She Succeeds Where Others Have Failed
The financial press is fond of highlighting the fact that, sporting stilettos and leather skirts, Lynn Tilton does not dress like your typical manufacturing executive. Much more important, however, is the fact that her business success is also far from typical. In fact, as the full or partial owner of 74 companies with revenues of more than $8 billion, Tilton is one of the wealthiest female entrepreneurs in the United States. Her company, Patriarch Partners, is sometimes referred to as the largest woman-owned business in America.
Her path to success is an inspiring tale of determination. Tilton started on Wall Street as a single mother, working 15-hour days as she put herself through business school. During years of employment at numerous financial institutions, she developed a knack for analyzing balance sheets and interpreting complex financial information. Eventually, Tilton started her own company, Patriarch Partners, and invested in the debt of a number of distressed companies. She quickly figured out that the only way she was going to make money on those investments was to take control of the companies and try to make them profitable. Thus, seemingly almost by accident, she became the CEO of dozens of failing manufacturing companies. Amazingly, she was able to make these companies profitable when others had given up on them.
As a result of this initial success, Tilton made corporate turnarounds the focus of her company. Once a business is acquired, she installs a new management team, improves productivity, and identifies new products for the company to produce. For example, she turned a failed paper mill into a producer of alternative fuels, and saved a helicopter company by identifying new customers. When others were fleeing the auto industry, she dove in and bought a number of auto-parts companies.
While she is a tough negotiator, Tilton also has the respect of her workers. Duane Ludgon, a union negotiator says, “Workers really take to Lynn. She's just human and honest with people. I don't say that about many CEOs.” In fact, Tilton is a crusader for U.S. manufacturing. She says, “The key to America's future is manufacturing. We simply have to become a country that can make things again.”
Not all of her investments are immediate successes. Her investment in a fire-truck manufacturer, American LaFrance, was slow to turn a profit. But everyone involved figured it was only a matter of time before her persistent approach made this fire-truck maker another business that she saved before it went up in smoke.
Scan Learning Objectives
Read Feature Story
Read Preview
Read Text and answer DO IT! p. 944 p. 952 p. 955 p. 959
Work Comprehensive DO IT! p. 960
Review Summary of Learning Objectives
Answer Self-Test Questions
Complete Assignments
Go to WileyPLUS for practice and tutorials
After studying this chapter, you should be able to:
[1] Explain the characteristics and purposes of cost accounting.
[2] Describe the flow of costs in a job order cost system.
[3] Explain the nature and importance of a job cost sheet.
[4] Indicate how the predetermined overhead rate is determined and used.
[5] Prepare entries for jobs completed and sold.
[6] Distinguish between under- and overapplied manufacturing overhead.
Source: Robert Frank, “Tilton Flaunts Her Style at Patriarch,” Wall Street Journal Online (January 8, 2011).
Preview of Chapter 20
The Feature Story about Patriarch Partners describes the approach Lynn Tilton uses to turn around a failing company. Accurate costing is critical to this process. For example, in order to submit accurate bids on new jobs and to know whether it profited from past jobs, the company needs a good costing system. This chapter illustrates how these costs are assigned to specific jobs, such as the manufacture of individual fire trucks at one of Tilton's companies, American LaFrance. We begin the discussion in this chapter with an overview of the flow of costs in a job order cost accounting system. We then use a case study to explain and illustrate the documents, entries, and accounts in this type of cost accounting system.
The content and organization of Chapter 20 are as follows.
Cost Accounting Systems
Cost accounting involves measuring, recording, and reporting product costs. Companies determine both the total cost and the unit cost of each product. The accuracy of the product cost information is critical to the success of the company. Companies use this information to determine which products to produce, what price to charge, and the amounts to produce. Accurate product cost information is also vital for effective evaluation of employee performance.
A cost accounting system consists of accounts for the various manufacturing costs. These accounts are fully integrated into the general ledger of a company. An important feature of a cost accounting system is the use of a perpetual inventory system. Such a system provides immediate, up-to-date information on the cost of a product.
There are two basic types of cost accounting systems: (1) a job order cost system and (2) a process cost system. Although cost accounting systems differ widely from company to company, most involve one of these two traditional product costing systems.
Job Order Cost System
Under a job order cost system, the company assigns costs to each job or to each batch of goods. An example of a job is the manufacture of a mainframe computer by IBM, the production of a movie by Disney, or the making of a fire truck by American LaFrance. An example of a batch is the printing of 225 wedding invitations by a local print shop, or the printing of a weekly issue of Fortune magazine by a high-tech printer such as Quad Graphics.
An important feature of job order costing is that each job or batch has its own distinguishing characteristics. For example, each house is custom built, each consulting engagement by a CPA firm is unique, and each printing job is different. The objective is to compute the cost per job. At each point in manufacturing a product or performing a service, the company can identify the job and its associated costs. A job order cost system measures costs for each completed job, rather than for set time periods. Illustration 20-1 shows the recording of costs in a job order cost system.
Illustration 20-1
Job order cost system
Process Cost System
A company uses a process cost system when it manufactures a large volume of similar products. Production is continuous. Examples of a process cost system are the manufacture of cereal by Kellogg, the refining of petroleum by ExxonMobil, and the production of ice cream by Ben & Jerry's. Process costing accumulates product-related costs for a period of time (such as a week or a month) instead of assigning costs to specific products or job orders. In process costing, companies assign the costs to departments or processes for the specified period of time. Illustration 20-2 shows examples of the use of a process cost system. We will discuss the process cost system further in Chapter 21.
Illustration 20-2
Process cost system
Can a company use both types of cost systems? Yes. For example, General Motors uses process cost accounting for its standard model cars, such as Malibus and Corvettes, and job order cost accounting for a custom-made limousine for the President of the United States.
The objective of both cost accounting systems is to provide unit cost information for product pricing, cost control, inventory valuation, and financial statement presentation.
MANAGEMENT INSIGHT
Jobs Won, Money Lost 
Many companies suffer from poor cost accounting. As a result, they sometimes make products they should not be selling at all, or they buy product components that they could more profitably make themselves. Also, inaccurate cost data leads companies to misallocate capital and frustrates efforts by plant managers to improve efficiency.
For example, consider the case of a diversified company in the business of rebuilding diesel locomotives. The managers thought they were making money, but a consulting firm found that the company had seriously underestimated costs. The company bailed out of the business, and not a moment too soon. Says the consultant who advised the company, “The more contracts it won, the more money it lost.” Given that situation, a company cannot stay in business very long!
What type of costs do you think the company had been underestimating? (See page 980.)
Job Order Cost Flow
The flow of costs (direct materials, direct labor, and manufacturing overhead) in job order cost accounting parallels the physical flow of the materials as they are converted into finished goods. As shown in Illustration 20-3 (page 942), companies first accumulate manufacturing costs in the form of raw materials, factory labor, or manufacturing overhead. They then assign manufacturing costs to the Work in Process Inventory account. When a job is completed, the company transfers the cost of the job to Finished Goods Inventory. Later when the goods are sold, the company transfers their cost to Cost of Goods Sold.
Illustration 20-3
Flow of costs in job order costing
Illustration 20-3 provides a basic overview of the flow of costs in a manufacturing setting. A more detailed presentation of the flow of costs is summarized near the end of this chapter in Illustration 20-15. There are two major steps in the flow of costs: (1) accumulating the manufacturing costs incurred, and (2) assigning the accumulated costs to the work done. The following discussion shows that the company accumulates manufacturing costs incurred by debits to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. When the company incurs these costs, it does not attempt to associate the costs with specific jobs. The company makes additional entries to assign manufacturing costs incurred. In the remainder of this chapter, we will use a case study to explain how a job order cost system operates.
Accumulating Manufacturing Costs
To illustrate a job order cost system, we will use the January transactions of Wallace Company, which makes custom electronic sensors for corporate safety applications (such as fire and carbon monoxide) and security applications (such as theft and corporate espionage).
RAW MATERIALS COSTS
When Wallace receives the raw materials it has purchased, it debits the cost of the materials to Raw Materials Inventory. The company would debit this account for the invoice cost of the raw materials and freight costs chargeable to the purchaser. It would credit the account for purchase discounts taken and purchase returns and allowances. Wallace makes no effort at this point to associate the cost of materials with specific jobs or orders.
To illustrate, assume that Wallace purchases 2,000 lithium batteries (Stock No. AA2746) at $5 per unit ($10,000) and 800 electronic modules (Stock No. AA2850) at $40 per unit ($32,000) for a total cost of $42,000 ($10,000 + $32,000). The entry to record this purchase on January 4 is:
At this point, Raw Materials Inventory has a balance of $42,000, as shown in the T-account in the margin. As we will explain later in the chapter, the company subsequently assigns direct raw materials inventory to work in process and indirect raw materials inventory to manufacturing overhead.
FACTORY LABOR COSTS
Some of a company's employees are involved in the manufacturing process, while others are not. As discussed in Chapter 19, wages and salaries of nonmanufacturing employees are expensed as period costs (e.g., Salaries and Wages Expense). Costs related to manufacturing employees are accumulated in Factory Labor to ensure their treatment as product costs. Factory labor consists of three costs: (1) gross earnings of factory workers, (2) employer payroll taxes on these earnings, and (3) fringe benefits (such as sick pay, pensions, and vacation pay) incurred by the employer. Companies debit labor costs to Factory Labor as they incur those costs.
To illustrate, assume that Wallace incurs $32,000 of factory labor costs. Of that amount, $27,000 relates to wages payable and $5,000 relates to payroll taxes payable in February. The entry to record factory labor for the month is:
At this point, Factory Labor has a balance of $32,000, as shown in the T-account in the margin. The company subsequently assigns direct factory labor to work in process and indirect factory labor to manufacturing overhead.
MANUFACTURING OVERHEAD COSTS
A company has many types of overhead costs. If these overhead costs, such as property taxes, depreciation, insurance, and repairs, relate to overhead costs of a nonmanufacturing facility, such as an office building, then these costs are expensed as period costs (e.g., Property Tax Expense, Depreciation Expense, Insurance Expense, and Repairs Expense). If the costs relate to the manufacturing process, then they are accumulated in Manufacturing Overhead, to ensure their treatment as product costs.
