Chap 002

Chapter 2
Systems Design: Job-Order Costing

Solutions to Questions
2-1
By definition, overhead costs
cannot practically be traced to products or
jobs. Therefore, overhead costs must be
allocated rather than traced if they are to
be assigned to products or jobs.
2-2
Job-order costing is used where
many different products or services are
produced each period. Each product (or
job) is different from all others and
requires separate costing. Process costing
is used where a single, homogeneous
product, such as cement, bricks, or
gasoline, is continuously produced for long
periods.
2-3
The job cost sheet is used to record
all costs that are assigned to a particular
job. These costs include direct materials
and direct labor costs traced to the job
and manufacturing overhead cost applied
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
also 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.
2-4
A predetermined overhead rate is
used to apply overhead to jobs. It is
determined before a period begins and is
computed by dividing the estimated total
manufacturing overhead for the period by
the estimated total units in 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 each
job. The most common allocation base is

direct labor hours.
2-5
A sales order is issued after a firm
agreement has been reached with a
customer on matters relating to quantities,
prices, and shipment dates for goods. This
sales order is the basis for the production
department to issue a production order.
The production order summarizes the
specifications of the goods involved, and is
the basis for the accounting departments
preparation of a job cost sheet. The job
cost sheet, in turn, is used to summarize
the various production costs incurred in
completing the job. These costs are
entered on the job cost sheet from
materials requisition forms and direct
labor time tickets and from allocations of
overhead via the predetermined overhead
rate.
2-6
Many production costs cannot be
traced to a particular product or job, but
rather are incurred as a result of overall
production activities. Therefore, to be
assigned to products, such costs must be
allocated to the products. Examples of
such costs would include utilities,
maintenance on machines, and
depreciation of the factory building. These
costs are indirect production costs, as
explained in Chapter 1.
2-7
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 to wait until the period was over
to add overhead cost to jobs or to add
overhead cost to jobs as the overhead cost
was incurred day by day. If the manager
The McGraw-Hill Companies, Inc., 2005. All rights reserved.

Solutions Manual, Chapter 2
39
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 production activity
often fluctuates, resulting in changes in
average fixed costs, and some costssuch
as heating costsare subject to seasonal
influences. For these reasons, most
companies use predetermined overhead
rates to apply overhead cost to jobs.
2-8
An allocation base should be the
cost driver 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.
2-9
Assigning overhead costs to jobs
does not ensure that there will be a profit.
The units produced may not be sold and if
they are sold, they may not in fact 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 customersnot by allocating
costs.
2-10 The Manufacturing Overhead
account is credited when overhead cost is
applied to Work in Process. Generally, the
amount of overhead applied will not be the
same as the amount of actual cost
incurred, since the predetermined
overhead rate figure which is used in
applying overhead is based on estimates.
2-11 Underapplied overhead occurs
when the actual overhead cost exceeds
the amount of overhead cost applied to
Work in Process inventory during the
period. Overapplied overhead occurs when
the actual overhead cost is less than the
amount of overhead cost applied to Work
in Process inventory during the period. The
simplest way to dispose of the under- or
overapplied overhead is to close it out to
Cost of Goods Sold. The adjustment for
underapplied overhead increases Cost of
Goods Sold (and inventories) whereas the

adjustment for overapplied overhead
decreases Cost of Goods Sold (and
inventories).
2-12 Overhead may be underapplied for
a number of reasons. Poor control over
overhead spending can result in actual
overhead costs exceeding estimated
overhead costs. Also, if some of the
overhead is fixed and actual amount of the
allocation base for the period is less than
estimated at the beginning of the period,
overhead will be underapplied.
2-13 Underapplied overhead is added to
cost of goods sold since underapplied
overhead implies that not enough
overhead was assigned to jobs during the
period and therefore cost of goods sold is
understated. Likewise, overapplied
overhead is deducted from cost of goods
sold.
2-14 Yes, overhead should be applied so
as to properly value the Work in Process
inventory at year-end. Since $6,000 of
overhead was applied to Job A on the basis
of $8,000 of direct labor cost, the
companys predetermined overhead rate
must be 75% of direct labor cost. Thus,
$3,000 of overhead should be applied to
Job B at year-end: $4,000 direct labor cost
75% = $3,000 overhead costs applied.
2-15
$10,000
Direct material............................................
12,000
Direct labor.................................................
Manufacturing overhead:
15,000
$12,000 125%.....................................
$37,000
Total manufacturing cost............................
Unit product cost: $37,000
1,000 units..............................................
$37
2-16 A plantwide overhead rate is a
single overhead rate used throughout all
production departments. Some companies
use a different overhead rate in each
production department rather than a
single plantwide rate. In situations where
the cost driver for overhead cost differs
from one department to another, the
allocation base should also be different.

40
Introduction to Managerial Accounting, 2nd Edition
Hence, multiple overhead rates can result

in more accurate product costs.
2-17 When direct labor is replaced by
automated equipment, overhead increases
and direct labor decreases. If the

predetermined overhead rate is based on
direct labor, this results in an increase in
the predetermined overhead rate.

Solutions Manual, Chapter 2
41
Brief Exercise 2-1 (15 minutes)

a.
Job-order costing
b.
Job-order costing
c.
Process costing
d.
Job-order costing
e.
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 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 its products are constructed of different
woods or come in markedly different sizes.

