Ch4 000

CHAPTER 4: JOB COSTING
QUESTIONS
4-1
The purpose of any product costing system is to (1) determine product and
service cost, and value inventory, (2) facilitate management planning, cost
control, and performance evaluation, and (3) facilitate managerial decision
making.
4-2
Management can use product costs to determine the product or service pricing,
to assess the financial effect of adding or deleting a product, division or
subsidiary, to evaluate a make or buy decision, and to evaluate department or
division product profitability performance.
4-3
Job costing is a product costing system that accumulates and assigns costs to a
specific job. Process costing accumulates product or service costs by process or
department and then assigns them to a large number of nearly identical
products.
4-4
Companies that are likely to use a job costing system have a wide variety of
products or services. These companies include printing shops, accounting firms,
equipment companies, and construction companies. Companies that are likely to
use a process costing system have homogeneous products or services. Such
companies include automobile manufacturer s, food processors, and textile
companies.
4-5
Service industry companies most likely use a job costing system because each
job is likely to have different quantities of materials and labor.
4-6
A job cost sheet accumulates direct materials, direct labor, and factory overhead.
4-7
The determination of a predetermined overhead rate has four steps: (1) estimate
the factory overhead costs for an appropriate operating period, usually a year,
(2) determine the most appropriate cost driver(s) for charging the factory
overhead costs, (3) estimate the total amount or activity level of the chosen cost
driver(s) for the operating period, (4) divide the estimated factory overhead costs
by the estimated activity level of the chosen cost driver(s) to obtain the
predetermined overhead rate(s). The predetermined factory overhead rates are
applied to units instead of actual overhead costs because if the actual rate is
applied to overhead costs the costs per unit for products produced in different
periods will vary greatly.
4-8
A material requisition form is a source document that is used to request materials

from the warehouse. A time ticket shows the time worked on each job, the pay
Blocher,Stout,Cokins,Chen: Cost Management 4e 4-1
The McGraw-Hill Companies, Inc., 2008
rate, and the total labor cost chargeable to each job. The bill of materials is a list
of different materials needed to manufacture a product or part.
4-9
Since the overhead cost cannot be traced directly to a particular product, we

need a good costing system, which can assign overhead accurately to specific
products. Generally speaking, the more expensive or extensive a costing system
is, the more information it provides and the more reliable it is. It is important to
balance the cost of obtaining the appropriate cost with the information obtained.
4-10
Costs originate with the purchase of materials. These costs and labor are
transferred to work-in-process as work is done and eventually to finished goods.
Overhead is applied to work-in-process as well. Work-in-process is forwarded to
finished goods as work is completed. These costs are transferred from finished
goods to cost of goods sold when the merchandise is sold.
4-11
Underapplied overhead is the amount of actual factory overhead that exceeds

the factory overhead applied. Overapplied overhead is the amount of factory
overhead applied that exceeds the actual factory overhead cost. Underapplied
or overapplied overhead can be disposed of in two ways: adjust the cost of
goods sold account or adjust the production costs of the month; that is, prorate
the discrepancy among the amounts of the current periods applied overhead
remaining in the ending balances of the work in process inventory, the finished
goods inventory, and the cost of goods sold accounts.
4-12
Due to the automation trend, the proper cost driver for a manufacturing firm
would probably be machine hours because the costs are predominantly related
to the equipment operation.
4-13 Overhead can be overapplied if the actual overhead is less than expected or the
actual level of the cost driver exceeds the estimate.
4-14
An actual costing system uses actual costs incurred for direct materials and
direct labor and assigns or applies actual factory overhead to various jobs.
Normal costing uses actual costs for direct materials and direct labor and applies
factory overhead to various jobs using a predetermined basis.
4-15
The best choice of a cost driver is that activity or output measure that best
represents what drives or causes overhead.
Blocher,Stout,Cokins,Chen: Cost Management 4e
4-2
4-16
Normal cost of goods sold includes actual direct materials, actual direct labor,
and applied factory overhead costs for products sold. Adjusted cost of goods
sold equals normal cost of goods sold plus underapplied overhead (or less
overapplied overhead).
BRIEF EXERCISES
4-17 The application of job costing is very similar in manufacturing and service firms.
Some differences is that service firms are likely to have a larger proportion of
direct labor in jobs than are manufacturers.
Also, since service firms do not
have significant amounts of work-in-process or finished goods inventory, service
firms are not likely to need to use proration of underapplied or overapplied
overhead.
4-18
16 x $10 = $160
4-19
The overhead rater for labor would be $80,000/4,000 = $20/ hour and the
machine hour rate would be $80,000/8,000 = $10/hour. Since this is a machine
shop, it might be appropriate to use a machine hour based rate, Consider of the
total overhead, what portion is labor related and what portion is machine related.
4-20
Applied overhead is 59,000 x $10 = $590,000. There is an underapplied

difference of $23,000 ($613,000 - $590,000).
4-21
Since the ending balances are $2,000; $8,000; $90,000, the proration
percentages are 2%,8%,90%. And the propration is 2%,8%,90% of the $10,000
underapplied difference, or $200,$800,$9,000.
Since the difference is
underapplied, it must be added to the current balances, and the balances after
proration would be $2,200, $8,800, and $99,000.
4-22 Job cost is $10,000 + $20,000 + 2 x $20,000 = $70,000.

4-23 Because of the greater variability of machine hours among jobs, job cost will be
more strongly influenced by the use of machine hours. The fact that machine
hours are significantly greater than labor hours suggests that workers attend to a
number of different machines, and that the overall cost of the machines is
somewhat greater than that of labor. In this case, a machine based rate would
be more appropriate, as the machine costs are a significant part of total
overhead, and because the different jobs consume significantly different
amounts of machine time.
4-24 When overhead is overapplied, this means that too much cost as been applied to
WIP, thence to finished goods, and thence to cost of goods sold. The cost of
goods sold account will be too high before adjusting for the overhead variance.
4-25 The departmental rate will likely be more accurate since it will take into account
the fact that different jobs may require different amounts of resource from each
department. Product costs will be less accurate if the overhead is pooled into a
single plantwide rate, which ignores these differences in use of departmental
recourses by the different jobs. Chapter 5 addresses this issue in some detail.
4-26
The information on units sold and the number of labor hours is irrelevant.
First, determine the amount of overhead applied:
Applied overhead = $222,000 - $20,400 (underapplied) = $201,6000
Second, determine the overhead rate:
$210,000/50,000 = $4.20 per unit
Third, determine the number of units produced
$201,600/$4.20 = 48,000 units
4-27
The information on units sold and the number of labor hours is irrelevant.
First, determine the amount of overhead applied:
Applied overhead = $360,000 + $30,000 (overapplied) = $390,000
Second, determine the overhead rate:
$350,000/700,000 = $.50 per unit
Third, determine the number of units produced
$390,000/$.50 = 780,000 units
4-4
EXERCISES
4-28 Job Costing (30 min)
1. Total cost of Job A:
Sept. Direct materials requisitioned
Sept. Direct labor cost: 4,200 hours x $5.50/hour
Sept. Applied overhead: 4,200 hours x $6.10/hour*
Sept. 1 Work-in-process
Total cost of Job A
$45,000
23,100
25,620
31,200
$ 124,920
*predetermined OH rate = $579,500/95,000 = $6.10

2. Total overhead cost applied during September:
Applied Overhead = total direct labor-hours x overhead rate
= (4,200 + 3,500) x $6.10 = $46,970
3. Overapplied overhead for September:
Actual Overhead = $13,500 + $6,000 + $7,000 + $7,500 + $12,000
= $46,000
Overapplied Overhead = $46,970 - $46,000 = $970
4-29 Job Costing in Aircraft Manufacturing

A key difficulty in these companies is that much of the overhead cost for
the job is for capacity costs that are incurred for a multiple-year period.
Thus, the determination of the overhead rate must determine an amount
for each year by determining in effect what portion of the total capacity
costs should be attributed to each year in which the job is being completed.
In simple terms, this might mean using straight-line depreciation for plant
and equipment needed for the job, or and allocation across the years
based on the number of aircraft to be produced in each year and the
capacity utilization expected for each year. Considerations of possible
future changes in the terms of the contract for the job (to increase or
decrease the number of aircraft in the order, for example), should also be
considered. The determination of the budgeted overhead rates in these
cases requires the careful judgment of the management accountant.
4-6
4-30 Journal Entries (20 min)

