = $8,350 Exercise 5.22 d Overhead rate =( $120,000 + $200,000)/80,000 = $4 per direct labor hour Direct materials Direct labor Applied overhead ($4 × 2,000) Cost of proposed job $ 4,000 6,000 8,000 $18,000 Exercise 5.23 d Exercise 5.24 a Purchasing and receiving rate = $60,000/(500 + 2,000) = $24/purchase order Product X allocation = $24 × 500 = $12,000 Product Y allocation = $24 × 2,000 = $48,000 Exercise 5.25 c 5-17 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part PROBLEMS Problem 5.26 a Materials Accounts Payable 60,100 b Work in Process Overhead Control Materials 50,000 8,800 c Work in Process Overhead Control Administrative Expense Selling Expense Wages Payable 75,000 36,000 28,000 19,000 d Overhead Control Accumulated Depreciation 10,400 e Overhead Control Property Taxes Payable 1,450 f Overhead Control Prepaid Insurance 6,200 g Overhead Control Utilities Payable 5,500 h Selling Expense Cash 7,900 7,900 i Administrative Expense Selling Expense Accumulated Depreciation 800 1,650 j Administrative Expense Accounts Payable 750 k Work in Process ($18 × 4,000) Overhead Control 72,000 l Finished Goods Work in Process 160,000 5-18 60,100 58,800 158,000 10,400 1,450 6,200 5,500 2,450 750 72,000 160,000 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Problem 5.26 Bal (a) Bal (l) (Concluded) Materials 7,500 (b) 60,100 8,800 58,800 Finished Goods 50,000 160,000 210,000 Bal (b) (c) (k) Work in Process 37,000 (l) 160,000 50,000 75,000 72,000 74,000 (b) (c) (d) (e) (f) (g) Overhead Control 8,800 (k) 72,000 36,000 10,400 1,450 6,200 5,500 3,650* *Overapplied overhead Jerico Company Statement of Cost of Goods Manufactured For the Month Ended May 31, 20XX Direct materials Direct labor Overhead: Supplies Indirect labor Depreciation, plant, and equipment Property taxes Utilities, factory Insurance $68,350 Plus: Overapplied overhead Overhead applied Manufacturing costs added Add: Beginning work in process Less: Ending work in process Cost of goods manufactured $ 50,000 75,000 $ 8,800 36,000 10,400 1,450 5,500 6,200 3,650 Cost of goods sold decreases by $3,650 5-19 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 72,000 $197,000 37,000 (74,000) $160,000 Problem 5.27 Overhead rate = $162,500/50,000 = $3.25 per machine hour Direct materials Direct labor Overhead ($3.25 × 200 MHr) Total manufacturing cost Plus 40% markup Bid price Purchasing rate Setup cost rate Engineering rate Other cost rate = $40,000/5,000 = $37,500/500 = $45,000/2,500 = $40,000/50,000 Job $ 9,340 2,100 650 $12,090 4,836 $16,926 = $8 per purchase order = $75 per setup = $18 per engineering hour = $0.80 per machine hour Direct materials Direct labor Overhead: Purchasing ($8 × 15); ($8 × 20) Setups ($75 × 3); ($75 × 4) Engineering ($18 × 45); ($18 × 10) Other ($0.80 × 200); ($0.80 × 200) Total manufacturing cost Plus 40% markup Bid price Job $4,500 1,200 650 $6,350 2,540 $8,890 Job $4,500 1,200 Job $ 9,340 2,100 120 225 810 160 $7,015 2,806 $9,821 160 300 180 160 $12,240 4,896 $17,136 The activity-based approach to assigning overhead gives a more accurate cost figure because so much of the overhead is non-unit-level and there is product diversity 5-20 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Problem 5.28 $37,500/7,500 = $5.00 per direct labor hour $90,000/7,500 = $12.00 per direct labor hour May 20: Direct materials (600 × $0.02) Direct labor (0.75 × $8) Applied overhead (0.75 × $5) Total job cost $12.00 6.00 3.75 $21.75 June 20: Direct materials (600 × $0.02) Direct labor (0.75 × $8) Applied overhead (0.75 × $12) Total job cost $12.00 6.00 9.00 $27.00 Photocopying overhead rate = $37,500/7,500 = $5.00 per direct labor hour Computer-aided printing overhead rate = $52,500/2,000 = $26.25 per machine hour The use of two rates more accurately costs the jobs in this shop as it shows a better cause-and-effect relationship between activity and overhead cost Problem 5.29 Bid prices with plantwide rate: Plantwide rate = $2,500,000/250,000 = $10 per direct labor hour Prime costs Overhead Total costs Markup (50%) Total bid revenues Units Unit bid price *(6,000 × $10); (1,000 × $10) 5-21 Job 97-28 $120,000 60,000* $180,000 90,000 $270,000 ÷ 14,400 $ 18.75 Job 97-35 $50,000 10,000* $60,000 30,000 $90,000 ữ 1,500 $ 60.00 â 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Problem 5.29 (Concluded) Bid prices with departmental rates: Rates: Department A: $500,000/200,000 = $2.50 per direct labor hour Department B: $2,000,000/120,000 = $16.67 per machine