1. These costs would have been recorded on four different
documents: the materials requisition form for Job ES34, the
time ticket for Harry Kerst, the time ticket for Mary Rosas, and
the job cost sheet for Job ES34.
2. The costs would have been recorded as follows:
Materials requisition form:
Quanti
Unit
ty
Cost
Blank
40
$8.00
s
Nibs
960
$0.60
Time ticket for Harry Kerst
Time
Starte
Complete
d
Ended
d
9:00
12:15
3.25
AM
PM
Time ticket for Mary Rosas
Time
Starte
Complete
d
Ended
d
2:15
4:30 PM
2.25
AM
Job Cost Sheet for Job ES34
Direct
$896.0
materials
0
Direct labor:
Harry Kerst
39.00
Mary Rosas
31.50
Total
Cost
$320
576
$896
Rate
$12.00
Rate
$14.00
Amount
$39.00
Job
Number
ES34
Amount
$31.50
Job
Number
ES34
$966.5
0

The predetermined overhead rate is computed as follows:
Estimated total manufacturing
$586,00
overhead..............................................................0
Estimated total direct labor hours
40,000 DLHs
(DLHs)...................................................................
= Predetermined overhead rate..............................
$14.65 per DLH

a.
b.
c.
d.
Raw Materials..........................
Accounts Payable..............
86,000
Work in Process.......................
Manufacturing Overhead.........
Raw Materials....................
72,000
12,000
Work in Process.......................
Wages Payable..................
105,000
3,000
Various Accounts...............
197,000
86,000
84,000
108,000
197,000

Actual direct labor-hours
Predetermined overhead rate
= Manufacturing overhead applied
12,600
$23.1
0
$291,06
0

1
.
Cost of Goods Manufactured

Direct materials:
Raw materials inventory, beginning......................
$24,00
0
Add: Purchases of raw materials...........................
53,00
0
Total raw materials available................................
77,00
0
Deduct: Raw materials, ending.............................
6,00
0
Raw materials used in production.........................
71,00
0
Less indirect materials included in
8,00
manufacturing overhead....................................0
Direct labor.............................................................
Manufacturing overhead applied to work
in process inventory..............................................
Total manufacturing costs.......................................
Add: Beginning work in process inventory...............
Deduct: Ending work in process inventory..............

Cost of goods manufactured...................................
2
.
Cost of Goods Sold

Finished goods inventory, beginning.......................
$ 86,00
0
Add: Cost of goods manufactured...........................
169,00
0
Goods available for sale..........................................
255,00
0
Deduct: Finished goods inventory,
93,00
$ 63,00
0
62,000
41,00
0
166,00
0
41,00
0
207,00
0
38,00
0
$169,00
0
ending..................................................................0
Unadjusted cost of goods sold.................................
162,00
0
Add: Underapplied overhead...................................
8,00
0
Adjusted cost of goods sold.....................................
$170,0
00

Parts 1 and 2.
Cash
75,000 (a)
152,000 (c)
126,000 (d)
(b)
(c)
(e)
Work in Process
67,000
134,000
178,000
379,000 379,000 (f)
Manufacturing Overhead
(b)
6,000 178,000 (e)
(c)
18,000
(d) 126,000
(g)
28,000
28,000
(a)
(f)
Raw Materials
75,000
73,000 (b)
Finished Goods
379,000
379,000 379,000 (f)
Cost of Goods Sold

(f) 379,000
28,000 (g)
351,000

1 Actual direct labor-hours.........................................
8,250
.
Predetermined overhead rate..............................
$21.4
0
= Manufacturing overhead applied.........................
$176,55
0
Less: Manufacturing overhead
172,50
incurred................................................................
0
$ 4,05
0
Manufacturing overhead
$4,050
overapplied...........................................................
2. Since manufacturing overhead is overapplied, the cost of goods
sold would be decreased by $4,050 and the gross margin would
increase by $4,050.
Exercise 2-9 (30 minutes)

1. Since $320,000 of studio overhead cost was applied to Work in
Process on the basis of $200,000 of direct staff costs, the
apparent predetermined overhead rate is 160%:
Studio overhead applied
$320,000
=
Total amount of the allocation base $200,000 direct staff costs
=160% of direct staff costs
2. The Krimmer Corporation Headquarters project is the only job
remaining in Work in Process at the end of the month;
therefore, the entire $40,000 balance in the Work in Process
account at that point must apply to it. Recognizing that the
predetermined overhead rate is 160% of direct staff costs, the
following computation can be made:
Total cost added to the Krimmer
Corporation Headquarters
project
Less: Direct staff costs
Studio overhead cost
($13,500 160%)
Costs of subcontracted work
$13,50
0
21,600
$40,000
35,100
$4,900
With this information, we can now complete the job cost sheet
for the Krimmer Corporation Headquarters project:
Costs of subcontracted work
Direct staff costs
Studio overhead
Total cost to January 31
$ 4,900
13,500
21,600
$40,00
0

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:
Predetermined= Estimated total manufacturing overhead cost
overhead rate Estimated total amount of the allocation base
=
$840,000
200,000 units
=$4.20 per unit.

The predetermined overhead rate could also be set on the
basis of either direct labor cost or direct materials cost. The
computations are:
=
$840,000
$240,000 direct labor cost
=350% of direct labor cost.