1. Predetermined Overhead Rate = $1,980,000 / 66,000
= $30 per machine-hour
2. Journal Entries:
a. Materials Inventory
Accounts Payable
180,000 x $5 = $900,000
900,000
900,000
b. Work-in-Process Inventory
525,000
($600,000 - $75,000)
Factory Overhead
75,000
(15,000 x $5)
Materials Inventory (120,000 x$5)
600,000
c. Work-in-Process Inventory
Factory Overhead
Accrued Payroll
d. Factory Overhead
Accumulated Depreciation
240,000
40,000
75,700
e. Factory Overhead
Prepaid Insurance
3,500
f. Factory Overhead
Cash
8,500
g. Finished Goods Control

Work-in-Process Inventory
84,500
h. Cost of Goods Sold

77,000
Finished Goods Inventory
Accounts Receivable
112,420
Sales
280,000
75,700
3,500
8,500
84,500
77,000
112,420
4-30 (Continued)
i. Work-in-Process Inventory
215,600
Factory Overhead Applied
$30 x 7,700 = $215,600
215,600
3. Actual factory overhead:

$75,000 + $40,000 + $75,700 + $3,500 + $8,500 = $202,700
Overapplied overhead = $215,600 - $202,700 = $ 12,900
Using a single overhead account (Factory Overhead):
Factory Overhead
12,900
Cost of Goods Sold
12,900
Or: (when using both accounts: Factory Overhead, and Factory Overhead
Applied):
Cost of Good Sold
Factory Overhead
215,600
4-8
12,900
202,700
4-31 Working with Unknowns
(20 min)
1. Job A23: $82,500 - $24,000 - $42,000 = $16,500 applied overhead

Total applied overhead:
A23 $16,500
C76
24,750
G15
6,050
$47,300
$48,600 - $47,300 = $1,300 underapplied overhead
2. From Job A23: $24,000 / $8 = 3,000 direct labor-hours
$16,500 / 3,000 = $5.50 factory overhead application rate
3. For Job C76:
$24,750 / $5.50 = 4,500 direct labor-hours
$8 x 4,500 = $36,000 direct labor
Therefore, $148,650 - ($36,000 + $61,000 + $24,750)
($8,800 + $6,050)
= $12,050 direct materials for Job G15
$42,000 + $61,000 + $12,050
= $115,050 cost of direct materials issued
4. Finished Goods Inventory
82,500
82,500
4-32 Application and Proration of Factory Overhead (20 min)

1. Predetermined Factory Overhead Rate
= $568,000 / 71,000 = $8 per direct labor-hour
2. Applied Overhead = $8 x 71,500 = $572,000
Actual Overhead
582,250
Underapplied Overhead
$10,250
3. Applied Overhead remaining in:
Work-in-Process Inv.
Finished Goods Inv.
Cost of Goods Sold
Proration:
Work-In-Process Inv.
Finished Goods Inv.
Cost of Goods Sold
$139,000
216,840
200,160
$556,000
25%
39%
36%
100%
25% x $10,250 = $ 2,562.50

39% x $10,250 = $ 3,997.50
36% x $10,250 = $ 3,690.00
Journal entry:
Cost of Goods Sold
Factory Overhead
572,000
2,562.50
3,997.50
3,690.00
4-10
582,250
4-33 Service Industry Overhead Rate, Pricing (20 min)

1. Predetermined Overhead Rate = $325,000 / 25,000
= $13 per professional hour
2. Total Cost = $32,000 + ($50 x 1,200) + ($13 x 1,200)
= $32,000 + $60,000 + $15,600 = $107,600
Total Revenue = $107,600 x 150% = $161,400
4-34 Operation Costing (20 Min)

1. The product cost for each of the T-shirt is computed as follows:
Medium
Large
Direct Materials:
Job 401 ($20,000 / 5,000)
$ 4.00
Job 402 ($50,000 / 10,000)
$ 5.00
Conversion: Cutting ($45,000 / 15,000)
3.00
3.00
Conversion: Assembly ($22,500 / 15,000) 1.50
1.50
1.00
Conversion: Finishing ($15,000 / 15,000) 1.00
Total product cost per unit
$ 9.50
$ 10.50
Total product costs $152,500 is calculated as below.
Medium T-Shirts: $9.50 x 5,000
Large T-shirts: $10.50 x 10,000
Total
$ 47,500
105,000
$152,500
2. The following journal entries are made to record the Pomona Companys
flow of costs. The first entry is made to record the requisition of direct
materials by the Cutting Department, when Job 401 is entered into
production.
Work-in-Process Inventory: Cutting Department
Direct Materials Inventory
20,000
20,000
The following entry is made to record the requisition of direct materials by

the Cutting Department, when Job 402 is entered into production.
50,000
50,000
Conversion costs are applied in the Cutting Department with the following
journal entry.
Conversion Costs Applied
4-12
45,000
45,000
4-34 (Continued)
The following entry records the transfer of partially completed goods from
the Cutting Department to the Assembling Department.
Work-in-Process Inventory: Assembling Department 115,000
115,000
Direct materials-Job 401 $20,000 + direct materials-Job 402 $50,000 +
conversion $45,000 = $115,000
Conversion costs are applied in the Assembling Department with the
following journal entry.
Work-in-Process Inventory: Assembling Department 22,500
22,500
The following entry records the transfer of partially completed goods from
the Assembling Department to the Finishing Department.
Work-in-Process Inventory: Finishing Department 137,500
Work-in-Process Inventory: Assembling Dept.
137,500
$115,000 + $22,500 = $137,500
Conversion costs are applied in the Finishing Department with the following
journal entry.
Work-in-Process Inventory: Finishing Department
15,000
15,000
Finally, the completed goods are transferred to finished goods.

Finished Goods Inventory: Medium
Finished Goods Inventory: Large
Work-in-Process Inventory: Finishing Dept.
Check:
47,500
105,000
152,500
$137,500 + $15,000 = $152,500
4-35 Spoilage and Scrap (20 Min)

Background Information:
Job X12 (specific normal spoilage for a particular job)
Cost of spoiled units
$600
Disposal value of spoiled unit
$300
Job Y34 (common normal spoilage, abnormal spoilage, and scrap)
Cost of spoiled units
Common normal spoilage $400
Abnormal spoilage
$200
Sale value of scrap
$80
Sale of scrap common to all jobs
$120
1. Journal entries to record spoilage costs:
a. To record the normal spoilage attributable to Job X12
Materials Inventory (disposal price of the spoiled goods)
Work-in-Process Inventory: Job X12
300
300
b. To record the normal and abnormal spoilages incurred in Job Y34

Factory Overhead (normal spoilage cost)
Loss from Abnormal Spoilage
Work-in-Process Inventory: Job Y34
400
200
600
2. Journal entries to record scrap sold:

a. To record the scrap sold attributable to a specific job
Cash
80
80
b. To record the scrap sold common to all jobs

Cash
Factory Overhead
120
4-14
120
PROBLEMS
4-36 Application and Disposition of Factory Overhead (25 min)
1. Actual Factory Overhead:
$15,000 + $53,000 + $23,000 + $12,000 + $20,000 = $123,000
2. Department 203 Underapplied Overhead:
($7,000 + $53,000 + $9,000 + $1,000) x 160% = $112,000
$123,000 - $112,000 = $11,000
3. Cost of Goods Sold for Job No. 1376:
$72,500 + $1,000 + $7,000 + ($7,000 x 160%) = $91,700
4. Work-in-Process Ending Inventory:
[$26,000 + $53,000 + ($53,000 x 160%)] + [$12,000 + $9,000 +
($9,000 x 160%)] + [$4,000 + $1,000 + ($1,000 x 160%)] = $205,800
5. Underapplied Overhead to Ending Work-in-Process Inventory: $12,600
Overhead in WIP: ($53,000 + $9,000 + $1,000) x 160% = $100,800
Overhead in CGS: $7,000 x 160% = $11,200
Applied Overhead remaining in:
Work-in-Process Inv.
$100,800 90%
Finished Goods Inv.
0
0
Cost of Goods Sold
11,200 10%
Total
$112,000 100%
$14,000 x 90% = $12,600
4-37 Job Costing; Review of Chapter 3 (40 min)