Using assumed data, the summary entry for manufacturing overhead in Wallace Company is:
At this point, Manufacturing Overhead has a balance of $13,800, as shown in the T-account in the margin. The company subsequently assigns manufacturing overhead to work in process.
Manufacturing Costs
During the current month, Ringling Company incurs the following manufacturing costs:
(a) Raw material purchases of $4,200 on account.
(b) Incurs factory labor of $18,000. Of that amount, $15,000 relates to wages payable and $3,000 relates to payroll taxes payable.
(c) Factory utilities of $2,200 are payable, prepaid factory insurance of $1,800 has expired, and depreciation on the factory building is $3,500.
Prepare journal entries for each type of manufacturing cost.
Action Plan
In accumulating manufacturing costs, debit at least one of three accounts: Raw Materials Inventory, Factory Labor, and Manufacturing Overhead.
Manufacturing overhead costs may be recognized daily. Or manufacturing overhead may be recorded periodically through a summary entry.
Solution
Related exercise material: BE20-1, BE20-2, E20-1, E20-7, E20-8, E20-11, and DO IT! 20-1.
Assigning Manufacturing Costs to Work in Process
Assigning manufacturing costs to work in process results in the following entries.
1. Debits made to Work in Process Inventory.
2. Credits made to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead.
An essential accounting record in assigning costs to jobs is a job cost sheet, as shown in Illustration 20-4. A job cost sheet is a form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job.
Companies keep a separate job cost sheet for each job. The job cost sheets constitute the subsidiary ledger for the Work in Process Inventory account. A subsidiary ledger consists of individual records for each individual item—in this case, each job. The Work in Process account is referred to as a control account because it summarizes the detailed data regarding specific jobs contained in the job cost sheets. Each entry to Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets.
Illustration 20-4
Job cost sheet
Helpful Hint In today's electronic environment, companies typically maintain job cost sheets as computer files.
RAW MATERIALS COSTS
Companies assign raw materials costs to jobs when their materials storeroom issues the materials in response to requests. Requests for issuing raw materials are made on a prenumbered materials requisition slip. The materials issued may be used directly on a job, or they may be considered indirect materials. As Illustration 20-5 shows, the requisition should indicate the quantity and type of materials withdrawn and the account to be charged. The company will charge direct materials to Work in Process Inventory, and indirect materials to Manufacturing Overhead.
Helpful Hint Approvals are an important part of a materials requisition slip because they help to establish individual accountability over inventory.
Illustration 20-5
Materials requisition slip
Helpful Hint Note the specific job to be charged.
Ethics Note 
The internal control principle of documentation includes prenumbering to enhance accountability.
The company may use any of the inventory costing methods (FIFO, LIFO, or average-cost) in costing the requisitions to the individual job cost sheets.
Periodically, the company journalizes the requisitions. For example, if Wallace uses $24,000 of direct materials and $6,000 of indirect materials in January, the entry is:
This entry reduces Raw Materials Inventory by $30,000, increases Work in Process Inventory by $24,000, and increases Manufacturing Overhead by $6,000, as shown below.
Illustration 20-6 shows the posting of requisition slip R247 to Job No. 101 and other assumed postings to the job cost sheets for materials. The requisition slips provide the basis for total direct materials costs of $12,000 for Job No. 101, $7,000 for Job No. 102, and $5,000 for Job No. 103. After the company has completed all postings, the sum of the direct materials columns of the job cost sheets (the subsidiary account amounts of $12,000, $7,000, and $5,000) should equal the direct materials debited to Work in Process Inventory (the control account amount of $24,000).
Illustration 20-6
Job cost sheets–direct materials
Helpful Hint Companies post to control accounts monthly, and post to job cost sheets daily.
Helpful Hint Prove the $24,000 direct materials charge to Work in Process Inventory by totaling the charges by jobs:
The Cost of an iPhone? Just Tear One Apart
All companies need to know what it costs to make their own products—but a lot of companies would also like to know the cost of their competitors’ products as well. That's where iSuppli steps in. For a price, iSuppli will tear apart sophisticated electronic devices to tell you what it would cost to replicate. In the case of smart-phones, which often have more than 1,000 tiny components, that is no small feat. As shown in the chart below, components of many smart-phones cost about $170. Assembly is only about another $6.50. The difference between what you pay and the “cost” is not all profit. Consider the additional nonproduction costs of research, design, marketing, patent fees, and selling costs.
Source: “The Business of Dissecting Electronics: The Lowdown on Teardowns,” The Economist.com (January 21, 2010).
What type of costs are marketing and selling costs, and how are they treated for accounting purposes? (See page 980.)
FACTORY LABOR COSTS
Companies assign factory labor costs to jobs on the basis of time tickets prepared when the work is performed. The time ticket indicates the employee, the hours worked, the account and job to be charged, and the total labor cost. Many companies accumulate these data through the use of bar coding and scanning devices. When they start and end work, employees scan bar codes on their identification badges and bar codes associated with each job they work on. When direct labor is involved, the time ticket must indicate the job number, as shown in Illustration 20-7 (page 948). The employee's supervisor should approve all time tickets.
The time tickets are later sent to the payroll department, which applies the employee's hourly wage rate and computes the total labor cost. Finally, the company journalizes the time tickets. It debits the account Work in Process Inventory for direct labor and debits Manufacturing Overhead for indirect labor. For example, if the $32,000 total factory labor cost consists of $28,000 of direct labor and $4,000 of indirect labor, the entry is:
As a result of this entry, Factory Labor is reduced by $32,000 so it has a zero balance, and labor costs are assigned to the appropriate manufacturing accounts. The entry increases Work in Process Inventory by $28,000 and increases Manufacturing Overhead by $4,000, as shown below.
Let's assume that the labor costs chargeable to Wallace's three jobs are $15,000, $9,000, and $4,000. Illustration 20-8 shows the Work in Process Inventory and job cost sheets after posting. As in the case of direct materials, the postings to the direct labor columns of the job cost sheets should equal the posting of direct labor to Work in Process Inventory.
Manufacturing Overhead Costs
Companies charge the actual costs of direct materials and direct labor to specific jobs. In contrast, manufacturing overhead relates to production operations as a whole. As a result, overhead costs cannot be assigned to specific jobs on the basis of actual costs incurred. Instead, companies assign manufacturing overhead to work in process and to specific jobs on an estimated basis through the use of a predetermined overhead rate.
Illustration 20-8
Job cost sheets–direct labor
Helpful Hint Prove the $28,000 direct labor charge to Work in Process Inventory by totaling the charges by jobs:
The predetermined overhead rate is based on the relationship between estimated annual overhead costs and expected annual operating activity, expressed in terms of a common activity base. The company may state the activity in terms of direct labor costs, direct labor hours, machine hours, or any other measure that will provide an equitable basis for applying overhead costs to jobs. Companies establish the predetermined overhead rate at the beginning of the year. Small companies often use a single, company-wide predetermined overhead rate. Large companies often use rates that vary from department to department. The formula for a predetermined overhead rate is as follows.
Illustration 20-9
Formula for predetermined overhead rate
Overhead relates to production operations as a whole. To know what “the whole” is, the logical thing is to wait until the end of the year's operations. At that time, the company knows all of its costs for the period. As a practical matter, though, managers cannot wait until the end of the year. To price products effectively as they are completed, managers need information about product costs of specific jobs completed during the year. Using a predetermined overhead rate enables a cost to be determined for the job immediately. Illustration 20-10 indicates how manufacturing overhead is assigned to work in process.
Illustration 20-10
Using predetermined overhead rates
Wallace uses direct labor cost as the activity base. Assuming that the company expects annual overhead costs to be $280,000 and direct labor costs for the year to be $350,000, the overhead rate is 80%, computed as follows.
$280,000 ÷ $350,000 = 80%
This means that for every dollar of direct labor, Wallace will assign 80 cents of manufacturing overhead to a job. The use of a predetermined overhead rate enables the company to determine the approximate total cost of each job when it completes the job.
Historically, companies used direct labor costs or direct labor hours as the activity base. The reason was the relatively high correlation between direct labor and manufacturing overhead. Today more companies are using machine hours as the activity base, due to increased reliance on automation in manufacturing operations. Or, as mentioned in Chapter 19 (and discussed more fully in Chapter 21), many companies now use activity-based costing to more accurately allocate overhead costs based on the activities that give rise to the costs.
A company may use more than one activity base. For example, if a job is manufactured in more than one factory department, each department may have its own overhead rate. In the Feature Story, American LaFrance might use two bases in assigning overhead to fire-truck jobs: direct materials dollars for indirect materials, and direct labor hours for such costs as insurance and supervisors’ salaries.
Wallace Company applies manufacturing overhead to work in process when it assigns direct labor costs. It also applies manufacturing overhead to specific jobs at the same time. For January, Wallace applied overhead of $22,400 in response to its assignment of $28,000 of direct labor costs (direct labor cost of $28,000 × 80%). The following entry records this application.
This entry reduces the balance in Manufacturing Overhead and increases Work in Process Inventory by $22,400, as follows.
The overhead that Wallace applies to each job will be 80% of the direct labor cost of the job for the month. Illustration 20-11 shows the Work in Process Inventory account and the job cost sheets after posting. Note that the debit of $22,400 to Work in Process Inventory equals the sum of the overhead applied to jobs: Job 101 $12,000 + Job 102 $7,200 + Job 103 $3,200.
Illustration 20-11
Job cost sheets–manufacturing overhead applied
At the end of each month, the balance in Work in Process Inventory should equal the sum of the costs shown on the job cost sheets of unfinished jobs. Illustration 20-12 presents proof of the agreement of the control and subsidiary accounts in Wallace. (It assumes that all jobs are still in process.)
Illustration 20-12
Proof of job cost sheets to work in process inventory
Work in Process
Danielle Company is working on two job orders. The job cost sheets show the following:
Direct materials—Job 120 $6,000; Job 121 $3,600
Direct labor—Job 120 $4,000; Job 121 $2,000
Manufacturing overhead—Job 120 $5,000; Job 121 $2,500
Prepare the three summary entries to record the assignment of costs to Work in Process from the data on the job cost sheets.