=
$840,000
$600,000 direct materials cost
=140% of direct materials cost.
Exercise 2-10 (continued)

2. Using a predetermined overhead rate, the unit costs would be:
Direct materials
Direct labor
Manufacturing
overhead:
Applied at $4.20 per
unit, 350% of direct
labor cost, or 140% of
direct materials cost
Total cost
Number of units
produced
Estimated unit product
cost
Quarter
First
Second
Third
Fourth
$240,00 $120,00
$ $180,00
0
0 60,000
0
96,000 48,000 24,000 72,000
336,000 168,000 84,000 252,000

$672,00 $336,00 $168,00 $504,00
0
0
0
0
80,000
40,000
20,000
60,000
$8.40
$8.40
$8.40
$8.40

210,00
1. a. Raw Materials Inventory..........................................
0
Accounts Payable..................................................210,000
152,00
b. Work in Process.......................................................
0
Manufacturing Overhead.........................................
38,000
Raw Materials Inventory.......................................190,000
c. Work in Process.......................................................
49,000
21,000
Salaries and Wages Payable.................................. 70,000
105,00
d. Manufacturing Overhead.........................................
0
Accumulated Depreciation....................................105,000
130,00
e. Manufacturing Overhead.........................................
0
Accounts Payable..................................................130,000
300,00
f. Work in Process.......................................................
0
Manufacturing Overhead......................................300,000
75,000 machine-hours $4 per machine-hour =
$300,000.
510,00
g. Finished Goods........................................................
0
Work in Process.....................................................510,000
450,00
h. Cost of Goods Sold..................................................
0
Finished Goods......................................................450,000
675,00
Accounts Receivable...............................................
0
Sales.....................................................................675,000
$450,000 1.5 = $675,000
2. Manufacturing Overhead
Work in Process
(b) 38,000 300,00 (f) Bal. 35,000 510,00 (g)
0
0
(c) 21,000
(b) 152,00
(d)
(e)
105,00
0
130,00
0
(c)
(f)
6,000
(Overapplie
d overhead)
0
49,000
300,00
0
Bal. 26,000

$
1. Actual manufacturing overhead costs..................... 48,000
Manufacturing overhead applied:
10,000 MH $5 per MH....................................... 50,000
Overapplied overhead cost.....................................$2,000
2. Direct materials:
$8,000
Add purchases of raw materials............................
32,000
Raw materials available for use............................
40,000
Deduct raw materials inventory,
ending................................................................
7,000
$
Raw materials used in production......................... 33,000
Direct labor............................................................. 40,000
Manufacturing overhead cost applied to
work in process..................................................... 50,000
Total manufacturing cost.........................................123,000
Add: Work in process, beginning............................. 6,000
129,000
Deduct: Work in process, ending............................. 7,500
$121,50
0

1. Predetermined overhead rates:
Company A:
=
$432,000
=$7.20 per DLH
60,000 DLHs
Company B:
=
$270,000
=$3.00 per MH
90,000 MHs
Company C:
=
$384,000
=160% of materials cost
$240,000 materials cost
2. Actual overhead costs incurred...............................

$420,000
Overhead cost applied to Work in Process:
58,000* actual hours $7.20 per hour.................
417,600
Underapplied overhead cost....................................
$2,400
*7,000 hours + 30,000 hours + 21,000 hours = 58,000 hours

1.
Item Actual manufacturing overhead costs for the

(a): year.
Item Overhead cost applied to work in process for
(b): the year.
Item
(c): Cost of goods manufactured for the year.
Item
(d): Cost of goods sold for the year.
2. Manufacturing Overhead.........................................
30,000
30,00
Cost of Goods Sold.............................................
0

315,00
0
1. a. Raw Materials
Accounts Payable
216,00
0
54,000
b. Work in Process
Raw Materials
c. Work in Process
315,000
270,000
80,000
110,00
0
Wages and Salaries
Payable
190,000
d. Manufacturing Overhead
Accumulated Depreciation
63,000
63,000
e. Manufacturing Overhead
Accounts Payable
85,000
85,000
300,00
0
f. Work in Process
300,000
=
$4,320,000
=$7.50 per machine-hour
576,000 machine-hours
40,000 MHs $7.50 per MH = $300,000.

2. Manufacturing Overhead
(b) 54,000 300,00 (f)
0
(c) 110,00
0
(d) 63,000
Work in Process
(b) 216,00
0
(c) 80,000
(f)
300,00
0
(e)
85,000
Exercise 2-15 (continued)

3. The cost of the completed job would be $596,000 as shown in
the Work in Process T-account above. The entry for item (g)
would be:
Finished Goods
Work in Process
596,000
596,000
The unit product cost on the job cost sheet would be:
$596,000 8,000 units = $74.50 per unit.
Problem 2-16 (30 minutes)

1. Cutting Department:
Estimated overhead cost
$260,000
=
= $4.00 per MH
Estimated machine-hours 65,000 MHs
Finishing Department:
Estimated overhead cost $705,600 120% of direct
=
=
Estimated direct labor cost $588,000 labor cost
2.
Overhead
Applied
Cutting Department: 110 MHs $4.00 per

MH........................................................................
$440
Finishing Department: $450 120%.......................
540
Total overhead cost applied.....................................
$980
3. 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 AF-45 which required considerable machine time to
complete, but required only a small amount of labor cost.