Valport Company
Statement of cost of Goods Manufactured
For the Year Ended November 30, 2007
($000s omitted)
Materials inventory
Materials purchases
($965+98)
Less: Indirect materials ($125+9)
Materials inventory
Direct Materials Used
12/1/06
Direct Labor
Manufacturing Overhead
Indirect materials
Indirect Labor ($345+30)
Utilities ($245+22)
Depreciation (385+35)
Total Manufacturing Costs
($845+80)
Add: Work-In-Process
Less: Work-In-Process
Cost of Goods Manufactured
12/1/06
11/30/07
11/30/07
$134
375
267
420
105
1,063
134
85
949
925
1,196
$3,070
60
150
$2,980
2.
Finished Goods Inventory 12/1/06
Plus: Cost of Goods Manufactured
Less: finished Goods Inventory 11/30/07
Cost of Goods Sold
4-16
$ 125
2,980
225
$2,880
4-38 Choice of a costing system (60 Min)

1.
a. New Century Software, Inc @ http://www.newcenturysoftware.com/
The goal of New Century Software, Inc. is to provide products and services
to help meet the facilities-based informational needs of the pipeline
industry through the use of Geographic Information Systems (GIS),
Automated Mapping and Facilities Management (AM/FM) software.
The company'
s Windows-based software products provide an
integrated approach to GIS implementation and augment the functionality
of leading GIS packages.
Based in Fort Collins, Colorado, the company has assisted in the
development of GIS for pipeline companies in the United States by
providing facilities database consulting, data conversion services, and
integrated software applications.
Their products include Data Capture, Centerline Routing, DOT
Compliance, Database Maintenance and Land Records Document
Management.
The company uses job costing.
Reasons:
The costing could be precisely calculated by the basis of the different job.
Each identifiable job has different needs from clients and is associated with
different cost.
Costs can be readily identified with specific products or projects because of
low volume of products or services.
b. Kinkos @ http://www.fedex.com/us/officeprint/main/
Kinko'
s, a unit of FedEx Corporation, is a provider of a variety of office and
business services.
4-38 (Continued 1)
Reasons:
Costs can be precisely calculated by the basis of the different jobs.
There are a wide variety of different services for individual clients.
The products and services are especially tailored to the customers need.
c. Txi Cement @ http://www.txi.com/
Txi Cement has a history in the cement industry of 90 years. They are one
of only two companies in the USA that make White Cement. Txi Cement is
constantly trying to be energy efficient, by generating electricity, and using
alternate energy and raw materials sources. Distribution of products is
done via two cement plants in Southern California as well as terminals in
San Diego and Stockton. Txi is one of the largest bagged cement
producers in the USA.
Portland Cement is a finely ground, manufactured mineral product that
when combined with water, sand, gravel and other materials forms
concrete, the most widely used construction material in the world.
The company uses process costing.
Reasons:
High volume low cost product, sold in unit bags.
It is not economically feasible to keep track of the detailed cost elements
applied to each unit of production.
4-18
4-38 (Continued 2)
d. Paramount Pictures @ http://www.paramount.com/
PARAMOUNT PICTURES, the most powerful motion picture corporation
coming out of the l920s into the studio era, braved the adverse effects of
the Depression and enjoyed financial success throughout the 1930s into
the 1990s.
Over this span, the studio boasted an enormous diversity of talent and
style including work by an impressive range of Hollywood masters. Ernst
Lubitsch, Billy Wilder, Preston Sturges, Josef von Sternberg and Rouben
Mamoulian, among others directed sophisticated comedies of manners
and contemporary dramas, while Cecil B. DeMille crafted his famed
monumental epics. The studio discovered and promoted stars as diverse
as Gary Cooper, Marlene Dietrich, Claudette Colbert, Maurice Chevalier,
Mae West and George Raft. In recent years Paramount has had a good
share of Oscar winners and commercial hits: GREASE, SATURDAY
NIGHT FEVER, THE GODFATHER films, the Indiana Jones series, the
films of Eddie Murphy and Mission Impossible series.
Paramount pictures is a privately owned entity involved in the
entertainment business. It offers an array of choices in the form of movies,
TV shows, home entertainment (DVD, CDs) etc.
Reasons:
High cost low volume projects.
The company produces movies, television shows and home entertainment
packages; each job goes through costing separately since every project is
highly customized.
e. Evian @ http://www.evian.com/
Evian Natural Spring Water is bottled exclusively at its source in Evian-lesBains located in the French Alps. Filled, sealed bottles are then shipped to
over 120 countries throughout the world. Evian spring water is perfect by
4-38 (Continued 3)
nature. Naturally pure and fresh, it is not artificially treated or processed in
anyway. Its unique source in the heart of the French Alps guarantees Evian
natural spring waters remarkable purity.
The company uses process costing.
Reasons:
High volume low cost product, sold in individual bottles.
It is not economically feasible to keep track of the detailed cost elements
applied to each unit of production.
f. IRCON @ http://www.irconinternational.com/
IRCON'
s diverse capabilities include construction works, such as runways,
terminal buildings, aircraft maintenance hangars & utility buildings, and
commercial buildings. IRCON undertakes execution of turnkey railway
electrification projects, high voltage sub-stations, transmission lines and
industrial electrification works, both in India and abroad.
Services offered cover the entire spectrum of activities including
construction of new railway lines, rehabilitation/conversion of existing lines,
station buildings and facilities, bridges, tunnels, signaling and
telecommunication networks, railway electrification, setting up of
production units for manufacture of rolling stock, maintenance
depots/workshops concrete sleepers and track components on turn-key
basis.
Development & diversification have been synonymous with IRCON. They
have constructed ADB & World Bank and funded roads and highways to
international specifications for Indian and overseas clients. IRCON has
constructed a number of prestigious buildings with intricate and
sophisticated finishes, complete with heating, ventilation and air
conditioning, plumbing, fire fighting, drainage & communications facilities.
4-20
4-38 (Continued 4)
IRCON has completed railway electrification on 25 KV, 2 x25 KV and
1,500-volt DC systems for over 4,400 tracks kilometer (TKM) in India and
abroad.
IRCON has also undertaken major industrial electrification works
comprising of H.V. sub-stations, HT/LT cabling, in-door/out door lighting
and HVAC works on turnkey basis, including those in refineries & petrochemical complexes.
Reasons:
High cost low volume orders.
The company is an engineering, procurement and construction
organization. Each project is fairly large in dollar value and uses large
sums of material and labor. Each individual task within the project in
broken into single cost entities including material, labor and overhead.
2. Answer will vary with student selections.
4-39 Choice of a Costing System (60 Min)

1.
a. Zurich Financial Services Group: www.zurich.com
The Zurich Financial Services Group is a global leader in the financial
services industry, providing its customers with solutions in the area of
financial protection and asset accumulation. The Group concentrates its
activities in five business segments: non-life and life insurance,
reinsurance, Farmers Management Services, and asset management.
Headquartered in Zurich, Switzerland, the Group'
s worldwide presence
builds on strong positions in its three key markets - the United States, the
United Kingdom and Switzerland.
We have determined that because Zurich FSG provides unique solutions
to customers, particularly in the high net worth area, the company uses a
job costing system. Each customer is handled individually and products,
such as insurance, asset management services, and reinsurance, are
provided as needed.
The company uses a job costing system.
c. Toyota Motor (www.global.toyota.com)

