2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in

©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Solutions Manual, Chapter 2 53 Chapter 2

Job Order Costing and Analysis

QUESTIONS

• 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.

• Several other factors (allocation bases) are possible and reasonable. These common

factors often include direct materials or machine hours.

• 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.

• 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.

• 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.

• 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.

• 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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• 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.

• 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).

• 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.

• 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.

• 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.

• 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.

• 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.

©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.56 Managerial Accounting, 4th Edition 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)

• Factory overhead, $117,000 / Direct labor, $468,000 = 25%
• Factory overhead, $117,000 / Direct materials, $354,500 = 33%*

*Rounded to nearest whole percent