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Chapter 2
Job Order Costing and Analysis

QUESTIONS
1. Factory overhead is not identified with specific units (jobs) or batches (job lots).
Therefore, to assign costs, estimates of the relation between factory overhead cost and
job or job lot are necessary. Also, since job order cost accounting is a perpetual
system, we need to estimate a predetermined overhead rate to compute (perpetual)
inventory costs. This estimated amount also helps job order companies determine
prices on a timely basis.
2. Several other factors (allocation bases) are possible and reasonable. These common
factors often include direct materials or machine hours.
3. The job order cost sheet captures information on cost and quantity of direct material
and direct labor, and on the amount of factory overhead applied to the respective job
or job lot. Management and employees use this information to monitor costs during
production and to estimate total cost of production.

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4. Each job is assigned a subsidiary ledger account. This account serves as the
“posting account” (accumulates all increases and decreases) during production for
direct material, direct labor, and applied factory overhead. The collection of job cost
sheets for all of the jobs in process make up a subsidiary ledger controlled by the
Goods in Process Inventory account in the general ledger.
When a job is finished, its job cost sheet is completed and moved from the file of jobs
in process to the file of finished jobs awaiting delivery to customers. This latter file
acts as a subsidiary ledger controlled by the Finished Goods Inventory account. In
this way, management and employees can obtain the costs, direct and indirect,
associated with any job or job lot at any time.
5. A debit (increase) to Goods in Process Inventory for direct materials, a debit
(increase) to Factory Overhead for indirect materials, and a credit (decrease) to Raw
Materials Inventory.
6. The materials requisition slip is designed to track the movement of materials from
raw materials to production. It also serves as an internal control document because
without the slip the inventory department should not release inventory to production.
7. The clock card is used to record the number of hours each employee works and is
used to compute total payroll. The time ticket is used to record how much time an
employee spends on each job. Time tickets are also used to determine the amount of
overhead to charge to jobs when overhead is based on direct labor.

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 8. Debits (increases) to factory overhead are the recording of actual overhead costs,
such as indirect materials, indirect labor, factory rent, and factory insurance. Credits
(decreases) represent the allocation of factory overhead to jobs or job lots.
9. Assuming that the overapplied or underapplied overhead is immaterial, it is closed to
the Cost of Goods Sold account. However, if the amount is material—meaning it
would change business decisions that rely on the information—then the amount of
overapplied or underapplied overhead is allocated to goods in process, finished
goods, and cost of goods sold (using an allocation base such as direct labor).
10. This production run should be accounted for as a job lot (batch). Although individual
snowmobile helmets could be viewed as individual jobs, the costs of tracking this
detailed information would outweigh the benefits. Determining the cost of the batch
should provide management and employees with sufficient information about this
product for all decision making purposes.
11. A predetermined factory overhead rate must be calculated for at least two reasons:
(1) Not all costs are known in advance, yet the costs must be applied to products during
the current period. (2) A predetermined rate is used to spread indirect costs to
products and/or services throughout an accounting period, where overhead costs are
not incurred uniformly throughout the period and production may not be uniform
throughout the period. For instance, property taxes on the factory building of $20,000
may be paid in July, but some of that $20,000 must be allocated to all items produced
during the year, January through December. A predetermined rate is necessary,
because we must estimate the rate at the beginning of the year, based on estimated
costs and activity, before the period begins.
12. Each patient in a hospital can be viewed as a “job.” In this case, a job order cost
sheet would be used to capture cost of direct materials (supplies, medicine, and so
forth), direct labor, and hospital overhead.
13. Each of the 30 luxury motorcycles will likely be accounted for as an individual job.
Although similar in many respects, each would have custom features that would
impact costs. As the luxury motorcycles are shipped to dealers each will have a
separate invoice detailing the cost associated with producing that motorcycle. Also,
the price of a custom-made motorcycle is probably large enough (in the area of
$20,000 to $50,000) that each would be accounted for individually.
14. Sprint employees can use job cost sheets to accumulate the costs (e.g. labor and
materials) used on each job. Managers can use this job cost information to monitor
whether Sprint is meetings its target costs and producing reasonable profits. This
information can be used to adjust the prices of certain services and/or cease
providing certain services if the costs cannot be controlled to yield a reasonable
profit.

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 QUICK STUDIES

Quick Study 2-1 (5 minutes)

Manufactured as a job: 3, 4, 6

Manufactured as a job lot: 1, 2, 5

Quick Study 2-2 (5 minutes)

Direct materials, direct labor, and factory overhead are the three types of
costs typically recorded on a job cost sheet. Managers can use job cost
sheets to monitor costs incurred to date and to predict and control costs
for each job.

Quick Study 2-3 (10 minutes)

Finished Goods Inventory .................................. 10,500

Goods in Process Inventory......................... 10,500
To transfer cost of completed job to Fin. Goods.

Cost of Goods Sold ............................................. 10,500

Finished Goods Inventory ............................. 10,500
To transfer cost of delivered job to COGS.

Cash ...................................................................... 14,900

Sales ................................................................ 14,900
To record sales price of delivered job.

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Quick Study 2-4 (15 minutes)
Raw Materials Inventory ........................................ 50,000
Cash ................................................................... 50,000
To record raw material purchases.

Factory Overhead ................................................... 12,000

Raw Materials Inventory .................................. 12,000
To record raw materials used in production.

Goods in Process Inventory.................................. 32,000

Raw Materials Inventory .................................. 32,000
To record raw materials used in production.

Quick Study 2-5 (10 minutes)

Factory Payroll........................................................ 180,000

Cash ................................................................... 180,000
To record factory payroll.

Goods in Process Inventory.................................. 140,000

Factory Overhead ................................................... 40,000
Factory Payroll.................................................. 180,000
To record direct and indirect labor.

Quick Study 2-6 (10 minutes)

Goods in Process Inventory (Job lot)................... 117,900

Factory Overhead ............................................. 117,900
To apply overhead to job lot [($175,000–$44,000) x 90%].

Quick Study 2-7 (10 minutes)

1. Factory overhead, $117,000 / Direct labor, $468,000 = 25%

2. Factory overhead, $117,000 / Direct materials, $354,500 = 33%*
*Rounded to nearest whole percent

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Quick Study 2-8 (5 minutes)

Factory Overhead ................................................... 22,000

Cost of Goods Sold*......................................... 22,000
To assign overapplied overhead.

*Computation of over- or underapplied overhead

Actual overhead (total debits) ....................... $624,000
Applied overhead (total credits) .................... 646,000
Overapplied overhead .................................... $(22,000)

Quick Study 2-9 (15 minutes)

Cost of Goods Sold ................................................ 50,000

Factory Overhead*............................................ 50,000
To assign underapplied overhead.
*Computation of over- or underapplied overhead
Actual overhead.............................................. $950,000
Overhead applied ($600,000 x 150%) ............ 900,000
Underapplied overhead.................................. $ 50,000

Quick Study 2-10 (10 minutes)

Rate = Estimated overhead costs = $1,170,000 = 130%

Estimated direct materials $900,000

Quick Study 2-11 (10 minutes)

JOB COST SHEET

Direct labor ($50 x 200) .............................................. $10,000
Overhead ($65 x 200) .................................................... 13,000
Total cost ...................................................................... $23,000

Quick Study 2-12 (5 minutes)

Since each car is custom-ordered, Porsche produces in jobs rather in job

lots (production of more than one unit of a custom product).

