Solution manual managerial accounting concept and applications by cabrera chapter 10 answer

Thus, if actual costs were used to cost products, it would be necessary either 1 to wait until the period was over to add overhead costs to jobs, or 2 to simply add overhead cost to jobs

CHAPTER 10

SYSTEMS DESIGN: JOB-ORDER COSTING AND

PROCESS COSTING

I Questions

1 Job-order costing is used in those manufacturing situations where there are many different products produced each period Each product or job

is different from all others and requires separate costing Process costing is used in those manufacturing situations where a single, homogeneous product, such as cement, bricks, or gasoline, is produced for long periods at a time

2 The job cost sheet is used in accumulating all costs assignable to a particular job These costs would include direct materials cost traceable to the job, and manufacturing overhead cost allocable to the job When a job is completed, the job cost sheet is used to compute the cost per completed unit The job cost sheet is then used as a control document for: (1) determining how many units have been sold and determining the cost of these units; and (2) determining how many units are still in inventory at the end of a period and determining the cost of these units on the balance sheet

3 Many production costs cannot be traced directly to a particular product

or job, but rather are incurred as a result of overall production activities Therefore, in order to be assigned to products, such costs must be allocated to the products in some manner Examples of such costs would include utilities, maintenance on machines, and depreciation of the factory building These costs are indirect production costs

4 A firm will not know its actual manufacturing overhead costs until after

a period is over Thus, if actual costs were used to cost products, it would be necessary either (1) to wait until the period was over to add overhead costs to jobs, or (2) to simply add overhead cost to jobs as the overhead cost was incurred day by day If the manager waits until after the period is over to add overhead cost to jobs, then cost data will not

be available during the period If the manager simply adds overhead

cost to jobs as the overhead cost is incurred, then unit costs may fluctuate from month to month This is because overhead cost tends to

be incurred somewhat evenly from month to month (due to the presence

of fixed costs), whereas production activity often fluctuates For these reasons, most firms use predetermined overhead rates, based on estimates of overhead cost and production activity, to apply overhead cost to jobs

5 An allocation base should act as a cost driver in the incurrence of the overhead cost; that is, the base should cause the overhead cost If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and their costs will be distorted

6 A process costing system is appropriate in those situations where a homogeneous product is produced on a continuous basis

7 In a process costing system, costs are accumulated by department

8 First, the activity performed in a department must be performed uniformly on all units moving through it Second, the output of the department must be homogeneous

9 The reason cost accumulation is simpler is that costs only need to be identified by department - not by separate job Usually there will be only a few departments in a company, whereas there can be hundreds

or even thousands of jobs in a job-order costing system

10 A quantity schedule shows the physical flow of units through a department during a period It serves several purposes First, it provides the manager with information relative to activity in his or her department and also shows the manager the stage of completion of any in-process units Second, it serves as an essential guide in computing the equivalent units and in preparing the other parts of the production report

11 By definition, manufacturing overhead consists of costs that cannot be practically traced to products or jobs Therefore, if these costs are to be assigned to products or jobs, they must be allocated rather than traced

12 Assigning manufacturing overhead costs to jobs does not ensure a profit The units produced may not be sold and if they are sold, they may not be sold at prices sufficient to cover all costs It is a myth that assigning costs to products or jobs ensures that those costs will be recovered Costs are recovered only by selling to customers—not by allocating costs

13 (a) Job-order costing and process costing have the same basic purposes

—to assign materials, labor, and overhead cost to products and to provide a mechanism for computing unit product costs

(b) Both systems use the same basic manufacturing accounts.

(c) Costs flow through the accounts in basically the same way in both systems

14 The company will want to distinguish between the costs of the metals used to make the medallions, but the medals are otherwise identical and

go through the same production processes Thus, operation costing is ideally suited for the company’s needs

II Exercises

Exercise 1 (Process Costing and Job Order Costing)

* Some of the listed companies might use either a process costing or a job-order costing system, depending on how operations are carried out and how homogeneous the final product is For example, a plywood manufacturer might use job-order costing if plywoods are constructed of different woods or come in markedly different sizes

Exercise 2 (Applying Overhead with Various Bases)

Requirement 1

Predetermined overhead rates:

Company X:

Company Y:

Predetermined

Estimated total manufacturing overhead cost Estimated total amount of the allocation base

= 60,000 DLHsP432,000 = P7.20 per DLH

Predetermined

Estimated total manufacturing overhead cost Estimated total amount of the allocation base

= 90,000 DLHsP270,000 = P3.00 per MH

Company Z:

Requirement 2

Actual overhead costs incurred P420,000

Overhead cost applied to Work in Process:

58,000* actual hours × P7.20 per hour 417,600

Underapplied overhead cost P    2,400

* 7,000 hours + 30,000 hours + 21,000 hours = 58,000 hours

Exercise 3 (Departmental Overhead Rates)

Requirement 1

Milling Department:

Assembly Department:

Requirement 2

Overhead Applied

Requirement 3

Predetermined

Estimated total manufacturing overhead cost Estimated total amount of the allocation base

= P240,000 materials cost = 160% of materials cost P384,000

Predetermined

Estimated total manufacturing overhead cost Estimated total amount of the allocation base

= 60,000 machine-hoursP510,000 = P8.50 per machine-hour

Predetermined

Estimated total manufacturing overhead cost Estimated total amount of the allocation base

= P640,000 direct labor cost = 125% of direct labor cost P800,000

Yes; if some jobs required a large amount of machine time and little labor cost, they would be charged substantially less overhead cost if a plantwide rate based on direct labor cost were being used It appears, for example, that this would be true of job 123 which required considerable machine time to complete, but required only a small amount of labor cost

Exercise 4 (Process Costing Journal Entries)

Work in Process—Mixing 330,000 Raw Materials Inventory 330,000 Work in Process—Mixing 260,000 Work in Process—Baking 120,000 Wages Payable 380,000 Work in Process—Mixing 190,000 Work in Process—Baking 90,000 Manufacturing Overhead 280,000 Work in Process—Baking 760,000 Work in Process—Mixing 760,000 Finished Goods 980,000 Work in Process—Baking 980,000

Exercise 5 (Quantity Schedule, Equivalent Units, and Cost per Equivalent Unit – Weighted Average Method)

Requirement 1

Weighted-Average Method

Quantity Schedule

Gallons to be accounted for:

Work in process, May 1 (materials 80%

complete, labor and overhead 75%

Equivalent Units Materials Labor Overhead

Gallons accounted for as follows:

Transferred to the next department 790,000 790,000 790,000 790,000 Work in process, May 31 (materials 60%

complete, labor and overhead 20%

complete) 50,000 30,000 10,000 10,000 Total gallons accounted for 840,000 820,000 800,000 800,000

Requirement 2

Total Costs Materials Labor Overhead Whole Unit

Cost to be accounted for:

Work in process, May 1 P 146,600 P 68,600 P 30,000 P 48,000

Cost added during the month 1,869,200 907,200 370,000 592,000

Total cost to be accounted for (a) P2,015,800 P975,800 P400,000 P640,000

Equivalent units (b) — 820,000 800,000 800,000

Cost per equivalent unit (a) ÷ (b) P1.19 + P0.50 + P0.80 = P2.49

Exercise 6 (Quantity Schedule, Equivalent Units, and Cost per Equivalent Unit – FIFO Method)

Requirement 1

Quantity Schedule

Gallons to be accounted for:

Work in process, May 1 (materials 80%

complete, labor and overhead 75%

Equivalent Units Material

Gallons accounted for as follows:

Transferred to the next department:

From the beginning inventory 80,000 16,000* 20,000* 20,000* Started and completed this month** 710,000 710,000 710,000 710,000 Work in process, May 31 (materials 60%

complete, labor and overhead 20%

complete) 50,000 30,000 10,000 10,000 Total gallons accounted for 840,000 756,000 740,000 740,000

* Work required to complete the beginning inventory.

** 760,000 gallons started – 50,000 gallons in ending work in process = 710,000 gallons started and completed.

Requirement 2

Total Costs Materials Labor Overhead Whole Unit

Cost to be accounted for:

Work in process, May 31 P 146,600

Cost added during the month (a) 1,869,200 P907,200 P370,000 P592,000

Total cost to be accounted for P2,015,800

Equivalent units (b) 756,000 740,000 740,000

Cost per equivalent unit (a) ÷ (b) P1.20 + P0.50 + P0.80 = P2.50

Exercise 7

Requirement (1)

The direct materials and direct labor costs listed in the exercise would have been recorded on four different documents: the materials requisition form for Job KC123, the time ticket for Kristine, the time ticket for Clarisse, and the job cost sheet for Job KC123

Requirement (2)

The costs for Job KC123 would have been recorded as follows:

Materials requisition form:

Quantity Unit Cost Total Cost

P8,960

Time ticket for Kristine

Started Ended

Time Completed Rate Amount

Job Number

Time ticket for Clarisse

Started Ended

Time Completed Rate Amount

Job Number

Job Cost Sheet for Job KC123

Direct materials P8,960.00

Direct labor:

Kristine 390.00

Clarisse 315.00

P9,665.00

Exercise 8

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead P586,000

÷ Estimated total direct labor hours (DLHs) 40,000 DLHs

= Predetermined overhead rate P14.65 per DLH

Exercise 9

Weighted-Average Method

Work in process, May 1 P 14,550 P23,620 P118,100

Cost added during May 88,350 14,330 71,650

Total cost (a) P102,900 P37,950 P189,750

Equivalent units of

production (b) 1,200 1,100 1,100

Cost per equivalent unit

(a) ÷ (b) P85.75 P34.50 P172.50 P292.75

Exercise 10

FIFO Method

To complete beginning work in process:

Materials: 400 units x (100% – 75%) 100 Conversion: 400 units x (100% – 25%) 300 Units started and completed during the period

(42,600 units started – 500 units in ending

inventory) 42,100 42,100 Ending work in process

Materials: 500 units x 80% complete 400 Conversion: 500 units x 30% complete 150 Equivalent units of production 42,600 42,550

III Problems

Problem 1

Requirement 1

a Raw Materials Inventory 210,000

Accounts Payable 210,000

b Work in Process 178,000

Manufacturing Overhead 12,000

Raw Materials Inventory 190,000

c Work in Process 90,000

Manufacturing Overhead 110,000

Salaries and Wages Payable 200,000

d Manufacturing Overhead 40,000

Accumulated Depreciation 40,000

e Manufacturing Overhead 70,000

Accounts Payable 70,000

f Work in Process 240,000

Manufacturing Overhead 240,000 30,000 MH x P8 per MH = P240,000

g Finished Goods 520,000

Work in Process 520,000

h Cost of Goods Sold 480,000

Finished Goods 480,000 Accounts Receivable 600,000

Sales 600,000 P480,000 × 1.25 = P600,000

Requirement 2

(Overapplied overhead)

Problem 2

Requirement 1

The costing problem does, indeed, lie with manufacturing overhead cost, as suggested Since manufacturing overhead is mostly fixed, the cost per unit increases as the level of production decreases The problem can be solved

by use of predetermined overhead rates, which should be based on expected activity for the entire year Many students will use units of product in computing the predetermined overhead rate, as follows:

Estimated manufacturing overhead cost, P840,000

The predetermined overhead rate could also be set on the basis of either direct labor cost or direct materials cost The computations are:

= P4.20 per unit

Estimated manufacturing overhead cost, P840,000

Estimated manufacturing overhead cost, P840,000

Requirement 2

Using a predetermined overhead rate, the unit costs would be:

Quarter First Second Third Fourth

Direct materials P240,000 P120,000 P 60,000 P180,000 Direct labor 96,000 48,000 24,000 72,000 Manufacturing overhead:

Applied at P4.20 per

units; 350% of direct

labor cost, or 140% of

direct materials cost 336,000 168,000 84,000 252,000 Total cost P672,000 P336,000 P168,000 P504,000 Number of units

produced 80,000 40,000 20,000 60,000

Problem 3

Weighted-Average Method

Quantity Schedule

Pounds to be accounted for:

Work in process, May 1

(all materials, 55% labor and

overhead added last month) 30,000

Started into production during

May 480,000

Total pounds 510,000

350% of direct labor cost

=

140% of direct materials cost

=

Equivalent Units Materials Overhead Labor &

Pounds accounted for as follows:

Transferred to Department 2 490,000* 490,000 490,000 Work in process, May 31

(all materials, 90% labor and

overhead added this month) 20,000 20,000 18,000 Total pounds 510,000 510,000 508,000

* 30,000 + 480,000 - 20,000 = 490,000

Problem 4 (Weighted-Average Method; Interpreting a Production Report)

Requirement 1

Weighted-Average Method

The equivalent units for the month would be:

Quantity Equivalent Units Schedule Materials Conversion

Units accounted for as follows:

Work in process, April 30

(75% materials, 60%

conversion cost added this

month) 40,000 30,000 24,000 Total units and equivalent units

of production 230,000 220,000 214,000

Requirement 2

Total Cost Materials Conversion Whole Unit

Work in process, April 1 P 98,000 P 67,800 P 30,200

Cost added during the

month 827,000 579,000 248,000

Total cost (a) P925,000 P646,800 P278,200

Equivalent units of

production (b)

– 220,000 214,000

P4.24