Chapter 17 Job Order Costing Study Guide Solutions Fill-in-the-Blank Equations. Exercises. 1. Estimated activity base. 2. Underapplied. 3.

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1 Chapter 17 Job Order Costing Study Guide Solutions Fill-in-the-Blank Equations 1. Estimated activity base 2. Underapplied 3. Overapplied Exercises 1. An automobile manufacturer produces various lines of cars. In each line, cars may have different features to appeal to different customers. Each car has an identification number to distinguish it from all others. The manufacturer tracks the features and cost of each through the identification number to determine the selling price. Is the automobile manufacturer using a job order or process cost system? Job order cost system 2. A paint manufacturer produces many different colors of paint. Each day, the company produces 2,000 gallons of five colors. The company allocates the costs to the departments used that day. Is the company using a job order or process cost system? Process cost system 3. A construction company builds custom houses for new homeowners. Using a catalog, the homeowners are able to pick the basic style of the house and customize it to their liking. Since all the houses require different materials, the company allocates cost to each house to determine the selling price. Is the construction company using a job order or process cost system? Job order cost system Strategy: Job order cost systems are usually used when finished goods are different. Since the finished goods are different, the cost of inputs is not the same, so the costs should be allocated to each finished goods. Companies typically use a process cost system when all finished goods are the exact same. Since the inputs to the goods are also the same, the company can allocate the cost to the entire batch of goods. 1

2 2 Chapter On March 5, 2015, the materials department of Cards by Shannon received the following: Receiving Report No. 110 for $3,100, materials requisition for Job 22 for $200, materials requisition for Job 23 for $800, and Receiving Report No. 110 for $1,000. Prepare the journal entries to record the transactions if the company pays for the materials on account. Mar. 5 Materials 4,100 Accounts Payable 4,100 Work in Process 1,000 Materials 1, On March 6, 2015, the time tickets of employees at Cards by Shannon gave the following information: ten hours for Job 22, twelve hours for Job 23, and four hours for Job 24. Employees are paid an hourly rate of $10. Prepare the journal entry to record the direct labor. Mar. 6 Work in Process 260 Wages Payable Cards by Shannon allocates factory overhead based upon hours used by a piece of equipment. At the beginning of the period, the company estimates factory overhead to be $25,000 and expects the equipment to be used for 4,000 hours. During the period Job 22 requires 1,900 hours of use of the equipment, Job 23 requires 1,700 hours, and Job 24 requires 100 hours. As of March 31, actual indirect costs include: $4,000 for indirect materials, $9,100 for indirect labor, $6,000 for utilities, and $5,200 for equipment depreciation. a. Prepare the journal entry to record the costs considered factory overhead. Mar. 31 Factory Overhead 24,300 Materials 4,000 Wages Payable 9,100 Utilities Payable 6,000 Accumulated Depreciation 5,200 b. Calculate the predetermined factory overhead rate. $6.25 per hour of equipment use; $25,000/4,000 hours

3 Job Order Costing 3 c. Prepare the journal entry required to apply the factory overhead to the jobs at the end of the month. Mar. 31 Work in Process 23,125 Factory Overhead 23,125 Factory Overhead: (1, , ) hours $6.25 per hour 7. Is the factory overhead from Exercise 6 overapplied or underapplied? If Cards by Shannon has a March 31 fiscal year-end, prepare the journal entry required to dispose of the balance in Factory Overhead. Factory Overhead 24,300 23,125 1,175 Since the account has a debit balance, the factory overhead was underapplied. Mar. 31 Cost of Goods Sold 1,175 Factory Overhead 1, Cards by Shannon completed Job 22 on April 5 and Job 23 on April 6. Use the information in Exercises 4-8 to prepare the journal entries required to transfer the jobs. Job 22 also incurred $7,900 of direct materials and $1,000 of direct labor costs, and Job 23 incurred $9,000 of direct materials and $900 of direct labor costs previously. Apr. 5 Finished Goods 21,075 Work in Process 21,075 Apr. 6 Finished Goods 21,545 Work in Process 21,545 Job 22 Job 23 Direct materials $ 8,100 $ 9,800 Direct labor 1,100 1,120 Factory overhead 11,875 10,625 Total $21,075 $21,545