Toyota Motor Corporation, Japans largest and the worlds #4 carmaker,
has a driving ambition to become greener. Toyota makes a hybrid-powered
(gas and electric) sedan, which is already being snapped up in US and
European markets. Toyotas gas-powered cars, pickups, minivans, and
SUVs have big quantity sales in the world. It also produces industrial
vehicles and offers services and financial services that are directly
(maintenance and car loans) or indirectly (cellular phone) to cars.
Each vehicle of the same model has the same production process.
Generally, Toyota operates mass production of few models in each plant.
Moreover, Toyota offers maintenance service and body shop for its car
users and fixed miles maintenance is the main service in Toyota body
shops.
4-22
4-39 (Continued 1)
Based on the characteristics of the operations described above, we
conclude that a process costing system is suitable to determine the
production costs of the product.
c. Nestle S.A. (www.nestle.com)
Nestle is one of the leading food companies in the world. Its product
portfolio includes brands such as Nescafe, Maggi, Perrier and Buitoni. The
whole food production process is a continuous high-volume one and so will
have a process costing system.
d. Nokia (www.nokia.com)
Nokia is a leading mobile phone supplier and a top supplier of mobile, fixed
and IP communication networks. The company operates globally and is
headquartered in Finland. Nokia will most likely use job costing for its
network design and implementation services, as each job will definitely
have its own set of specifications and requirements. However, for its
mobile phone manufacturing business line, the company will most likely
use process costing as phones are mass produced and homogeneous
products.
e. SAP (www.sap.com)
SAP is a worldwide e-business and inter-enterprise solutions provider. SAP
develops and implements software and internet-based solutions to help its
clients with such issues as human resources, customer relationship
management, strategic enterprise management, etc. While SAP develops
software products which make up the core of all SAP services, SAP uses a
job costing system because: (1) clients need to have the software cores
highly customized to their specific needs and requirements, and (2) scale
of implementation cost can vary widely at each client site.
2. Answers will vary with student selections.
4-40 Job Costing (20 min)

Direct
Materials
Data Section
Job X
Material A
Material B
$
$
6,000
2,000
Job Y
Material A
Material B
$
$
15,000
7,000
Direct Labor Machine Hours

$
16,000
1,300
12,000
900
$46 per machine hr
Solution
Factory Overhead Analysis

Actual Factory OH
Indirect Materials
Indirect Labor
Utilities
Depreciation
Insurance
Total Actual Factory OH
Less: Applied Factory OH
Under/overapplied Factory OH
Adjust Difference to COGS
$42,000
28,000
3,000
18,000
2,500
$93,500
$101,200
-$7,700 OVERAPPLIED
-$7,700 Decrease Cost of Goods Sold by this Amount
Breakdown of Job Costs

Total Direct Materials Cost
Job X
Job Y
$16,000
Total Direct Labor Cost

Applied Overhead
Machine Hours
Application rate
Total Applied Overhead Cost
$8,000
1,300
$46
Total Manufacturing Costs
$22,000
$12,000
900
$46
$59,800
$41,400
$83,800
$75,400
**
4-24
4-41 Journal Entries and Accounting for Overhead (35 min)

1. Predetermined Overhead Rate = $ 120,000 / 8,000 = $15 per DL hour
2. Journal Entries
a. Materials Inventory
Accounts Payable
90,000
b. Work-in-Process Inventory- Job S10

Work-in-process Inventory - Job C20
Work-in-Process Inventory - Job M54
Factory Overhead
Materials Inventory
23,000
42,000
22,000
4,000
c. Work-in-Process Inventory- Job S10

Work-in-Process Inventory- Job C20
Work-in-Process Inventory- Job M54
Factory Overhead
Salary Expense (S & A)
Accrued Payroll
6,110
4,030
1,820
2,500
6,000
d. Factory Overhead
Depreciation Expense (S & A)
2,200
1,700
e. Advertising Expense (S & A)

Cash
6,000
f. Factory Overhead
Accounts Payable (or Cash)
1,300
g. Factory Overhead
Accounts Payable (or Cash)
1,600
90,000
91,000
20,460
3,900
6,000
1,300
1,600
h. Work-in-Process Inventory
13,800
13,800
Applied Overhead = $15 x 920 hours = $13,800
4-41 (Continued)
i. Finished Goods Inventory-Job S10
46,660
Work-in-Process Inventory- Job S10
46,660
$6,110 / $13 = 470 direct labor-hours
$10,500 + $23,000 + $6,110 + ($15 x 470) = $46,660
j. Accounts Receivable
59,000
Sales
Cost of Goods Sold
54,000
Finished Goods Inventory - Job J21
k. Cash
Accounts Receivable
25,000
59,000
54,000
25,000
3. Ending balance of the Materials Inventory

= Beginning balance + Purchases - Uses
= $27,000 + $90,000 - $91,000 = $26,000
4. Ending balance of the Work-in-Process Inventory
= Job C20 Cost + Job M54 Cost
= (Direct Materials + Direct Labor + Applied Overhead) of 2 jobs
= ($42,000 + $22,000) + ($4,030 + $1,820) + $15 x (310 + 140)
= $64,000 + $5,850 + $6,750 = $76,600
where direct labor-hours for Job C20 = $4,030 / $13 = 310 hours
for Job M54 = $1,820 / $13 = 140 hours
Alternative approach:
Ending WIP = Beginning WIP + DM + DL + Applied OH - FG
= $10,500 + ($23,000 + $42,000 + $22,000) + ($6,110 + $4,030 +
$1,820) + $13,800 - $46,660 = $76,600
5. Actual Overhead = $4,000 + $2,500 + $2,200 + $1,300 + $1,600
= $11,600
$11,600 (Actual) - $13,800 (Applied) = $2,200 Overapplied Overhead
4-26
4-42 Journal Entries, Schedule of Cost of Goods Manufactured

(50-60 min)
1. Predetermined Overhead Rate
= $1,235,475 / 86,700 = $14.25 per direct labor-hour
2. a. Direct Materials Inventory
Accounts Payable
$25 x 5,000 = $125,000
b. Supplies Inventory
Accounts Payable
$36 x 50 = $1,800
c. Work-in-Process Inventory
Factory Overhead
Supplies Inventory
$25 x 3,500 = $87,500
$36 x 30.5 = $1,098
125,000
1,800
87,500
1,098
125,000
1,800
87,500
1,098
d. Work-in-Process Inventory
141,900
Factory Overhead
46,000
Cash
187,900
$187,900 - $46,000 = $141,900
Direct labor-hours used = $141,900 / $22 = 6,450 hours
e. Factory Overhead
Cash
15,230
f. Factory Overhead
Prepaid Insurance
3,500
g. Factory Overhead
(Factory Asset)
8,200
h. Selling & Administrative Expense

2,400
15,230
3,500
8,200
2,400
4-42 (Continued 1)
i. Selling & Administrative Expense

Cash
5,500
j. Factory Overhead
Cash
13,500
k. Selling & Administrative Expense

Cash
13,250
5,500
13,500
13,250
l. Applied Overhead = $14.25 x 6,450 DL hour = $91,912.50

91,912.50
91,912.50
m. Finished Goods Inventory
146,000
n. Accounts Receivable
Sales Revenue
132,000
Cost of Goods Sold

112,000
146,000
132,000
112,000
3. Actual Overhead = $1,098 + $46,000 + $15,230 + $3,500 + $8,200

+ $13,500 = $87,528
Overapplied Overhead = $91,912.50 - $87,528 = $4,384.50
4-28
4-42 (Continued 2)
4.
Apex Corporation
Schedule of Cost of Goods Manufactured and Sold
For the month ended August 31, 2007
__________________________________________________
Direct materials:
Beginning materials inventory
$
0.00
Purchase
125,000.00
Total materials available
$125,000.00
Deduct: ending materials inventory (37,500.00) $ 87,500.00
Direct labor
141,900.00
Factory overhead applied
91,912.50
Total manufacturing costs
$321,312.50
Add: beginning work-in-process inventory
0.00
Deduct: ending work-in-process inventory
( 175,312.50)
Cost of goods manufactured
$ 146,000.00
Add: beginning finished goods inventory
0.00
Deduct: ending finished goods inventory
(34,000.00)
Normal cost of goods sold
$ 112,000.00
Deduct: overapplied overhead
( 4,384.50)
Cost of goods sold
$107,615.50
5.
Apex Corporation
Income Statement
For the month ended August 31, 2007
__________________________________________________
Sales
Cost of Goods Sold
Gross Margin
Selling & Administrative Expense*
Net Income
$132,000.00
( 107,615.50)
$ 24,384.50
21,150.00
$ 3,234.50
* S & A Expense = $2,400 + $5,500 + $13,250 = $21,150
4-43 Service Industry Job Costing (15 min)

