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Chapter 17Job Order Costing
Review Questions
1. If the manager knows the cost to produce each unit of product, then the manager can plan and control the cost of resources needed to create the product and deliver it to the customer. It enables them to set selling prices that will lead to profits, compute cost of goods sold for the income statement, and compute the cost of inventory for the balance sheet.
2. Companies that manufacture unique products or provide specialized services, such as accounting firms, music studios, health-care providers, building contractors, and custom furniture manufacturers, use job order costing systems.
3. Companies that produce identical units through a series of production steps or processes, such as soft drink companies, surfboard manufacturers, and medical equipment manufacturers, use process costing systems.
4. A job cost record is a document that shows the direct materials, direct labor, and manufacturing overhead costs for an individual job and allows the company to track the cost of individual jobs.
5. When a company finishes a job, it totals the costs and transfers them to Finished Goods Inventory, an asset account. These costs are called Cost of Goods Manufactured. When the jobs units are sold, the costing system moves the costs from Finished Goods Inventory, an asset, to Cost of Goods Sold, an expense. These costs are called Cost of Goods Sold.
6. May 31—Work-in-Process Inventory on the balance sheet; June 30—Finished Goods Inventory on the balance sheet; July 31—Cost of Goods Sold on the income statement.
7.Date Accounts and Explanation Debit Credit
Raw Materials Inventory XXAccounts Payable XX
This transaction increases assets (Raw Materials Inventory) and increases liabilities (Accounts Payable).
8. The use of a subsidiary ledger allows for better control of inventory as it helps track the quantity and cost of each type of material used in production. A subsidiary ledger contains the details of a general ledger account, and the sum of the subsidiary ledger equals the balance in the general ledger account.
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–1
9. The cost of direct materials is transferred out of Raw Materials Inventory (credit) and is assigned to Work-in-Process Inventory (debit). The cost of indirect materials is transferred out of the Raw Materials Inventory account (credit) and is accumulated in the Manufacturing Overhead account (debit).
10.Date Accounts and Explanation Debit Credit
Work-In-Process Inventory (direct labor) XXManufacturing Overhead (indirect labor) XX Wages Payable XX
This transaction increases assets (Work-in-Process Inventory), increases liabilities (Wages Payable), and decreases equity (Manufacturing Overhead).
11. The following are examples of manufacturing overhead costs:a. Plant utilitiesb. Depreciation on manufacturing plant and equipmentc. Plant insuranced. Plant property taxese. Rent on the manufacturing plant
They are considered indirect costs because they can’t be easily traced to individual jobs.
12. The predetermined overhead allocation rate is the estimated manufacturing overhead cost per unit of the allocation base, calculated at the beginning of the period.
13. The allocation base is a denominator that links overhead costs to the products. Ideally, the allocation base is the primary cost driver of manufacturing overhead. Examples: direct labor hours, direct labor cost, machine hours.
14. Manufacturing overhead is allocated to jobs based on a predetermined overhead allocation rate. The rate should be based on the main cost driver.
15. Unit product cost = Cost of goods manufactured / Total units produced.
16. To allocate manufacturing overhead, Work-in-Process Inventory is debited and Manufacturing Overhead is credited. Work-in-Process Inventory, an asset, is increased and Manufacturing Overhead is decreased, which increases equity.
17. When a job is completed, Finished Goods Inventory is debited and Work-in-Process Inventory is credited. The effect on the accounting equation is that one asset (Finished Goods Inventory) is increased and another asset (Work-in-Process Inventory) is decreased.
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–2
18. One journal entry is required to recognize the revenue earned and another journal entry is required to remove the product from inventory when it is shipped to the customer and recognize the expense incurred.
Date Accounts and Explanation Debit CreditAccounts Receivable XX
Sales Revenue XX
Cost of Goods Sold XXFinished Goods Inventory XX
19. Underallocated overhead occurs when actual manufacturing overhead costs are more than allocated manufacturing overhead costs. Overallocated overhead occurs when actual manufacturing overhead costs are less than allocated manufacturing costs. This is caused by the fact that overhead is allocated using a predetermined overhead allocation rate that is based on estimates.
20. The overhead is overallocated because the company allocated more than the actual overhead costs. The amount is $325 ($5,575 – $5,250).
21.
Date Accounts and Explanation Debit CreditManufacturing Overhead 325
Cost of Goods Sold 325
22. Costs are accumulated in various accounts as they are incurred. Direct costs are assigned to individual jobs and recorded on the job cost records. Manufacturing overhead costs (indirect costs) are allocated to individual jobs based on a predetermined overhead allocation rate. The Manufacturing Overhead account is adjusted at the end of the period for the amount of underallocated or overallocated manufacturing overhead.
23. Service companies, like manufacturing companies, work on individual, unique jobs and need to know the cost of the jobs. Knowing the full cost of a job allows for better pricing decisions.
