Systems Design Question Solutions

Chapter 3 Systems Design: Job-order Costing Solutions to Questions 3-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. 3-job-order costing is used in situations where many different products or services are produced each period. Process costing is used in situations where a single, homogeneous product, such as cement, bricks, or gasoline, is produced for long periods.

-the job cost sheet is used to record all costs that are assigned to a particular bob. These costs include direct materials costs traced to the job, direct labor costs traced to the job, and manufacturing overhead costs applied to the job. When a job is completed, the job cost sheet is used to compute the unit product cost. 3-AAA predetermined overhead rate is used to apply overhead to jobs, It is computed before a period begins by dividing the period’s estimated total manufacturing overhead by the period’s estimated total amount of the allocation base.Thereafter, overhead is applied to jobs by multiplying the predetermined overhead rate by the actual amount of the allocation base that is incurred for ACH job. The most common allocation base is direct labor-hours. 3-AAA sales order is issued after an agreement has been reached with a customer on quantities, prices, and shipment dates for goods.

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The sales order forms the basis for the production order. The production order specifies what is to be produced and forms the basis for the job cost sheet.The job cost sheet, in turn, is used to summarize the various production costs incurred to complete the job. These costs are entered on the job cost sheet from materials requisition forms, direct labor time tickets, and by applying overhead. -some production costs such as a factory managers salary cannot be traced to a particular product or job, but rather are incurred as a result of overall production activities, In addition, some production costs such as indirect materials cannot be easily traced to jobs.If these costs are to be assigned to products, they must be allocated to the products. 3-off actual manufacturing overhead costs are applied to jobs, then the company must wait until the end of the accounting period to apply overhead and to cost jobs. A company may try to compute its actual overhead rate more frequently o get around this problem.

However, overhead cost tends to be incurred somewhat uniformly from month to month (due to the presence of fixed costs), whereas production activity often fluctuates.The result would be high overhead rates in periods With low activity and low overhead rates in periods with high activity. For these reasons, most companies use predetermined overhead rates to apply manufacturing overhead costs to jobs. 3-the measure Of activity used as the allocation base should drive the overhead cost; that is, the base should cause the overhead cost. Fifth allocation base does not cause the overhead, then costs will be incorrectly attributed to products and jobs and product costs will be distorted.

3-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, 3-10 Generally, the amount of overhead applied will not be the same as the mount of actual cost incurred, since the predetermined overhead rate is based on estimates. 3-11 Underplayed overhead occurs when the actual overhead cost exceeds the amount of overhead cost applied to jobs during the period.Oversupplied overhead Occurs when the actual overhead cost is less than the amount Of overhead cost applied to jobs during the period. Underplayed or oversupplied overhead is disposed Of by either closing out the amount to Cost Of Goods Sold or by allocating the amount among Cost of Goods Sold and ending inventories in proportion to the applied overhead in each account. The adjustment for underpinned overhead increases Cost of Goods Sold (and inventories) whereas the adjustment for oversupplied overhead decreases Cost of Goods Sold (and inventories).

-12 Manufacturing overhead may be Underplayed for a number of reasons including: (1) control over overhead spending may have been poor; (2) the estimate of the total manufacturing overhead at the beginning of the period may have been too low; and (3) the actual amount of the allocation base may have been less than estimated at the beginning of the period, 3-13 Underplayed overhead implies that not enough overhead was assigned to bobs during the period and therefore cost of goods sold was understated. Therefore, Underplayed overhead is added to cost of goods sold, Oversupplied overhead is deducted from cost of goods sold. -14 Yes, overhead should be applied to Job B at year-end. Since $6,000 of overhead was applied to Job A on the basis of $8,000 of direct labor cost, the company’s predetermined overhead rate must be 75% of direct labor cost. Thus, 53,000 of overhead should be applied to Job B at year-end: $4,000 direct labor cost ( 75% = $3,000 applied overhead cost. 3-15 I Direct material 12,000 | Manufacturing overhead | 15,000 | Iota manufacturing cost Direct labor I 125% 1537. 000 product cost | $37 1,000 units 3-16 A plantlike overhead rate is a single overhead rate used throughout all production departments in a plant.

Some companies use multiple overhead rates rather than plantlike rates to more appropriately allocate overhead costs among products. Multiple overhead rates should be used, for example, in situations where one department is machine-intensive and another department is labyrinthine. The overhead rate in the department that is more machine- intensive would rely on an allocation base like machine-hours whereas the overhead rate in the department that is more labor-intensive would rely on an allocation base like labor-hours. -17 When automated equipment replaces direct labor, overhead increases and direct labor decreases.

This results in an increase in the predetermined overhead rate-?particularly if it is based on direct labor _ 3-18 When the predetermined overhead rate is based on the amount Of the allocation base at capacity and the plant is operated at less than capacity, overhead Will ordinarily be Underplayed. This occurs because actual activity is less than the activity that the predetermined overhead rate is based on. -19 Critics of current practice advocate disclosing Underplayed overhead on the income statement as Cost of unused Capacity-?a period expense. This would highlight the amount rather than burying it in other accounts. Exercise 3-1 (10 minutes) a. Job-order costing b. Job-order costing process costing d.

Job-order costing _ Process costing* f. Process costing* g- Job-order costing h. Job-order costing i. Job-order costing j. Job-order costing k. Process costing l. Process costingSome of the listed companies might use either a process costing or a job-order costing system, depending on the nature of their operations and how homogeneous the final product is.

