CHAPTER 18Introduction to MANAGERIAL ACCOUNTING and Job Order Cost Systems

CHAPTER 18 INTRODUCTION TO MANAGERIAL ACCOUNTING AND JOB ORDER COST SYSTEMS

EXERCISES

Ex. 18–1 a. factory overhead e. direct labor b. factory overhead f. direct materials c. direct labor g. factory overhead d. direct materials h. factory overhead

Ex. 18–2 a. factory overhead f. direct materials b. direct labor g. direct labor c. factory overhead h. direct materials d. direct materials i. factory overhead e. factory overhead j. factory overhead

Ex. 18–3 a, c, g, i, j

Ex. 18–4 a. Period i. Product b. Product j. Product c. Product k. Product d. Period l. Period e. Period m. Period f. Period n. Period g. Product o. Product h. Product p. Product

Ex. 18–5

1 a. product e. period b. conversion f. work in process inventory c. increases g. direct materials d. costs h. plant depreciation Ex. 18–6 a. Materials requisitioned for use (both direct and indirect). b. Factory labor used (both direct and indirect). c. Application of factory overhead costs to jobs. d. Jobs completed. e. Cost of goods sold.

Ex. 18–7 a. Cost of goods sold: Sales...... $ 850,000 Less gross profit...... 235,000 Cost of goods sold...... $ 615,000 b. Direct materials cost: Materials purchased...... $ 305,000 Less: Indirect materials...... $ 27,000 Materials inventory...... 20,000 47,000 Direct materials cost...... $ 258,000 c. Direct labor cost: Total manufacturing costs for the period...... $ 640,000 Less: Direct materials cost...... $ 258,000 Factory overhead...... 105,500* 363,500 Direct labor cost...... $ 276,500 *$65,000 + $27,000 + $13,500 Ex. 18–8 a. RECEIVED ISSUED BALANCE Materials Receiving Requi- Report Unit sition Unit Number Quantity Price Number Quantity Amount Date Quantity Amount Price

2 May 1 120 $2,160 $18.00 23 190 $20.00 May 3 120 2,160 18.00 190 3,800 20.00 104 250 $4,760* May 5 60 1,200 20.00 29 140 22.00 May 19 60 1,200 20.00 140 3,080 22.00 117 160 3,400** May 25 40 880 22.00

*May 5 issuance 120 at $18.00 $2,160 130 at $20.00 2,600 $4,760 **May 25 issuance 60 at $20.00 $1,200 100 at $22.00 2,200 $3,400 b. Ending wire cable balance: 40 at $22.00...... $880 c. Work in Process ($4,760 + $3,400)...... 8,160 Materials...... 8,160 d. Comparing quantities on hand as reported in the materials ledger with predetermined order points enables management to order materials before a lack of materials causes idle time. Also, the subsidiary ledger can include columns for recording quantities ordered, so that management can have easy access to information about materials on order.

Ex. 18–9

Work in Process...... 64,950 Factory Overhead...... 250 Materials...... 65,200

Ex. 18–10 a. Materials...... 1,632,200 Accounts Payable...... 1,632,200 b. Work in Process...... 1,617,600 Factory Overhead...... 13,500 Materials...... 1,631,100 c. Polyester Fabric Filling Lumber Glue

3 Balance, June 1...... $ 32,400 $ 7,300 $106,900 $ 1,500 June purchases...... 547,300 103,600 968,100 13,200 Less: June requisitions...... 539,700 86,700 991,200 13,500 Balance, June 30...... $ 40,000 $ 24,200 $ 83,800 $ 1,200

Ex. 18–11

Work in Process...... 14,170 Factory Overhead...... 12,600 Wages Payable...... 26,770

Ex. 18–12 a. Work in Process...... 1,327.80 Factory Overhead...... 118.20 Wages Payable...... 1,446.00