24. Indirect costs are allocated to jobs using the predetermined overhead allocation rate.
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–3
Short Exercises
S17-1
S17-2
Account Is increased by: Is decreased by:Raw Materials Inventory Materials purchased Materials usedWork-in-Process Inventory Direct materials used
Direct labor incurredManufacturing overhead allocated
Completion of jobs
Finished Goods Inventory Completion of jobs Shipping sold jobsCost of Goods Sold Shipping sold jobs
Adjusting entryAdjusting entry
S17-3
Date Accounts and Explanation Debit CreditRaw Materials Inventory ($71,000 + $1,100) 72,100
Accounts Payable 72,100
Work-in-Process Inventory 64,000Manufacturing Overhead 250
Raw Materials Inventory 64,250
Raw Materials InventoryBal. 34,000 64,250 Used Purchased 72,100Bal. 41,850
The ending balance of the Raw Materials Inventory account is $41,850.
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–4
a. A manufacturer of refrigerators Processb. A manufacturer of specialty wakeboards Job Orderc. A manufacturer of luxury yachts Job Orderd. A professional services firm Job Ordere. A landscape contractor Job Orderf. A custom home builder Job Orderg. A cell phone manufacturer Processh. A manufacturer of frozen pizzas Processi. A manufacturer of multivitamins Processj. A manufacturer of tennis shoes Process
S17-4
Total materials used ($50 + $ 205 – $35) $220Direct materials used ($15 + $285 + $135 – $550 – $45) $160Indirect materials used ($220 – $160) $60
S17-5
Date Accounts and Explanation Debit CreditWork-in-Process Inventory 78,000Manufacturing Overhead ($570 + $880) 1,450
Wages Payable 79,450
S17-6
Manufacturing Overhead = $26,000 + $5,500 + $38,000 = $69,500
Date Accounts and Explanation Debit CreditManufacturing Overhead 26,000
Raw Materials Inventory 26,000
Manufacturing Overhead 5,500Accumulated Depreciation 5,500
Manufacturing Overhead 38,000Wages Payable 38,000
These costs are not overhead costs: Wood is a direct material Depreciation on the delivery truck is a selling and administrative expense (period
cost, not a product cost) Assembly-line workers’ wages are direct labor
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–5
S17–7Direct materials $ 500 Direct labor 430Manufacturing overhead ($430 × 0.80) 344Total cost of Job 303 $ 1,274
S17-8
Predetermined Overhead
Allocation Rate= Total estimated overhead cost
Total estimated quantity of the overhead allocation base
= $65,000 = $13 per DLHr5,000 DLHr
Allocated Manufacturing Overhead Cost =
Predetermined Overhead
Allocation Rate×
Actual Quantity of theAllocation Based used by
Each Job= $13 per DLHr × 4,850 DLHr= $63,050
Date Accounts and Explanation Debit CreditWork-in-Process Inventory 63,050 Manufacturing Overhead 63,050
S17-9Requirement 1
Total debits = $3,400 + $12,000 + $36,500 = $51,900
Requirement 2
Total credits = $53,900
Requirement 3
Overallocated by $2,000 (Difference between total debits and total credits = $53,900 – $51,900)
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–6
S17-10Requirements 1, 2 and 3
Allocated overhead – Actual Overhead$207,000 – $197,000 = $10,000 overallocated
S17-11
Date Accounts and Explanation Debit CreditFinished Goods Inventory 45,000
Work-in-Process Inventory 45,000
Accounts Receivable 85,000 Sales Revenue 85,000
Cost of Goods Sold 40,000 Finished Goods Inventory 40,000
S17-12
Date Accounts and Explanation Debit CreditCost of Goods Sold ($163,000 – $152,000) 11,000 Manufacturing Overhead 11,000
S17-13Requirement 1
Work hours per year = Hours per week × Weeks per year= 40 hours × 50 hours= 2,000 hours
Yearly rate / Hours per year = Cost per hour$104,400 / 2,000 hours = $52.20 per hour
Requirement 2
Hours worked × Rate per hour = Direct Labor Cost12 hours × $52.20 per hour = $626.40
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–7
S17-14Requirement 1
Predetermined Overhead
Allocation Rate= Total estimated overhead costs
Total estimated quantity of the overhead allocation base
= $240,000 = $30 per DLHr8,000 DLHr
Requirement 2
Indirect Costs = Predetermined Overhead Allocation Rate × Actual Quantity of the
Allocation Base Used= $30 per DLHr × 12 DLHr = $360
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–8
Exercises
E17-15
a. Companies that produce small quantities of many different products. Job Orderb. A company that pulverizes wood into pulp to manufacture cardboard. Processc. A company that manufactures thousands of identical files. Processd. Companies that produce large numbers of identical products. Processe. A computer repair service that makes service calls to homes. Job Orderf. A company that assembles electronic parts and software to manufacture
millions of portable media players.Process
g. A textbook publisher that produces titles of a particular book in batches. Job Orderh. A company that bottles milk into one-gallon containers. Processi. A company that makes large quantities of one type of tankless hot water
heaters.Process
j. A governmental agency that takes bids for specific items it utilizes where each item requires a separate bid.