1. $225,000 / $180,000 = 125%
This is used to allocate the budgeted overhead for the period to each
specific account based on the direct professional labor that has occurred
for each account.
2. Amount of overhead charged to:
Barry Account: 125% x $2,200 = $2,750
Miles Account: 125% x $8,400 = $10,500
3. Computation of the total contract cost:
Cost
Barry Account
Miles Account
Direct materials
$ 200
$ 2,690
Direct labor
2,200
8,400
10,500
Overhead
2,750
Total
$ 5,150
$21,590
4-30
4-44 Job Cost Sheets; Departmental Rates

(40 min)
1.Using Excel and Pivot Tables. (SEE NOTE TO PARTS 1&2 BELOW)
DATA:
Requistions for materials or time tickets
Department Number
1
1
1
1
1
1
2
2
Job No.
Mat. Quant.
2906
2906
2906
2906
2908
2908
2907
2908
Rates:
Department 1
Department 2
Labor
$
6.50
$
8.88
Mat. Price
Mat. Cost
4,550
4,430
$
$
1.34
1.35
$
$
6,097
5,981
1,000
9.00
9,000
110
23
$
$
22.18
48.00
$
$
2,440
1,104
Labor Hours
1,102
810
151
136
32
Overhead
3 per labor hour
1.5 per labor dollar
Solution:
First, do a Pivot Table on Jobs and Departments for labor hours and materials cost:
Job No.
Data
2906
1 Sum of Materials Cost
12077.5
Sum of Labor Hours 1912
Sum of Labor Hours
Total Sum of Materials Cost
12077.5
Total Sum of Labor Hours
1912
Department Number
2907
2908 Grand Total

9000
21077.5
151
2063
1104
3543.8
32
168
10104
24621.3
183
2231
2439.8
136
2439.8
136
Then, complete the cost report below to obtain cost for each job:
Total Materials Cost

Direct Labor
Hours
Labor Rate
Subtotal
Applied Overhead
Labor hours Dept 1
OH Rate in Dept 1
Subtotal Dept 1
Labor Hours Dept 2
Labor Cost Dept 2
OH Rate in Dept 2
Subtotal for Dept 2
Total Applied Overhead
Total Job Cost
Job 2906
$12,077.50
Dept 1
1912
6.50
12428.00
Dept 2
Job 2907
$2,439.80
Dept 1
0
8.88 $
0.00
$12,428.00
1912
$3.00
$5,736.00
$
0
8.88
150%
0.00
$5,736.00
$30,241.50
Dept 2
136
8.88
1207.68
$1,207.68
0
6.50
0
0
$3.00
$0.00
$
136.00
8.88
150%
1,811.52
$1,811.52
$5,459.00
Job 2908
$10,104.00
Dept 1
Dept 2
151
6.50
981.50
32
8.88
284.16
$1,265.66
151
$3.00
$453.00
$
32.00
8.88
150%
426.24
$879.24
$12,248.90
4-44 (continued)
2. Using Excel and Pivot Tables.
DATA:
Department Number
1
1
1
1
1
1
2
2
Rates:
Department 1
Department 2
Job No.
2906
2906
2906
2906
2908
2908
2907
2908
Labor
$
7.15
$
11.10
Mat. Quant
4,550
4,430
Mat. Price
$
$
1.34
1.35
1,000
110
23
$
$
Mat. Cost
$
$
6,097
5,981
9.00
9,000
22.18
48.00
$
$
2,440
1,104
Labor Hours
1,102
810
151
136
32
Overhead
3 per labor hour
Solution:
Job No.
Data
2906
12077.5
Sum of Labor Hours 1912
Sum of Labor Hours
12077.5
1912
Department Number
2907
2908 Grand Total

9000
21077.5
151
2063
1104
3543.8
32
168
10104
24621.3
183
2231
2439.8
136
2439.8
136

Direct Labor
Hours
Labor Rate
Subtotal
Applied Overhead
Labor hours Dept 1
OH Rate in Dept 1
Subtotal Dept 1
Labor Hours Dept 2
Labor Cost Dept 2
OH Rate in Dept 2
Subtotal for Dept 2
Total Job Cost
Job 2906
$12,077.50
Dept 1
1912
7.15
13670.80
Dept 2
0
11.10 $
0.00
$13,670.80
1912
$3.00
$5,736.00
$
0
11.10
150%
0.00
$5,736.00
Job 2907
$2,439.80
Dept 1
0
$3.00
$0.00
$
$31,484.30
Dept 2
136
11.10
1509.60
$1,509.60
0
7.15
0
136.00
11.10
150%
2,264.40
$2,264.40
$6,213.80
4-32
Job 2908
$10,104.00
Dept 1
Dept 2
151
7.15
1079.65
32
11.10
355.20
$1,434.85
151
$3.00
$453.00
$
32.00
11.10
150%
532.80
$985.80
$12,524.65
4-44 (Note to parts one and two)

The solution can be arrived at without using pivot tables. A convenient
alternative would be to use the Data Sort and the Data Subtotals
commands. For example, the following sequence would provide the
needed job totals for materials and labor hours for each department for
each job.
1. Mark the data on materials requisitions and time tickets, and sort this by
job number
2. For the same range of data, use Data Subtotals by Job for Materials
cost (see example screen shot below) to find the materials cost for each
job
3. Return to Data Subtotals for the same range of data and select to
remove subtotals
4. Use Data Subtotals by Department for labor hours to find the labor hours
for each department for each job.
4-45 Assigning Overhead to Jobs; Ethics (20 min)

The management accountant should keep the professional ethics code in
mind. First, he or she should try to persuade other pilot project members
and the company controller to strongly recommend the top management to
adopt the more accurate departmental overhead rate method. If the
company top management still would not listen, the management
accountant should report the situation to the companys audit committee.
4-34
4-46 Operation Costing (30 Min)

1.
Cost per pound:

Raw Sweet Corn: $5,200 / 800 = $6.50
Raw Regular Corn: $2,450 / 700 = $3.50
Total pounds for separating and cleaning depts.. 800 + 700 = 1,500
Total pounds for Creaming Department 700
Separating Department: $1,500 / 1,500 = $1.00
Cleaning Department: $900 / 1,500 = $0.60
Creaming Department: $210 / 700 = $0.30
Total product cost per pound:
Sweet Corn = $6.50 + $1.00 + $0.60 = $8.10
Regular Corn = $3.50 + $1.00 + $0.60 + $0.30 = $5.40
2.
Journal Entries:
a. To record the requisition of the raw corn for both types less
the cream cost:
WIP Inventory: Separation Department.......7,350
Direct Materials Inventory...........7,350
$5,200 + $2,450 - $300 = $7,350
b. To apply conversion costs to the Separation Department:
WIP Inventory: Separation Department .......1,500
Conversion Costs Applied ...1,500
c. To transfer both types of corn to the Cleaning Department:
WIP Inventory: Cleaning Department........8,850
WIP Inventory: Separation Department.....8,850
$7,350 + $1,500 = $8,850
d. To apply conversion cost to the Cleaning Department:
WIP Inventory: Cleaning Department.......900
Conversion Costs Applied......
900
4-46 (Continued)
e. To transfer the Regular Corn to the Creaming Department
and the Sweet Corn to Finished Goods Inventory:
WIP Inventory: Creaming Department........3,270
Finished Goods Inventory......6,480
WIP Inventory: Cleaning Department......9,750
$2,450 - $300 + ($1 x 700) + ($0.60 x 700) = $3,270
$5,200 + ($1 x 800) + ($0.60 x 800) = $6,480
$8,850 + $900 = $9,750
f. To transfer cream costs and conversion cost to the
Creaming Department:
WIP Inventory: Creaming Department.......510
Direct Materials Inventory....300
Conversion Costs Applied ......210
g. To transfer the Regular Corn to Finished Goods:
Finished Goods Inventory........3,780
WIP Inventory: Creaming Department...3,780
$3,270 + $510 = $3,780
The Above Entries can be Posted to T-accounts as follows:
WIP Inventory: Separation
(a) 7,350 l
l (a) 7,350
(b) 1,500 l
l (f) 300
l (c) 8,850
l
l (b) 1,500
l (d) 900
l (f) 210
WIP Inventory: Cleaning