hour Prime costs Overhead Total costs Markup (50%) Total bid revenues Units Unit bid price a ($2.50 × 5,000) + ($16.67 × 500) b ($2.50 × 400) + ($16.67 × 3,000) Revenues Cost of goods sold Gross profit Plantwide $90,000 60,000 $30,000 Job 97-28 $120,000 20,835a $140,835 70,418 $211,253 ÷ 14,400 $ 14.67 Departmental $362,768 241,845 $120,923 Job 97-35 $ 50,000 51,010b $101,010 50,505 $151,515 ÷ 1,500 $ 101.01 Differences $272,768 181,845 $ 90,923 If plantwide overhead is used, only Job 97-35 would have been won Therefore, the revenues and cost of goods sold pertain only to that job If departmental rates had been used, the bids on both jobs would have been won Therefore, the revenues and cost of goods sold pertain to both jobs, and gross profit would have gone up by $90,923 The departments differ significantly in their overhead intensity, with Department B being much more automated Jobs spending more time in Department B ought to receive more overhead costs Use of departmental rates provides this outcome 5-22 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Problem 5.30 Direct materials ($0.60 × 50) Direct labor ($0.15 × 50) Overhead ($0.20 × 50) Total cost $30.00 7.50 10.00 $47.50 This spoilage is normal and should be added to Overhead Control Price = $380 × 1.5 = $570 (Spoilage is not attributable to this job and should not be added to job cost.) Spoilage cost is identical to that computed in Requirement However, in this case, the spoilage is attributable to demanding requirements of the job, and the cost is added to the job cost Price = ($380 + $47.50) × 1.5 = $641.25 Problem 5.31 Direct materials (75 × $0.45) Direct labor (1.2 × $8) Overhead (1.2 × $4) Total cost $33.75 9.60 4.80 $48.15 Direct materials (75 × $0.45) Direct labor (1.70 × $8) Overhead (1.70 × $4) Total cost $33.75 13.60 6.80 $54.15 The rework cost is normal but is not attributable to the job, so it should be assigned to overhead The price charged for the new letters is 75 letters × $0.60 for a total of $45 5-23 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Problem 5.32 Land Direct Materials Direct labor Subcontractor $ 7,813* 8,000 6,000 14,000 $35,813 *$250,000/8 = $31,250 per acre; $31,250 × 0.25 = $7,813 General condition costs and finance costs can be classified as production costs and would correspond to overhead in a manufacturing firm Most (if not all) of the marketing costs are traceable to each job (advertising may be for the subdivision and thus common to all units) Some may argue that finance costs are not production costs, and they would classify these separately Job-Order Cost Sheet Job MATERIALS Req No Amount Materials $8,000 Land 7,813 DIRECT LABOR Hrs Rate Amount $ 6,000 Subctr OVERHEAD Hrs Rate Amount General $6,000* Finance 4,765 14,000 Cost Summary Direct materials $15,813 Direct labor 20,000 Overhead 10,765 Total cost $46,578 *$120,000/20 = $6,000 per unit General condition costs are prorated to the 20 units Finance costs are included as they are a cost of building the home However, marketing costs are a selling expense and are not inventoriable The cost of the land was determined in Requirement Overhead is equivalent to general conditions and finance costs Finance costs are traceable to each job; therefore, no allocation problem exists Allocating general condition costs evenly among the housing units may create unit cost distortions It could be argued that larger homes, for example, would place greater demands on site utilities, insurance, architect’s fees, and decorating Allocating these costs on the basis of square footage would likely provide more accurate cost assignments 5-24 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Problem 5.32 (Concluded) Production costs Marketing costs Total cost $46,578 800 $47,378 Selling price = $47,378 × 140% = $66,329 Profit $66,329 47,378 $18,951 Problem 5.33 Job-Order Cost Sheet Job 267 MATERIALS Kind Amount Novocaine $14 Amalgam 18 DIRECT LABOR OVERHEAD Employee Hrs Rate Amount Hrs Rate Amount Dentist 0.25 $60 $15 0.5 $32 $16 Asst 0.50 20 10 Cost Summary Direct materials Direct labor Overhead Total cost Gross profit computation: Charge Cost Gross profit $32 25 16 $73 $110 73 $ 37 The X-ray is a direct cost of a job assuming that an X-ray is taken for each job If X-rays are used for more than one treatment (as they often are), then it becomes a common cost X-rays could be included in overhead, and services could be priced to cover the cost of X-rays Apparently, this practice