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 EXERCISES

Exercise 2-1 (10 minutes)

1. C 3. B 5. A

2. D 4. F 6. E

Exercise 2-2 (15 minutes)

JOB COST SHEET: Job 9-1005

Direct materials cost
Q-4698 ....................................... $1,250
Q-4725 ....................................... 1,000 $2,250
Direct labor cost
W-3393 ...................................... 600
W-3479 ...................................... 450
W-3559 ...................................... 300 1,350
Overhead ($1,350 X 110%) ........... 1,485
Total cost ..................................... $5,085

Exercise 2-3 (10 minutes)

1. A 3. C 5. D 7. B

2. F 4. E 6. G

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Exercise 2-4 (25 minutes)

1. The cost of direct materials requisitioned in the month equals the total
direct materials costs accumulated on the three jobs less the amount of
direct materials cost assigned to Job 102 in May:

Job 102 ........................................................... $15,000

Less prior costs ............................................. ( 6,000) $ 9,000
Job 103 ........................................................... 33,000
Job 104 ........................................................... 27,000
Total materials used (requisitioned) ............ $69,000

2. Direct labor cost incurred in the month equals the total direct labor
costs accumulated on the three jobs less the amount of direct labor cost
assigned to Job 102 in May:

Job 102 ........................................................... $8,000

Less prior costs ............................................. (1,800) $ 6,200
Job 103 ........................................................... 14,200
Job 104 ........................................................... 21,000
Total direct labor............................................ $41,400

3. The predetermined overhead rate equals the ratio of the amount of

overhead assigned to jobs divided by the amount of direct labor cost
assigned to them. Since the same rate is used for all jobs started and
completed within a month, the ratio for any one job equals the rate that
was applied. This table shows the ratio for jobs 102 and 104:

Job 102 Job 104

Overhead ........................................................ $ 4,000 $10,500
Direct labor ..................................................... 8,000 21,000
Ratio ................................................................ 50% 50%

4. The cost transferred to finished goods in June equals the total costs of
the two completed jobs for the month, which are Jobs 102 and 103:

Job 102 Job 103 Total

Direct materials ......................... $15,000 $33,000 $48,000
Direct labor ................................ 8,000 14,200 22,200
Overhead ................................... 4,000 7,100 11,100
Total transferred cost ............... $27,000 $54,300 $81,300

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Exercise 2-5 (15 minutes)
1.
$747,500
Rate = Estimated overhead costs = = 130%
Estimated direct labor $575,000

2.
Direct materials ......................................................................... $15,350
Direct labor ................................................................................ 3,200
Overhead ($3,200 x 130%) ........................................................ 4,160
Total cost of Job No. 13-56 ...................................................... $22,710

Exercise 2-6 (20 minutes)

1. $600,000
Rate = Overhead costs = = 40%
Direct material costs $1,500,000

2. Total cost of job in process (given) ........................................ $ 50,000

Less materials cost of job in process (given) ........................ (30,000)
Less overhead applied (30,000 x 40%).................................... (12,000)
Direct labor cost........................................................................ $ 8,000

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Exercise 2-7 (30 minutes)
1. Cost of direct materials used
Beginning raw materials inventory..................................... $ 43,000
Plus purchases ..................................................................... 210,000
Raw materials available ....................................................... 253,000
Less ending raw materials inventory ................................. (52,000)
Total raw materials used ..................................................... 201,000
Less indirect materials used ............................................... (15,000)
Cost of direct materials used .............................................. $ 186,000

2. Cost of direct labor used

Total factory payroll ............................................................. $ 345,000
Less indirect labor ............................................................... (80,000)
Cost of direct labor used ..................................................... $ 265,000

3. Cost of goods manufactured

Beginning goods in process inventory.............................. $ 10,200
Plus direct materials ............................................................ 186,000
Plus direct labor ................................................................... 265,000
Plus overhead applied (70% of direct labor cost) ................ 185,500
Total cost of goods in process ........................................... 646,700
Less ending goods in process inventory .......................... (21,300)
Cost of goods manufactured .............................................. $ 625,400

4. Cost of goods sold

Beginning finished goods inventory .................................. $ 63,000
Plus cost of goods manufactured ...................................... 625,400
Less ending finished goods inventory............................... (35,600)
Cost of goods sold ............................................................... $ 652,800

5. Gross profit
Sales ...................................................................................... $1,400,000
Cost of goods sold ............................................................... (652,800)
Gross profit ........................................................................... $ 747,200

6. Actual overhead incurred

Indirect materials.................................................................. $ 15,000
Indirect labor......................................................................... 80,000
Other overhead costs .......................................................... 120,000
Total actual overhead incurred ........................................... 215,000
Overhead applied ................................................................. 185,500
Underapplied overhead ....................................................... $ 29,500

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Exercise 2-8 (10 minutes)

1. Raw Materials Inventory .............................. 210,000

Cash......................................................... 210,000
To record materials purchases.

2. Goods in Process Inventory ....................... 186,000

Raw Materials Inventory ........................ 186,000
To assign direct materials to jobs.

3. Factory Overhead......................................... 15,000

Raw Materials Inventory ........................ 15,000
To record indirect materials.

Exercise 2-9 (10 minutes)

1. Factory Payroll ............................................. 345,000

Cash......................................................... 345,000
To record factory payroll.

2. Goods in Process Inventory ....................... 265,000

Factory Payroll ....................................... 265,000
To assign direct labor to jobs.

3. Factory Overhead......................................... 80,000

Factory Payroll ....................................... 80,000
To record indirect labor.

Exercise 2-10 (10 minutes)

1. Factory Overhead......................................... 120,000

Other Accounts ...................................... 120,000
To record other factory overhead.

2. Goods in Process Inventory ....................... 185,500

Factory Overhead................................... 185,500
To apply overhead to jobs.
Computed as: 70% Predetermined overhead rate x
Direct labor of $265,000

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Exercise 2-11 (10 minutes)

Cost of Goods Sold...................................... 29,500

Factory Overhead................................... 29,500
To allocate (close) underapplied overhead to cost of
goods sold. Applied overhead equals $265,000 x 70%
= $185,500. Actual overhead = $215,000, computed as
$15,000 + $80,000 + $120,000.

Exercise 2-12 (15 minutes)

Factory Overhead......................................... 3,200

Cost of Goods Sold................................ 3,200
To close overapplied overhead for Marsh.
Cost of Goods Sold...................................... 800
Factory Overhead................................... 800
To close underapplied overhead for Ellis.

Exercise 2-13 (25 minutes)

a. Raw Materials Inventory ....................................... 90,000

Accounts Payable ........................................... 90,000
To record materials purchases.

b. Goods in Process Inventory ................................ 36,500

Raw Materials Inventory ................................. 36,500
To assign costs of direct materials used.

Factory Overhead.................................................. 19,200

Raw Materials Inventory ................................. 19,200
To record indirect materials.

c. Factory Payroll ...................................................... 50,000

Cash ................................................................. 50,000
To record payroll costs paid.

Goods in Process Inventory ................................ 38,000

Factory Payroll ................................................ 38,000
To assign costs of direct labor used.

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Exercise 2-13 (Continued)
[continued from prior page]

c.
Factory Overhead.................................................. 12,000
Factory Payroll ................................................ 12,000
To record indirect labor costs as overhead.

d. Factory Overhead.................................................. 11,475

Cash ................................................................. 11,475
To record other factory overhead paid.

e. Goods in Process Inventory ................................ 47,500

Factory Overhead............................................ 47,500
To apply overhead to jobs at the rate of 125% of
direct labor cost.

f. Finished Goods Inventory.................................... 56,800

Goods in Process Inventory .......................... 56,800
To record jobs completed.

g. Cost of Goods Sold............................................... 56,800

Finished Goods Inventory.............................. 56,800
To record cost of sale of job.

Accounts Receivable ............................................ 82,000

Sales................................................................. 82,000
To record sale of job.

h. Factory Overhead* ................................................ 3,000

Cost of Goods Sold.......................................... 3,000
To close overapplied overhead.

*Overhead applied to jobs...................... $47,500

Overhead incurred
Indirect materials .................................. $19,200
Indirect labor ......................................... 12,000
Other actual overhead paid.................. 11,475 42,675
Overapplied overhead .......................... $ 4,325

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Exercise 2-14 (25 minutes)

1. Predetermined overhead rate

Estimated overhead costs ................................................ $1,680,000
Estimated direct labor costs ............................................ $ 480,000

Rate ($1,680,000/$480,000) ............................................... 350%

2. & 3.
Overhead
Incurred ......... 1,652,000 Applied* .............. 1,662,500

Overapplied ........ 10,500

*Overhead applied to jobs = 350% x $475,000 = $1,662,500

4.
Dec. 31 Factory Overhead............................................... 10,500
Cost of Goods Sold...................................... 10,500
To close overapplied overhead.

Exercise 2-15 (35 minutes)

1. Predetermined overhead rate

Estimated overhead costs .................................................... $750,000
Estimated direct labor costs................................................. $625,000
Rate (Overhead/Direct labor) ................................................ 120%
2. & 3.
Factory Overhead
Incurred ................ 830,000 Applied* ........... 822,000
Underapplied........ 8,000

*Overhead applied to jobs = 120% x $685,000 = $822,000

4.
Dec. 31 Cost of Goods Sold ..................................... 8,000
Factory Overhead.................................. 8,000
To allocate underapplied overhead.

