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Week 5 TUTE Chapter 4 Solutions

Management Accounting (University of Western Australia)

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ACCT2112 Week 5 TUTE Chapter 4 Q & S

4-21 Job costing, process costing. In each of the following situations, determine whether
job costing or process costing would be more appropriate.

a. A hospital l. An advertisement film producer

b. A car manufacturer m. A travel agent company
c. A computer manufacturer n. A health drink manufacturer
d. A road construction firm o. A cost audit firm
e. A soap manufacturer p. A boiler manufacturer
f. A solicitor firm q. An electric lamp manufacturer
g. A glassware manufacturer r. A courier service agency
h. A land development company s. A pharmaceutical company
i. An event management company t. A cosmetic products manufacturer
j. An oil mill u. A cell phone manufacturer
k. A wine manufacturer

SOLUTION

Job order costing, process costing.

a. Job costing l. Job costing

b. Process costing m. Job costing
c. Process costing n. Process costing
d. Job costing o. Job costing
e. Process costing p. Process costing
f. Job costing q. Process costing
g. Process costing r. Job costing
h. Job costing s. Process costing
i. Job costing t. Process costing
j. Process costing u. Process costing
k. Process costing

4-22 Actual costing, normal costing, accounting for manufacturing overhead. Carolin
Chemicals produces a range of chemical products for industries on getting bulk orders. It uses
a job-costing system to calculate the cost of a particular job. Materials and labors used in the
manufacturing process are direct in nature, but manufacturing overhead is allocated to
different jobs using direct manufacturing labor costs. Carolin provides the following
information:

Budget for 2017 Actual Results for 2017

Direct material costs $ 2,750,000 $3,000,000
Direct manufacturing labor costs 1,830,000 2,250,000
Manufacturing overhead costs 3,294,000 3,780,000

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Required:
1. Compute the actual and budgeted manufacturing overhead rates for 2017.
2. During March, the job-cost records for Job 635 contained the following information:

Direct materials used $73,500

Direct manufacturing labor costs $51,000

Compute the cost of Job 635 using (a) actual costing and (b) normal costing.
3. At the end of 2017, compute the under- or overallocated manufacturing overhead
under normal costing. Why is there no under- or overallocated overhead under actual
costing?
4. Why might managers at Carolin Chemicals prefer to use normal costing?

SOLUTION

Actual costing, normal costing, accounting for manufacturing overhead.

𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵𝐵𝐵𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵 𝑜𝑜𝑜𝑜𝐵𝐵𝑚𝑚ℎ𝐵𝐵𝑚𝑚𝐵𝐵 𝑚𝑚𝑜𝑜𝑐𝑐𝐵𝐵𝑐𝑐

1. 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵𝐵𝐵𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵 𝑜𝑜𝑜𝑜𝐵𝐵𝑚𝑚ℎ𝐵𝐵𝑚𝑚𝐵𝐵 𝑚𝑚𝑚𝑚𝐵𝐵𝐵𝐵 = 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝐵𝐵𝑚𝑚𝑚𝑚𝐵𝐵𝑚𝑚𝐵𝐵 𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵𝐵𝐵𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵 𝑙𝑙𝑚𝑚𝑙𝑙𝑜𝑜𝑚𝑚 𝑚𝑚𝑜𝑜𝑐𝑐𝐵𝐵𝑐𝑐

$3,294,000
= $1,830,000
= 1.80 𝑜𝑜𝑚𝑚 180%

𝐴𝐴𝑚𝑚𝐵𝐵𝐵𝐵𝑚𝑚𝐴𝐴 𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵𝐵𝐵𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵 𝑜𝑜𝑜𝑜𝐵𝐵𝑚𝑚ℎ𝐵𝐵𝑚𝑚𝐵𝐵 𝑚𝑚𝑜𝑜𝑐𝑐𝐵𝐵𝑐𝑐

𝐴𝐴𝑚𝑚𝐵𝐵𝐵𝐵𝑚𝑚𝐴𝐴 𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵𝐵𝐵𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵 𝑜𝑜𝑜𝑜𝐵𝐵𝑚𝑚ℎ𝐵𝐵𝑚𝑚𝐵𝐵 𝑚𝑚𝑚𝑚𝐵𝐵𝐵𝐵 =
𝐴𝐴𝑚𝑚𝐵𝐵𝐵𝐵𝑚𝑚𝐴𝐴 𝐵𝐵𝑚𝑚𝑚𝑚𝐵𝐵𝑚𝑚𝐵𝐵 𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵𝐵𝐵𝑚𝑚𝑚𝑚𝑚𝑚𝐵𝐵 𝐴𝐴𝑚𝑚𝑙𝑙𝑜𝑜𝑚𝑚 𝑚𝑚𝑜𝑜𝑐𝑐𝐵𝐵𝑐𝑐