(c) 8,850 l
(d) 900 l
l (e) 9,750
WIP Inventory: Creaming

(e) 3,270 l
(f) 510 l
l (g) 3,780

(e) 6,480 l
(g) 3,780 l
l
4-36
4-47 Spoilage, Rework and Scrap (30 Min)

1. Normal spoilage is the occurrence of unacceptable units arising under
efficient operating conditions. Normal spoilage is an inherent result of
the particular process or operation and is uncontrollable in the short run.
The costs associated with normal spoilage are typically viewed as part of
the cost of the good units produced.
Abnormal spoilage is spoilage that is not expected to arise under
efficient operating conditions and is not an inherent part of the
production process. Accordingly, abnormal spoilage is usually
considered controllable and is not included as a portion of the cost of
good units produced but as an expense of the period.
2. a. Spoiled units are unacceptable units of production that are either
discarded or sold for disposal value.
b. Rework units are unacceptable units or production that are
subsequently reconditioned into good units which can be sold as
acceptable finished goods.
c. Scrap represents inputs that do not become part of the output and
have minor economic value when compared to the sales value of the
completed product.
3. a. An analysis of the 5,000 units rejected by Richport Company for Job
No. N1192-122 yields the following breakdown between normal and
abnormal spoilage.
Units
Normal spoilage (see below)*
3,000
Abnormal spoilage:
Design defect (given)
900
Other [5,000 (3,000 + 900)]
1,100 2,000
Total units rejected
5,000
*Normal spoilage = .025 of units of good production (where good
production = production before any spoilage)
Good Production for 117,000 units = 117,000 / (1-.025)= 120,000 units;
if we produced 120,000 units, we would expect a normal spoilage of
2.5% for a net of 117,000 units; so Normal spoilage = 120,000 x .025 =
3,000 units, or 120,000 117,000 = 3,000
4-47 (Continued)
b. The journal entries required to properly account for Job No. N1192122 is presented below and uses an average cost per unit of $57
($6,954,000 / 122,000).
Debit
Credit
Spoiled Inventory (4,100 x $7)
$ 28,700
Loss from Abnormal Spoilage (b)
106,300
WIP Inventory (a)
$135,000
Supporting Calculations:
a)
900 abnormal spoiled units @ $57
1,100 other abnormal rejected units @ $57
3,000 normal spoiled units @ $7
b)
$ 51,300
62,700
21,000
$135,000
$135,000 - $28,700 = $107,500
4-38
4-48 Job Cost Sheets (40 min)

1. Solution using Pivot Tables: (SEE NOTE AT END OF SOLUTION)
Department 1
Department 2
$
$
12.60
11.40
4.50 per labor hour

Solution:
Job No.
Data
88X
88Y
88Z
Grand Total
55261.5
9217.38
16856.37
81335.25
Sum of Labor Hours
554
25
613
1192
0
0
Sum of Labor Hours
321
618
939
55261.5
9217.38
16856.37
81335.25
554
346
1231
2131
Department Number
Job 88X
Direct Labor
Hours
Labor Rate
Subtotal
Applied Overhead
Labor hours Dept 1
OH Rate in Dept 1
Subtotal Dept 1
Labor Hours Dept 2
Labor Cost Dept 2
OH Rate in Dept 2
Subtotal for Dept 2
Total Job Cost
Job 88Y
$9,217.38
$55,261.50
Dept 1
Dept 2
554
12.60
6980.40
0
11.40 $
0.00
$6,980.40
554
$4.50
$2,493.00
$
0
11.40
125%
0.00
$2,493.00
Dept 1
25
12.60
315
Dept 2
321
11.40
3659.40
$3,974.40
25
$4.50
$112.50
$64,734.90
321.00
11.40
125%
4,574.25
$4,686.75
$17,878.53
Job 88Z
$16,856.37
Dept 1
613
12.60
7723.80
Dept 2
618
11.40
7045.20
$14,769.00
613
$4.50
$2,758.50
$
618.00
11.40
150%
10,567.80
$13,326.30
$44,951.67
4-48 (continued)
2. Solution using Pivot Tables in Excel:
Department Number
1
1
1
2
1
2
1
1
1
1
Rates:
Department 1
Department 2
Job No.
Mat. Quant
88X
88Y
88X
88Y
88Z
88Z
88Y
88Z
88Y
88Z
Labor
$
$
Mat. Price
Mat. Cost
6,650 $
2,130 $
8.31 $
2.52 $
55,262
5,368
1,818 $
9.16 $
16,653
921 $
63 $
4.18 $
3.23 $
3,850
203
Labor Hours
554
321
618
25
613
Overhead
12.60 $
4.50 per labor hour
11.40
Solution:
Job No.
Data
88X
88Y
88Z
Grand Total
55261.5
9217.38
16856.37
81335.25
Sum of Labor Hours
554
25
613
1192
0
0
Sum of Labor Hours
321
618
939
55261.5
9217.38
16856.37
81335.25
554
346
1231
2131
Department Number
Job 88X
Direct Labor
Hours
Labor Rate
Subtotal
Applied Overhead
Labor hours Dept 1
OH Rate in Dept 1
Subtotal Dept 1
Labor Hours Dept 2
Labor Cost Dept 2
OH Rate in Dept 2
Subtotal for Dept 2
Total Job Cost
Job 88Y
$9,217.38
$55,261.50
Dept 1
Dept 2
554
12.60
6980.40
0
11.40 $
0.00
$6,980.40
554
$4.50
$2,493.00
$
0
11.40
125%
0.00
$2,493.00
Dept 1
25
12.60
315
25
$4.50
$112.50
$
$64,734.90
Dept 2
321
11.40
3659.40
$3,974.40
321.00
11.40
125%
4,574.25
$4,686.75
$17,878.53
4-40
Job 88Z
$16,856.37
Dept 1
613
12.60
7723.80
Dept 2
618
11.40
7045.20
$14,769.00
613
$4.50
$2,758.50
$
618.00
11.40
125%
8,806.50
$11,565.00
$43,190.37
4-48 (Continued)
The solution can be arrived at without using pivot tables. A convenient
alternative would be to use the Data Sort and the Data Subtotals
commands. For example, the following sequence would provide the
needed job totals for materials and labor hours for each department for
each job.
1. Mark the data on materials requisitions and time tickets, and sort this by
job number
2. For the same range of data, use Data Subtotals by Job for Materials
cost (see example screen shot below) to find the materials cost for each
job
3. Return to Data Subtotals for the same range of data and select to
remove subtotals
4. Use Data Subtotals by Department for labor hours to find the labor hours
for each department for each job.
4-49 Job Costing; Quarterly and Annual Rates

1,2,3
Annual
First Quarter Second QuarterThird Quarter
Number of machine hours/quarter
36,250
5,000
12,500
7,500
Fixed Administrative Costs/qtr $
100,000 $
25,000 $
25,000 $
25,000
Overhead per quarter
$ 1,800,000 $
450,000 $
450,000 $
450,000
Overhead per machine hour
$
90.00 $
36.00 $
60.00
Variable cost per machine hour
$
45.00 $
45.00 $
45.00
Full Cost per machine hour
$
135.00 $
81.00 $
105.00
Cost used in Pricing Orders/hr
Price based on % markup
85.00
127.50
$
$
135.00
202.50
$
$
81.00
121.50
$
$
105.00
157.50
141.98
141.98
141.98
141.98
Using Quarterly Rate: Contribution Income Statement