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Exercise 2-16 (30 minutes)

1. Overhead rate = Total overhead costs / Total direct labor costs

= $1,800,000 / $3,000,000 = 60%

2.
Total cost of goods in process inventory ............................. $ 71,000
Deduct: Direct labor ................................................................ (20,000)
Deduct: Factory overhead ($20,000 x 60%)........................... (12,000)
Direct materials........................................................................ $ 39,000

3.
Total cost of finished goods inventory ................................. $490,000
Deduct: Direct materials ........................................................ (250,000)
Direct labor and factory overhead costs............................... $240,000

We also know that the total of direct labor costs (X) and factory
overhead costs (0.6X) equals $240,000. Thus, to get the individual
amounts we need to solve: [X + 0.6X = $240,000]. The solution is:

Direct labor costs = $150,000

Factory overhead costs = $150,000 x 0.6 = $90,000

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Exercise 2-17 (35 minutes)

1. Overhead rate = Total estimated overhead cost_

Total estimated direct labor cost
= $375,000 / $300,000 = 125%

2. Cost of the two ending inventories

Goods in Process Finished Goods
Cost Total Cost Total
per Unit Units Cost per Unit Units Cost

Direct materials ..... $10.00 5,000 $ 50,000 $12.00 12,000 $144,000

Direct labor ............ 7.00 5,000 35,000 9.00 12,000 108,000

Overhead* .............. 8.75 5,000 43,750 11.25 12,000 135,000
Total ....................... $25.75 $128,750 $32.25 $387,000
*125% of labor

3.
Step 1
Cost of goods manufactured
Direct materials cost................................................................... $ 535,000
Direct labor cost.......................................................................... 290,000
Factory overhead cost applied .................................................. 362,500
Total manufacturing cost ........................................................... 1,187,500
Add beginning goods in process .............................................. 0
Total cost of goods in process .................................................. 1,187,500
Less ending goods in process .................................................. (128,750)
Cost of goods manufactured ..................................................... $1,058,750

Step 2
Cost of goods sold
Beginning finished goods .......................................................... $ 0
Add cost of goods manufactured.............................................. 1,058,750
Goods available for sale 1,058,750
Less ending finished goods....................................................... (387,000)
Cost of goods sold...................................................................... $ 671,750

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Exercise 2-18 (35 minutes)

1. Estimated cost of the architectural job

Estimated
Labor type hours Hourly rate Total cost

Architects....................... 150 $300 $ 45,000

Staff ................................ 300 75 22,500
Clerical ........................... 500 20 10,000
Total labor cost.................................................................... 77,500
Overhead @ 175% of direct labor cost ............................. 135,625
Total estimated cost............................................................ $213,125

2. Frey should first determine an estimated selling price, based on its cost
and desired profit for this job.
Total estimated cost ............................................................ $213,125
Desired profit........................................................................ 80,000
Estimated selling price ........................................................ $293,125

This $293,125 price may or may not be its bid. It must consider past
experiences and competition. It might make the bid at the low end of
what it believes the competition will bid. By bidding at about $285,000,
the profit on the job will only be $71,875 ($285,000 – $213,125). While
this may allow Frey to get the job, it must consider several other factors.
Among them:
a. How accurate are its estimates of costs? If costs are understated,
the bid may be too low. This will cause profits to be lower than
anticipated. If costs are overestimated, it may bid too high and lose
the job.
b. How accurate is the estimate of the competition’s probable bidding
range? If it has underestimated the low end, it may be unnecessarily
underbidding. If it has overestimated the low end, it may lose the job.
c. Is it willing to meet the expected low bid of the competition? In the
example above, would it be acceptable to earn only $71,875 on this
job (about a 25% gross profit ratio), rather than the normal $80,000
(about a 27% gross profit ratio)? Can it earn a better profit on
another job?
There is no exact answer to these questions, but Frey must consider
these and other factors before it submits the bid.

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Exercise 2-19 (15 minutes)

(1) Raw Materials Inventory ........................................ 3,108

Accounts Payable............................................. 3,108
To record raw material purchases.

Goods in Process Inventory* ................................ 3,106

Raw Materials Inventory .................................. 3,106
To record raw materials used in production.

* The amount of raw materials used in production is computed from the Raw Materials
Inventory account. Beginning balance plus purchases minus ending balance equals
raw materials used in production, or (in millions), €83 + €3,108 - €85 = €3,106.

(2) The amount of materials purchased is almost equal to the amount of

materials used in production. This means the company holds very
little inventory of raw materials, consistent with lean manufacturing.

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 PROBLEM SET A
Problem 2-1A (80 minutes)
Part 1 Total manufacturing costs and the costs assigned to each job
306 307 308 April Total
From March
Direct materials............... $ 29,000 $ 35,000
Direct labor ...................... 20,000 18,000
Applied overhead* .......... 10,000 9,000
Beginning goods
in process .................... 59,000 62,000 $ 121,000
For April
Direct materials............... 135,000 220,000 $100,000 455,000
Direct labor ..................... 85,000 150,000 105,000 340,000
Applied overhead* .......... 42,500 75,000 52,500 170,000
Total costs added in April. 262,500 445,000 257,500 965,000
Total costs ....................... $321,500 $507,000 $257,500 $1,086,000
*Equals 50% of direct labor cost.

Part 2 Journal entries for April

a. Raw Materials Inventory ........................................ 500,000

Accounts Payable ............................................ 500,000
To record materials purchases.

Factory Payroll ....................................................... 363,000

Cash................................................................... 363,000
To record factory payroll.

Factory Overhead ................................................... 50,000

Raw Materials Inventory .................................. 50,000
To record indirect materials.

Factory Overhead ................................................... 23,000

Factory Payroll ................................................. 23,000
To record indirect labor.

Factory Overhead ................................................... 32,000

Cash................................................................... 32,000
To record factory rent.

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Problem 2-1A (Continued)
a. [continued from prior page]

Factory Overhead ................................................... 19,000

Cash................................................................... 19,000
To record factory utilities.
Factory Overhead ................................................... 51,000
Accumulated Depreciation—Factory Equip .. 51,000
To record other factory overhead.

b. Goods in Process Inventory.................................. 455,000

Raw Materials Inventory .................................. 455,000
To assign direct materials to jobs.
Goods in Process Inventory.................................. 340,000
Factory Payroll ................................................. 340,000
To assign direct labor to jobs.
Goods in Process Inventory.................................. 170,000
Factory Overhead............................................. 170,000
To apply overhead to jobs.

c. Finished Goods Inventory (306 & 307) .................. 828,500

Goods in Process Inventory............................ 828,500
To record jobs completed ($321,500 + $507,000).

d. Cost of Goods Sold (306) ....................................... 321,500

Finished Goods Inventory ............................... 321,500
To record cost of sale of job.
e. Cash......................................................................... 635,000
Sales .................................................................. 635,000
To record sale of job.

f. Cost of Goods Sold ................................................ 5,000

Factory Overhead* ........................................... 5,000
To assign underapplied overhead.
*Overhead applied to jobs ..... $170,000
Overhead incurred
Indirect materials.................... $50,000
Indirect labor .......................... 23,000
Factory rent ............................ 32,000
Factory utilities....................... 19,000
Factory equip. depreciation. . 51,000 175,000
Underapplied overhead ......... $ 5,000

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Problem 2-1A (Continued)
Part 3
CIOLINO COMPANY
Manufacturing Statement
For Month Ended April 30
Direct materials used ......................................................... $ 455,000
Direct labor used ................................................................ 340,000
Factory overhead
Indirect materials............................................................. $50,000
Indirect labor.................................................................... 23,000
Factory rent...................................................................... 32,000
Factory utilities................................................................ 19,000
Depreciation of equipment ............................................. 51,000 175,000
Total manufacturing costs ................................................ 970,000
Add goods in process March 31 (Jobs 306 & 307).......... 121,000
Total cost of goods in process ......................................... 1,091,000
Deduct goods in process, April 30 (Job 308) .................. (257,500)
Deduct underapplied overhead* ....................................... (5,000)
Cost of goods manufactured ............................................ $ 828,500
*Alternatively, the underapplied overhead can be listed among factory overhead items.