Action Plan
Recognize that Work in Process Inventory is the control account for all unfinished job cost sheets.
Debit Work in Process Inventory for the materials, labor, and overhead charged to the job cost sheets.
Credit the accounts that were debited when the manufacturing costs were accumulated.
Solution
Related exercise material: BE20-3, BE20-4, BE20-7, E20-2, E20-7, E20-8, and DO IT! 20-2.
Assigning Costs to Finished Goods
When a job is completed, Wallace summarizes the costs and completes the lower portion of the applicable job cost sheet. For example, if we assume that Wallace completes Job No. 101, a batch of electronic sensors, on January 31, the job cost sheet appears as shown in Illustration 20-13.
Illustration 20-13
Completed job cost sheet
When a job is finished, Wallace makes an entry to transfer its total cost to finished goods inventory. The entry is as follows.
This entry increases Finished Goods Inventory and reduces Work in Process Inventory by $39,000, as shown in the T-accounts below.
Finished Goods Inventory is a control account. It controls individual finished goods records in a finished goods subsidiary ledger. The company posts directly from completed job cost sheets to the receipts columns. Illustration 20-14 shows the finished goods inventory record for Job No. 101.
Assigning Costs to Cost of Goods Sold
Companies recognize cost of goods sold when each sale occurs. To illustrate the entries a company makes when it sells a completed job, assume that on January 31 Wallace sells on account Job 101. The job cost $39,000, and it sold for $50,000. The entries to record the sale and recognize cost of goods sold are:
As Illustration 20-14 shows, Wallace records, in the issues section of the finished goods record, the units sold, the cost per unit, and the total cost of goods sold for each job sold.
Illustration 20-14
Finished goods record
Summary of Job Order Cost Flows
Illustration 20-15 shows a completed flowchart for a job order cost accounting system. All postings are keyed to entries 1–8 in the example presented in the previous pages for Wallace Company.
Illustration 20-15
Flow of costs in a job order cost system
The cost flows in the diagram can be categorized as one of four types:
- Accumulation. The company first accumulates costs by (1) purchasing raw materials, (2) incurring labor costs, and (3) incurring manufacturing overhead costs.
- Assignment to jobs. Once the company has incurred manufacturing costs, it must assign them to specific jobs. For example, as it uses raw materials on specific jobs (4), it assigns them to work in process, or treats them as manufacturing overhead if the raw materials cannot be associated with a specific job. Similarly, it either assigns factory labor (5) to work in process, or treats it as manufacturing overhead if the factory labor cannot be associated with a specific job. Finally it assigns manufacturing overhead (6) to work in process using a predetermined overhead rate. This deserves emphasis: Do not assign overhead using actual overhead costs, but instead use a predetermined rate.
- Completed jobs. As jobs are completed (7), the company transfers the cost of the completed job out of work in process inventory into finished goods inventory.
- When goods are sold. As specific items are sold (8), the company transfers their cost out of finished goods inventory into cost of goods sold.
Illustration 20-16 summarizes the flow of documents in a job order cost system.
Illustration 20-16
Flow of documents in a job order cost system
DO IT!
Completion and Sale of Jobs
During the current month, Onyx Corporation completed Job 109 and Job 112. Job 109 cost $19,000 and Job 112 cost $27,000. Job 112 was sold on account for $42,000. Journalize the entries for the completion of the two jobs and the sale of Job 112.
Action Plan
Debit Finished Goods Inventory for the cost of completed jobs.
Debit Cost of Goods Sold for the cost of jobs sold.
Solution
Related exercise material: BE20-8, E20-2, E20-3, E20-4, E20-6, E20-7, E20-10, and DO IT! 20-3.
Job Order Costing for Service Companies
Our extended job order costing example focuses on a manufacturer so that you see the flow of costs through the inventory accounts. It is important to understand, however, that job order costing is also commonly used by service companies. While service companies do not have inventory, the techniques of job order costing are still quite useful in many service-industry environments. Consider, for example, the Mayo Clinic (health care), PriceWaterhouseCoopers (accounting), and Goldman Sachs (investment banking). These companies need to keep track of the cost of jobs performed for specific customers to evaluate the profitability of medical treatments, audits, or investment banking engagements.
Many service organizations bill their customers using cost-plus contracts. Cost-plus contracts mean that the customer's bill is the sum of the costs incurred on the job, plus a profit amount that is calculated as a percentage of the costs incurred. In order to minimize conflict with customers and reduce potential contract disputes, service companies that use cost-plus contracts must maintain accurate and up-to-date costing records. Up-to-date cost records enable a service company to immediately notify a customer of cost overruns due to customer requests for changes to the original plan or unexpected complications. Timely recordkeeping allows the contractor and customer to consider alternatives before it is too late.
A service company that uses a job order cost system does not have inventory accounts. It does, however, use an account similar to Work in Process Inventory, referred to here as Service Contracts in Process, to record job costs prior to completion. To illustrate the journal entries for a service company under a job order cost system, consider the following transactions for Frugal Interiors, an interior design company. The entry to record the assignment of $9,000 of supplies to projects ($7,000 direct and $2,000 indirect) is:
The entry to record the assignment of service salaries and wages of $100,000 ($84,000 direct and $16,000 indirect) is:
Frugal Interiors applies operating overhead at a rate of 50% of direct labor costs. The entry to record the application of overhead ($84,000 × 50%) based on the direct labor costs is:
Finally, upon completion, the job cost sheet of a design project for Sampson Corporation shows a total cost of $34,000. The entry to record completion of this project is:
Job cost sheets for a service company keep track of materials, labor, and overhead used on a particular job similar to a manufacturer. A number of exercises at the end of this chapter apply job order costing to service companies.
Sales Are Nice, but Service Revenue Pays the Bills
Jet engines are one of the many products made by the industrial operations division of General Electric (GE). At prices as high as $30 million per engine, you can bet that GE does its best to keep track of costs. It might surprise you that GE doesn't make much profit on the sale of each engine. So why does it bother making them? Service revenue—during one recent year, about 75% of the division's revenues came from servicing its own products. One estimate is that the $13 billion in aircraft engines sold during a recent three-year period will generate about $90 billion in service revenue over the 30-year life of the engines. Because of the high product costs, both the engines themselves and the subsequent service are most likely accounted for using job order costing. Accurate service cost records are important because GE needs to generate high profit margins on its service jobs to make up for the low margins on the original sale. It also needs good cost records for its service jobs in order to control its costs. Otherwise, a competitor, such as Pratt and Whitney, might submit lower bids for service contracts and take lucrative service jobs away from GE.
Source: Paul Glader, “GE's Focus on Services Faces Test,” Wall Street Journal Online (March 3, 2009).
Explain why GE would use job order costing to keep track of the cost of repairing a malfunctioning engine for a major airline. (See page 980.)
Advantages and Disadvantages of Job Order Costing
An advantage of job order costing is it is more precise in assignment of costs to projects than process costing. For example, assume that a construction company, Juan Company, builds 10 custom homes a year at a total cost of $2,000,000. One way to determine the cost of the homes is to divide the total construction cost incurred during the year by the number of homes produced during the year. For Juan Company, an average cost of $200,000 ($2,000,000 ÷ 10) is computed. If the homes are nearly identical, then this approach is adequate for purposes of determining profit per home. But if the homes vary in terms of size, style, and material types, using the average cost of $200,000 to determine profit per home is inappropriate. Instead, Juan Company should use a job order cost system to determine the specific cost incurred to build each home and the amount of profit made on each. Thus, job order costing provides more useful information for determining the profitability of particular projects and for estimating costs when preparing bids on future jobs.
One disadvantage of job order costing is that it requires a significant amount of data entry. For Juan Company, it is much easier to simply keep track of total costs incurred during the year than it is to keep track of the costs incurred on each job (home built). Recording this information is time-consuming, and if the data is not entered accurately, then the product costs are not accurate. In recent years, technological advances, such as bar-coding devices for both labor costs and materials, have increased the accuracy and reduced the effort needed to record costs on specific jobs. These innovations expand the opportunities to apply job order costing in a wider variety of business settings, thus improving management's ability to control costs and make better informed decisions.
A common problem of all costing systems is how to allocate overhead to the finished product. Overhead often represents more than 50% of a product's cost, and this cost is often difficult to allocate meaningfully to the product. How, for example, is the salary of a project manager allocated to the various homes, which may differ in size, style, and materials used, that she oversees? The accuracy of the job order cost system is largely dependent on the accuracy of the overhead allocation process. Even if the company does a good job of keeping track of the specific amounts of materials and labor used on each job, if the overhead costs are not allocated to individual jobs in a meaningful way, the product costing information is not useful. This issue will be addressed in more detail in Chapter 21.
Reporting Job Cost Data
At the end of a period, companies prepare financial statements that present aggregate data on all jobs manufactured and sold. The cost of goods manufactured schedule in job order costing is the same as in Chapter 19 with one exception: The schedule shows manufacturing overhead applied, rather than actual overhead costs. The company adds this amount to direct materials and direct labor to determine total manufacturing costs.
Companies prepare the cost of goods manufactured schedule directly from the Work in Process Inventory account. Illustration 20-17 shows a condensed schedule for Wallace Company for January.
Illustration 20-17
Cost of goods manufactured schedule
Helpful Hint Companies usually prepare monthly financial statements for management use only.
Note that the cost of goods manufactured ($39,000) agrees with the amount transferred from Work in Process Inventory to Finished Goods Inventory in journal entry No. 7 in Illustration 20-15 (page 954).
The income statement and balance sheet are the same as those illustrated in Chapter 19. For example, Illustration 20-18 shows the partial income statement for Wallace for the month of January.
Illustration 20-18
Partial income statement
Under- or Overapplied Manufacturing Overhead
When Manufacturing Overhead has a debit balance, overhead is said to be under-applied. Underapplied overhead means that the overhead assigned to work in process is less than the overhead incurred. Conversely, when manufacturing overhead has a credit balance, overhead is overapplied. Overapplied overhead means that the overhead assigned to work in process is greater than the overhead incurred. Illustration 20-19 shows these concepts.