$3,780,000
= = 1.68 𝑜𝑜𝑚𝑚 168%
$2,250,000

2. Costs of Job 635 under actual and normal costing follow:

Actual Normal
Costing Costing
Direct materials $ 73,500 $ 73,500
Direct manufacturing labor costs 51,000 51,000
Manufacturing overhead costs
$51,000 × 1.68; $51,000 × 1.80 85,680 91,800
Total manufacturing costs of Job 635 $210,180 $216,300

3. Total manufacturing overhead allocated under normal costing

= Actual manufacturing labor costs × Budgeted overhead rate
= $2,250,000 × 1.80
= $4,050,000

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Overallocated manufacturing overhead

= Manufacturing overhead allocated – Actual manufacturing overhead costs
= $4,050,000 − $3,780,000
= $270,000

There is no under- or over-allocated overhead under actual costing because overhead is

allocated under actual costing by multiplying actual manufacturing labor costs and the actual
manufacturing overhead rate. This, of course, equals the actual manufacturing overhead
costs. All actual overhead costs are allocated to products. Hence, there is no under- or over-
allocated overhead.

4. Managers at Carolin Chemicals might prefer to use normal costing because it enables
them to use the budgeted manufacturing overhead rate determined at the beginning of the
year to estimate the cost of a job as soon as the job is completed. Managers may want to
know job costs for ongoing uses, including pricing jobs, monitoring and managing costs,
evaluating the success of the job, learning about what did and did not work, bidding on new
jobs, and preparing interim financial statements. Under actual costing, managers would only
determine the cost of a job at the end of the year when they know actual manufacturing
overhead costs.

4-24 Budgeted manufacturing overhead rate, allocated manufacturing overhead.

Gammaro Company uses normal costing. It allocates manufacturing overhead costs using a
budgeted rate per machine-hour. The following data are available for 2017:

Budgeted manufacturing overhead $4,600,000

Budgeted machine-hours 184,000
Actual manufacturing overhead costs $4,830,000
Actual machine-hours 180,000

Required:
1. Calculate the budgeted manufacturing overhead rate.
2. Calculate the manufacturing overhead allocated during 2017.
3. Calculate the amount of under- or overallocated manufacturing overhead. Why do
Gammaro’s managers need to calculate this amount?

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SOLUTION

Budgeted manufacturing overhead rate, allocated manufacturing overhead.

Budgeted manufacturing overhead

1. Budgeted manufacturing overhead rate =
Budgeted machine hours

$4, 600, 000

=
184, 000 machine-hours
= $25 per machine-hour

2. Manufacturing Budgeted
Actual
overhead = × manufacturing
machine-hours
allocated overhead rate
= 180,000 × $25
= $4,500,000

3. Because manufacturing overhead allocated is less than the actual manufacturing

overhead costs, Gammaro calculates under-allocated manufacturing overhead as follows:
Manufacturing overhead allocated $4,500,000
Actual manufacturing overhead costs 4,830,000
Under-allocated manufacturing overhead $ 330,000

4-28 Accounting for manufacturing overhead. Holland Woodworking uses normal costing
and allocates manufacturing overhead to jobs based on a budgeted labor-hour rate and actual
direct labor-hours. Under- or overallocated overhead, if immaterial, is written off to cost of
goods sold. During 2014, Holland recorded the following:

Budgeted manufacturing overhead costs $4,400,000

Budgeted direct labor-hours 200,000
Actual manufacturing overhead costs 4,650,000
Actual direct labor-hours 212,000

Required:

1. Compute the budgeted manufacturing overhead rate.

2. Prepare the summary journal entry to record the allocation of manufacturing
overhead.
3. Compute the amount of under- or overallocated manufacturing overhead. Is the
amount significant enough to warrant proration of overhead costs, or would it be
permissible to write it off to cost of goods sold? Prepare the journal entry to dispose
of the under- or overallocated overhead.

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SOLUTION

Accounting for manufacturing overhead.

$4, 400,000
1. Budgeted manufacturing overhead rate =
200,000 labor-hours

= $22 per direct labor-hour

2. Work-in-Process Control 4,664,000

Manufacturing Overhead Allocated 4,664,000
(212,000 direct labor-hours × $22 per direct labor-hour = $4,664,000)

3. $4,650,000– $4,664,000 = $14,000 overallocated, an insignificant amount of difference

compared to manufacturing overhead costs allocated $14,000 ÷ $4,664,000 = 0.3%. If the
quantities of work-in-process and finished goods inventories are small, the difference
between proration and write off to Cost of Goods Sold account would be very small
compared to net income.