Supporting Calculations: Labor Costs (Hourly rate × Hours) Direct Labor Hourly (sum of Indirect Rate Job 111 Job 112 Job 113 job costs) Labor Harvey Daniels $11.50 $207.00 $172.50 $ 23.00 $ 402.50 $ 57.50 Cedrick Price 13.25 79.50 92.75 331.25 503.50 26.50 Dan Zhu 11.40 102.60 148.20 171.00 421 .80 34 .20 $1,327 .80 $118 .20 b. The direct labor costs in the completed jobs would become part of finished goods inventory. The direct labor costs in Job 113 would remain part of work in process inventory. Ex. 18–13 a. Work in Process...... 3,836 Factory Overhead...... 845 Wages Payable...... 4,681 b. Work in Process...... 4,932 Factory Overhead...... 4,932 $3,836 ÷ $14 per hour = 274 hours 274 hours × $18 per hour = $4,932

Ex. 18–14

4 a. Factory 1: $19.00 per machine hour ($237,500 ÷ 12,500 machine hours) b. Factory 2: $12.50 per direct labor hour ($112,500 ÷ 9,000 direct labor hours) c. Factory 1: Work in Process...... 19,665 Factory Overhead...... 19,665 ($19.00 × 1,035) Factory 2: Work in Process...... 9,625 Factory Overhead...... 9,625 ($12.50 × 770) d. Factory 1—$435 debit (underapplied) ($20,100 – $19,665) Factory 2—$175 credit (overapplied) ($9,450 – $9,625)

Ex. 18–15

The estimated shop overhead is determined as follows: Shop and repair equipment depreciation...... $ 16,900 Shop supervisor salaries...... 95,200 Shop property tax...... 19,200 Shop supplies...... 12,200 Total shop overhead...... $ 143,500 The auto parts and shop labor are direct to the jobs and are not included in the shop overhead rate. The advertising and administrative expenses are selling and administrative expenses that are not included in the shop overhead but are treated as period expenses. Ex. 18–15 Concluded

The estimated activity base is determined by dividing the shop direct labor cost by the direct labor rate, as follows: $490,000 = 35,000 hours $14 per hour The predetermined shop overhead rate is: $143,500 = $4.10 per direct labor hour 35,000

Ex. 18–16 a. Estimated annual operating room overhead: $399,000

5 Estimated operating room activity base, number of operating room hours: Hours per day...... 7 Days per week...... × 6 Weeks per year (net of maintenance weeks)..... × 50 Estimated annual operating room hours...... 2,100 Predetermined surgical overhead rate: $399,000 = $190 per hour 2,100 hours b. LeVar Wilson’s procedure: Number of surgical room hours...... 2.5 Predetermined surgical room overhead rate..... × $190 Procedure overhead...... $ 475 c. Actual hours used in January...... 170 Predetermined surgical room overhead rate...... × $190 Surgical room overhead applied, January...... $ 32,300 Actual surgical room overhead incurred, January...... 31,800 Overapplied surgical room overhead (credit bal.)...... $ 500 Ex. 18–17 a. Finished Goods...... 248,200 Work in Process...... 248,200 b. Cost of unfinished jobs at March 31: Balance in Work in Process at March 1...... $ 15,700 Add: Direct materials...... 84,700 Direct labor...... 63,200 Factory overhead...... 92,100 $255,700 Less: Jobs finished during March...... 248,200 Balance in Work in Process at March 31...... $ 7,500

Ex. 18–18 a. Work in Process...... 18,900 Factory Overhead...... 620 Materials...... 19,520 b. Work in Process...... 4,130 Factory Overhead...... 6,740 Wages Payable...... 10,870 c. Work in Process...... 7,434 Factory Overhead...... 7,434 Predetermined overhead rate: $2,520 ÷ $1,400 = 180% or