Estimated manufacturing overhead cost
$248,000
=
= $4.00 per MH
1
Estimated machine-hours
62,000 MHs
.
2. The amount of overhead cost applied to Work in Process for the
year would be: 56,000 machine-hours $4.00 per machinehour = $224,000. This amount is shown in entry (a) below:
(Maintenance)
(Indirect
materials)
(Indirect labor)
(Utilities)
(Insurance)
(Depreciation)
Balance
Manufacturing
Overhead
21,500 224,000
(a)
15,000
76,000
45,000
12,000
68,000
13,500
Work in Process
(Direct
materials)
(Direct labor)
(Overhead) (a)
650,000
67,000
224,000
3. Overhead is underapplied by $13,500 for the year, as shown in

the Manufacturing Overhead account above. The entry to close
out this balance to Cost of Goods Sold would be:
Cost of Goods Sold..................................................
13,500
Manufacturing Overhead....................................
13,500
Problem 2-17 (continued)

4. When overhead is applied using a predetermined rate based on
machine-hours, it is assumed that overhead cost is proportional
to machine-hours. So when the actual machine-hours turn out
to be 56,000, the costing system assumes that the overhead
will be 56,000 machine-hours $4.00, or $224,000. This is a
decrease of $24,000 from the initial estimated manufacturing
overhead cost of $248,000. However, the actual manufacturing
overhead did not decrease by this much. The actual
manufacturing overhead was $237,500a decrease of $10,500
from the estimate. The manufacturing overhead did not decline
by the full $24,000 because of the existence of fixed costs
and/or because overhead spending was not under control.
These issues will be covered in more detail in later chapters.

1.
Alpha
30
$74
Designer-hours
Predetermined overhead rate
applied
2.
Direct materials
Direct labor
Overhead applied
Total cost
Gamm
Beta
a
55
15
$74 $74
$2,220 $4,070 $1,110
Alpha
Beta
$ 3,300 $ 5,400
5,100
7,000
2,220
4,070
$10,620 $16,470
Completed Projects*
Work in Process
27,090
27,090
* $10,620 + $16,470 = $27,090

3. The balance in the Work in Process account will consist entirely
of the costs associated with the Gamma project:
Direct materials
Direct labor
Overhead applied
Total cost in work in
process
$ 600
1,500
1,110
$3,210
4. The balance in the Overhead account can be determined as

follows:
Actual overhead
costs
Underapplied
overhead
Overhead
7,900
7,400
Applied overhead
costs
500
As indicated above, the debit balance in the Overhead account

is called underapplied overhead.

1. a. Raw Materials..........................................................
400,000
Cash...................................................................
400,000
b. Work in Process.......................................................
350,000
79,000
Raw Materials.....................................................
429,000
c. Work in Process.......................................................
375,000
110,000
Sales Commissions Expense...................................
95,000
Salaries Expense.....................................................
80,000
Cash...................................................................
660,000
d. Manufacturing Overhead.........................................
35,000
Rent Expense..........................................................
17,000
Cash...................................................................
52,000
e. Manufacturing Overhead.........................................
98,000
Cash...................................................................
98,000
f. Advertising Expense................................................
150,000
Cash...................................................................
150,000
g. Manufacturing Overhead.........................................
183,000
Depreciation Expense.............................................
20,000
Accumulated Depreciation..................................
203,000
h. Work in Process.......................................................
487,500
487,500
Estimated manufacturing
overhead cost
$481,000
=
= 130% of direct labor cost.
Estimated direct labor cost $370,000
$375,000 actual direct labor cost 130% = $487,500.

i. Finished Goods........................................................
1,230,000
Work in Process..................................................
1,230,000
j. Cash........................................................................
1,850,000
Sales..................................................................
1,850,000
1,250,000
Finished Goods...................................................
1,250,000
2.
Bal
.
(a)
Bal
.
Bal
.
(i)
Bal
.
(j)
Raw Materials
35,000
400,000
429,000
(b)
6,000
Finished Goods
65,000 1,250,00
0
1,230,00
0
45,000
Bal
.
(b)
(c)
(h)
Bal
.
(j)
Work in Process
1,230,00
25,000
0
350,000
(i)
375,000
487,500
7,500
(b)
79,000 487,500 (h)
(c)
110,000
(d)
35,000
(e)
(g)
Bal
.
98,000
183,000
17,500
Cost of Goods Sold

1,250,00
0
3. Manufacturing overhead is underapplied by $17,500 for the

year. The entry to close this balance to Cost of Goods Sold
would be:

17,500
17,50
0

4.
Productos Elina S.A.

Income Statement
Sales
Less cost of goods sold
($1,250,000 + $17,500)
Gross margin
Less selling and administrative expenses:
Sales commissions
$ 95,000
Administrative salaries
80,000
Rent expense
17,000
Advertising expense
150,000
Depreciation expense
20,000
Net operating income
$1,850,000
1,267,500
582,500
362,000
$ 220,500

1. The cost of raw materials put into production would be:
Raw materials inventory, 1/1...................................
$50,000
Debits (purchases of materials)...............................
350,000
Materials available for use......................................
400,000
Raw materials inventory, 12/31...............................
40,000
Materials requisitioned for production.....................
$360,000
2. Of the $360,000 in materials requisitioned for production,
$310,000 was taken into Work in Process as direct materials.
Therefore, the difference of $50,000 would have been debited
to Manufacturing Overhead as indirect materials.
3. Total factory wages accrued during the year
(credits to the Factory Wages Payable
account)...............................................................
$520,000
Less direct labor cost (from Work in Process)..........
500,000
Indirect labor cost...................................................
$20,000
4. The cost of goods manufactured would have been $1,600,000
the credits to the Work in Process account.
5. The Cost of Goods Sold for the year would have been:
Finished goods inventory, 1/1
Add: Cost of goods manufactured
(from Work in Process)
Goods available for sale
Finished goods inventory, 12/31
Cost of goods sold
$ 100,00
0
1,600,000
1,700,000
200,000
$1,500,00
0
6. The predetermined overhead rate would have been:

Manufacturing overhead cost applied $750,000 150% of direct
=
=
Direct labor cost
$500,000 labor cost.