Part 4
Gross profit on the income statement for the month ended April 30
Sales ...................................................................................................... $ 635,000
Cost of goods sold ($321,500 + $5,000) .............................................. (326,500)
Gross profit ........................................................................................... $ 308,500

Presentation of inventories on the April 30 balance sheet

Inventories
Raw materials ...................................................................................... $ 75,000*
Goods in process (Job 308)................................................................. 257,500
Finished goods (Job 307) .................................................................... 507,000
Total inventories .................................................................................. $ 839,500
* Beginning raw materials inventory.................... $ 80,000
Purchases ............................................................ 500,000
Direct materials used ......................................... (455,000)
Indirect materials used....................................... (50,000)
Ending raw materials inventory ........................ $ 75,000

Part 5
Overhead is underapplied by $5,000, meaning that individual jobs or batches of
jobs are under-costed. Thus, profits at the job (and batch) level are overstated.

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Problem 2-2A (75 minutes)
Part 1
a.
Dec. 31 Goods in Process Inventory .............................. 28,800
Raw Materials Inventory ............................... 28,800
To record direct materials costs for
Jobs 402 and 404 ($10,200 + 18,600).
b.
Dec. 31 Goods in Process Inventory .............................. 59,800
Factory Payroll .............................................. 59,800
To record direct labor costs for
Jobs 402 and 404 ($36,000 + $23,800).
c.
Dec. 31 Goods in Process Inventory .............................. 119,600
Factory Overhead.......................................... 119,600
To allocate overhead to Jobs 402 and 404
at 200% of direct labor cost assigned.
d.
Dec. 31 Factory Overhead................................................ 5,600
Raw Materials Inventory ............................... 5,600
To add cost of indirect materials
to actual factory overhead.
e.
Dec. 31 Factory Overhead................................................ 8,200
Factory Payroll .............................................. 8,200
To add cost of indirect labor to
actual factory overhead.

Part 2

Revised Factory Overhead account

Ending balance from trial balance.......................................... $115,000 debit
Applied to Jobs 402 and 404 ................................................... (119,600) credit
Additional indirect materials ................................................... 5,600 debit
Additional indirect labor .......................................................... 8,200 debit
Underapplied overhead ........................................................... $ 9,200 debit

Dec. 31 Cost of Goods Sold............................................. 9,200

Factory Overhead.......................................... 9,200
To close underapplied overhead.

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Problem 2-2A (continued)
Part 3
FARINA BAY COMPANY
Trial Balance December
31, 2013
Debit Credit
Cash ............................................................................... $102,000
Accounts receivable ...................................................... 75,000
Raw materials inventory * ............................................. 45,600
Goods in process inventory ** ..................................... 208,200
Finished goods inventory ............................................ 15,000
Prepaid rent ................................................................... 3,000
Accounts payable ......................................................... $ 17,000
Notes payable ................................................................ 25,000
Common stock .............................................................. 50,000
Retained earnings ......................................................... 271,000
Sales ............................................................................... 373,000
Cost of goods sold ($218,000 + $9,200) ............................ 227,200
Factory payroll ............................................................... 0
Factory overhead ........................................................... 0
Operating expenses....................................................... 60,000
Totals .............................................................................. $736,000 $736,000

* Raw materials inventory

Balance per trial balance ................................................. $80,000
Less: Amounts recorded for Jobs 402 and 404 ............ (28,800)
Less: Indirect materials .................................................. (5,600)
Ending balance ................................................................ $45,600

** Goods in process inventory

Job 402 Job 404 Total
Direct materials ........... $ 10,200 $18,600 $ 28,800
Direct labor .................. 36,000 23,800 59,800
Overhead ..................... 72,000 47,600 119,600
Total cost ..................... $118,200 $90,000 $208,200

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Problem 2-2A (continued)
Part 4
FARINA BAY COMPANY
Income Statement
For Year Ended December 31, 2013
Sales .......................................................................................... $373,000
Cost of goods sold................................................................... (227,200)
Gross profit............................................................................... 145,800
Operating expenses................................................................. (60,000)
Net income................................................................................ $ 85,800

FARINA BAY COMPANY

Balance Sheet
Assets
December 31, 2013
Cash .......................................................................... $102,000
Accounts receivable ................................................ 75,000
Inventories
Raw materials inventory......................................... $ 45,600
Goods in process inventory................................... 208,200
Finished goods inventory ...................................... 15,000 268,800
Prepaid rent .............................................................. 3,000
Total assets .............................................................. $448,800

Liabilities and equity

Accounts payable .................................................... $ 17,000
Notes payable........................................................... 25,000
Total liabilities .......................................................... 42,000

Common stock ......................................................... 50,000

Retained earnings ($271,000 + $85,800) ................... 356,800
Total stockholders' equity....................................... 406,800

Total liabilities and equity ....................................... $448,800

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Problem 2-2A (concluded)

Part 5

This $5,600 error would cause the costs for Job 404 to be understated. Since
Job 404 is in process at the end of the period, goods in process inventory
and total assets would both be understated on the balance sheet. In addition,
the over- or underapplied overhead would change by $5,600. That is, if
overhead is underapplied by, say, $9,200, this amount would decrease by
$5,600 when the error is corrected. Since underapplied overhead is charged
directly to cost of goods sold, then cost of goods sold would decrease by
$5,600 and net income would increase by $5,600—
yielding a $5,600 increase in retained earnings on the balance sheet.

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Problem 2-3A (70 minutes)
Part 1
JOB COST SHEETS

Job No. 136 Job No. 138

Materials......... $ 48,000 Materials ......... $ 19,200
Labor .............. 12,000 Labor .............. 37,500
Overhead........ 24,000 Overhead ........ 75,000
Total cost ....... $ 84,000 Total cost ....... $131,700

Job No. 137 Job No. 139

Materials......... $ 32,000 Materials ......... $ 22,400
Labor .............. 10,500 Labor .............. 39,000
Overhead........ 21,000 Overhead ........ 78,000
Total cost ....... $ 63,500 Total cost ....... $139,400

Job No. 140

Materials ......... $ 6,400
Labor .............. 3,000
Overhead ........ 6,000
Total cost ....... $ 15,400

Part 2
a. Raw Materials Inventory ........................................ 200,000
Accounts Payable ............................................ 200,000
To record materials purchases.

b. Factory Payroll ....................................................... 126,000

Cash................................................................... 126,000
To record factory payroll.

c. Factory Overhead ................................................... 15,000

Cash................................................................... 15,000
To record other factory overhead.

d. Goods in Process Inventory.................................. 128,000

Factory Overhead ................................................... 19,500
Raw Materials Inventory .................................. 147,500
To record direct & indirect materials.

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Problem 2-3A (Continued)
[continued from prior page]

e.
Goods in Process Inventory.................................. 102,000
Factory Overhead ................................................... 24,000
Factory Payroll ................................................. 126,000
To record direct & indirect labor.

f. Goods in Process Inventory.................................. 177,000

Factory Overhead............................................. 177,000
To apply overhead to jobs
[($12,000 + $37,500 + $39,000) x 200%].

g. Finished Goods Inventory ..................................... 355,100

Goods in Process Inventory............................ 355,100
To record completion of jobs
($84,000 + $131,700 + $139,400).

h. Accounts Receivable ............................................. 525,000

Sales .................................................................. 525,000
To record sales on account.

Cost of Goods Sold ................................................ 215,700

Finished Goods Inventory ............................... 215,700
To record cost of sales ($84,000 + $131,700).

i. Factory Overhead ................................................... 149,500

Accum. Depreciation—Factory Building ....... 68,000
Accum. Depreciation—Factory Equipment ... 36,500
Prepaid Insurance ............................................ 10,000
Property Taxes Payable................................... 35,000
To record other factory overhead.

j. Goods in Process Inventory.................................. 27,000

Factory Overhead............................................. 27,000
To apply overhead to jobs
[($10,500 + $3,000) x 200%].