Revenue
$ 5,851,875 $
637,500 $
Variable Costs
$ 1,631,250
225,000
Contribution
$ 4,220,625 $
412,500 $
Fixed Costs
$ 1,900,000
475,000
Net Income
$ 2,320,625 $
(62,500) $
2,531,250
562,500
1,968,750
475,000
1,493,750
911,250
337,500
573,750
475,000
98,750
Annual OH Rate
Price Based on Annual Rate
$
150% $
Fourth Quarter
11,250
$
25,000
450,000
$
40.00
$
45.00
$
85.00
49.6552
$
$
$ 1,771,875
506,250
$ 1,265,625
475,000
$ 790,625
Using Annual Rate: Contribution Income Statement

Revenue
$ 5,146,875 $
709,914 $ 1,774,784 $ 1,064,871 $ 1,597,306
Variable Costs
$ 1,631,250
225,000
562,500
337,500
506,250
Contribution
$ 3,515,625 $
484,914 $ 1,212,284 $
727,371 $ 1,091,056
Fixed Costs
$ 1,900,000
475,000
475,000
475,000
475,000
Net Income
$ 1,615,625 $
9,914 $
737,284 $
252,371 $ 616,056
Total operating income is lower because of lower price in high-volume quarters
Note the reduced variability between quarters using the annual rate
CONVENTIONAL INCOME STATEMENTS
Using Quarterly Rate: Conventional Income Statement
Revenue
$ 5,851,875 $
637,500 $
COGS
$ 3,431,250
675,000
Gross Margin
$ 2,420,625 $
(37,500) $
Non Operating Costs
$
100,000
25,000
Net Income
$ 2,320,625 $
(62,500) $
2,531,250
1,012,500
1,518,750
25,000
1,493,750
911,250
787,500
123,750
25,000
98,750
$ 1,771,875
956,250
$ 815,625
25,000
$ 790,625
Using Annual Rate: Conventional Income Statement

Revenue
$ 5,146,875 $
709,914
COGS
$ 3,431,250
675,000
Gross Margin
$ 1,715,625 $
34,914
Non Operating Costs
$
100,000
25,000
Net Income
$ 1,615,625 $
9,914
1,774,784
1,012,500
762,284
25,000
737,284
$ 1,064,871
787,500
$
277,371
25,000
$
252,371
$ 1,597,306
956,250
$ 641,056
25,000
$ 616,056
4-42
$
$
$
$
$
Problem 4-49 (continued)

4. The analyses in parts 1-3 show:
a) An annual pricing rate under the annual approach would be $141.98,
while the quarterly approach would produce prices ranging from a
low of $121.50 in the third quarter to high of $202.50 in the second
quarter. Note that the quarterly rates determined above are based
on the assumption, stated in the case, that the rate for any quarter is
based on the actual results of the prior quarter.
b) The result of the quarterly policy as implemented is to have overhead
rates and pricing rates relatively high in the high volume quarters, the
quarters in which per-hour overhead rates are the lowest. This
arises because the high and low quarters alternate, and the rates are
calculated for one quarter to apply to the next. It appears that
George and Steve may be unaware of the fact that volume
differences between quarters affect their overhead rates and prices
from quarter to quarter.
c) The effect of using the quarterly rates, relative to the annual rates, is
that prices and revenues are higher for the high volume months
under the quarterly method. The result is higher variability of prices
and profits, from quarter to quarter, using the quarterly rates. The
annual rate approach reduces this variability among quarters. This
could be used as a strong argument that the annual rate should be
used, as the text argues. Note from examining the solution above
that this is true whether we use the contribution income statement or
the conventional full cost income statement.
d) Total annual profit is greater under the quarterly rate approach
($2,320,625 relative to $1,615,625 for the annual rates) because the
quarterly approach has higher rates in the high volume quarters.
Total costs are the same in both approaches but revenues are higher
for the quarterly approach. The fact that Mansfield is charging
somewhat higher rates during the high volume months is probably
what has caused some customers to say that some of Mansfields
competitors have better prices. By using annual rates, Mansfield is
likely to address this pricing problem and also to reduce the
variability in profits among quarters. Of course, it also appears that
going to the annual rate could also reduce profits. The demand
figures used in the analysis are the actual figures for the prior year,

so using an annual rate would have produced lower profits in the
prior year if demand were the same.
e) If the use of annual rates would significantly increase demand, then
George and Steve should consider the change, as it would increase
profits and reduce variability in pricing and profits across quarters.
However, there is a significant difference in annual profit figures for
the two methods ( $2,320,625 - $1,615,625 = $705,000, or 30% of
current profit). This suggests that demand would have to increase
significantly. There are two issues that now arise:
can Mansfield achieve the significant increase in demand with
annual rates?
if the increased demand comes in the two busiest quarters (as is
likely to happen), will Mansfield have the capacity to meet the
increase? Note that the firms capacity per quarter is
approximately 27 machines x 150 hours x 3 months = 12,150
machine hours. Right now the busiest quarter has 12,500
machine hours of demand, indicating that these machines are
already used beyond planned capacity levels in this quarter, and
thus, any increase in capacity means a need for more machines,
an investment that should be carefully considered.
f) given the seasonality of the business, George and Steve may want to
consider monthly profit reports, irrespective of the overhead rate and
pricing method chosen.
g) A good additional question for class discussion would be the
following: What would be the effect of the choice of a quarterly or
annual rate on the quarterly income statements if Mansfield were to
close the overhead account quarterly and close the underapplied or
overapplied overhead to cost of goods sold? The solution shown for
parts 1,2 and 3 above assumes that underapplied or overapplied
overhead is charged to cost of goods sold quarterly. The solution for
overhead closed at year end for both the quarterly rate and the
annual rate is shown below. The year end closing of the overhead
variance tends to reduce the variability in profit across the quarters
the high volume quarters are in effect charged a higher amount of
overhead. Note that the overhead variances for the annual rate net
to zero over the four quarters.
4-44

Using Quarterly Rate: Conventional Income Statement
(Actual Costing: Using Last period'
s overhead rate for costing and for pricing; overhead closed at year end)
Revenue
$ 5,851,875 $
637,500 $
2,531,250 $
911,250 $
COGS
Variable
$ 1,631,250 $
225,000 $
562,500 $
337,500 $
Overhead Applied
$ 2,270,000
200,000
1,125,000
270,000
Overhead Variance
$
(470,000)
$ 3,431,250 $
425,000 $
1,687,500 $
607,500 $
Gross Margin
Non Operating Costs
Net Income
$
$
$
2,420,625
100,000
2,320,625
$
$
$
212,500
25,000
187,500
$
$
$
843,750
25,000
818,750
$
$
$
Using Annual Rate: Conventional Income Statement

(Normal costing: Annual rate for pricing and costing, overhead closed at year end)
Revenue
$ 5,146,875 $
709,914 $
1,774,784 $
COGS
Variable
$ 1,631,250 $
225,000 $
562,500 $
Overhead Applied
$ 1,800,000
248,276
620,690
Overhead Variance
$
$ 3,431,250 $
473,276 $
1,183,190 $
Gross Margin
Non Operating Costs
Net Income
$
$
$
1,715,625
100,000
1,615,625
$
$
$
236,638
25,000
211,638
$
$
$
591,595
25,000
566,595
$
$
$
1,771,875
506,250
675,000
1,181,250
303,750
25,000
278,750
$
$
$
590,625
25,000
565,625
1,064,871
1,597,306
337,500
372,414
709,914
506,250
558,621
1,064,871
354,957
25,000
329,957
$
$
$
532,435
25,000
507,435
4-50 Overhead Rates Used for Each Machine in a Printing Plant