7. Manufacturing overhead would have been underapplied by
$15,000, computed as follows:
Actual manufacturing overhead cost for the
year (debits).........................................................
$765,000
Applied manufacturing overhead cost (from
Work in Processthis would have been the
credits to the Manufacturing Overhead
account)...............................................................
750,000
Underapplied overhead...........................................
$ 15,000
8. The ending balance in Work in Process is $60,000. Direct
materials make up $10,000 of this balance, and manufacturing
overhead makes up $30,000. The computations are:
Balance, Work in Process, 12/31..............................$60,000
Less: Direct labor cost (given)................................. 20,000
Manufacturing overhead cost ($20,000
150%)........................................................... 30,000
Direct materials cost (remainder)............................$10,000

1. a.

$360,000
=
= 125%
Estimated direct materials used $288,000
b. Before the under- or overapplied overhead can be computed,

we must determine the amount of direct materials used in
production for the year.
Raw materials inventory, beginning........................
$ 4,000
Add, Purchases of raw materials.............................
450,000
Raw materials available..........................................
454,000
Deduct: Raw materials inventory,
ending..................................................................
39,000
Raw materials used in production...........................
$415,000
Since no indirect materials are identified in the problem,
these would all be direct materials. With this figure, we can
proceed as follows:
Actual manufacturing overhead costs:
Indirect labor........................................................
$145,000
Property taxes.......................................................
10,000
Depreciation of equipment...................................
190,000
Maintenance.........................................................
60,000
Insurance..............................................................
4,250
Rent, building........................................................
94,000
Total actual costs.....................................................
503,250
Applied manufacturing overhead costs:
$415,000 125%.................................................
518,750
$ (15,500
Overapplied Overhead............................................)

2.
Timeless Products
Schedule of Cost of Goods Manufactured
Direct materials:
$ 4,000
Add purchases of raw materials............................
450,000
Total raw materials available................................
454,000
Deduct raw materials inventory,
ending................................................................
39,000
Raw materials used in production...........................
$ 415,000
Direct labor.............................................................
65,000
Manufacturing overhead applied to
work in process..................................................... 518,750
Total manufacturing costs....................................... 998,750
Add: Work in process, beginning............................. 100,000
1,098,750
Deduct: Work in process, ending.............................
45,000
$1,053,750
3. Cost of goods sold:

Finished goods inventory, beginning.....................
$ 300,000
Add cost of goods manufactured..........................
1,053,750
Goods available for sale........................................
1,353,750
Deduct finished goods inventory,
ending................................................................
280,000
$1,073,75
Cost of goods sold................................................ 0
4. Direct materials.......................................................
$4,000
Direct labor.............................................................
1,500
Overhead applied ($4,000 125%)........................
5,000
Total job cost...........................................................
$10,500
$10,500 112% = $11,760 price to the customer.

5. The amount of overhead cost in Work in Process would be:
$18,000 direct materials cost 125% = $22,500.
The amount of direct labor cost in Work in Process would be:
Total ending work in process
Deduct: Direct materials
Manufacturing
overhead
Direct labor cost
$18,00
0
$45,00
0
22,500 40,500
$ 4,500
The completed schedule of costs in Work in Process would be:

Direct materials
Direct labor
Total work in process
$18,000
4,500
22,500
$45,000

1. Molding Department predetermined overhead rate:
$324,000
=
= $5.40 per
Estimated machine-hours 60,000 MHs machine-hour
Painting Department predetermined overhead rate:
Estimated overhead cost $952,000 160% of direct
=
=
Estimated direct labor cost $595,000 labor cost
2. Molding Department overhead applied:
250 machine-hours $5.40 per machinehour....................................................................
$1,350
Painting Department overhead applied:
$1,840 direct labor cost 160%..........................
2,944
Total overhead cost.................................................
$4,294
3. Total cost of job 435:
Direct materials
Direct labor
applied
Total cost
Department
Paintin
Molding
g
Total
$ 700 $ 105 $ 805
150
1,840 1,990
1,350
$2,200
2,944 4,294
$4,889 $7,089
Cost per unit for job 435:

Total cost, $7,089
= $236.30 per unit
30 units
4.
Department
Molding Painting
Manufacturing overhead incurred...........................
$320,000 $970,000
Manufacturing overhead applied:
62,000 machine-hours $5.40
per machine-hour...............................................
334,800
$602,000 direct labor cost 160%.......................963,200
Underapplied (or overapplied)
$(14,800) $ 6,800
overhead..............................................................

1. and 2.
Bal
.
(l)
Bal
.
Bal
.
(a)
Bal
.
Bal
.
(b)
(f)
(i)
Bal
.
Cash
5,280
182,000
(m)
190,000
13,280
Raw Materials
7,000
29,600
(b)
31,000
Bal
.
Bal
.
Prepaid Insurance
3,120
2,300
(l)
(g)
820
8,400
Work in Process
15,600
104,000
23,680
35,100
Finished Goods
(j)
46,400
16,780
Plant and Equipment
Bal
.
Accounts Receivable
Bal
13,000
.
190,000
(k)
195,000
Bal
18,000
.
163,000
(b)
5,920
46,400 * (i)
(c)
15,000
(d)
23,800
Bal
.
(j)
Bal
.
25,000
104,000
101,400
(k)
27,600
Bal
41,000
.
28,000 (d)
69,000 Bal
.
Depreciation Expense
(d)
4,200
(f)
(g)
Bal
.
7,800
1,725
7,845
7,845
(n)
(g)
Insurance Expense
575
*5,800 MH $8 per MH = $46,400.