Illustration 20-19
Under- and overapplied overhead
YEAR-END BALANCE
At the end of the year, all manufacturing overhead transactions are complete. There is no further opportunity for offsetting events to occur. At this point, Wallace eliminates any balance in Manufacturing Overhead by an adjusting entry. It considers under- or overapplied overhead to be an adjustment to cost of goods sold. Thus, Wallace debits underapplied overhead to Cost of Goods Sold. It credits overapplied overhead to Cost of Goods Sold.
To illustrate, assume that Wallace has a $2,500 credit balance in Manufacturing Overhead at December 31. The adjusting entry for the overapplied overhead is:
After Wallace posts this entry, Manufacturing Overhead has a zero balance. In preparing an income statement for the year, Wallace reports cost of goods sold after adjusting it for either under- or overapplied overhead.
Conceptually, some argue, under- or overapplied overhead at the end of the year should be allocated among ending work in process, finished goods, and cost of goods sold. The discussion of this possible allocation approach is left to more advanced courses.
DO IT!
Applied Manufacturing Overhead
For Karr Company, the predetermined overhead rate is 140% of direct labor cost. During the month, Karr incurred $90,000 of factory labor costs, of which $80,000 is direct labor and $10,000 is indirect labor. Actual overhead incurred was $119,000.
Compute the amount of manufacturing overhead applied during the month. Determine the amount of under- or overapplied manufacturing overhead.
Action Plan
Calculate the amount of overhead applied by multiplying the predetermined overhead rate by actual activity.
If actual manufacturing overhead is greater than applied, manufacturing overhead is underapplied.
If actual manufacturing overhead is less than applied, manufacturing overhead is overapplied.
Solution
Manufacturing overhead applied = (140% × $80,000) = $112,000
Underapplied manufacturing overhead = ($119,000 − $112,000) = $7,000
Related exercise material: BE20-10, E20-5, E20-12, E20-13, and DO IT! 20-4.
Cardella Company applies overhead on the basis of direct labor costs. The company estimates annual overhead costs will be $760,000, and annual direct labor costs will be $950,000. During February, Cardella works on two jobs: A16 and B17. Summary data concerning these jobs are as follows.
Manufacturing Costs Incurred
Purchased $54,000 of raw materials on account.
Factory labor $76,000, plus $4,000 employer payroll taxes.
Manufacturing overhead exclusive of indirect materials and indirect labor $59,800.
Assignment of Costs
| Direct materials: | Job A16 $27,000, Job B17 $21,000 |
| Indirect materials: | $3,000 |
| Direct labor: | Job A16 $52,000, Job B17 $26,000 |
| Indirect labor: | $2,000 |
The company completed Job A16 and sold it on account for $150,000. Job B17 was only partially completed.
Instructions
(a) Compute the predetermined overhead rate.
(b) Journalize the February transactions in the sequence followed in the chapter.
(c) What was the amount of under- or overapplied manufacturing overhead?
Action Plan
Predetermined overhead rate = Estimated annual overhead cost ÷ Expected annual operating activity.
In accumulating costs, debit three accounts: Raw Materials Inventory, Factory Labor, and Manufacturing Overhead.
When Work in Process Inventory is debited, credit one of the three accounts listed above.
Debit Finished Goods Inventory for the cost of completed jobs. Debit Cost of Goods Sold for the cost of jobs sold.
Overhead is underapplied when Manufacturing Overhead has a debit balance.
Solution to Comprehensive DO IT!
SUMMARY OF LEARNING OBJECTIVES
1 Explain the characteristics and purposes of cost accounting. Cost accounting involves the procedures for measuring, recording, and reporting product costs. From the data accumulated, companies determine the total cost and the unit cost of each product. The two basic types of cost accounting systems are job order cost and process cost.
2 Describe the flow of costs in a job order cost system. In job order costing, companies first accumulate manufacturing costs in three accounts: Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. They then assign the accumulated costs to Work in Process Inventory and eventually to Finished Goods Inventory and Cost of Goods Sold.
3 Explain the nature and importance of a job cost sheet. A job cost sheet is a form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job. Job cost sheets constitute the subsidiary ledger for the Work in Process Inventory control account.
4 Indicate how the predetermined overhead rate is determined and used. The predetermined overhead rate is based on the relationship between estimated annual overhead costs and expected annual operating activity. This is expressed in terms of a common activity base, such as direct labor cost. Companies use this rate to assign overhead costs to work in process and to specific jobs.
5 Prepare entries for jobs completed and sold. When jobs are completed, companies debit the cost to Finished Goods Inventory and credit it to Work in Process Inventory. When a job is sold, the entries are (a) debit Cash or Accounts Receivable and credit Sales Revenue for the selling price; and (b) debit Cost of Goods Sold and credit Finished Goods Inventory for the cost of the goods.
6 Distinguish between under- and overapplied manufacturing overhead. Underapplied manufacturing overhead indicates that the overhead assigned to work in process is less than the overhead incurred. Overapplied overhead indicates that the overhead assigned to work in process is greater than the overhead incurred.
GLOSSARY
Cost accounting An area of accounting that involves measuring, recording, and reporting product costs. (p. 940).
Cost accounting system Manufacturing cost accounts that are fully integrated into the general ledger of a company. (p. 940).
Job cost sheet A form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job. (p. 944).
Job order cost system A cost accounting system in which costs are assigned to each job or batch. (p. 940).
Materials requisition slip A document authorizing the issuance of raw materials from the storeroom to production. (p. 945).
Overapplied overhead A situation in which overhead assigned to work in process is greater than the overhead incurred. (p. 959).
Predetermined overhead rate A rate based on the relationship between estimated annual overhead costs and expected annual operating activity, expressed in terms of a common activity base. (p. 949).
Process cost system A cost accounting system used when a company manufactures a large volume of similar products. (p. 940).
Time ticket A document that indicates the employee, the hours worked, the account and job to be charged, and the total labor cost. (p. 947).
Underapplied overhead A situation in which overhead assigned to work in process is less than the overhead incurred. (p. 958).
Self-Test, Brief Exercises, Exercises, Problem Set A, and many more resources are available for practice in WileyPLUS.
SELF-TEST QUESTIONS
Answers are on page 980.
(LO 1)
1. Cost accounting involves the measuring, recording, and reporting of:
(a) product costs.
(b) future costs.
(c) manufacturing processes.
(d) managerial accounting decisions.
(LO 1)
2. A company is more likely to use a job order cost system if:
(a) it manufactures a large volume of similar products.
(b) its production is continuous.
(c) it manufactures products with unique characteristics.
(d) it uses a periodic inventory system.
(LO 2)
3. In accumulating raw materials costs, companies debit the cost of raw materials purchased in a perpetual system to:
(a) Raw Materials Purchases.
(b) Raw Materials Inventory.
(c) Purchases.
(d) Work in Process.
(LO 2)
4. When incurred, factory labor costs are debited to:
(a) Work in Process.
(b) Factory Wages Expense.
(c) Factory Labor.
(d) Factory Wages Payable.
(LO 2)
5. The flow of costs in job order costing:
(a) begins with work in process inventory and ends with finished goods inventory.
(b) begins as soon as a sale occurs.
(c) parallels the physical flow of materials as they are converted into finished goods.
(d) is necessary to prepare the cost of goods manufactured schedule.
(LO 3)
6. Raw materials are assigned to a job when:
(a) the job is sold.
(b) the materials are purchased.
(c) the materials are received from the vendor.
(d) the materials are issued by the materials storeroom.
(LO 3)
7. The source documents for assigning costs to job cost sheets are:
(a) invoices, time tickets, and the predetermined overhead rate.
(b) materials requisition slips, time tickets, and the actual overhead costs.
(c) materials requisition slips, payroll register, and the predetermined overhead rate.
(d) materials requisition slips, time tickets, and the predetermined overhead rate.
(LO 3)
8. In recording the issuance of raw materials in a job order cost system, it would be incorrect to:
(a) debit Work in Process Inventory.
(b) debit Finished Goods Inventory.
(c) debit Manufacturing Overhead.
(d) credit Raw Materials Inventory.
(LO 3)
9. The entry when direct factory labor is assigned to jobs is a debit to:
(a) Work in Process Inventory and a credit to Factory Labor.
(b) Manufacturing Overhead and a credit to Factory Labor.
(c) Factory Labor and a credit to Manufacturing Overhead.
(d) Factory Labor and a credit to Work in Process Inventory.
(LO 4)
10. The formula for computing the predetermined manufacturing overhead rate is estimated annual overhead costs divided by an expected annual operating activity, expressed as:
(a) direct labor cost.
(b) direct labor hours.
(c) machine hours.
(d) Any of the above.
(LO 4)
11. In Crawford Company, the predetermined overhead rate is 80% of direct labor cost. During the month, Crawford incurs $210,000 of factory labor costs, of which $180,000 is direct labor and $30,000 is indirect labor. Actual overhead incurred was $200,000. The amount of overhead debited to Work in Process Inventory should be:
(a) $200,000.
(b) $144,000.
(c) $168,000.
(d) $160,000.
(LO 5)
12. Mynex Company completes Job No. 26 at a cost of $4,500 and later sells it for $7,000 cash. A correct entry is:
(a) debit Finished Goods Inventory $7,000 and credit Work in Process Inventory $7,000.
(b) debit Cost of Goods Sold $7,000 and credit Finished Goods Inventory $7,000.
(c) debit Finished Goods Inventory $4,500 and credit Work in Process Inventory $4,500.
(d) debit Accounts Receivable $7,000 and credit Sales Revenue $7,000.
(LO 5)
13. At the end of an accounting period, a company using a job order cost system calculates the cost of goods manufactured:
(a) from the job cost sheet.
(b) from the Work in Process Inventory account.
(c) by adding direct materials used, direct labor incurred, and manufacturing overhead incurred.
(d) from the Cost of Goods Sold account.
(LO 5)
14. Which of the following statements is true?
(a) Job order costing requires less data entry than process costing.
(b) Allocation of overhead is easier under job order costing than process costing.
(c) Job order costing provides more precise costing for custom jobs than process costing.
(d) The use of job order costing has declined because more companies have adopted automated accounting systems.