This short case is intended as a basis for class discussion that could the
following topics and questions: application of job costing in the printing
industry; what are the factors driving the accuracy of product costing;
how does the choice of job costing method affect pricing; what is the effect
of cost allocation methods on management behavior, performance
evaluation, and how does a chosen cost method advance or hinder the
firms progress to its strategic goals? Some observations that I would
bring out in this discussion include:
EFS uses a job costing system in which materials and direct labor are
traced to the job, and overhead is traced to each machine and then applied
to the jobs based on machine usage
A strength would be that EFS has put a lot of effort into tracing the printing
costs accurately and using an overhead allocation approach that attempts
to trace the costs of the machinery to the jobs that used that machinery
I would begin a discussion of the EFS approach to allocating other
overhead costs insurance, supervision, and office salaries to the jobs
based on the capacity of the machines. That is, machines with more
printing capacity (where capacity is the number of feet of forms produced
per minute of machine time) will receive a larger portion of this portion of
overhead. This is very much like a volume based rate, which is OK, but
does not reflect the actual behavior of these costs. Suppose the total of
other overhead is significant. Then small jobs on high capacity (fast)
machines will be charged a relatively high rate. Conversely, large jobs
on low-capacity machines will be charged a relatively low rate. How this
would affect pricing and the allocation of jobs to machines is not easy to
predict.
Source: Jacci L. Rodgers, S. Mark Comstock and Karl Pritz, Customize

Your Costing System, Management Accounting, May 1993, pp. 31-32.
4-46
4-51 Plantwide vs. Departmental Overhead Rate (30 Min)

1.
Empco Inc. is currently using a plantwide overhead rate that is

applied on the basis of direct labor dollars. In general, a
plantwide factory overhead rate is acceptable only if a similar
relationship between overhead and direct labor exists in all
departments, or the company manufactures products, which
receive proportional services from each department.
In most cases, departmental overhead rates are
preferable to plantwide overhead rates because plantwide
overhead rates do not provide:
a framework for reviewing overhead costs on a
departmental basis, identifying departmental cost
overruns, or taking corrective action to improve
departmental cost control.
sufficient information about product profitability, thus,
increasing the difficulties associated with management
decision-making.
2.
Because Empco uses a plantwide overhead rate applied on the

basis of direct labor dollars, thus elimination of direct labor in
the Drilling Department through the introduction of robots may
appear to reduce the overhead cost of the Drilling Department
to zero. However, this change will not reduce fixed factory
overhead expenses such as depreciation, plant supervision,
etc. In reality, the use of robots is likely to increase fixed
expenses because of increased depreciation expense. Under
Empco'
s current method of allocating overhead costs, the
remaining departments will merely absorb these costs.
Problem 4-51 (Continued)

3.
a.
In order to improve the allocation of overhead costs in the
Cutting and Grinding Departments, Empco should:
establish separate overhead accounts (pools) and rates
for each of these departments.
select an application basis for each of these departments
that best reflects the relationship of the departmental
activity to the overhead costs incurred (e.g., direct labor
hours, machine hours, etc.)
identify, if possible, fixed and variable overhead costs and
establish fixed and variable overhead rates.
b.
In order to accommodate the automation of the

Drilling Department in its overhead accounting
system, Empco should:
establish separate overhead accounts (pools) and rates
for the Drilling Department.
identify, if possible, fixed and variable overhead costs and
establish fixed and variable overhead rates.
apply overhead costs to the Drilling Department on the
basis of robot or machine hours.
4-48
4-52 Plantwide vs. Departmental Overhead Rate (30 min)

1. Budgeted Overhead = ($146,000 + $94,000) + ($77,000 + $163,000)
= $480,000
Budgeted Direct Labor-hours = 1,000 units x (12 + 8) hours
= 20,000 hours
Predetermined Overhead Rate = $480,000 / 20,000
= $24 per direct labor-hour
2. Budgeted Machine-hours = 1,000 units x (5 + 15) hours = 20,000 hours
3. Using Direct Labor-hours:
Department A
Department B
Total
DL-hours 1,000 x 12
1,000 x 8
= 12,000 hours
= 8,000 hours
20,000 hours
Overhead applied 12,000 x $24 8,000 x $24
= $288,000
= $192,000
$480,000
Using Machine-hours:
Department A
Department B
Total
Machine-hours 1,000 x 5
1,000 x 15
= 5,000 hours
= 15,000 hours
20,000 hours
Overhead applied 5,000 x $24 15,000 x $24
= $120,000
= $360,000
$480,000
4. If direct labor-hours are used to apply factory overhead, Department A is
overcharged and Department B is undercharged. If machine hours are
used, Department A is undercharged and Department B is overcharged.
The reason is that each department has a different cost driver.
Department A is labor intensive and Department B is machine intensive.
Therefore, using one single plantwide overhead rate is not appropriate.
5. Using direct labor-hours for Department A:
= $20 per direct labor-hour
Applied Overhead = 1,000 units x 12 hours x $20 = $240,000
Using machine-hour for Department B:
Applied Overhead = 1,000 units x 15 hours x $16 = $240,000

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CHAPTER 4: JOB COSTING

A material requisition form is a source document that is used to request materials

Blocher,Stout,Cokins,Chen: Cost Management 4e 4-1

The McGraw-Hill Companies, Inc., 2008

Since the overhead cost cannot be traced directly to a particular product, we

Underapplied overhead is the amount of actual factory overhead that exceeds

Blocher,Stout,Cokins,Chen: Cost Management 4e

The McGraw-Hill Companies, Inc., 2008

Applied overhead is 59,000 x $10 = $590,000. There is an underapplied

4-22 Job cost is $10,000 + $20,000 + 2 x $20,000 = $70,000.

Blocher,Stout,Cokins,Chen: Cost Management 4e 4-3

The McGraw-Hill Companies, Inc., 2008

Blocher,Stout,Cokins,Chen: Cost Management 4e

The McGraw-Hill Companies, Inc., 2008

*predetermined OH rate = $579,500/95,000 = $6.10

Blocher,Stout,Cokins,Chen: Cost Management 4e 4-5

The McGraw-Hill Companies, Inc., 2008

4-29 Job Costing in Aircraft Manufacturing

Blocher,Stout,Cokins,Chen: Cost Management 4e

The McGraw-Hill Companies, Inc., 2008

4-30 Journal Entries (20 min)

g. Finished Goods Control

h. Cost of Goods Sold

Blocher,Stout,Cokins,Chen: Cost Management 4e 4-7

The McGraw-Hill Companies, Inc., 2008

3. Actual factory overhead:

Blocher,Stout,Cokins,Chen: Cost Management 4e

The McGraw-Hill Companies, Inc., 2008

4-31 Working with Unknowns

1. Job A23: $82,500 - $24,000 - $42,000 = $16,500 applied overhead

Blocher,Stout,Cokins,Chen: Cost Management 4e 4-9

The McGraw-Hill Companies, Inc., 2008

4-32 Application and Proration of Factory Overhead (20 min)

25% x $10,250 = $ 2,562.50

Blocher,Stout,Cokins,Chen: Cost Management 4e

The McGraw-Hill Companies, Inc., 2008

4-33 Service Industry Overhead Rate, Pricing (20 min)

Blocher,Stout,Cokins,Chen: Cost Management 4e 4-11

The McGraw-Hill Companies, Inc., 2008

4-34 Operation Costing (20 Min)

The following entry is made to record the requisition of direct materials by

Blocher,Stout,Cokins,Chen: Cost Management 4e

The McGraw-Hill Companies, Inc., 2008

Finally, the completed goods are transferred to finished goods.

$137,500 + $15,000 = $152,500

Blocher,Stout,Cokins,Chen: Cost Management 4e 4-13

The McGraw-Hill Companies, Inc., 2008

4-35 Spoilage and Scrap (20 Min)

b. To record the normal and abnormal spoilages incurred in Job Y34

2. Journal entries to record scrap sold:

b. To record the scrap sold common to all jobs

Blocher,Stout,Cokins,Chen: Cost Management 4e

The McGraw-Hill Companies, Inc., 2008

Blocher,Stout,Cokins,Chen: Cost Management 4e 4-15

The McGraw-Hill Companies, Inc., 2008

4-37 Job Costing; Review of Chapter 3 (40 min)

Blocher,Stout,Cokins,Chen: Cost Management 4e

The McGraw-Hill Companies, Inc., 2008

4-38 Choice of a costing system (60 Min)

Blocher,Stout,Cokins,Chen: Cost Management 4e 4-17

The McGraw-Hill Companies, Inc., 2008

Blocher,Stout,Cokins,Chen: Cost Management 4e

The McGraw-Hill Companies, Inc., 2008