4 4 Chapter On June 12, 2015, the Raw Materials account has a balance of $350. Michael s Camping Supply receives the following: materials requisition for Job 81 for $120, Receiving Report No. 99 for $790, Receiving Report No. 100 for $900, and materials requisition for Job 83 for $185. Prepare the journal entries to record the transactions if the company pays for the materials on credit. Also determine the balance of Raw Materials at the end of the day. June 12 Materials 1,690 Accounts Payable 1,690 Work in Process 305 Materials 305 Materials 350 1, , During the month of the June, employee time tickets at Michael s Camping Supply provide the following information: 700 hours for Job 81, 675 hours for Job 82, and 500 hours for Job 83. Workers are paid $9 for every hour worked. Prepare the journal entries required as of the end of the month. June 30 Work in Process 16,875 Wages Payable 16, Michael s Camping Supply incurs the following expenses throughout the month of June: $5,000 for indirect materials, $7,000 for indirect labor, $4,400 for factory utilities, and $1,200 for factory depreciation. At the beginning of the month, the company expected to incur $20,000 in factory overhead, which would be allocated based upon the expected 2,000 direct labor hours to be worked. a. Prepare the journal entry required to record the costs considered to be factory overhead. June 30 Factory Overhead 17,600 Materials 5,000 Wages Payable 7,000 Utilities Payable 4,400 Accumulated Depreciation 1,200

5 Job Order Costing 5 b. Calculate the predetermined factory overhead rate. $10 per direct labor hour; $20,000/2,000 hours c. Prepare the journal entry to allocate the overhead to the jobs at the end of the month using the direct labor hours given in Exercise 10. June 30 Work in Process 18,750 Factory Overhead 18,750 Factory Overhead: ( ) hours $10 per hour 12. Throughout the year, Factory Overhead at Michael s Camping Supply had the following activities: applied costs of $90,500 and actual costs of $88,100 previous to the month of June. Use the information in Exercise 11 to determine if the factory overhead was underapplied or overapplied as of the June 30 fiscal year-end. Also, prepare the journal entry required to account for the balance. Factory Overhead 88,100 90,500 17,600 18,750 3,550 Since the account has a credit balance, factory overhead was overapplied by $3,550. June 30 Factory Overhead 3,550 Cost of Goods Sold 3,550

6 6 Chapter On July 10, Michael s Camping Supply completed Jobs 81 and 82 discussed in Exercises Job 81 previously incurred costs of $4,000 for direct materials and $2,000 for direct labor. Job 82 previously incurred costs of $5,750 for direct materials and $1,100 for direct labor. Prepare the journal entry to record the completion of these products. July 10 Finished Goods 19,420 Work in Process 19,420 Finished Goods 19,675 Work in Process 19,675 Job 81 Job 82 Direct materials $4,120 $5,750 Direct labor 8,300 7,175 Factory overhead 7,000 6,750 Total $19,420 $19, On January 7, 2015, the materials department of Deacon Corporation received the following items: Receiving Report No. 40 for $1,400, materials requisition for Job 70 for $400, and materials requisition for Job 71 for $230. Prepare the journal entries to record the transactions if the company will pay for the materials in the next month. Jan. 7 Materials 1,400 Accounts Payable 1,400 Work in Process 630 Materials 630 Strategy: In a job order cost system, when materials are allocated to a job, debit Work in Process to show that more costs were incurred to produce the goods and credit Materials to record the decrease. The company uses a job cost sheet to record how much each job incurs in costs.

7 Job Order Costing During the month of January, employee time tickets gave the following information: 500 hours worked on Job 70 and 300 hours worked on Job 71. Prepare the journal entry at the end of the month to record the direct labor hours used if Deacon Corporation pays its employees an hourly wage of $9.75. Jan. 31 Work in Process 7,800 Wages Payable 7,800 Strategy: To record direct labor, debit Work in Process to record the increase in costs incurred for the goods and credit Wages Payable to increase the amount payable to employees. Indirect labor should increase Factory Overhead to be applied to individual jobs. 16. As of January 1, 2015, Deacon Corporation expected to incur $10,000 of factory overhead. This would be applied per hour of machine usage, which is expected to be 4,000 hours for the month. The company incurs the following expenses during the month: $1,000 for indirect materials, $4,100 for indirect labor, $5,000 for factory utilities, and $1,750 for factory depreciation. Job 70 required 1,900 of machine hours and Job 71 required 2,950 of machine hours. a. Calculate the predetermined factory overhead rate. $2.50 per machine hour; $10,000/4,000 hours b. Prepare the journal entry required to record the costs incurred. Jan. 31 Factory Overhead 11,850 Materials 1,000 Wages Payable 4,100 Utilities Payable 5,000 Accumulated Depreciation 1,750