Manufacturing Overhead Allocated 4,664,000

Manufacturing Department Overhead Control 4.650,000
Cost of Goods Sold 14,000

4-36 Job costing, accounting for manufacturing overhead, budgeted rates. The Pisano
Company uses a job-costing system at its Dover, Delaware, plant. The plant has a machining
department and a finishing department. Pisano uses normal costing with two direct-cost
categories (direct materials and direct manufacturing labor) and two manufacturing overhead
cost pools (the machining department with machine-hours as the allocation base and the
finishing department with direct manufacturing labor costs as the allocation base). The 2014
budget for the plant is as follows:

Machining Department Finishing

Department
Manufacturing overhead costs $9,065,000 $8,181,000
Direct manufacturing labor costs $ 970,000 $4,050,000
Direct manufacturing labor-hours 36,000 155,000
Machine-hours 185,000 37,000

Required:

1. Prepare an overview diagram of Pisano’s job-costing system.

2. What is the budgeted manufacturing overhead rate in the machining department? In
the finishing department?
3. During the month of January, the job-cost record for Job 431 shows the following:

Machining Department Finishing

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Department
Direct materials used $13,000 $5,000
Direct manufacturing labor costs $ 900 $1,250
Direct manufacturing labor-hours 20 70
Machine-hours 140 20

Compute the total manufacturing overhead cost allocated to Job 431.

4. Assuming that Job 431 consisted of 300 units of product, what is the cost per unit?
5. Amounts at the end of 2014 are as follows:

Machining Finishing
Department Department
Manufacturing overhead incurred $10,000,000 $7,982,000
Direct manufacturing labor costs $ 1,030,000 $4,100,000
Machine-hours 200,000 34,000

Compute the under- or overallocated manufacturing overhead for each department

and for the Dover plant as a whole.
6. Why might Pisano use two different manufacturing overhead cost pools in its job-
costing system?

SOLUTION

Job costing, accounting for manufacturing overhead, budgeted rates.

1. An overview of the job-costing system is:

INDIRECT
COST
POOL
} Machining Department
Manufacturing Overhead
Finishing Department
Manufacturing Overhead

COST
ALLOCATION
BASE
} Machine-Hours
in Machining Dept.
Direct Manufacturing
Labor Costs
in Finishing Dept.

COST
COST OBJECT:
PRODUCT }
OBJECT:
JOB
Indirect Costs
Direct Costs

DIRECT
COST } Direct
Materials
Direct
Manufacturing
Labor

2. Budgeted manufacturing overhead divided by allocation base:

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a. Machining Department:
$9,065,000
= $49 per machine-hour
185,000 machine-hours

b. Finishing Department:
$8,181,000
= 202% of direct manufacturing labor costs
$4,050,000

3. Machining Department overhead, $49 × 140 machine-hours $6,860

Finishing Department overhead, 202% of $1,250 2,525
Total manufacturing overhead allocated $9,385

4. Total costs of Job 431:

Direct costs:
Direct materials––Machining Department $13,000
––Finishing Department 5,000
Direct manufacturing labor —Machining Department 900
—Finishing Department 1,250 $20,150
Indirect costs:
Machining Department overhead, $49 × 140 $ 6,860
Finishing Department overhead, 202% of $1,250 2,525 9,385
Total costs $29,535

The per-unit product cost of Job 431 is $29,535 ÷ 300 units = $98.45 per unit

The point of this part is (a) to get the definitions straight and (b) to underscore that
overhead is allocated by multiplying the actual amount of the allocation base by the budgeted
rate.

5.
Machining Finishing
Manufacturing overhead incurred (actual) $10,000,000 $7,982,000
Manufacturing overhead allocated
200,000 hours × $49 9,800,000
202% of $4,100,000 8,282,000
Underallocated manufacturing overhead $ 200,000
Overallocated manufacturing overhead $ 300,000
Total overallocated overhead = $300,000 – $200,000 = $100,000

6. A homogeneous cost pool is one where all costs have the same or a similar cause-and-
effect or benefits-received relationship with the cost-allocation base. Pisano likely assumes
that all its manufacturing overhead cost items are not homogeneous. Specifically, those in the
Machining Department have a cause-and-effect relationship with machine-hours, while those
in the Finishing Department have a cause-and-effect relationship with direct manufacturing
labor costs. Pisano believes that the benefits of using two cost pools (more accurate product
costs and better ability to manage costs) exceed the costs of implementing a more complex
system.

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