6 $1,080 ÷ $600 = 180% Direct labor cost × Predetermined factory overhead rate: $4,130 × 180% = $7,434 d. Finished Goods...... 15,100* Work in Process...... 15,100 * $10,220 + $4,880 Ex. 18–19 a. MERCURY SHOE COMPANY Income Statement For the Month Ended May 31, 2006 Revenues...... $ 510,000 Cost of goods sold...... 300,100 Gross profit...... $ 209,900 Selling expenses...... $116,000 Administrative expenses...... 48,400 164,400 Income from operations...... $ 45,500 b. Materials inventory: Purchased materials...... $ 155,300 Less: Materials used in production...... 145,800 Materials inventory, May 31...... $ 9,500 Work in process inventory: Materials used in production...... $ 145,800 Direct labor...... 94,500 Factory overhead (75% × $94,500)...... 70,875 Additions to work in process...... $ 311,175 Less: Transferred to finished goods...... 304,300 Work in process inventory, May 31...... $ 6,875

Finished goods inventory: Transferred to finished goods...... $ 304,300 Less: Cost of goods sold...... 300,100 Finished goods inventory, May 31...... $ 4,200

7 Ex. 18–20 a. Unit Date Job No. Quantity Product Amount Cost Jan. 1 1 400 XXY $ 7,600 $19 Jan. 29 26 1,200 AAB 18,000 15 Feb. 15 43 600 AAB 9,600 16 Mar. 10 64 450 XXY 7,650 17 Mar. 31 75 900 MM 7,200 8 May 10 91 1,000 MM 12,000 12 June 20 104 400 XXY 4,800 12 Aug. 2 112 1,500 MM 24,000 16 Sept. 20 114 400 AAB 6,000 15 Nov. 1 126 600 XXY 6,000 10 Dec. 3 133 850 MM 17,850 21

MM Units Costs

t $25 s

o $20 C

t $15 i

U $5 $0 75 91 112 133 Job Number

Ex. 18–20 Concluded

8 AAB Unit Costs

$20 t s

o $15 C

i $10 n

$0 26 43 114 Job Number

XXY Unit Costs

t $20 s

o $15 C

i $10 n

$0 1 64 104 126 Job Number

As can be seen, the unit costs behave differently for each product. MM has increasing unit costs during the year, AAB is steady, and XXY has decreasing unit costs during the year. b. Management should want to determine why MM costs are increasing and why XXY costs are decreasing. This information can be determined from the job cost sheets for each job. By comparing the cost sheets from job to job (for a particular product), management can isolate the cause of the cost changes. The cost sheets will show how materials, labor, and overhead are consumed across the production process for each job. This information can isolate the problem or opportunity areas.

9 Ex. 18–21 a. The first item to note is that the cost did not go up due to any increases in the cost of labor or materials. Rather, the cost of the plaques increased because Job 275 used more labor and materials per unit than did Job 223. Specifically, Job 223 required exactly the same number of backboards and brass plates as the number of actual plaques shipped. However, Job 275 required ten more backboards and brass plates (60 vs. 50) than the number actually shipped. In addition, the labor hours for Job 223 were as follows: Engraving: (42 units × 10 min. per unit) / 60 min. = 7 hours Assembly: (42 units × 5 min. per unit) / 60 min. = 3.5 hours These are the labor hours to be expected for 42 plaques. However, the labor hours for Job 275 were: Engraving: (60 units × 10 min. per unit) / 60 min. = 10 hours Assembly: (60 units × 5 min. per unit) / 60 min. = 5 hours Job 275’s 15 labor hours is 2.5 hours more than should have been expected for a job of 50 plaques [(50 × 15 min.)/ 60 min. = 12.5 hrs.]. As a result, the additional hours of labor costs, applied factory overhead, and direct material costs cause the unit cost of Job 275 to increase. b. Apparently, the engraving and assembly work is becoming sloppy. Job 275 required 60 engraved brass plates in order to get 50 with acceptable quality. It is likely that the engraver is not being careful in correctly spelling the names. The names should be supplied to the engraver using large typewritten fonts so that it is easy to read the names. The engraver should be instructed to be careful in engraving the names. The assembly operation also needs some im- provement. It took 60 assembly operations to properly assemble 50 plaques. It may be that the plates are assembled off-register (crooked) to the backboard. This could be improved by using a fixture to properly align the plate to the backboard. Alternatively, it’s possible mis-engraved plaques were assembled to backboards and needed to be disassembled, re-engraved, and re- assembled to new backboards.