8 8 Chapter 17 c. Prepare the journal entry to record the allocation of the factory overhead. Jan. 31 Work in Process 12,125 Factory Overhead 12,125 Factory Overhead: (1, ,950) hours $2.50 per hour Strategy: To increase efficiency, a company calculates a predetermined overhead allocation rate using estimates. Calculate the rate by dividing the expected factory overhead costs by the estimated activity base. The overhead is applied to jobs based upon the activity base used by the job. Record costs incurred that are considered factory overhead by debiting Factory Overhead (which increases the account) and crediting the corresponding account. When applying the overhead to jobs, debit Work in Process to record the costs applied to the jobs and credit Factory Overhead, which decreases the account. 17. Throughout the year, Deacon Corporation (information in Exercise 16) incurred an additional $90,400 expenses allocated to Factory Overhead. The company applied an additional $89,200 of Factory Overhead to Work in Process. At the end of January and December, was Factory Overhead overapplied or underapplied? Prepare the journal entry required as of the calendar year-end to dispose of the balance. Factory Overhead 11,850 12, ,400 89, Factory Overhead was overapplied as of the end of January by $275 and underapplied by $925 as of the end of December. Dec. 31 Cost of Goods Sold 925 Factory Overhead 925

9 Job Order Costing 9 Strategy: If Factory Overhead has an ending debit balance, overhead has been underapplied, meaning that the company incurred more costs considered to be factory overhead than applied to the projects. Since the company must record the costs not allocated to projects, debit Cost of Goods Sold to record an increase in the expenses. If Factory Overhead has an ending credit balance, overhead has been overapplied, meaning the company applied more costs to jobs than it actually incurred. When disposing of the balance, debit Factory Overhead and credit Cost of Goods Sold to record a decrease in costs. 18. Deacon Corporation completed Job 70 on February 15 and Job 71 on March 18 (information found in Exercises 14-17). Job 70 required the following additional costs: $7,500 of materials, $5,000 of direct labor, and $4,000 of factory overhead. Job 71 required the following additional costs: $6,100 of materials, $3,300 of factory overhead, and $4,900 of direct labor. a. Prepare the journal entries to record the completion of the jobs. Feb. 15 Finished Goods 26,525 Work in Process 26,525 Mar. 18 Finished Goods 24,830 Work in Process 24,830 Job 70 Job 71 Direct materials $7,900 $6,330 Direct labor 9,875 7,825 Factory overhead 8,750 10,675 Total $26,525 $24,830 b. If Work in Process had a beginning balance of $5,000 as of the beginning of January, what is the balance after the completion of the jobs? An additional $2,300 was transferred to Finished Goods inventory for Job 72. Work in Process 5,000 14,230 24,830 17,700 26,525 19,425 2,300 2,700

10 10 Chapter 17 Strategy: Costs to manufacture goods are accounted for using the Work in Process account. Once completed, the items should be transferred into Finished Goods. Companies use job cost sheets to determine how much of costs each project incurred. 19. During October, Carolina Cup completed two jobs. Although both were similar and required the same inputs, the company incurred a higher cost for Job 22. Use the information below to answer the following: a. Why did Job 22 have higher costs per finished good? Although the number of units produced decreased, the number of hours of artist labor increased, which also caused the hours used for factory overhead to increase. b. What could have caused the difference? New, less efficient employees; increased down time; more complex project for artists to design; or employees becoming less efficient due to boredom Job 22 Cost per Unit Units Job Cost Direct materials: Glass $6/unit 120 units $ Paint 3/unit 120 units Artist labor 15/hour 12 hours Packing labor 12/hour 5 hours Factory overhead 5/hour 17 hours $1, Products produced 120 Cost per finished good $ Job 26 Cost per Unit Units Job Cost Direct materials: Glass $6/unit 100 units $ Paint 3/unit 100 units Artist labor 15/hour 14 hours Packing labor 12/hour 4.5 hours Factory overhead 5/hour 18.5 hours $1, Products produced 100 Cost per finished good $ 12.57