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Problem 2-3A (Continued)
Part 3
GENERAL LEDGER ACCOUNTS

Raw Materials Inventory Factory Payroll

(a) 200,000 (d) 147,500 (b) 126,000 (e) 126,000
Bal. 52,500 Bal. 0

Goods in Process Inventory Factory Overhead

(d) 128,000 (g) 355,100 (c) 15,000 (f) 177,000
(e) 102,000 (d) 19,500 (j) 27,000
(f) 177,000 (e) 24,000
(j) 27,000 (i) 149,500
Bal. 78,900 Bal. 4,000

Finished Goods Inventory Cost of Goods Sold

(g) 355,100 (h) 215,700 (h) 215,700
Bal. 139,400 Bal. 215,700

Part 4

Reports of Job Costs*

Goods in Process Inventory
Job 137 ................................. $ 63,500
Job 140 ................................. 15,400
Balance ................................. $ 78,900

Finished Goods Inventory

Job 139 ................................. $139,400
Balance ................................. $139,400

Cost of Goods Sold

Job 136 ................................. $ 84,000
Job 138 ................................. 131,700
Balance ................................. $215,700

*Individual totals reconcile with account balances in part 3.

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Problem 2-4A (35 minutes)

Part 1
a. Predetermined overhead rate
Estimated overhead costs $1,500,000 $1,500,000
Estimated direct labor cost = = = 60%
[50 x 2,000 x $25] $2,500,000

b. Overhead costs charged to jobs

Direct Applied
Job No. Labor Overhead (60%)
201 .................................................................. $ 604,000 $ 362,400
202 .................................................................. 563,000 337,800
203 .................................................................. 298,000 178,800
204 .................................................................. 716,000 429,600
205 .................................................................. 314,000 188,400
206 .................................................................. 17,000 10,200
Total ............................................................... $2,512,000 $1,507,200

c. Overapplied or underapplied overhead determination

Actual overhead cost.................................... $1,520,000

Less applied overhead cost......................... 1,507,200
Underapplied overhead................................ $ 12,800

Part 2

Dec. 31 Cost of Goods Sold................................................ 12,800

Factory Overhead.............................................. 12,800
To assign underapplied overhead.

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Problem 2-5A (80 minutes)

JOB COST

Customer's Name Worldwide Company Job No.

Direct Materials Direct Labor Overhead Costs Applied

Time
Requisition Ticket
Date Number Amount Number Amount Date Rate Amount
#35 33,750 #1-10 90,000 May --- 80% 72,000
#36 12,960
SUMMARY OF COSTS
Dir. Materials .......... 46,710
Dir. Labor................ 90,000
Overhead ................ 72,000
Total cost of Job .... 208,710
Total 46,710 Total 90,000
F I N I S H E D

JOB COST

Customer's Name Reuben Company Job No.

Direct Materials Direct Labor Overhead Costs Applied

Time
Requisition Ticket
Date Number Amount Number Amount Date Rate Amount
#37 17,500 #11-30 65,000 May --- 80% 52,000
#38 6,840
SUMMARY OF COSTS
Dir. Materials ..........
Dir. Labor................
Overhead ................
Total cost of Job ....
Total Total

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Problem 2-5A (Continued)

MATERIALS LEDGER CARD

Item Material M

Received Issued Balance

Receiving Unit Total Requi- Unit Total Unit Total
Date Report Units Price Price sition Units Price Price
Units Price Price
May 1 200 250 50,000
#426 250 250 62,500 450 250 112,500
#35 135 250 33,750 315 250 78,750
#37 70 250 17,500 245 250 61,250

MATER

Item Material R

Received Issued Balance

Receiving Unit Total Requi- Unit Total Unit Total
Date Report Units Price Price sition Units Price Price
Units Price Price
May 1 95 180 17,100
#427 90 180 16,200 185 180 33,300
#36 72 180 12,960 113 180 20,340
#38 38 180 6,840 75 180 13,500

MATERIALS LEDGER CARD

Item Paint

Received Issued Balance

Receiving Unit Total Requi- Unit Total Unit Total
Date Report Units Price Price sition Units Price Price Units Price Price
May 1 55 75 4,125
#39 15 75 1,125 40 75 3,000

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Problem 2-5A (Continued)
GENERAL JOURNAL
a. Raw Materials Inventory ......................................... 78,700
Accounts Payable.............................................. 78,700
To record materials purchases ($62,500+$16,200).

d. Factory Payroll......................................................... 174,250

Cash .................................................................... 174,250
To record factory payroll.

Factory Overhead .................................................... 102,000

Cash .................................................................... 102,000
To record other factory overhead.

e. Finished Goods Inventory ...................................... 208,710

Goods in Process .............................................. 208,710
To record completion of jobs.

f. Accounts Receivable .............................................. 400,000

Sales ................................................................... 400,000
To record sales on account.

Cost of Goods Sold ................................................. 208,710

Finished Goods Inventory ................................ 208,710
To record cost of sales.

h. Goods in Process Inventory* ................................. 71,050

Factory Overhead .................................................... 1,125
Raw Materials Inventory ................................... 72,175
To record direct & indirect materials.
*($33,750 + $12,960 + $17,500 + $6,840)

i. Goods in Process Inventory* ................................. 155,000

Factory Overhead .................................................... 19,250
Factory Payroll................................................... 174,250
To record direct & indirect labor.
*($90,000 + 65,000)

j. Goods in Process Inventory................................... 124,000

Factory Overhead .............................................. 124,000
To apply overhead ($72,000 + 52,000).

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Problem 2-5A (Continued)

k. The ending balance in the Factory Overhead account is computed as:

Actual Factory Overhead

Miscellaneous overhead ..................... $102,000
Indirect materials ................................ 1,125
Indirect labor ....................................... 19,250
Total actual factory overhead ............. 122,375
Factory overhead applied ...................... 124,000
Overapplied overhead ............................ $ (1,625)

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 PROBLEM SET B
Problem 2-1B (80 minutes)
Part 1
Total manufacturing costs and the costs assigned to each job
114 115 116 Sept. Total
From August
Direct materials ...................... $ 14,000 $ 18,000
Direct labor ............................. 18,000 16,000
Applied overhead* ................. 9,000 8,000
Beginning goods
In process ............................ 41,000 42,000 $ 83,000
For September
Direct materials ...................... 100,000 170,000 $ 80,000 350,000
Direct labor ............................ 30,000 68,000 120,000 218,000
Applied overhead* ................. 15,000 34,000 60,000 109,000
Total costs added in
September ........................... 145,000 272,000 260,000 677,000
Total costs .............................. $186,000 $314,000 $260,000 $760,000
*Equals 50% of direct labor cost.

Part 2 Journal entries for September

a. Raw Materials Inventory ....................................... 400,000
Accounts Payable ........................................... 400,000
To record materials purchases.
Factory Payroll ...................................................... 232,000
Cash ................................................................. 232,000
To record factory payroll.
Factory Overhead.................................................. 30,000
Raw Materials Inventory ................................. 30,000
To record indirect materials.
Factory Overhead.................................................. 14,000
Factory Payroll ................................................ 14,000
To record indirect labor.
Factory Overhead.................................................. 20,000
Cash ................................................................. 20,000
To record other factory overhead (rent).

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Problem 2-1B (Continued)
a. [continued from prior page]
Factory Overhead.................................................. 12,000
Cash ................................................................. 12,000
To record other factory overhead (utilities).

Factory Overhead.................................................. 30,000

Accum. Depreciation—Factory Equip........... 30,000
To record other factory overhead (depreciation).

b. Goods in Process Inventory ................................ 350,000

Raw Materials Inventory ................................. 350,000
To assign direct materials to jobs.

Goods in Process Inventory ................................ 218,000

Factory Payroll ................................................ 218,000
To assign direct labor to jobs.