(LO 6)
15. At end of the year, a company has a $1,200 debit balance in Manufacturing Overhead. The company:
(a) makes an adjusting entry by debiting Manufacturing Overhead Applied for $1,200 and crediting Manufacturing Overhead for $1,200.
(b) makes an adjusting entry by debiting Manufacturing Overhead Expense for $1,200 and crediting Manufacturing Overhead for $1,200.
(c) makes an adjusting entry by debiting Cost of Goods Sold for $1,200 and crediting Manufacturing Overhead for $1,200.
(d) makes no adjusting entry because differences between actual overhead and the amount applied are a normal part of job order costing and will average out over the next year.
(LO 6)
16. Manufacturing overhead is underapplied if:
(a) actual overhead is less than applied.
(b) actual overhead is greater than applied.
(c) the predetermined rate equals the actual rate.
(d) actual overhead equals applied overhead.
Go to the book's companion website, www.wiley.com/college/weygandt, for additional Self-Test Questions.
QUESTIONS
1. (a) Mary Barett is not sure about the difference between cost accounting and a cost accounting system. Explain the difference to Mary.
(b) What is an important feature of a cost accounting system?
2. (a) Distinguish between the two types of cost accounting systems.
(b) Can a company use both types of cost accounting systems?
3. What type of industry is likely to use a job order cost system? Give some examples.
4. What type of industry is likely to use a process cost system? Give some examples.
5. Your roommate asks your help in understanding the major steps in the flow of costs in a job order cost system. Identify the steps for your roommate.
6. There are three inventory control accounts in a job order system. Identify the control accounts and their subsidiary ledgers.
7. What source documents are used in accumulating direct labor costs?
8. “Entries to Manufacturing Overhead normally are only made daily.” Do you agree? Explain.
9. Stan Kaiser is confused about the source documents used in assigning materials and labor costs. Identify the documents and give the entry for each document.
10. What is the purpose of a job cost sheet?
11. Indicate the source documents that are used in charging costs to specific jobs.
12. Explain the purpose and use of a “materials requisition slip” as used in a job order cost system.
13. Sam Bowden believes actual manufacturing overhead should be charged to jobs. Do you agree? Why or why not?
14. What elements are involved in computing a predetermined overhead rate?
15. How can the agreement of Work in Process Inventory and job cost sheets be verified?
16. Jane Neff believes that the cost of goods manufactured schedule in job order cost accounting is the same as shown in Chapter 19. Is Jane correct? Explain.
17. Matt Litkee is confused about under- and overapplied manufacturing overhead. Define the terms for Matt, and indicate the balance in the manufacturing overhead account applicable to each term.
18. “At the end of the year, under- or overapplied overhead is closed to Income Summary.” Is this correct? If not, indicate the customary treatment of this amount.
BRIEF EXERCISES
BE20-1 Knox Company begins operations on January 1. Because all work is done to customer specifications, the company decides to use a job order cost system. Prepare a flowchart of a typical job order system with arrows showing the flow of costs. Identify the eight transactions.
Prepare a flowchart of a job order cost accounting system, and identify transactions.
(LO 2)
BE20-2 During January, its first month of operations, Knox Company accumulated the following manufacturing costs: raw materials $4,000 on account, factory labor $6,000 of which $5,200 relates to factory wages payable and $800 relates to payroll taxes payable, and utilities payable $2,000. Prepare separate journal entries for each type of manufacturing cost.
Prepare entries in accumulating manufacturing costs.
(LO 2)
BE20-3 In January, Knox Company requisitions raw materials for production as follows: Job 1 $900, Job 2 $1,400, Job 3 $700, and general factory use $600. Prepare a summary journal entry to record raw materials used.
Prepare entry for the assignment of raw materials costs.
(LO 3)
BE20-4 Factory labor data for Knox Company is given in BE20-2. During January, time tickets show that the factory labor of $6,000 was used as follows: Job 1 $2,200, Job 2 $1,600, Job 3 $1,400, and general factory use $800. Prepare a summary journal entry to record factory labor used.
Prepare entry for the assignment of factory labor costs.
(LO 3)
BE20-5 Data pertaining to job cost sheets for Knox Company are given in BE20-3 and BE20-4. Prepare the job cost sheets for each of the three jobs. (Note: You may omit the column for Manufacturing Overhead.)
Prepare job cost sheets. (LO 3)
BE20-6 Marquis Company estimates that annual manufacturing overhead costs will be $900,000. Estimated annual operating activity bases are direct labor cost $500,000, direct labor hours 50,000, and machine hours 100,000. Compute the predetermined overhead rate for each activity base.
Compute predetermined overhead rates.
(LO 4)
BE20-7 During the first quarter, Roland Company incurs the following direct labor costs: January $40,000, February $30,000, and March $50,000. For each month, prepare the entry to assign overhead to production using a predetermined rate of 80% of direct labor cost.
Assign manufacturing overhead to production.
(LO 4)
BE20-8 In March, Stinson Company completes Jobs 10 and 11. Job 10 cost $20,000 and Job 11 $30,000. On March 31, Job 10 is sold to the customer for $35,000 in cash. Journalize the entries for the completion of the two jobs and the sale of Job 10.
Prepare entries for completion and sale of completed jobs.
(LO 5)
BE20-9 Preprah Engineering Contractors incurred service salaries and wages of $32,000 ($24,000 direct and $8,000 indirect) on an engineering project. The company applies overhead at a rate of 25% of direct labor. Record the entries to assign service salaries and wages and to apply overhead.
Prepare entries for service salaries and wages and operating overhead.
(LO 5)
BE20-10 At December 31, balances in Manufacturing Overhead are Shimeca Company—debit $1,200, Garcia Company—credit $900. Prepare the adjusting entry for each company at December 31, assuming the adjustment is made to cost of goods sold.
Prepare adjusting entries for under- and overapplied overhead.
(LO 6)
DO IT! 20-1 During the current month, Tomlin Company incurs the following manufacturing costs.
(a) Purchased raw materials of $16,000 on account.
(b) Incurred factory labor of $40,000. Of that amount, $31,000 relates to wages payable and $9,000 relates to payroll taxes payable.
(c) Factory utilities of $3,100 are payable, prepaid factory property taxes of $2,400 have expired, and depreciation on the factory building is $9,500.
Prepare journal entries for manufacturing costs.
(LO 2)
Prepare journal entries for each type of manufacturing cost. (Use a summary entry to record manufacturing overhead.)
DO IT! 20-2 Milner Company is working on two job orders. The job cost sheets show the following.
Assign costs to work in process.
(LO 3, 4)
Prepare the three summary entries to record the assignment of costs to Work in Process from the data on the job cost sheets.
DO IT! 20-3 During the current month, Reyes Corporation completed Job 310 and Job 312. Job 310 cost $60,000 and Job 312 cost $50,000. Job 312 was sold on account for $90,000. Journalize the entries for the completion of the two jobs and the sale of Job 312.
Prepare entries for completion and sale of jobs.
(LO 5)
DO IT! 20-4 For Eckstein Company, the predetermined overhead rate is 130% of direct labor cost. During the month, Eckstein incurred $100,000 of factory labor costs, of which $85,000 is direct labor and $15,000 is indirect labor. Actual overhead incurred was $115,000. Compute the amount of manufacturing overhead applied during the month. Determine the amount of under- or overapplied manufacturing overhead.
Apply manufacturing overhead and determine under- or overapplication.
(LO 6)
EXERCISES
E20-1 The gross earnings of the factory workers for Vargas Company during the month of January are $66,000. The employer's payroll taxes for the factory payroll are $8,000. The fringe benefits to be paid by the employer on this payroll are $6,000. Of the total accumulated cost of factory labor, 85% is related to direct labor and 15% is attributable to indirect labor.
Prepare entries for factory labor.
(LO 2, 3)
Instructions
(a) Prepare the entry to record the factory labor costs for the month of January.
(b) Prepare the entry to assign factory labor to production.
E20-2 Stine Company uses a job order cost system. On May 1, the company has a balance in Work in Process Inventory of $3,500 and two jobs in process: Job No. 429 $2,000, and Job No. 430 $1,500. During May, a summary of source documents reveals the following.
Prepare journal entries for manufacturing costs.
(LO 2, 3, 4, 5)
Stine Company applies manufacturing overhead to jobs at an overhead rate of 60% of direct labor cost. Job No. 429 is completed during the month.
Instructions
(a) Prepare summary journal entries to record (i) the requisition slips, (ii) the time tickets, (iii) the assignment of manufacturing overhead to jobs, and (iv) the completion of Job No. 429.
(b) Post the entries to Work in Process Inventory, and prove the agreement of the control account with the job cost sheets. (Use a T-account.)
E20-3 A job order cost sheet for Lowry Company is shown below.
Analyze a job cost sheet and prepare entries for manufacturing costs.
(LO 2, 3, 4, 5)
Instructions
(a) 
On the basis of the foregoing data, answer the following questions.
(1) What was the balance in Work in Process Inventory on January 1 if this was the only unfinished job?
(2) If manufacturing overhead is applied on the basis of direct labor cost, what overhead rate was used in each year?
(b) Prepare summary entries at January 31 to record the current year's transactions pertaining to Job No. 92.
E20-4 Manufacturing cost data for Orlando Company, which uses a job order cost system, are presented below.
Analyze costs of manufacturing and determine missing amounts.
(LO 2, 6)
Instructions
Indicate the missing amount for each letter. Assume that in all cases manufacturing overhead is applied on the basis of direct labor cost and the rate is the same.
E20-5 Duggan Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $325,000 for the year, and machine usage is estimated at 125,000 hours.
For the year, $342,000 of overhead costs are incurred and 130,000 hours are used.
Compute the manufacturing overhead rate and under- or overapplied overhead.
(LO 4, 6)
(a) Compute the manufacturing overhead rate for the year.
(b) What is the amount of under- or overapplied overhead at December 31?
(c) Prepare the adjusting entry to assign the under- or overapplied overhead for the year to cost of goods sold.
E20-6 A job cost sheet of Sandoval Company is given below.
Analyze job cost sheet and prepare entry for completed job.