(e)
Advertising Expense
37,000
Miscellaneous Expense
(h)
7,500
(f)
(k)
(n)
Bal
.
Administrative Salaries
Expense
23,400
Sales
Cost of Goods Sold
Accounts Payable
117,000
29,000
195,000
(m)
101,400
7,845
(k)
31,000
15,000
109,245
37,000
7,500
2,500
Bal
.
(a)
(c)
(e)
(h)
Bal
.
Salaries & Wages Payable

(m)
65,000
66,300
(f)
1,300 Bal.
Capital Stock
124,000
Retained Earnings
Bal.
38,000
3. Overhead is underapplied. Entry (n) above records the closing

of this underapplied overhead balance to Cost of Goods Sold.
4.
Kleinman Company
Income Statement
For the Year Ended June 30
Sales.......................................................................$195,000
Less cost of goods sold ($101,400 +
$7,845)................................................................. 109,245
Gross margin........................................................... 85,755
Less selling and administrative
expenses:
$
Depreciation expense...........................................
4,200
Advertising expense.............................................
37,000
Bal
.
Administrative salaries expense...........................

23,400
Insurance expense................................................
575
Miscellaneous expense.........................................
7,500
72,675
Net operating income.............................................. $ 13,080

1. a. Raw Materials
Accounts Payable
b. Work in Process
Raw Materials
c. Work in Process
Salaries Expense
Salaries and Wages
Payable
d. Manufacturing Overhead
Accounts Payable
e. Advertising Expense
Accounts Payable
f. Manufacturing Overhead
Insurance Expense
Prepaid Insurance
g. Manufacturing Overhead
273,000
273,000
240,000
80,000
320,000
370,000
100,000
85,000
555,000
107,000
107,000
168,000
168,000
40,850
2,150
43,000
224,000
56,000
280,000
h. Work in Process
555,000
555,000
$370,000 actual direct labor cost 150% = $555,000

overhead applied.
i. Finished Goods
1,170,00
0
1,170,00
0
Work in Process
j. Accounts Receivable
1,560,00
0
1,560,00
0
Sales
Cost of Goods Sold
1,190,00
0
Finished Goods
1,190,00
0

2.
Raw Materials
Bal.
(a)
Bal.
Bal.
(b)
(c)
(h)
Bal.
(j)
Finished Goods
1,190,00
53,000 320,000 (b) Bal.
81,000
0
1,170,00
273,000
(i)
0
6,000
Bal.
61,000
Work in Process
1,170,00
33,400
0 (i) (b)
240,000
(c)
370,000
(d)
555,000
(f)
28,400
(g)
(j)
Manufacturing
Overhead
80,000 555,000 (h)
100,000
107,000
40,850
224,000
Bal
3,150
.
Cost of Goods Sold

1,190,00
0
3. Overhead overapplied by $3,150 for the year. The entry to

close this balance to Cost of Goods Sold would be:
Cost of Goods Sold
4.
3,150
3,150
Basin Products
Income Statement
For the Year Ended December 31
Sales.......................................................................
Less Cost of Goods Sold ($1,190,000
$3,150).................................................................
Gross margin...........................................................
Less selling and administrative expenses:
$1,560,00
0
1,186,850
373,150
$ 85,00
Salaries expense...................................................0
168,000
2,150
56,000
311,150
Net operating income.............................................. $ 62,000

1. and 2.
Bal
.
(l)
Bal
.
Bal
.
(a)
Bal
.
Bal
.
(b)
(f)
(i)
Bal
.
Cash
22,000
274,50
0
290,000
37,500
Raw Materials
10,500
50,000
(m)
(b)
64,700
(b)
(c)
(d)
Bal
.
Bal
.
Prepaid Insurance
3,100
2,500
(l)
(g)
600
25,200
Videos in Process
17,200
174,00
0
40,000
28,700
Finished Goods
(j)
91,440
3,340
Studio and Equipment
Bal
.
Accounts Receivable
Bal
35,700
.
290,000
(k)
323,000
Bal
68,700
.
40,000
174,000
210,000
(k)
4,000
Bal
73,500
.
30,000 (d)
103,500 Bal
.
256,000
Studio Overhead
10,000
91,440
16,000
25,500
Bal
.
(j)
Bal
.
* (i)
(d)
4,500
(f)
(g)
(n)
37,000
1,750
1,190
1,190
Bal.
(g)
Insurance Expense
750
* $90,000 2,500 hours = $36 per hour;

2,540 hrs. $36 per hr. = $91,440.
(e)
Advertising Expense
45,000
Miscellaneous Expense
(h)
2,900

Administrative Salaries
Expense
(f)
35,000
Sales
323,000
Cost of Goods Sold

(k)
Bal
.
210,000
1,190
(n)
(m)
Accounts Payable
175,000
56,000
64,700
16,000
208,810
45,000
2,900
9,600
(k)
Bal
.
(a)
(c)
(e)
(h)
Bal
.
Salaries & Wages Payable

(m)
100,70
(f)
99,500
0
1,200 Bal.
Capital Stock
160,50
0
Retained Earnings
Bal.
94,500
Bal
.
3. Overhead is overapplied for the year. Entry (n) above records

the closing of this overapplied overhead balance to Cost of
Goods Sold.
4.
Videoland Corp.
Income Statement
For the Year Ended June 30
Sales of videos........................................................$323,000
Less cost of goods sold ($210,000
$1,190)................................................................. 208,810
Gross margin........................................................... 114,190
Less selling and administrative
expenses:
$ 4,500
45,000
Administrative salaries.........................................
35,000
750
Miscellaneous expense.........................................
2,900
88,150
Net operating income..............................................$ 26,040
Analytical Thinking (75 minutes)