Goods in Process Inventory ................................ 109,000

Factory Overhead............................................ 109,000
To apply overhead to jobs.

c. Finished Goods Inventory.................................... 500,000

Goods in Process Inventory .......................... 500,000
To record jobs completed ($186,000 + $314,000).

d. Cost of Goods Sold............................................... 186,000

Finished Goods Inventory.............................. 186,000
To record cost of sale of job.

e. Cash ....................................................................... 380,000

Sales................................................................. 380,000
To record sale of job.

f. Factory Overhead* ................................................ 3,000

Cost of Goods Sold.......................................... 3,000
To assign overapplied overhead.
*Overhead applied to jobs...................... $109,000
Overhead incurred
Indirect materials .................................. $30,000
Indirect labor ......................................... 14,000
Factory rent ........................................... 20,000
Factory utilities ..................................... 12,000
Factory equip. depreciation ................. 30,000 106,000
Overapplied overhead .......................... $ 3,000

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Problem 2-1B (Continued)
Part 3
TAVELLA COMPANY
Manufacturing Statement
For Month Ended September 30
Direct materials used ....................................................... $350,000
Direct labor used............................................................... 218,000
Factory overhead
Indirect materials ........................................................... $ 30,000
Indirect labor .................................................................. 14,000
Factory rent .................................................................... 20,000
Factory utilities .............................................................. 12,000
Depreciation of equipment ........................................... 30,000 106,000
Total manufacturing costs ............................................... 674,000
Add goods in process August 31 (Jobs 114 & 115) ........ 83,000
Total cost of goods in process........................................ 757,000
Deduct goods in process, September 30 (Job 116) ....... (260,000)
Add overapplied overhead* ............................................. 3,000
Cost of goods manufactured ........................................... $500,000
*Alternatively, overapplied overhead can be listed among the overhead items.

Part 4

Gross profit on the income statement for the month ended September 30
Sales ................................................................................................... $380,000
Cost of goods sold ($186,000 - $3,000) ........................................... (183,000)
Gross profit ........................................................................................ $197,000

Presentation of inventories on the September 30 balance sheet

Inventories
Raw materials .................................................................................. $170,000*
Goods in process (Job 116) ............................................................ 260,000
Finished goods (Job 115) ................................................................ 314,000
Total inventories .............................................................................. $744,000
* Beginning raw materials inventory ............... $150,000
Purchases ...................................................... 400,000
Direct materials used .................................... (350,000)
Indirect materials used.................................. (30,000)
Ending raw materials inventory.................... $170,000

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Problem 2-1B (Concluded)

Part 5
Overhead is overapplied by $3,000, meaning that individual jobs or batches
are over-costed. Thus, profits at the job (and batch) level are understated.

Problem 2-2B (75 minutes)

Part 1
a.
Dec. 31 Goods in Process Inventory ........................... 12,200
Raw Materials Inventory ............................ 12,200
To record direct materials costs for
Jobs 603 and 604 ($4,600 + $7,600).

b.
Dec. 31 Goods in Process Inventory ........................... 13,000
Factory Payroll ........................................... 13,000
To record direct labor costs for
Jobs 603 and 604 ($5,000 + $8,000).

c.
Dec. 31 Goods in Process Inventory ........................... 26,000
Factory Overhead....................................... 26,000
To allocate overhead to Jobs 603 and 604 at
200% of direct labor cost assigned to them.

d.
Dec. 31 Factory Overhead............................................. 2,100
Raw Materials Inventory ............................ 2,100
To add cost of indirect materials
to actual factory overhead.

e.
Dec. 31 Factory Overhead............................................. 3,000
Factory Payroll ........................................... 3,000
To add cost of indirect labor to
actual factory overhead.

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Problem 2-2B (Continued)
Part 2
Revised Factory Overhead account
Ending balance from trial balance .................................... $27,000 Debit
Applied to Jobs 603 and 604 ............................................. (26,000) Credit
Additional indirect materials ............................................. 2,100 Debit
Additional indirect labor .................................................... 3,000 Debit
Underapplied overhead ...................................................... $ 6,100 Debit

Dec. 31 Cost of Goods Sold.......................................... 6,100

Factory Overhead....................................... 6,100
To remove $6,100 of underapplied overhead from
the Factory Overhead account and add it to cost
of goods sold.

Part 3
SWISHER COMPANY
Trial Balance
December 31, 2013
Debit Credit
Cash ............................................................................. $ 48,000
Accounts receivable .................................................... 42,000
Raw materials inventory* ............................................ 11,700
Goods in process inventory** ................................... 51,200
Finished goods inventory .......................................... 9,000
Prepaid rent ................................................................. 3,000
Accounts payable ....................................................... $ 10,500
Notes payable .............................................................. 13,500
Common stock ............................................................ 30,000
Retained earnings ....................................................... 87,000
Sales ............................................................................. 180,000
Cost of goods sold*** ................................................. 111,100
Factory payroll ............................................................. 0
Factory overhead ......................................................... 0
Operating expenses..................................................... 45,000
Totals ............................................................................ $321,000 $321,000

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Problem 2-2B (Continued)

Part 3 (Concluded)

* Raw materials inventory

Balance per trial balance ................................................. $26,000
Less: Amounts recorded for Jobs 603 and 604 ............ (12,200)
Less: Indirect materials .................................................. (2,100)
Ending balance ................................................................ $11,700

** Goods in process inventory

Job 603 Job 604 Total
Direct materials ........... $ 4,600 $ 7,600 $12,200
Direct labor .................. 5,000 8,000 13,000
Overhead ..................... 10,000 16,000 26,000
Total cost ..................... $19,600 $31,600 $51,200

*** $105,000 + $6,100 = $111,100

Part 4
SWISHER COMPANY
Income Statement
For Year Ended December 31, 2013
Sales ................................................................................ $ 180,000
Cost of goods sold......................................................... (111,100)
Gross profit..................................................................... 68,900
Operating expenses....................................................... (45,000)
Net income ...................................................................... $ 23,900

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Problem 2-2B (Concluded)

Part 4 (Concluded)

SWISHER COMPANY
Balance Sheet
December 31, 2013
Assets
Cash ................................................................ $ 48,000
Accounts receivable ...................................... 42,000
Inventories
Raw materials inventory............................... $11,700
Goods in process inventory......................... 51,200
Finished goods inventory ............................ 9,000 71,900
Prepaid rent .................................................... 3,000
Total assets .................................................... $164,900

Liabilities and equity

Accounts payable .......................................... $ 10,500
Notes payable................................................. 13,500
Total liabilities ................................................ 24,000
Common stock ............................................... 30,000
Retained earnings ($87,000 + $23,900) ............. 110,900
Total stockholders' equity............................. 140,900
Total liabilities and equity ............................. $164,900

Part 5

The $2,100 error would cause the costs for Job 604 to be understated.
Since Job 604 is in process at the end of the period, goods in process
inventory and total assets would both be understated on the balance sheet.
In addition the over- or underapplied overhead would change by $2,100. That
is, if overhead is underapplied by, say, $6,100, that amount would decrease
by $2,100, yielding $4,000 in underapplied overhead. Any under- or
overapplied overhead is charged directly to cost of goods sold, so
correcting the error would cause cost of goods sold to decrease and net
income to increase by $2,100—yielding a $2,100 increase in retained
earnings.

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Problem 2-3B (70 minutes)
Part 1

JOB COST SHEETS

Job No. 487

Materials ........ $30,000
Labor ............. 8,000
Overhead ....... 16,000
Total cost ...... $54,000

Job No. 488

Materials ........ $20,000
Labor ............. 7,000
Overhead ....... 14,000
Total cost ...... $41,000

Materials
Job No. 489........ $12,000
Labor ............. 25,000
Overhead ....... 50,000
Total cost ...... $87,000

Materials
Job No. 490........ $14,000
Labor ............. 26,000
Overhead ....... 52,000
Total cost ...... $92,000

Materials
Job No. 491........ $ 4,000
Labor ............. 2,000
Overhead ....... 4,000
Total cost ...... $10,000

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Problem 2-3B (Concluded)

Part 2

a. Raw Materials Inventory ....................................... 125,000

Accounts Payable ........................................... 125,000
To record materials purchases.

b. Factory Payroll ...................................................... 84,000

Cash ................................................................. 84,000
To record factory payroll.

c. Factory Overhead.................................................. 11,000

Cash ................................................................. 11,000
To record other factory overhead.

d. Goods in Process Inventory ................................ 80,000

Factory Overhead.................................................. 12,000
Raw Materials Inventory ................................. 92,000
To record direct & indirect materials.

e. Goods in Process Inventory ................................ 68,000

Factory Overhead.................................................. 16,000
Factory Payroll ................................................ 84,000
To record direct & indirect labor.

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Problem 2-3B (Continued)
[continued from prior page]

f. Goods in Process Inventory ................................ 118,000

Factory Overhead............................................ 118,000
To apply overhead to jobs
[($8,000 + $25,000 + $26,000) x 200%].

g. Finished Goods Inventory.................................... 233,000

Goods in Process Inventory .......................... 233,000
To record completion of jobs
($54,000 + $87,000 + $92,000).

h. Accounts Receivable ............................................ 340,000

Sales................................................................. 340,000
To record sales on account.