For example, a plywood manufacturer might use job-order costing if it has a number of different plywood products that are constructed of different woods or come in markedly different sizes. Exercise 3-3 (10 minutes) The predetermined overhead rate is computed as follows: I Estimated total manufacturing overhead $585,000 | 40,000 | $14. 65 Idles I per DAHL Estimated total direct labor hours (Dahl) I = Predetermined overhead rateExercise 3-5 (10 minutes) I Indirect materials ($84,000 – $72,000) I linter labor ($108,000 – I I Additional actual manufacturing overhead costs 1$ 12. 000 13,000 197,000 1212. 000 applied I Total actual manufacturing overhead cost incurred I Total manufacturing overhead | 218,000 manufacturing overhead Exercise 3-8 (IS minutes) lapidaries IS 6,000 l. There were no beginning or ending inventories, so all of the jobs were started, finished, and sold during the month. Therefore cost of goods sold equals the total manufacturing cost, We can verify that by computing the cost of goods sold as shown below:I Manufacturing costs charged to jobs: I Direct materials Direct labor (all variable) Manufacturing overhead applied 1 1($74 hour x 124 hours) Total manufacturing cost charged to jobs I Add: Beginning work in process inventory Ending work in process inventory Of goods manufactured I Beginning finished goods inventory I I Add: Cost of goods manufactured I I Goods available for sale I Deduct: Ending finished goods inventory I I Cost of goods sold IS 4,820 19,640 123, 636 9,176 23,636 I Deduct: I Cost | 523,636 | 23,636 $23,636 At the end tooth month, overhead was Underplayed by $1,694 as shown low: I Manufacturing overhead incurred 1$10,870 hours) Underplayed Manufacturing overhead applied ($74 hour x 124 | 9,176 I Overhead 1$ 1,694 Consequently, the income statement would appear as follows: I Sancta Cabinets Income Statement Sales of goods sold (see above) I Gross margin Underplayed manufacturing overhead I I Selling and administrative expenses 1 1 | I Net operating income 165,180 Exercise 3-8 (continued) | $39, 860 16,224 1$1,694 9,350 2.

When the predetermined overhead rate is based on capacity, overhead is ordinarily Underplayed because manufacturing overhead ordinarily contains significant amounts of fixed costs. Suppose, for example, that manufacturing overhead includes $9,000 of fixed costs and the capacity is 150 hours, Then the portion of the predetermined overhead rate that represents fixed costs is $9,000 divided by ISO hours or 560 per hour. Because the plant is seldom (if ever) operated beyond capacity, less than $9,000 will ordinarily be applied to jobs. In yields less than $9,000_ Therefore, overhead will ordinarily be Underplayed_ Exercise 3-13 (15 minutes) 1. Milling Department: [pica Assembly Department: 12.

I I I Milling Department: 90 OHMS x $8. 50 per MMI I Assembly Department: SSL 60 * 125% I Total overhead cost applied 5965 I Overhead Applied I | $765 3. Yes; if some jobs require a large amount of machine time and little labor cost, they would be charged substantially less overhead cost if a plantlike rate based on direct labor cost were used. It appears, for example, that this would be true of Job 407 which required considerable machine time to complete, but required only a small amount of labor cost, problem 3-15 (30 minutes) I. Research & Documents predetermined overhead rate: [pit] Litigation predetermined overhead rate: I Research & Documents overhead applied: hour applied: x overhead cost 3.Total cost of Case 618- 630 I Departments 18 hours x $35 per Litigation overhead ‘Total SIS,470 I Research & Doc .NET Litigation I I Materials and supplies Total | 2,100 so 1$ 80 2,510 840 Direct attorney cost I Airhead cost applied 410 1,470 I I Total cost 151,090 $4,060 problem 3-15 (continued) Department Research & Documents I Litigation ‘Departmental overhead cost incurred son,oho x ASS per hour SIS’S,oho x $300,000 Departmental overhead cost | 805,000 Underplayed (or oversupplied) overhead 10,000 Problem 3-16 (45 minutes) 123,000 hours | 290,000 I $ (35,000) 1. The actual manufacturing overhead costs incurred were as follows: I Reference 27,000 water Insurance Indirect materials I Indirect labor IF-actors heat, power, and 142 coo Factory depreciation ‘Total manufacturing overhead incurred | 51,000 IS 38,000 I Factory | $167,000 In contrast, $170,000 in manufacturing overhead cost was applied to jobs: Therefore, the overhead was oversupplied by $3,000.

I Manufacturing overhead applied 1(40. 000 OHMS $4. 25 per MM) Overhead oversupplied I$167,oho | 170,000 3,000 2.The cost of goods sold for the year (before adjustment for Underplayed or overlapped overhead) is total cost to manufacture the goods that were sold according to their job cost sheets.

The adjusted cost to goods sold is computed as follows Unadjusted cost of goods sold Deduct: Oversupplied overhead $472,000 I Cost of goods sold Reference 5 36,000 salaries I Advertising I Sales commissions Administrative 180,000 11,000 | 50,000 I Depreciation Total selling and administrative expense $176,000 Problem 3;16 (continued) I Ravages Company Year Ended December 31 I I Gross margin and administrative expense operating income | 228,000 | 176,000 I $ 52000 9,000 I For the I Sales | 472,000 Selling .NET