(LO 2, 3, 4, 5)
Instructions
(a) Answer the following questions.
(1) What are the source documents for direct materials, direct labor, and manufacturing overhead costs assigned to this job?
(2) What is the predetermined manufacturing overhead rate?
(3) What are the total cost and the unit cost of the completed job? (Round unit cost to nearest cent.)
(b) Prepare the entry to record the completion of the job.
E20-7 Torre Corporation incurred the following transactions.
1. Purchased raw materials on account $46,300.
2. Raw materials of $36,000 were requisitioned to the factory. An analysis of the materials requisition slips indicated that $6,800 was classified as indirect materials.
3. Factory labor costs incurred were $55,900, of which $51,000 pertained to factory wages payable and $4,900 pertained to employer payroll taxes payable.
4. Time tickets indicated that $50,000 was direct labor and $5,900 was indirect labor.
5. Manufacturing overhead costs incurred on account were $80,500.
6. Depreciation on the company's office building was $8,100.
7. Manufacturing overhead was applied at the rate of 150% of direct labor cost.
8. Goods costing $88,000 were completed and transferred to finished goods.
9. Finished goods costing $75,000 to manufacture were sold on account for $103,000.
Prepare entries for manufacturing and nonmanufacturing costs.
(LO 2, 3, 4, 5)
Instructions
Journalize the transactions. (Omit explanations.)
E20-8 Enos Printing Corp. uses a job order cost system. The following data summarize the operations related to the first quarter's production.
Prepare entries for manufacturing and nonmanufacturing costs.
(LO 2, 3, 4, 5)
1. Materials purchased on account $192,000, and factory wages incurred $87,300.
2. Materials requisitioned and factory labor used by job:
3. Manufacturing overhead costs incurred on account $49,500.
4. Depreciation on factory equipment $14,550.
5. Depreciation on the company's office building was $14,300.
6. Manufacturing overhead rate is 90% of direct labor cost.
7. Jobs completed during the quarter: A20, A21, and A23.
Instructions
Prepare entries to record the operations summarized above. (Prepare a schedule showing the individual cost elements and total cost for each job in item 7.)
E20-9 At May 31, 2014, the accounts of Mantle Company show the following.
1. May 1 inventories—finished goods $12,600, work in process $14,700, and raw materials $8,200.
2. May 31 inventories—finished goods $9,500, work in process $17,900, and raw materials $7,100.
3. Debit postings to work in process were direct materials $62,400, direct labor $50,000, and manufacturing overhead applied $40,000.
4. Sales revenue totaled $210,000.
Instructions
(a) Prepare a condensed cost of goods manufactured schedule.
(b) Prepare an income statement for May through gross profit.
(c) Indicate the balance sheet presentation of the manufacturing inventories at May 31, 2014.
Prepare a cost of goods manufactured schedule and partial financial statements.
(LO 2, 5)
E20-10 Tierney Company begins operations on April 1. Information from job cost sheets shows the following.
Compute work in process and finished goods from job cost sheets.
(LO 3, 5)
Job 12 was completed in April. Job 10 was completed in May. Jobs 11 and 13 were completed in June. Each job was sold for 25% above its cost in the month following completion.
Instructions
(a) What is the balance in Work in Process Inventory at the end of each month?
(b) What is the balance in Finished Goods Inventory at the end of each month?
(c) What is the gross profit for May, June, and July?
E20-11 Shown below are the job cost related accounts for the law firm of Jack, Bob, and Will and their manufacturing equivalents:
Prepare entries for costs of services performed.
(LO 2, 4, 5)
Cost data for the month of March follow.
1. Purchased supplies on account $1,500.
2. Issued supplies $1,200 (60% direct and 40% indirect).
3. Assigned labor costs based on time cards for the month which indicated labor costs of $60,000 (80% direct and 20% indirect).
4. Operating overhead costs incurred for cash totaled $40,000.
5. Operating overhead is applied at a rate of 90% of direct attorney cost.
6. Work completed totaled $75,000.
Instructions
(a) Journalize the transactions for March. (Omit explanations.)
(b) Determine the balance of the Service Contracts in Process account. (Use a T-account.)
E20-12 Don Lieberman and Associates, a CPA firm, uses job order costing to capture the costs of its audit jobs. There were no audit jobs in process at the beginning of November. Listed below are data concerning the three audit jobs conducted during November.
Determine cost of jobs and ending balance in work in process and overhead accounts.
(LO 3, 4, 6)
Overhead costs are applied to jobs on the basis of auditor hours, and the predetermined overhead rate is $50 per auditor hour. The Lynn job is the only incomplete job at the end of November. Actual overhead for the month was $11,000.
Instructions
(a) Determine the cost of each job.
(b) Indicate the balance of the Service Contracts in Process account at the end of November.
(c) Calculate the ending balance of the Operating Overhead account for November.
E20-13 Pure Decorating uses a job order cost system to collect the costs of its interior decorating business. Each client's consultation is treated as a separate job. Overhead is applied to each job based on the number of decorator hours incurred. Listed below are data for the current year.
Determine predetermined overhead rate, apply overhead and determine whether balance under- or overapplied.
(LO 4, 6)
| Estimated overhead | $920,000 |
| Actual overhead | $942,800 |
| Estimated decorator hours | 40,000 |
| Actual decorator hours | 40,500 |
The company uses Operating Overhead in place of Manufacturing Overhead.
Instructions
(a) Compute the predetermined overhead rate.
(b) Prepare the entry to apply the overhead for the year.
(c) Determine whether the overhead was under- or overapplied and by how much.
EXERCISES: SET B AND CHALLENGE EXERCISES
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Exercise Set B and Challenge Exercises.
PROBLEMS: SET A
P20-1A Degelman Company uses a job order cost system and applies overhead to production on the basis of direct labor costs. On January 1, 2014, Job No. 50 was the only job in process. The costs incurred prior to January 1 on this job were as follows: direct materials $20,000, direct labor $12,000, and manufacturing overhead $16,000. As of January 1, Job No. 49 had been completed at a cost of $90,000 and was part of finished goods inventory. There was a $15,000 balance in the Raw Materials Inventory account.
Prepare entries in a job order cost system and job cost sheets.
(LO 2, 3, 4, 5, 6)
During the month of January, Degelman Company began production on Jobs 51 and 52, and completed Jobs 50 and 51. Jobs 49 and 50 were also sold on account during the month for $122,000 and $158,000, respectively. The following additional events occurred during the month.
1. Purchased additional raw materials of $90,000 on account.
2. Incurred factory labor costs of $70,000. Of this amount $16,000 related to employer payroll taxes.
3. Incurred manufacturing overhead costs as follows: indirect materials $17,000; indirect labor $20,000; depreciation expense on equipment $19,000; and various other manufacturing overhead costs on account $16,000.
4. Assigned direct materials and direct labor to jobs as follows.
Instructions
(a) Calculate the predetermined overhead rate for 2014, assuming Degelman Company estimates total manufacturing overhead costs of $980,000, direct labor costs of $700,000, and direct labor hours of 20,000 for the year.
(b) Open job cost sheets for Jobs 50, 51, and 52. Enter the January 1 balances on the job cost sheet for Job No. 50.
(c) Prepare the journal entries to record the purchase of raw materials, the factory labor costs incurred, and the manufacturing overhead costs incurred during the month of January.
(d) Prepare the journal entries to record the assignment of direct materials, direct labor, and manufacturing overhead costs to production. In assigning manufacturing overhead costs, use the overhead rate calculated in (a). Post all costs to the job cost sheets as necessary.
(e) Total the job cost sheets for any job(s) completed during the month. Prepare the journal entry (or entries) to record the completion of any job(s) during the month.
(e) Job 50, $70,000 Job 51, $99,000
(f) Prepare the journal entry (or entries) to record the sale of any job(s) during the month.
(g) What is the balance in the Finished Goods Inventory account at the end of the month? What does this balance consist of?
(h) What is the amount of over- or underapplied overhead?
P20-2A For the year ended December 31, 2014, the job cost sheets of Cinta Company contained the following data.
Prepare entries in a job order cost system and partial income statement.
(LO 2, 3, 4, 5, 6)
Other data:
1. Raw materials inventory totaled $15,000 on January 1. During the year, $140,000 of raw materials were purchased on account.
2. Finished goods on January 1 consisted of Job No. 7638 for $87,000 and Job No. 7639 for $92,000.
3. Job No. 7640 and Job No. 7641 were completed during the year.
4. Job Nos. 7638, 7639, and 7641 were sold on account for $530,000.
5. Manufacturing overhead incurred on account totaled $120,000.
6. Other manufacturing overhead consisted of indirect materials $14,000, indirect labor $18,000, and depreciation on factory machinery $8,000.
Instructions
(a) Prove the agreement of Work in Process Inventory with job cost sheets pertaining to unfinished work. (Hint: Use a single T-account for Work in Process Inventory.) Calculate each of the following, then post each to the T-account: (1) beginning balance, (2) direct materials, (3) direct labor, (4) manufacturing overhead, and (5) completed jobs.
(a) $179,000; Job 7642: $179,000
(b) Prepare the adjusting entry for manufacturing overhead, assuming the balance is allocated entirely to Cost of Goods Sold.
(b) Amount = $6,800
(c) Determine the gross profit to be reported for 2014.
(c) $158,600
P20-3A Stellar Inc. is a construction company specializing in custom patios. The patios are constructed of concrete, brick, fiberglass, and lumber, depending upon customer preference. On June 1, 2014, the general ledger for Stellar Inc. contains the following data.
Prepare entries in a job order cost system and cost of goods manufactured schedule.
(LO 2, 3, 4, 5)
Subsidiary data for Work in Process Inventory on June 1 are as follows.
During June, raw materials purchased on account were $4,900, and all wages were paid. Additional overhead costs consisted of depreciation on equipment $700 and miscellaneous costs of $400 incurred on account.
A summary of materials requisition slips and time tickets for June shows the following.
Overhead was charged to jobs at the same rate of $1.25 per dollar of direct labor cost. The patios for customers Gannon, Rosenthal, and Linton were completed during June and sold for a total of $18,900. Each customer paid in full.