1. The revised predetermined overhead rate is determined as
follows:
Original estimated total manufacturing
$2,475,00
overhead..............................................................
0
Plus: Lease cost of the new machine.......................
300,000
45,00
Plus: Cost of new technician/programmer...............
0
$2,820,00
Estimated total manufacturing overhead................
0
Original estimated total direct labor-hours..............
52,000
Less: Estimated reduction in direct laborhours....................................................................6,000
Estimated total direct labor-hours...........................
46,000
Predetetermined= Estimated total manufacturing overhead
=
$2,820,000
46,000 DLHs
=$61.30 per DLH

The revised predetermined overhead rate is higher than the
original rate because the automated milling machine will
increase the overhead for the year (the numerator in the rate)
and will decrease the direct labor-hours (the denominator in the
rate). This double-whammy effect increases the predetermined
overhead rate.
2. Acquisition of the automated milling machine will increase the
apparent costs of all jobsnot just those that use the new
facility. This is because the company uses a plantwide
overhead rate. If there were a different overhead rate for each
department, this would not happen.
3. The predetermined overhead rate is now considerably higher
than it was. This will penalize products that continue to use the
same amount of direct labor-hours. Such products will now
appear to be less profitable and the managers of these

products will appear to be doing a poorer job. There may be
pressure to increase the prices of these products even though
there has in fact been no increase in their real costs.
Analytical Thinking (continued)

4. While it may have been a good idea to acquire the new
equipment because of its greater capabilities, the calculations
of the cost savings were in error. The original calculations
implicitly assumed that overhead would decrease because of
the reduction in direct labor-hours. In reality, the overhead
increased because of the additional costs of the new
equipment. A differential cost analysis would reveal that the
automated equipment would increase total cost by about
$285,000 a year if the labor reduction is only 2,000 hours.
Cost consequences of leasing the automated equipment:
Increase in manufacturing overhead cost:
$300,00
Lease cost of the new machine..........................
0
Cost of new technician/programmer................... 45,000
345,000
Less: labor cost savings (2,000 hours $30 per
hour).................................................................. 60,000
$285,00
Net increase in annual costs.................................
0
Even if the entire 6,000-hour reduction in direct labor-hours
occurred, that would have added only $120,000 (4,000 hours
$30 per hour) in cost savings. The net increase in annual costs
would have been $165,000 and the machine would still be an
unattractive proposal. The entire 6,000-hour reduction may
ultimately be realized as workers retire or quit. However, this is
by no means automatic.
There are two morals to this tale. First, predetermined
overhead rates should not be misinterpreted as variable costs.
They are not. Second, a reduction in direct labor requirements
does not necessarily lead to a reduction in direct labor hours
paid. It is often very difficult to actually reduce the direct labor
force and may be virtually impossible in some companies
except through natural attrition.
Communicating in Practice
Date:
To:
From:
Subject:
Current date
Instructor
Students Name
Talk with a Controller
The students memorandum should address the following:

The name, title and job affiliation of the individual interviewed.
(Note: Not specifically required in problem but essential and, as
such, a good topic for class discussion, if appropriate.)
A list of the companys main products.
Identification of the type of costing system in use (job order,
process or other).
Brief description of how overhead is assigned to products
(including basis for allocation and whether more than one
overhead rate is in use).
Indication as to whether any changes have been made to or
are being considered in relation to the companys costing
system, and, if applicable, a brief description of the changes.
Ethics Challenge (60 minutes)

1. Shaving 5% off the estimated direct labor-hours in the
predetermined overhead rate will result in an artificially high
overhead rate. The artificially high predetermined overhead
rate is likely to result in overapplied overhead for the year. The
cumulative effect of overapplying the overhead throughout the
year is all recognized in December when the balance in the
Manufacturing Overhead account is closed out to Cost of Goods
Sold. If the balance were closed out every month or every
quarter, this effect would be dissipated over the course of the
year.
2. This question may generate lively debate. Where should Cristin
Madsens loyalties lie? Is she working for the general manager
of the division or for the corporate controller? Is there anything
wrong with the Christmas bonus? How far should Cristin go in
bucking her boss on a new job?
While individuals can certainly disagree about what Cristin
should do, some of the facts are indisputable. First, the practice
of understating direct labor-hours results in artificially inflating
the overhead rate. This has the effect of inflating the cost of
goods sold figures in all months prior to December and
overstating the costs of inventories. In December, the
adjustment for overapplied overhead provides a big boost to
net operating income. Therefore, the practice results in
distortions in the pattern of net income over the year. In
addition, since all of the adjustment is taken to Cost of Goods
Sold, inventories are still overstated at year-end. This means
that retained earnings is also overstated.
While Cristin is in an extremely difficult position, her
responsibilities under the IMAs Standards of Ethical Conduct
for Management Accountants seem to be clear. The Objectivity
Standard states that management accountants have a
responsibility to disclose fully all relevant information that
could reasonably be expected to influence an intended users
understanding of the reports, comments, and
recommendations presented. Cristin should discuss this
situation with her immediate supervisor in the controllers
office at corporate headquarters. This step may bring her into

direct conflict with the general manager of the division, so it
would be a very difficult decision for her to make.
Ethics Challenge (continued)