Cost of Goods Sold............................................... 141,000

Finished Goods Inventory.............................. 141,000
To record cost of sales ($54,000 + $87,000).

i. Factory Overhead.................................................. 96,000

Accum. Depreciation—Factory Building ...... 37,000
Accum. Depreciation—Factory Equipment .. 21,000
Prepaid Insurance ........................................... 7,000
Property Taxes Payable ................................. 31,000
To record other factory overhead.

j. Goods in Process Inventory ................................ 18,000

Factory Overhead............................................ 18,000
To apply overhead to jobs
[($7,000 + $2,000) x 200%].

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Problem 2-3B (Continued)
Part 3
GENERAL LEDGER ACCOUNTS

Raw Materials Inventory Factory Payroll

(a) 125,000 (d) 92,000 (b) 84,000 (e) 84,000
Bal. 33,000 Bal. 0

Goods in Process Inventory Factory Overhead

(d) 80,000 (g) 233,000 (c) 11,000 (f) 118,000
(e) 68,000 (d) 12,000 (j) 18,000
(f) 118,000 (e) 16,000
(j) 18,000 (i) 96,000
Bal. 51,000 Bal. 1,000

Finished Goods Inventory Cost of Goods Sold

(g) 233,000 (h) 141,000 (h) 141,000
Bal. 92,000 Bal. 141,000

Part 4
Reports of Job Costs*
Goods in Process Inventory
Job 488 .................................
$ 41,000
Job 491 ................................. 10,000
Balance................................. $ 51,000

Finished Goods Inventory

Job 490 ................................. $ 92,000
Balance................................. $ 92,000

Cost of Goods Sold

Job 487 ................................. $ 54,000
Job 489 ................................. 87,000
Balance................................. $141,000

*Individual totals reconcile with account balances shown in part 3.

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Problem 2-4B (35 minutes)

Part 1

a. Predetermined overhead rate

Estimated overhead costs $750,000 $750,000
Estimated direct labor cost = [50 x 2,000 x $15] = $1,500,000 = 50%

b. Overhead costs charged to jobs

Direct Applied
Job No. Labor Overhead (50%)
625 .............................................................. $ 354,000 $177,000
626 .............................................................. 330,000 165,000
627 .............................................................. 175,000 87,500
628 .............................................................. 420,000 210,000
629 .............................................................. 184,000 92,000
630 .............................................................. 10,000 5,000
Total ........................................................... $1,473,000 $736,500

c. Overapplied or underapplied overhead determination

Actual overhead cost............................................................ $725,000

Less applied overhead cost................................................. 736,500
Overapplied overhead .......................................................... $ (11,500)

Part 2

Dec. 31 Factory Overhead................................................... 11,500

Cost of Goods Sold.......................................... 11,500
To assign overapplied overhead.

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Problem 2-5B (90 minutes)

JOB COST

Customer's Name Encinita Company Job No. 450

Direct Materials Direct Labor Overhead Costs Applied

Time
Requisition Ticket
Date Number Amount Number Amount Date Rate Amount
#223 16,000 #1-10 40,000 June -- 70% 28,000
#224 9,600
SUMMARY OF COSTS
Dir. Materials ....... 25,600
Dir. Labor............. 40,000
Overhead ............. 28,000
Total Cost of Job .. 93,600
Total 25,600 Total 40,000
F I N I S H E D

JOB COST

Customer's Name Fargo, Inc. Job No.

Direct Materials Direct Labor Overhead Costs Applied

Time
Requisition Ticket
Date Number Amount Number Amount Date Rate Amount
#225 8,000 #11-20 32,000 June-- 70% 22,400
#226 4,800
SUMMARY OF COSTS
Dir. Materials ..........
Dir. Labor................
Overhead ................
Total cost of Job ....
Total Total

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Problem 2-5B (Continued)

MATERIALS LEDGER CARD

Item Material M

Received Issued Balance

Receiving Unit Total Requi- Unit Total Unit Total
Date Report Units Price Price sition Units Price Price
Units Price Price
June 1 120 200 24,000
#20 150 200 30,000 270 200 54,000
#223 80 200 16,000 190 200 38,000
#225 40 200 8,000 150 200 30,000

MATERIALS LEDGER CARD

Item Material R

Received Issued Balance

Receiving Unit Total Requi- Unit Total Unit Total
Date Report Units Price Price sition Units Price Price Units Price Price
June 1 80 160 12,800
#21 70 160 11,200 150 160 24,000
#224 60 160 9,600 90 160 14,400
#226 30 160 4,800 60 160 9,600

MATERIALS LEDGER CARD

Item Paint

Received Issued Balance

Receiving Unit Total Requi- Unit Total Unit Total
Date Report Units Price Price sition Units Price Price Units Price Price
June 1 44 72 3,168
#227 12 72 864 32 72 2,304

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Problem 2-5B (Continued)
GENERAL JOURNAL
a. Raw Materials Inventory........................................... 41,200
Accounts Payable ............................................... 41,200
To record materials purchases ($30,000+$11,200).

d. Factory Payroll .......................................................... 84,000

Cash ..................................................................... 84,000
To record factory payroll.

Factory Overhead ..................................................... 36,800

Cash ..................................................................... 36,800
To record other factory overhead.

e. Finished Goods Inventory ....................................... 93,600

Goods in Process ............................................... 93,600
To record completion of jobs.

f. Accounts Receivable................................................ 290,000

Sales..................................................................... 290,000
To record sales on account.

Cost of Goods Sold .................................................. 93,600

Finished Goods Inventory ................................. 93,600
To record cost of sales.

h. Goods in Process Inventory*................................... 38,400

Factory Overhead ..................................................... 864
Raw Materials Inventory..................................... 39,264
To record direct & indirect materials.
*($16,000 + $8,000 + $9,600 + $4,800)

i. Goods in Process Inventory*................................... 72,000

Factory Overhead ..................................................... 12,000
Factory Payroll .................................................... 84,000
To record direct & indirect labor.
*($40,000 + $32,000)

j. Goods in Process Inventory .................................... 50,400

Factory Overhead ............................................... 50,400
To apply overhead ($28,000 + $22,400).

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Problem 2-5B (Continued)

k. The ending balance in Factory Overhead is computed as:

Actual Factory Overhead

Miscellaneous overhead .............. $36,800
Indirect materials .......................... 864
Indirect labor ................................. 12,000
Total actual factory overhead ...... 49,664
Factory overhead applied ............... 50,400
Overapplied overhead ..................... $ (736)

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 SERIAL PROBLEM— SP 2
Serial Problem—SP 2, Success Systems (40 minutes)
1. The cost of direct materials requisitioned in the month equals the total
direct materials costs accumulated on the three jobs less the amount of
direct materials cost assigned to Job 6.02 in May:
Job 6.02 .................................................................. $1,500
Less prior costs ..................................................... (600) $ 900
Job 6.03 .................................................................. 3,300
Job 6.04 .................................................................. 2,700
Total materials used (requisitioned) .................... $6,900

2. Direct labor cost incurred in the month equals the total direct labor
costs accumulated on the three jobs less the amount of direct labor cost
assigned to Job 6.02 in May:
Job 6.02 .................................................................. $ 800
Less prior costs ..................................................... (180) $ 620
Job 6.03 .................................................................. 1,420
Job 6.04 .................................................................. 2,100
Total direct labor.................................................... $4,140

3. The predetermined overhead rate equals the ratio between the amount
of overhead assigned to the jobs divided by the amount of direct labor
cost assigned to them. Since the rate is assumed constant during the
year in this problem, and the same rate is used for all jobs within a month,
the ratio for any one of them equals the rate that was applied. This table
shows the ratio for jobs 6.02 and 6.04:
Job 6.02 Job 6.04
Overhead ........................................................ $ 400 $1,050
Direct labor ..................................................... 800 2,100
Predetermined overhead rate ....................... 50% 50%

4. The cost transferred to finished goods in June equals the total costs of
the two completed jobs for the month, which are Jobs 6.02 and 6.03:
Job 6.02 Job 6.03 Total
Direct materials ............................ $1,500 $3,300 $4,800
Direct labor ................................... 800 1,420 2,220
Overhead....................................... 400 710 1,110
Total transferred cost .................. $2,700 $5,430 $8,130

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 Reporting in Action — BTN 2-1

1. We would anticipate that at least two types of costs will increase as a

percent of sales with Polaris’s growth in domestic sales. The first type
is broadly classed into variable costs. Variable costs are the usual
operating costs including selling, and administrative costs. Simply
stated, it will cost Polaris to expand and operate in more markets. The
second type of costs relates to fixed costs that occur with growth
beyond Polaris’s current productive capacity. Specifically, increasing
amounts of property and equipment assets are likely to be required with
growth in domestic markets. This is because Polaris would expand its
ability to meet increasing sales through expanding the number of stores
and its inventory.