10 Ex. 18–22 a. Mar. 7 Work in Process (420 hrs. × $150)...... 63,000 Salaries Payable...... 63,000 11 Work in Process...... 24,000 Cash...... 24,000 22 Work in Process (250 hrs. × $200)...... 50,000 Salaries Payable...... 50,000 25 Work in Process...... 45,000 Consultant Fees Payable...... 45,000 30 Work in Process (670 × $50)...... 33,500 Office Overhead...... 33,500 31 Office Overhead...... 28,000 Cash...... 28,000 31 Office Overhead...... 4,000 Supplies...... 4,000 31 Salaries Payable...... 63,000 Cash...... 63,000 31 Accounts Receivable...... 250,000 Fees Earned...... 250,000 31 Cost of Services...... 215,500 Work in Process...... 215,500* *$63,000 + $24,000 + $50,000 + $45,000 + $33,500 b. Office overhead incurred ($28,000 + $4,000)...... $ 32,000 Office overhead applied...... 33,500 Overapplied overhead...... $ (1,500) c. Fees earned...... $250,000 Cost of services...... 214,000* Gross profit...... $ 36,000 *$215,500 – $1,500. Assumes the over- or underapplied office overhead is closed to cost of services annually. Note to Instructors: The consultant fees and travel costs can be directly as- signed to the case and thus are not treated as office overhead. Costs such as secretarial and administrative salaries and supplies would be part of office overhead incurred.

11 Ex. 18–23 a. Work in Process...... 230,000 Salaries Payable...... 230,000 b. Work in Process...... 510,000 Accounts Payable...... 510,000 c. Work in Process (30% × $510,000)...... 153,000 Agency Overhead...... 153,000 d. Cost of Services...... 721,000 Work in Process...... 721,000 Cost of completed jobs, $721,000: First Fizz4U Bev. Security June 1 balance...... $105,000 $175,000 June costs: Direct labor...... 36,000 15,000 Media...... 160,000 140,000 Overhead...... 48,000 42,000 Total costs...... $349,000 $372,000

PROBLEMS

Prob. 18–6A

1. Sales...... $11,400,000 Cost of goods sold...... 5,367,500 Gross profit...... $ 6,032,500 Selling expenses: Media campaign ...... $ 3,000,000 Promotional materials...... 1,000,000 Shipping expenses...... 95,000 Total selling expenses...... $4,095,000 Administrative expenses: Legal expenses...... 750,000 Total operating expenses...... 4,845,000 Income from operations...... $ 1,187,500 Supporting calculations: Sales: 950,000 units × $12 = $11,400,000 Cost of goods sold: 950,000 units × $5.65 = $5,367,500 Manufacturing cost per unit (CD): Direct materials: Blank CD...... $4.00

12 Jewel case...... 0.75 Song lyric insert...... 0.25 Total direct materials...... $5.00 Direct labor ...... 0.40 Factory overhead ...... 0.251 Total manufacturing cost per CD...... $ 5.65 1$250 ÷ 1,000 CDs per hour Promotional materials: 40,000 stores × $25 = $1,000,000 Shipping expenses: 950,000 units × $0.10 = $95,000

2. Finished Goods balance, December 31, 2006: (1,200,000 units – 950,000 units) × $5.65 = $1,412,500 Work in Process, December 31, 2006: 15,000 units × ($5.00 + $0.25) = $78,750 The materials and copying have already been applied to the 15,000 units. Only the direct assembly labor has yet to be applied for these units. Prob. 18–1B

Product Costs Period Costs Direct Materials Direct Labor Factory Overhead Selling Administrative Cost Cost Cost Cost Expense Expense

a. X b. X c. X d. X e. X f. X g. X h. X i. X j. X k. X l. X m. X n. X o. X p. X q. X

13 r. X s. X t. X u. X v. X w. X x. X* y. X z. X * Paint may be considered indirect material if it is deemed to be an insignificant part of a boat’s cost. Often, however, the paint will be sufficiently significant and measurable to be treated as direct material.