11 Job Order Costing TDFW completed two projects during the month of May. Although the projects were both similar, the company incurred higher costs for Job 71. Use the information shown to determine the following: a. Why did Job 71 have higher costs per finished good? For Job 70, five yards of fabric was used per unit produced, while Job 71 used almost six yards per unit produced. Job 71 also used over two pounds of wood per unit produced, while Job 70 used only two. b. What are some examples of what could have caused the difference? Higher scrap and rework due to lower quality materials for Job 71 or new employees for Job 71 Job 70 Cost per Unit Units Job Cost Direct materials: Fabric $7/yard 500 yards $3,500 Wood 10/pounds 200 pounds 2,000 Production labor 15/hour 18 hours 270 Assembly labor 12/hour 10 hours 120 Factory overhead 7/machine hours 200 hours 1,400 $7,290 Products produced 100 Cost per finished good $72.90 Job 71 Cost per Unit Units Job Cost Direct materials: Fabric $7/yard 425 yards $2,975 Wood 10/pounds 170 pounds 1,700 Production labor 15/hour 13 hours 195 Assembly labor 12/hour 8 hours 96 Factory overhead 7/machine hours 150 hours 1,050 $6,016 Products produced 75 Cost per finished good $80.21

12 12 Chapter A production manager is concerned with the cost the company incurred in the recent undertaking of a project (Project 102). He compares the project s costs to another project that produced the same number of products in the previous month. Use the information to determine the following: a. Why did the new project have higher costs per finished goods? Although both projects produced the same number of goods, the cost of the direct materials increased for Project 102. Project 102 also required more hours of research labor. Although the number of hours used for production labor decreased, the research labor is more expensive. b. What could be the cause of the higher costs? The higher cost of direct materials could be caused by new suppliers or suppliers increasing the costs. The increase in research labor could be caused by newer employees, or even the time needed to adapt to the change in direct materials. Project 102 Cost per Unit Units Job Cost Direct materials: Chemical A $4/gallon 200 gallons $ 800 Chemical B 2/gallon 490 gallons 980 Production labor 10/hour 15 hours 150 Research labor 14/hour 22 hours 308 Factory overhead 10/hour 37 hours 370 $2,608 Products produced 200 Cost per finished good $13.04 Project 50 Cost per Unit Units Job Cost Direct materials: Chemical A $3/gallon 200 gallons $ Chemical B 1.75/gallon 490 gallons Production labor 10/hour 16 hours Research labor 14/hour 21 hours Factory overhead 10/hour 36 hours $2, Products produced 200 Cost per finished good $ 11.36

13 Job Order Costing 13 Strategy: If the cost per finished good increases, a company should look at the job cost sheet to determine where the increase occurred. Increases in costs could be due to the increase in unit cost or increase in amount used. If the amount used increases, the company is becoming less efficient and should be investigated. 22. Prepare the journal entries required for the transactions below for a law firm that uses a job order cost system. a. Purchased $5,000 of office supplies on January 1. Jan. 1 Supplies 5,000 Cash 5,000 b. The top legal advisor of the firm worked thirty hours for one client for the month of January at an hourly rate of $35. Jan. 31 Work in Process 1,050 Wages Payable 1,050 c. Used $350 of office supplies throughout the month of January. Jan. 31 Factory Overhead 350 Supplies Prepare the journal entries required to record the following transactions for a computer repair shop using a job order cost system. a. The cleaning lady worked ten hours during the month of March at an hourly wage of $10. Mar. 31 Factory Overhead 100 Wages Payable 100 b. Factory overhead is applied at a rate of $6 per direct labor hour. During the month of March, Job 41 required fourteen direct labor hours. Mar. 31 Work in Process 84 Factory Overhead 84

14 14 Chapter 17 c. On March 18, the company completed Project 43, which had total costs of $300. Mar. 18 Cost of Services 300 Work in Process Prepare the journal entries to record the following transactions for an accounting firm that uses a job order cost system. a. Received a utility bill for $3,750 on May 4 May 4 Factory Overhead 3,750 Utilities Payable 3,750 b. Charged 50 hours to one client (Smith) for services provided during the month at an hourly rate of $40 May 31 Work in Process 2,000 Wages Payable 2,000 c. Applied overhead to Smith at a rate of $7.50 per hour billed May 31 Work in Process 375 Factory Overhead 375 Strategy: In a professional service business, job order costing is usually used because each customer, client, or patient has different needs and the cost incurred to meet the needs will differ. Once the job is completed, the costs incurred transfer from Work in Process to Cost of Services (rather than Finished Goods) because the project is completed and the customer billed.

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