Instructions
(a) Journalize the June transactions: (i) for purchase of raw materials, factory labor costs incurred, and manufacturing overhead costs incurred; (ii) assignment of direct materials, labor, and overhead to production; and (iii) completion of jobs and sale of goods.
(b) Post the entries to Work in Process Inventory.
(c) Reconcile the balance in Work in Process Inventory with the costs of unfinished jobs.
(d) Prepare a cost of goods manufactured schedule for June.
(d) Cost of goods manufactured $13,840
P20-4A Agassi Company uses a job order cost system in each of its three manufacturing departments. Manufacturing overhead is applied to jobs on the basis of direct labor cost in Department D, direct labor hours in Department E, and machine hours in Department K.
Compute predetermined overhead rates, apply overhead, and calculate under- or overapplied overhead.
(LO 4, 6)
In establishing the predetermined overhead rates for 2014, the following estimates were made for the year.
During January, the job cost sheets showed the following costs and production data.
Instructions
(a) Compute the predetermined overhead rate for each department.
(a) 80%, $12, $7.50
(b) Compute the total manufacturing costs assigned to jobs in January in each department.
(b) $356,000, $368,000, $193,500
(c) Compute the under- or overapplied overhead for each department at January 31.
(c) $3,000, $(8,000), $1,000
P20-5A Rodman Corporation's fiscal year ends on November 30. The following accounts are found in its job order cost accounting system for the first month of the new fiscal year.
Analyze manufacturing accounts and determine missing amounts.
(LO 2, 3, 4, 5, 6)
other data.
1. On December 1, two jobs were in process: Job No. 154 and Job No. 155. These jobs had combined direct materials costs of $9,750 and direct labor costs of $15,000. Overhead was applied at a rate that was 75% of direct labor cost.
2. During December, Job Nos. 156, 157, and 158 were started. On December 31, Job No. 158 was unfinished. This job had charges for direct materials $3,800 and direct labor $4,800, plus manufacturing overhead. All jobs, except for Job No. 158, were completed in December.
3. On December 1, Job No. 153 was in the finished goods warehouse. It had a total cost of $5,000. On December 31, Job No. 157 was the only job finished that was not sold. It had a cost of $4,000.
4. Manufacturing overhead was $230 overapplied in December.
Instructions
List the letters (a) through (m) and indicate the amount pertaining to each letter.
(c) $14,950
(f) $54,150
(i) $55,150
PROBLEMS: SET B
P20-1B Pedriani Company uses a job order cost system and applies overhead to production on the basis of direct labor hours. On January 1, 2014, Job No. 25 was the only job in process. The costs incurred prior to January 1 on this job were as follows: direct materials $10,000; direct labor $6,000; and manufacturing overhead $9,000. Job No. 23 had been completed at a cost of $42,000 and was part of finished goods inventory. There was a $5,000 balance in the Raw Materials Inventory account.
Prepare entries in a job order cost system and job cost sheets.
(LO 2, 3, 4, 5, 6)
During the month of January, the company began production on Jobs 26 and 27, and completed Jobs 25 and 26. Jobs 23 and 25 were sold on account during the month for $63,000 and $74,000, respectively. The following additional events occurred during the month.
1. Purchased additional raw materials of $45,000 on account.
2. Incurred factory labor costs of $33,500. Of this amount, $7,500 related to employer payroll taxes.
3. Incurred manufacturing overhead costs as follows: indirect materials $10,000; indirect labor $9,500; depreciation expense on equipment $12,000; and various other manufacturing overhead costs on account $11,000.
4. Assigned direct materials and direct labor to jobs as follows.
5. The company uses direct labor hours as the activity base to assign overhead. Direct labor hours incurred on each job were as follows: Job No. 25, 200; Job No. 26, 800; and Job No. 27, 600.
Instructions
(a) Calculate the predetermined overhead rate for the year 2014, assuming Pedriani Company estimates total manufacturing overhead costs of $440,000, direct labor costs of $300,000, and direct labor hours of 20,000 for the year.
(b) Open job cost sheets for Jobs 25, 26, and 27. Enter the January 1 balances on the job cost sheet for Job No. 25.
(c) Prepare the journal entries to record the purchase of raw materials, the factory labor costs incurred, and the manufacturing overhead costs incurred during the month of January.
(d) Prepare the journal entries to record the assignment of direct materials, direct labor, and manufacturing overhead costs to production. In assigning manufacturing overhead costs, use the overhead rate calculated in (a). Post all costs to the job cost sheets as necessary.
(e) Total the job cost sheets for any job(s) completed during the month. Prepare the journal entry (or entries) to record the completion of any job(s) during the month.
(e) Job 25, $37,400 Job 26, $46,600
(f) Prepare the journal entry (or entries) to record the sale of any job(s) during the month.
(g) What is the balance in the Work in Process Inventory account at the end of the month? What does this balance consist of?
(h) What is the amount of over- or underapplied overhead?
P20-2B For the year ended December 31, 2014, the job cost sheets of Dosey Company contained the following data.
Prepare entries in a job order cost system and partial income statement.
(LO 2, 3, 4, 5, 6)
Other data:
1. Raw materials inventory totaled $20,000 on January 1. During the year, $100,000 of raw materials were purchased on account.
2. Finished goods on January 1 consisted of Job No. 7648 for $93,000 and Job No. 7649 for $62,000.
3. Job No. 7650 and Job No. 7651 were completed during the year.
4. Job Nos. 7648, 7649, and 7650 were sold on account for $490,000.
5. Manufacturing overhead incurred on account totaled $135,000.
6. Other manufacturing overhead consisted of indirect materials $12,000, indirect labor $16,000, and depreciation on factory machinery $19,500.
Instructions
(a) Prove the agreement of Work in Process Inventory with job cost sheets pertaining to unfinished work. (Hint: Use a single T-account for Work in Process Inventory.) Calculate each of the following, then post each to the T-account: (1) beginning balance, (2) direct materials, (3) direct labor, (4) manufacturing overhead, and (5) completed jobs.
(a)(1) $111,000 (4) $180,000 Unfinished job 7652, $188,000
(b) Prepare the adjusting entry for manufacturing overhead, assuming the balance is allocated entirely to cost of goods sold.
(b) Amount = $2,500
(c) Determine the gross profit to be reported for 2014.
(c) $156,500
P20-3B Robert Perez is a contractor specializing in custom-built jacuzzis. On May 1, 2014, his ledger contains the following data.
Prepare entries in a job order cost system and cost of goods manufactured schedule.
(LO 2, 3, 4, 5)
| Raw Materials Inventory | $30,000 |
| Work in Process Inventory | 12,200 |
| Manufacturing Overhead | 2,500(dr.) |
The Manufacturing Overhead account has debit totals of $12,500 and credit totals of $10,000. Subsidiary data for Work in Process Inventory on May 1 include:
During May, the following costs were incurred: raw materials purchased on account $4,000, labor paid $7,000, and manufacturing overhead paid $1,400.
A summary of materials requisition slips and time tickets for the month of May reveals the following.
Overhead was charged to jobs on the basis of $0.70 per dollar of direct labor cost. The jacuzzis for customers Stiner, Alton, and Herman were completed during May. The three jacuzzis were sold for a total of $36,000.
Instructions
(a) Prepare journal entries for the May transactions: (i) for purchase of raw materials, factory labor costs incurred, and manufacturing overhead costs incurred; (ii) assignment of raw materials, labor, and overhead to production; and (iii) completion of jobs and sale of goods.
(b) Post the entries to Work in Process Inventory.
(c) Reconcile the balance in Work in Process Inventory with the costs of unfinished jobs.
(d) Prepare a cost of goods manufactured schedule for May.
(d) Cost of goods
manufactured $20,190
P20-4B Net Play Company uses a job order cost system in each of its three manufacturing departments. Manufacturing overhead is applied to jobs on the basis of direct labor cost in Department A, direct labor hours in Department B, and machine hours in Department C.
Compute predetermined overhead rates, apply overhead, and calculate under- or overapplied overhead.
(LO 4, 6)
In establishing the predetermined overhead rates for 2014, the following estimates were made for the year.
During January, the job cost sheets showed the following costs and production data.
Instructions
(a) Compute the predetermined overhead rate for each department.
(a) 120%, $16, $6
(b) Compute the total manufacturing costs assigned to jobs in January in each department.
(b) $197,600, $177,000, $190,000
(c) Compute the under- or overapplied overhead for each department at January 31.
(c) $2,400 $4,000, $(3,500)
P20-5B Bell Company's fiscal year ends on June 30. The following accounts are found in its job order cost accounting system for the first month of the new fiscal year.
Analyze manufacturing accounts and determine missing amounts.
(LO 2, 3, 4, 5, 6)
Other data:
1. On July 1, two jobs were in process: Job No. 4085 and Job No. 4086, with costs of $19,000 and $8,200, respectively.
2. During July, Job Nos. 4087, 4088, and 4089 were started. On July 31, only Job No. 4089 was unfinished. This job had charges for direct materials $2,000 and direct labor $1,500, plus manufacturing overhead. Manufacturing overhead was applied at the rate of 130% of direct labor cost.
3. On July 1, Job No. 4084, costing $145,000, was in the finished goods warehouse. On July 31, Job No. 4088, costing $138,000, was in finished goods.
4. Overhead was $3,000 underapplied in July.
Instructions
List the letters (a) through (n) and indicate the amount pertaining to each letter. Show computations.
(d) $90,000
(f) $308,750
(l) $106,000
PROBLEMS: SET C
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Problem Set C.
WATERWAYS CONTINUING PROBLEM
(Note: This is a continuation of the Waterways Problem from Chapter 19.)
WCP20 Waterways has two major public-park projects to provide with comprehensive irrigation in one of its service locations this month. Job J57 and Job K52 involve 15 acres of landscaped terrain which will require special-order sprinkler heads to meet the specifications of the project. This problem asks you to help Waterways use a job order cost system to account for production of these parts.
Go to the book's companion website, at www.wiley.com/college/weygandt, to find the completion of this problem.