treats Xrays as a profit-making activity, and they are therefore costed and priced separately 5-25 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Problem 5.33 (Concluded) Surfaces Assistanta Dentistb Novocaine $6.67 $10 $14 210.00 15 14 18 313.33 20 14 24 416.67 25 14 30 a b (20/60) × $20 (20/60) × 0.5 × $60 (30/60) × $20 (30/60) × 0.5 × $60 (40/60) × $20 (40/60) × 0.5 × $60 (50/60) × $20 (50/60) × 0.5 × $60 Unit revenue Unit cost Gross profit Profit/revenue 1-Surface $90.00 53.33 $36.67 40.7% Amalgam $12 16.00 21.33 26.67 2-Surface $110.00 73.00 $ 37.00 33.6% OHc Total Cost $10.67 $53.33 73.00 92.67 112.33 c (20/60) × $32 (30/60) × $32 (40/60) × $32 (50/60) × $32 3-Surface $150.00 92.67 $ 57.33 38.2% 4-Surface $175.00 112.33 $ 62.67 35.8% The gross profit per unit increases as the surfaces increase, but the profit percentage decreases Whether this increase is fair (to either the patient or the corporation) depends on what is considered a normal rate of return for these services 5-26 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Problem 5.34 Job-Order Cost Sheet Potassium Aspartate MATERIALS DIRECT LABOR Type Quantity Cost Hrs Rate Amount Aspartic 195.00 $1,121.25 16 $12.50 $200 Citric 15.00 30.30 K2CO3 121.50 563.76 Rice 30.00 12.90 OVERHEAD Cost Rate Amount $200 110% $220 Cost Summary Direct materials .$1,728.21 Direct labor 200.00 Overhead 220.00 Total cost .$2,148.21 ÷ 300 Unit cost $ 7.16 Price charged: $7.16 × 130% = $9.31 If overhead is allocated accurately, they should not sell at $8.80 as the job earns less than the markup Revenues ($2,148.21 × 130%) Cost of goods sold Gross profit Total actual costs: Direct materials Direct labor Applied overhead Total $2,792.67 2,148.21 $ 644 46 $1,790.00 225.00 247.50 $2,262.50 Actual unit cost: $2,262.50/300 = $7.54 Unexpected loss: Bid based on actual cost ($2,262.50 × 1.30) Actual revenue Loss $2,941.25 2,792.67 $ 148.58 Possible reasons for loss: a Workers may have been wasteful with the materials b Workers may have been inefficient c Overhead costs may not have been controlled properly d Expected costs were too optimistic Problem 5.34 (Concluded) 5-27 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Total billing: Materials Labor Applied overhead Underapplied overhead Total cost Markup (30%) Total price $1,790.00 225.00 247.50 30.00 $2,292.50 687.75 $2,980.25 You could explain that Nutratask uses a predetermined overhead rate to assign overhead to jobs and that adding underapplied overhead is an adjustment required to assign actual overhead to the job Adding underapplied overhead to the job does not necessarily imply inefficient use of overhead costs It does imply that the estimated overhead cost of the job was not equal to the actual cost The customer could then be reminded that the agreement was actual cost plus 30% If the customer is still not satisfied, good relations may require deletion of the $30 charge In the future, problems like this could be avoided by not showing two separate overhead charges Problem 5.35 Answers will vary CYBER RESEARCH CASE 5.36 Answers will vary The Collaborative Learning Exercise Solutions can be found on the instructor website at http://login.cengage.com The following problems can be assigned within CengageNOW and are autograded See the last page of each chapter for descriptions of these new 5-28 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part assignments • • • • Analyzing Relationships—Calculate Cost of various jobs to show impact of costs on WIP, Finished Goods, Cost of Goods Sold Integrative Problem—Job Order Costing, Support Department Allocation, Relevant Costing (Covering chapters 5, 7, and 17) Integrative Problem—Job Costing, Joint Costs, Process Costing, Decentralization (Covering chapters 5, 6, 7, and 10) Blueprint Problem—Job Order Costing 5-29 © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part ... Relationships—Calculate Cost of various jobs to show impact of costs on WIP, Finished Goods, Cost of Goods Sold Integrative Problem—Job Order Costing, Support Department Allocation, Relevant Costing (Covering... General condition costs and finance costs can be classified as production costs and would correspond to overhead in a manufacturing firm Most (if not all) of the marketing costs are traceable... prorated to the 20 units Finance costs are included as they are a cost of building the home However, marketing costs are a selling expense and are not inventoriable The cost of the land was determined