Prob. 18–2B a. Materials...... 226,150 Accounts Payable...... 226,150 b. Work in Process...... 197,120 Factory Overhead...... 4,580 Materials...... 201,700 c. Work in Process...... 127,400 Factory Overhead...... 59,700 Wages Payable...... 187,100 d. Factory Overhead...... 83,500 Selling Expenses...... 51,000 Administrative Expenses...... 36,400 Accounts Payable...... 170,900 e. Factory Overhead...... 3,600 Selling Expenses...... 950 Administrative Expenses...... 700 Prepaid Expenses...... 5,250 f. Factory Overhead...... 15,200 Depreciation Expense—Office Equipment...... 11,100 Depreciation Expense—Store Equipment...... 1,900 Accumulated Depreciation—Fixed Assets...... 28,200 g. Work in Process...... 170,100 Factory Overhead...... 170,100 h. Finished Goods...... 485,600 Work in Process...... 485,600 i. Cost of Goods Sold...... 476,200

14 Finished Goods...... 476,200

Prob. 18–3B

1. a. Materials...... 140,600 Accounts Payable...... 140,600 b. Work in Process...... 243,000 Factory Overhead...... 52,000 Materials...... 127,900 Wages Payable...... 167,100 c. Factory Overhead...... 5,600 Accounts Payable...... 5,600 d. Factory Overhead...... 2,500 Accumulated Depreciation—Machinery and Equipment...... 2,500 e. Work in Process...... 61,200 Factory Overhead (1,360 hours × $45)...... 61,200 f. Finished Goods...... 172,735 Work in Process...... 172,735 Computation of cost of jobs finished: Direct Direct Factory Job Materials Labor Overhead Total No. 601 $17,900 $16,300 $10,035 $ 44,235 No. 602 24,300 22,300 11,025 57,625 No. 603 11,900 10,500 6,750 29,150 No. 605 16,800 15,700 9,225 41,725 Total $172,735

g. Accounts Receivable...... 243,400 Sales...... 243,400 Cost of Goods Sold...... 143,585 Finished Goods...... 143,585

Computation of cost of jobs sold: Job No. 601...... $ 44,235 No. 602...... 57,625 No. 605...... 41,725 Total...... $ 143,585 Prob. 18–3B Continued

15 Work in Process Finished Goods (b) 243,000 (f) 172,735 (f) 172,735 (g) 143,585 (e) 61,200 131,465 304,200 29,150

3. Schedule of unfinished jobs: Direct Direct Factory Job Materials Labor Overhead Total No. 604...... $32,100 $36,200 $14,265 $ 82,565 No. 606...... 18,500 20,500 9,900 48,900 Balance of Work in Process, June 30...... $131,465

4. Schedule of completed jobs: Direct Direct Factory Materials Labor Overhead Total Finished Goods, June 30 (Job 603)...... $11,900 $10,500 $6,750 $29,150 Prob. 18–3B Concluded

This solution is applicable only if the P.A.S.S. Software that accompanies the text is used.

KITCHEN AND BATH FIXTURES CO. Trial Balance June 30, 2006 Account Number Account Title Debit Credit 120 Accounts Receivable...... 243,400 130 Finished Goods...... 29,150 140 Work in Process...... 131,465 150 Materials...... 12,700 171 Accum. Depr.—Mach. & Equipment...... 2,500 210 Accounts Payable...... 146,200 220 Wages Payable...... 167,100 410 Sales...... 243,400 510 Cost of Goods Sold...... 143,585 610 Factory Overhead...... 1,100 Totals...... 560,300 560,300 Prob. 18–4B

16 1. and 2.