In the actual situation that this case is based on, the corporate
controllers staff were aware of the general managers
accounting tricks, but top management of the company
supported the general manager because he comes through
with the results and could be relied on to hit the annual profit
targets for his division. Personally, we would be very
uncomfortable supporting a manager who will resort to
deliberate distortions to achieve results. If the manager will
pull tricks in this area, what else might he be doing that is
questionable or even perhaps illegal?
Teamwork In Action
1. The types of transactions that are posted to the accounts may
be summarized in T-account form as follows:
Raw Materials
Beginning balance
Purchases
Direct materials used (to

Work in Process)
Accounts Payable
Beginning balance
Payments to suppliers
Purchases of raw materials
Work in Process
Beginning balance
Direct materials used (from
Raw Materials)
Direct labor
applied
Cost of goods manufactured

(to Finished Goods)
Actual manufacturing costs
applied
Overhead overapplied (to
Overhead underapplied (to
COGS)
COGS)
Finished Goods
Beginning balance
Cost of goods manufactured
(from WIP)
Cost of goods sold
Cost of Goods Sold

Cost of goods sold
Overhead underapplied (from
Manufacturing Overhead)
Overhead overapplied (from

Manufacturing Overhead)
Teamwork In Action (continued)

2. The predetermined overhead rate and overhead applied
amounts are:
Predetermined overhead rate:
$180,000 60,000 DLHs = $3 per DLH.
Overhead applied:
5,200 DLHs $3 per DLH = $15,600
3. The balance in the work in process account is determined as
follows:
Direct materials (given)...........................................
$2,60
0
Direct labor (300 DLHs $6 per DLH).....................
1,800
Overhead applied (300 DLHs $3 per
90
DLH).....................................................................
0
Total........................................................................
$5,30
0
4. The completed T-accounts follow:
(c)
Payments
(given) Balance 4/1

(b,d)
Direct labor*
(above Overhead
applied
)
(plug) Direct
materials
(above Balance 4/30
)
Accounts Payable
40,00 6,000 Balance 4/1
0
42,00 Purchases
0
8,000 Balance 4/30
Work in Process
4,500 89,00 Cost of goods
0 manufactured
31,20
0
15,60
0
43,00
0
5,300
* 5,200 DLHs $6 per DLH = $31,200
(c)
(plug)
(given)
(f)
(given) Balance 4/1

(above Purchases
)
Balance 4/30
Raw Materials
12,00 43,00 Direct
0
0 materials
42,00
0
11,00
0
(above
)
Teamwork In Action (continued)

14,80 15,60 Overhead
(given Actual costs
for April
0
0 applied
)
To cost of
800
800 Overapplied
goods sold
overhead
(e)
Balance 4/1
Cost of goods
manufactured
(given) Balance 4/30
(f)
Finished Goods
11,00 84,00 Cost of goods
0
0 sold
89,00
0
16,00
0
Cost of Goods Sold

84,00
800 Overapplied
(above Cost of goods
sold
0
overhead
)
83,20
0
(above
)
(plug)
(above
)

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Chapter 2

Systems Design: Job-Order Costing

job. The most common allocation base is

The McGraw-Hill Companies, Inc., 2005. All rights reserved.

waits until after the period is over to add

Goods Sold (and inventories) whereas the

The McGraw-Hill Companies, Inc., 2005. All rights reserved.

Introduction to Managerial Accounting, 2nd Edition

Hence, multiple overhead rates can result

and direct labor decreases. If the

The McGraw-Hill Companies, Inc., 2005. All rights reserved.

Brief Exercise 2-1 (15 minutes)

* Some of the listed companies might use either a process

Brief Exercise 2-2 (15 minutes)

Brief Exercise 2-3 (10 minutes)

Brief Exercise 2-4 (15 minutes)

Brief Exercise 2-5 (10 minutes)

Brief Exercise 2-6 (30 minutes)

Cost of Goods Manufactured

Deduct: Ending work in process inventory..............

Cost of Goods Sold

Brief Exercise 2-7 (30 minutes)

Cost of Goods Sold

Brief Exercise 2-8 (15 minutes)

Exercise 2-9 (30 minutes)

Exercise 2-10 (30 minutes)

=$4.20 per unit.

=350% of direct labor cost.

=140% of direct materials cost.

Exercise 2-10 (continued)

336,000 168,000 84,000 252,000

Exercise 2-11 (30 minutes)

Exercise 2-12 (30 minutes)

Exercise 2-13 (20 minutes)

2. Actual overhead costs incurred...............................

Exercise 2-14 (20 minutes)

Item Actual manufacturing overhead costs for the

Exercise 2-15 (45 minutes)

40,000 MHs $7.50 per MH = $300,000.

Exercise 2-15 (continued)

Problem 2-16 (30 minutes)

Cutting Department: 110 MHs $4.00 per

3. Yes; if some jobs required a large amount of machine time and

Problem 2-17 (45 minutes)

3. Overhead is underapplied by $13,500 for the year, as shown in

Problem 2-17 (continued)

Problem 2-18 (45 minutes)

$2,220 $4,070 $1,110

* $10,620 + $16,470 = $27,090

4. The balance in the Overhead account can be determined as

As indicated above, the debit balance in the Overhead account

Problem 2-19 (75 minutes)

Problem 2-19 (continued)

Cost of Goods Sold

3. Manufacturing overhead is underapplied by $17,500 for the

Cost of Goods Sold..................................................

Problem 2-19 (continued)