Job Order Costing

Elliott Company uses a predetermined overhead rate based on machine-hours to apply manufacturing
overhead to jobs. The company manufactures tools to customer specifications. The following data pertain
to Job 1501:

Direct materials used $4,200

Direct labor-hours worked 300
Direct labor rate per hour $8.00
Machine-hours used 200
Predetermined overhead rate per machine-hour $15.00

What is the total manufacturing cost recorded on Job 1501?

Answer: $9,600

Solution:

Direct materials used $4,200

Direct labor (300 hours × $8.00 per hour) 2,400
Manufacturing overhead applied (200 hours × $15.00 per hour) 3,000
Total manufacturing cost for job 1501 $9,600
Serritella Manufacturing Corporation uses a job-order costing system. At the beginning of the year,
Serritella had $38,000 in its Work in Process inventory account. The following information relates to
Serritella's operations for the year:

Direct materials cost assigned to production $114,000

Direct labor cost assigned to production $78,000
Selling, general, and administrative expenses incurred $25,000
Manufacturing overhead cost incurred $296,000
Underapplied manufacturing overhead cost $11,000
Cost of goods manufactured $502,000
Cost of goods sold $509,000

What is the balance in Serritella's Work in Process inventory account at the end of the
year? (Assume that the Manufacturing Overhead account has not yet been closed out.)

Answer: $13,000
Solution:
Work in Process
Cost of goods
Bal. 38,000 manufactured 502,000
Direct material 114,000
Direct labor 78,000
*Applied Mfg. Overhead 285,000
Bal. 13,000

*Actual manufacturing Applied manufacturing Underapplied

− =
overhead overhead manufacturing overhead

Applied manufacturing
$296,000 − = $11,000
overhead

*Applied manufacturing overhead = $ 285,000

Marc Corp. has a job-order costing system. The following debits (credits) appeared in the Work in
Process account for the month of May:
 May 1 Balance $10,000
May 31 Direct materials $60,000
May 31 Direct labor $40,000
May 31 Manufacturing overhead $32,000
May 31 To finished goods $(120,000)

Marc applies overhead to jobs at a predetermined rate of 80% of direct labor cost. Job
No. 23, the only job still in process at the end of May has been charged with direct labor of $5,000. The
amount of direct materials charged to Job No. 23 was:

Answer: $13,000

Solution:

Work in Process
Bal. 10,000 FG 120,000
DM 60,000
DL 40,000
Applied MOH 32,000
Bal. 22,000

Ending Balance of Work in Process $22,000

Less:
Direct labor $5,000
Manufacturing overhead (80% × $5,000) 4,000    9,000
Direct materials charged to Job No. 23 $13,000

Use the following to answer the next questions

The following T accounts are for Stanford Company:

Raw Materials
Beg. Bal. 7,000 (2) 24,000
(1) 19,000

Cost of Goods Sold

Sales Salaries Expense

(4) 11,000

Work in Process
Beg. Bal. 11,000
(2) 15,000 (7) ?
(4) 18,000
(6) 31,000

Accounts Payable
(1) 19,000
(5) 5,000

Manufacturing Overhead
(2) 9,000 (6) 31,000
(3) 16,000
(4) 8,000
(5) 5,000
7,000

Wages & Salaries Payable

Beg. Bal. 7,000
(4) 37,000

Finished Goods
Beg. Bal. 18,000
(7) 62,000
End. Bal. 15,000

Accumulated Depreciation—Factory
 Beg. Bal. 82,000

(3) 16,000

The indirect labor cost is:

Answer: $8,000

Solution:

Journal entry (4):

Sales Salaries Expense 11,000
Work in Process 18,000
Manufacturing Overhead 8,000
Wages and Salaries Payable 37,000

The cost of goods manufactured is:

Answer: $62,000

Solution:

Journal entry (7):

Finished Goods 62,000
Work in Process 62,000*
*To balance Finished Goods debit of $62,000
The cost of goods sold (after adjustment for underapplied or overapplied overhead) is:

Answer: $72,000

Solution:

Finished Goods
Beg. Bal. 18,000 COGS 65,000*
(7) 62,000
End. Bal. 15,000
*18,000 + 62,000 − Cost of Goods Sold = 15,000
Cost of Goods Sold = 65,000

Manufacturing Overhead

(2) 9,000 (6) 31,000

(3) 16,000
(4) 8,000
(5) 5,000
7,000

The $7,000 debit balance represents underapplied overhead; the $7,000 will be added to the original
$65,000 Cost of Goods Sold to arrive at an adjusted Cost of Goods Sold of $72,000.

The manufacturing overhead applied is:

Answer: $31,000

Solution:

Journal entry (6):

Work in Process 31,000
Manufacturing Overhead 31,000

The cost of direct materials used is:

Answer: $15,000

Solution:

Journal entry (2):

Work in Process 15,000
 Manufacturing Overhead 9,000
Raw Materials 24,000

The debit to Work in Process ($15,000) represents the direct materials used.

The ending Work in Process account balance would be:

Answer: $13,000

Solution:

Journal entry (7):

Finished Goods 62,000
Work in Process 62,000*
*To balance Finished Goods debit of $62,000

Work in Process
Beg. Bal. 11,000

(2) 15,000 (7) 62,000

(4) 18,000
(6) 31,000
End. Bal. 13,000

Rockville, Inc., which uses a job-costing system, began business on January 1, 20x3 and applies
manufacturing overhead on the basis of direct-labor cost. The following information relates to 20x3:
 Budgeted direct labor and manufacturing overhead were anticipated to be $200,000 and
$250,000, respectively.
 Job nos. 1, 2, and 3 were begun during the year and had the following charges for direct
material and direct labor:
 Job No. Direct Materials Direct Labor
1 $145,000 $35,000

2 320,000 65,000

3 55,000 80,000

 Job nos. 1 and 2 were completed and sold on account to customers at a profit of 60% of cost.
Job no. 3 remained in production.
 Actual manufacturing overhead by year-end totaled $233,000. Rockville adjusts all under-
and overapplied overhead to cost of goods sold.

Required:
A. Compute the company's predetermined overhead application rate.
B. Compute Rockville's ending work-in-process inventory.
C. Determine Rockville's sales revenue.
D. Was manufacturing overhead under- or overapplied during 20x3? By how much?
E. Present the necessary journal entry to handle under- or overapplied manufacturing
overhead at year-end.
F. Does the presence of under- or overapplied overhead at year-end indicate that
Rockville's accountants made a serious error? Briefly explain.

Answer:
A. $250,000 ÷ $200,000 = 125% of direct labor cost

B. Job no. 3:
Direct material $ 55,000
Direct labor 80,000
Manufacturing overhead ($80,000 x 125%) 100,000
 Total cost of job no. 3 $235,000

C. Job nos. 1 and 2:

Direct material ($145,000 + $320,000) $465,000
Direct labor ($35,000 + $65,000) 100,000
Manufacturing overhead ($100,000 x 125%) 125,000
Total cost of job nos. 1 and 2 $690,000

Sales revenue: $1,104,000 ($690,000 x 160%)

D. Actual overhead $233,000
Applied overhead: [($35,000 + $65,000 +
$80,000) x 125%] 225,000
Underapplied overhead $ 8,000

E. Cost of Goods Sold 8,000

Manufacturing Overhead 8,000

F. No. Companies use a predetermined application rate for several reasons, including
the fact that manufacturing overhead is not easily traced to jobs and products. The
predetermined rate is based on estimates of both overhead and an appropriate cost
driver, and situations where these amounts coincide precisely with actual
experiences are rare. As a result, under- or overapplied overhead typically arises at
year-end.