JOB ORDER COST SHEET

Customer Janice French Date Sept. 1, 2006 Address 1244 Merchants Drive Date wanted Oct. 13, 2006 Columbus Date completed Oct. 10, 2006 Item Reupholster couch and chairs Job. No. 00–10–23

ESTIMATE Direct Materials Direct Labor Summary Amount Amount Amount 12 meters at $22 264 25 hours at $12 300 Direct materials 264.00 Direct labor 300.00 Factory overhead 180.00 Total 264 Total 300 Total cost 744.00

ACTUAL Direct Materials Direct Labor Summary Mat. Time Req. Descrip- Ticket Descrip- No. tion Amount No. tion Amount Item Amount 5 meters 15 hours Direct materials 308.00 3480 110 H143 180 at $22 at $12 Direct labor 336.00 9 meters 13 hours 3492 198 H151 156 Factory overhead 201.60 at $22 at $12 Total 308 Total 336 Total cost 845.60

Comments: The direct materials cost exceeded the estimate by $44 because two meters of materials were spoiled. The direct labor cost exceeded the estimate by $36 because an additional three hours of labor was used by an inexperienced employee.

Prob. 18–5B

1. Supporting calculations: Aug. 1 Cost of Quan- Work in Direct Direct Factory Total Unit Units Goods Job No. tity Process Materials Labor Overhead Cost Cost Sold Sold No. 111 DL-8 65 $18,000 $ 14,450 $ 12,300 $ 7,380 $ 52,130 $802.00 58 $ 46,516

17 No. 112 DL-18 100 35,000 22,400 19,500 11,700 88,600 $886.00 84 74,424 No. 113 DL-11 125 28,500 25,150 15,090 68,740 $549.92 100 54,992 No. 114 SL-101 50 12,200 10,300 6,180 28,680 No. 115 SL-110 150 31,300 28,400 17,040 76,740 $511.60 135 69,066 No. 116 DL-14 70 16,800 15,800 9,480 42,080 Total 535 $53,000 $ 125,650 $111,450 $66,870 $356,970 $244,998 A. $128,150. Materials applied to production in August + indirect materials. ($125,650 + $2,500) B. $53,000. From table above and problem. C. $125,650. From table above. D. $111,450. From table above. E. $66,870. $111,450 × 0.6 and from table above. F. $286,210. ($52,130 + $88,600 + $68,740 + $76,740) G. $244,998. From table above. H. $13,550. Wages incurred less direct labor applied to production in August. ($125,000 – $111,450) 2. August 31 balances: Materials $ 6,350 ($8,000 + $124,000 – $125,650) Work in Process $ 70,760* ($28,680 + $42,080, Job 114 and Job 116) Finished Goods $ 41,212** ($286,210 – $244,998) Factory Overhead $ 2,820 Cr. overapplied ($2,000 + $13,550 + $2,500 + $46,000 – $66,870) * or ($53,000 + $125,650 + $111,450 + $66,870 – $286,210) ** Units in Job No. Inventory Cost Job 111 7 $ 5,614 Job 112 16 14,176 Job 113 25 13,748 Job 115 15 7,674 Total $ 41,212

18 Prob. 18–6B

1. Sales...... $6,840,000 Cost of goods sold...... 969,000 Gross profit...... $5,871,000 Selling expenses: Advertising expenses...... $2,000,000 Salespersons commissions...... 684,000 Advertising design ...... 600,000 Total selling expenses...... 3,284,000 Income from operations...... $2,587,000 Supporting calculations: Sales: 38,000 units × $180 = $6,840,000 Cost of goods sold: 38,000 units × $25.50 = $969,000 Manufacturing cost per unit: Direct materials: Blank disk...... $ 5.00 Packaging...... 7.00 Manual...... 12.00 Total direct materials...... $24.00 Direct labor...... 0.70 Factory overhead cost...... 0.80* Total manufacturing cost per disk...... $25.50 *$1,200 ÷ 1,500 disks per hour Salespersons commissions: $6,840,000 × 10% = $684,000

2. Finished Goods balance, December 31, 2006: (40,000 units – 38,000 units) × $25.50 = $51,000 Work in Process, December 31, 2006: 600 units × ($24.00 + $0.80) = $14,880 The materials and copying have already been applied to the 600 units. Only the direct assembly labor has yet to be applied for these units.