Broadening Your Perspective
Management Decision-Making
Decision-Making Problem: Current Designs
BYP20-1 Huegel Hollow Resort has ordered 20 rotomolded kayaks from Current Designs. Each kayak will be formed in the rotomolded oven, cooled, and then the excess plastic trimmed away. Then, the hatches, seat, ropes, and bungees will be attached to the kayak.
Dave Thill, the kayak plant manager, knows that manufacturing each kayak requires 54 pounds of polyethylene powder and a finishing kit (rope, seat, hardware, etc.). The polyethylene powder used in these kayaks costs $1.50 per pound, and the finishing kits cost $170 each. Each kayak will use two kinds of labor: 2 hours of more-skilled type I labor from people who run the oven and trim the plastic, and 3 hours of less-skilled type II labor from people who attach the hatches and seat and other hardware. The type I employees are paid $15 per hour, and the type II employees are paid $12 per hour. For purposes of this problem, assume that overhead is allocated to all jobs at a rate of 150% of direct labor costs.
Instructions
Determine the total cost of the Huegel Hollow order and the cost of each individual kayak in the order. Identify costs as direct materials, direct labor, or manufacturing overhead.
Decision-Making Across the Organization 
BYP20-2 Khan Products Company uses a job order cost system. For a number of months, there has been an ongoing rift between the sales department and the production department concerning a special-order product, TC-1. TC-1 is a seasonal product that is manufactured in batches of 1,000 units. TC-1 is sold at cost plus a markup of 40% of cost.
The sales department is unhappy because fluctuating unit production costs significantly affect selling prices. Sales personnel complain that this has caused excessive customer complaints and the loss of considerable orders for TC-1.
The production department maintains that each job order must be fully costed on the basis of the costs incurred during the period in which the goods are produced. Production personnel maintain that the only real solution to the problem is for the sales department to increase sales in the slack periods.
Andrea Parley, president of the company, asks you as the company accountant to collect quarterly data for the past year on TC-1. From the cost accounting system, you accumulate the following production quantity and cost data.
Instructions
With the class divided into groups, answer the following questions.
(a) What manufacturing cost element is responsible for the fluctuating unit costs? Why?
(b) What is your recommended solution to the problem of fluctuating unit cost?
(c) Restate the quarterly data on the basis of your recommended solution.
Managerial Analysis
BYP20-3 In the course of routine checking of all journal entries prior to preparing year-end reports, Betty Eller discovered several strange entries. She recalled that the president's son Joe had come in to help out during an especially busy time and that he had recorded some journal entries. She was relieved that there were only a few of his entries, and even more relieved that he had included rather lengthy explanations. The entries Joe made were:
(This is for materials put into process. I don't find the record that we paid for these, so I'm crediting Cash because I know we'll have to pay for them sooner or later.)
(This is for bonuses paid to salespeople. I know they're part of overhead, and I can't find an account called “Non-Factory Overhead” or “Other Overhead” so I'm putting it in Manufacturing Overhead. I have the check stubs, so I know we paid these.)
(This is for the factory workers’ wages. I have a note that payroll taxes are $18,000. I still think that's part of wages expense and that we'll have to pay it all in cash sooner or later, so I credited Cash for the wages and the taxes.)
(This is for the glue used in the factory. I know we used this to make the products, even though we didn't use very much on any one of the products. I got it out of inventory, so I credited an inventory account.)
Instructions
(a) How should Joe have recorded each of the four events?
(b) If the entry was not corrected, which financial statements (income statement or balance sheet) would be affected? What balances would be overstated or understated?
Real-World Focus
BYP 20-4 Founded in 1970, Parlex Corporation is a world leader in the design and manufacture of flexible interconnect products. Utilizing proprietary and patented technologies, Parlex produces custom flexible interconnects including flexible circuits, polymer thick film, laminated cables, and value-added assemblies for sophisticated electronics used in automotive, telecommunications, computer, diversified electronics, and aerospace applications. In addition to manufacturing sites in Methuen, Massachusetts; Salem, New Hampshire; Cranston, Rhode Island; San Jose, California; Shanghai, China; Isle of Wight, UK; and Empalme, Mexico, Parlex has logistic support centers and strategic alliances throughout North America, Asia, and Europe.
The following information was provided in the company's annual report.
PARLEX COMPANY
Notes to the Financial Statements
The Company's products are manufactured on a job order basis to customers’ specifications. Customers submit requests for quotations on each job, and the Company prepares bids based on its own cost estimates. The Company attempts to reflect the impact of changing costs when establishing prices. However, during the past several years, the market conditions for flexible circuits and the resulting price sensitivity haven't always allowed this to transpire. Although still not satisfactory, the Company was able to reduce the cost of products sold as a percentage of sales to 85% this year versus 87% that was experienced in the two immediately preceding years. Management continues to focus on improving operational efficiency and further reducing costs.
Instructions
(a) Parlex management discusses the job order cost system employed by their company. What are several advantages of using the job order approach to costing?
(b) Contrast the products produced in a job order environment, like Parlex, to those produced when process cost systems are used.
BYP20-5 The Institute of Management Accountants sponsors a certification for management accountants, allowing them to obtain the title of Certified Management Accountant.
Address: www.imanet.org, or go to www.wiley.com/college/weygandt
Steps
1. Go to the site shown above.
2. Choose CMA Certification, and then, Earning & Maintaining Your Credential.
Instructions
(a) What is the experience qualification requirement?
(b) How many hours of continuing education are required, and what types of courses qualify?
Critical Thinking
Communication Activity
BYP20-6 You are the management accountant for Williams Company. Your company does custom carpentry work and uses a job order cost system. Williams sends detailed job cost sheets to its customers, along with an invoice. The job cost sheets show the date materials were used, the dollar cost of materials, and the hours and cost of labor. A predetermined overhead application rate is used, and the total overhead applied is also listed.
Nancy Kopay is a customer who recently had custom cabinets installed. Along with her check in payment for the work done, she included a letter. She thanked the company for including the detailed cost information but questioned why overhead was estimated. She stated that she would be interested in knowing exactly what costs were included in overhead, and she thought that other customers would, too.
Instructions
Prepare a letter to Ms. Kopay (address: 123 Cedar Lane, Altoona, KS 66651) and tell her why you did not send her information on exact costs of overhead included in her job. Respond to her suggestion that you provide this information.
Ethics Case
BYP20-7 LRF Printing performs printing services for many different corporate clients. Although LRF bids most jobs, some jobs, particularly new ones, are negotiated on a “cost-plus” basis. Cost-plus means that the buyer is willing to pay the actual cost plus a return (profit) on these costs to LRF.
Alice Reiley, controller for LRF, has recently returned from a meeting where LRF's president stated that he wanted her to find a way to charge more costs to any project that was on a cost-plus basis. The president noted that the company needed more profits to meet its stated goals this period. By charging more costs to the cost-plus projects and therefore fewer costs to the jobs that were bid, the company should be able to increase its profit for the current year.
Alice knew why the president wanted to take this action. Rumors were that he was looking for a new position and if the company reported strong profits, the president's opportunities would be enhanced. Alice also recognized that she could probably increase the cost of certain jobs by changing the basis used to allocate manufacturing overhead.
Instructions
(a) Who are the stakeholders in this situation?
(b) What are the ethical issues in this situation?
(c) What would you do if you were Alice Reiley?
All About You
BYP20-8 Many of you will work for a small business. Some of you will even own your own business. In order to operate a small business, you will need a good understanding of managerial accounting, as well as many other skills. Much information is available to assist people who are interested in starting a new business. A great place to start is the website provided by the Small Business Administration, which is an agency of the federal government whose purpose is to support small business.
Go to www.sba.gov and in the Small Business Planner, Plan Your Business link, review the material under “Get Ready.” Answer the following questions.
(a) What are some of the characteristics required of a small business owner?
(b) What are the top 10 reasons given for business failure?
Considering Your Costs and Benefits
BYP20-9 After graduating, you might decide to start a small business. As discussed in this chapter, owners of any business need to know how to calculate the cost of their products. In fact, many small businesses fail because they don't accurately calculate their product costs, so they don't know if they are making a profit or losing money—until it's too late.
Suppose that you decide to start a landscape business. You use an old pickup truck that you've fully paid for. You store the truck and other equipment in your parents’ barn, and you store trees and shrubs on their land. Your parents will not charge you for the use of these facilities for the first two years, but beginning in the third year they will charge a reasonable rent. Your mother helps you by answering phone calls and providing customers with information. She doesn't charge you for this service, but she plans on doing it for only your first two years in business. In pricing your services, should you include charges for the truck, the barn, the land, and your mother's services when calculating your product cost? The basic arguments for and against are as follows.
YES: If you don't include charges for these costs, your costs are understated and your profitability is overstated.
NO: At this point, you are not actually incurring costs related to these activities; therefore, you shouldn't record charges.
Instructions
Write a response indicating your position regarding this situation. Provide support for your view.
Answers to Chapter Questions
Answers to Insight and Accounting Across the Organization Questions
p. 941 Jobs Won, Money Lost Q: What type of costs do you think the company had been underestimating? A: It is most likely that the company failed to estimate and track overhead. In a highly diversified company, overhead associated with the diesel locomotive jobs may have been “lost” in the total overhead pool for the entire company.
p. 947 The Cost of an iPhone? Just Tear One Apart Q: What type of costs are marketing and selling costs, and how are they treated for accounting purposes? A: Product costs include materials, labor, and overhead. Costs not related to production, such as marketing and selling costs, are period costs which are expensed in the period that they are incurred.
p. 957 Sales Are Nice, but Service Revenue Pays the Bills Q: Explain why GE would use job order costing to keep track of the cost of repairing a malfunctioning engine for a major airline. A: GE operates in a competitive environment. Other companies offer competing bids to win service contracts on GE's airplane engines. GE needs to know what it costs to repair engines, so that it can present competitive bids while still generating a reasonable profit.
Answers to Self-Test Questions
1. a 2. c 3. b 4. c 5. c 6. d 7. d 8. b 9. a 10. d 11. b ($180,000 × 80%) 12. c 13. b 14. c 15. c 16. b
Remember to go back to The Navigator box on the chapter opening page and check off your completed work.
1The numbers placed above the entries for Wallace Company are used for reference purposes in the summary provided in Illustration 20-15.