2. Both types of costs identified in part 1 are likely to increase as Polaris

expands into more markets. Examples of specific items include
communication, advertising, training, travel, and management costs. In
addition, if growth is sufficiently large to push Polaris’s sales beyond its
current capacity, additional costs will be incurred in expanding property
and equipment assets.

Achieving success with the first type of costs can be examined by

looking at the relation between operating costs and sales growth.
Success with the second type of costs can be indirectly examined by
looking at Polaris’s gross margin ratio as sales increase. If Polaris does
not expand and add capacity, this percent should increase as sales
increase—this would be due to “economies of scale.” Success could
also be assessed using asset turnover ratios and return on asset ratios.

3. Solution depends on the annual report information obtained.

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 Comparative Analysis — BTN 2-2

1. Actual inventory changes and operating cash flow effects as found on

the cash flow statement (amounts are in $thousands)
One Year Two Years
Polaris Current Year Prior Prior
Inventory change .......... Increase Increase Decrease
Operating cash
flow effect from Decrease of Decrease of Increase of
inventory change .......... $49,973 $56,612 $42,997

One Year Two Years

Arctic Cat Current Year Prior Prior
Inventory change .......... Decrease Decrease Decrease
Operating cash
flow effect from Increase of Increase of Increase of
inventory change .......... $20,587 $40,003 $2,798

2. A successful JIT system should reduce inventory levels. This reduction

in inventory should increase operating cash flows. In the solution of
part 1, notice that decreases in inventory yield increases in operating
cash flow, while increases in inventory yield decreases in operating
cash flow. The decreases in inventory from a JIT system should free up
additional resources that could be directed toward paying off debt or
expanding operations for even greater returns. This should increase
operating income. In addition, losses from obsolete or damaged
inventory should decline, also increasing operating income.

3. This is a one-time occurrence of a release of cash. However, this one-

time adjustment can yield a recurring impact on returns if such freed up
resources are directed into productive assets. Moreover, this
adjustment should not reverse provided the JIT inventory system can
maintain the reduced inventory levels.

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 Ethics Challenge — BTN 2-3

Instructor note: This problem is designed to illustrate why the accounting professional
must be aware of management’s and employees’ biases when working with and relying
on accounting estimates and data.

MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:

Suggested content outline

The obvious concern is that management is allocating more overhead to

government jobs compared to open market bid contracts. There is no
obvious reason for such behavior other than a profit motive.

Specifically, by allocating more overhead to government jobs, profits on

government jobs will increase in relation to cost. Conversely, private
market jobs will show greater profits because more overhead is allocated
to government jobs and less to private jobs.

This type of abuse in overhead allocation is a real problem in practice.

This is why we hear of “$500 hammers” sold to the U.S. Government.

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 Communicating in Practice — BTN 2-4

Student notes should include but not be limited to the following points:
1. You recommend replacing the general accounting (periodic inventory)
system with a cost accounting (perpetual inventory) system— specifically
a job order cost accounting system. Cost accounting systems provide
product cost information as products are manufactured whereas the
current system does not. The new system would yield more timely
information for pricing goods for sale. A job order system is
particularly appropriate for the kinds of goods this business
produces—goods made-to-order or stock items produced at varying
points in time. A job order system is also appropriate for this type of
discontinuous production of goods. Finally, the new system has the
potential to reduce inventory levels—with possible implementation of a
JIT system—that will free up funds to be devoted elsewhere.

2. This new system would require use of many different documents to

control the acquisition, use, and availability of materials. It also requires
documents for allocation of labor and overhead costs, and for finished
goods that are sold and unsold. The chapter illustrates many of these
source documents for a cost accounting system. You might also
suggest that these documents could/should be implemented in an
“online” (paperless) manner to further facilitate information and
inventory management.

3. The focal point of the new system is the job cost sheet, which is used to
accumulate and tally costs of goods as produced for each specific job
order and job lot. You could prepare a sample and explain and illustrate
how the system determines unit costs as production is completed.

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 Taking It to the Net — BTN 2-5

Instructor note: There is no single solution to this assignment.

The Website [amsi.com] provides details about what its job costing
software can provide to users. After careful examination, students can write
a report to the CEO, which may include the following points:
Features of the software (including the tools it offers)
Reports that can be generated using the software
Benefits of the software—pricing, cost control, inventory management,
general ledger package, accounts payable and receivable, etc.

Teamwork in Action — BTN 2-6

1. A medical clinic can be considered as appropriate for a job order cost

accounting system. This is because each patient is unique in many
ways, such as the type/location of the illness (skin, heart, lung, etc.),
health condition (some may have diabetes or high blood pressure
whereas others may be free of such conditions), and other personal
characteristics (age, gender, weight, etc.). Also, different patients have
different emotional frames of mind that impact diagnosis and treatment.

2. In light of the differences identified in part 1, the doctors will consider

the individual characteristics of every patient in determining the type
and extent of treatment to be provided, the extent of counseling
required, and so forth. Each individual patient will therefore “consume”
resources in varying quantities resulting in different costs. This would
suggest a job order cost accounting system as an appropriate
monitoring and control system.

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 Entrepreneurial Decision — BTN 2-7

1. A job cost sheet for a service company would likely not have any costs
for direct materials. A manufacturing company like Astor and Black
converts raw materials into finished goods, thus its job cost sheet
would accumulate and track costs of raw materials for each job.

2. Examples of direct labor and overhead costs for Astor and Black
include:

Direct Labor: Wages/salaries of tailors.

Overhead: Allocated portions of general administrative costs such as

supervisors’ salaries, depreciation on equipment used, and indirect
materials such as thread and needles.

Hitting the Road — BTN 2-8

1. The framework for the job cost sheet should follow that in the second
exhibit in the chapter. This includes the descriptions for: company name,
date, quantity, etc. In addition, the direct costs should include
subcontract work, such as electrical and plumbing. The response for
overhead will likely vary. The key is that any overhead allocation pattern
be logical. In the building business, square footage, lot size, labor time,
cost of materials, a straight average, or a combination may be utilized to
allocate overhead.

2. Results of the comparison of job cost sheets to a builder’s actual job

cost sheets depend on the builder chosen and the format used.
Instructors often find it useful to have students/teams report findings to
the class.

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 Global Decision — BTN 2-9

1. Actual inventory amounts and changes. KTM’s amounts are in Australian

dollars (thousands) and Piaggio’s amounts are in euros (thousands).
Balance, Balance, Change in
KTM ($ ‘000’s) Current Year Prior Year Inventory
Inventory......................... $113,979 $108,910 $5,069
Increase
Operating cash
flow effect from Decrease of
inventory change .......... $5,069

Balance, Balance, Change in

Piaggio (€ ‘000’s) Current Year Prior Year Inventory
Inventory......................... €236,998 €240,066 €3,068
Decrease
Operating cash
flow effect from Increase of
inventory change .......... €3,068

2. A successful JIT system should reduce inventory levels. This reduction

in inventory should increase operating cash flows. In the solution of
part 1, notice that decreases in inventory yield increases in operating
cash flow, while increases in inventory yield decreases in operating cash
flow. The decreases in inventory from a JIT system should free up
additional resources that could be directed toward paying off debt or
expanding operations for even greater returns. This should also increase
operating income. In addition, losses from obsolete or damaged
inventory should decline, also increasing operating income.

3. We cannot definitively determine which company of the two would

benefit the most from JIT implementation. The benefit of JIT would
depend on the efficiencies gained from the implementation, which
might vary by company. Also, we cannot directly compare changes
expressed in euros with those expressed in Australian dollars. We
would have to translate euros into Australian dollars (or vice versa) to
be able to determine which company has experienced the largest
changes in inventory over the past few years.

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