Job Order
E17-16
a. A record used to assign direct labor cost to specific jobs.
4. Labor Time Record
b. Request for the transfer of materials to the production floor.
5. Materials Requisition
c. Document that shows the direct materials, direct labor, and manufacturing overhead costs for an individual job.
2. Job Cost Record
d. An accounting system that accumulates costs by process.
6. Process Costing System
e. The production of a unique product or specialized service
1. Job
f. Used by companies that manufacture unique products or provide specialized services.
3. Job Order Costing System
E17-17
(a) Work-in-ProcessInventory
(b) Finished GoodsInventory
(c) Cost of GoodsSold
Job Cost Job Cost Job Cost 3 $ 6,900 4 $ 4,400 1 $ 3,100
2 13,000Total $ 6,900 Total $ 4,400 Total $ 16,100
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–9
E17-18Date Accounts and Explanation Debit Credit
Raw Materials Inventory 53,000Accounts Payable 53,000
Purchase of raw materials on account.
Work-in-Process Inventory 42,100Manufacturing Overhead 700
Raw Materials Inventory 42,800Raw materials used in production.
Work-in-Process Inventory 22,500Manufacturing Overhead 1,250
Wages Payable 23,750Labor incurred in production.
E17-19Requirement 1
Predetermined Overhead
Allocation Rate= Total estimated overhead cost
Total estimated quantity of the overhead allocation base
= $115,000 = 1.60 or 160% of direct labor cost$71,875
Requirement 2
Date Accounts and Explanation Debit CreditDec. 31 Work-in-Process Inventory ($73,000 × 160%) 116,800
Manufacturing Overhead 116,800
Requirement 3
Manufacturing Overhead119,000 116,800
Manufacturing overhead is underallocated by $2,200 ($119,000 − $116,800).
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–10
E17-19, cont.Requirement 4
E17-20Requirement 1
Predetermined Overhead
Allocation Rate= Total estimated overhead cost
Total estimated quantity of the overhead allocation base
= $840,000 = $12 per MHr70,000 MHr
Requirement 2
Date Accounts and Explanation Debit CreditDec. 31 Work-in-Process Inventory (67,000 MHr × $12/MHr) 804,000
Manufacturing Overhead 804,000
Requirement 3
Manufacturing Overhead600,000 804,00040,00017,000
147,000 Bal.
Manufacturing overhead is overallocated by $147,000.
Requirement 4
Date Accounts and Explanation Debit CreditDec. 31 Manufacturing Overhead 147,000
Cost of Goods Sold 147,000
This entry decreases Cost of Goods Sold.
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–11
Date Accounts and Explanation Debit CreditDec. 31 Cost of Goods Sold 2,200
Manufacturing Overhead 2,200
E17-21Requirement 1
Allocated manufacturing overhead / Predetermined overhead
allocation rate = Machine hours
$405,900 / $41 per MHr = 9,900 MHr
Requirement 2
Allocated overhead – Actual Overhead =$405,900 – $428,000 = $22,100 underallocated
Requirement 3
Date Accounts and Explanation Debit CreditDec. 31 Cost of Goods Sold 22,100
Manufacturing Overhead 22,100
E17-22Requirement 1
Date Accounts and Explanation Debit CreditJun. 30 Finished Goods Inventory ($38,000 + 36,000) 74,000
Work-in-Process Inventory 74,000
Requirement 2
Work-in-Process Inventory Jun. 1 Bal. 20,000Direct materials used 31,000Direct labor assigned to jobs 33,000 38,000 Job 142 completedMOH allocated to jobs 13,000 36,000 Job 143 completedJun. 30 Bal. 23,000
Requirement 3
Date Accounts and Explanation Debit CreditJun. 30 Accounts Receivable 46,000
Sales Revenue 46,000Cost of Goods Sold 36,000
Finished Goods Inventory 36,000
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–12
E17-22, cont.Requirement 4
Sales Revenue $ 46,000Cost of Goods Sold 36,000Gross Profit $ 10,000
E17-23
KELLY COMPANYSchedule of Cost of Goods Manufactured
Year Ended December 31, 2014(in millions)
Beginning Work-in-Process Inventory $ 10Direct Materials Used:
Beginning Raw Materials Inventory $ 5Purchases of Raw Materials 35Raw Materials Available for Use 40Ending Raw Materials Inventory (7)
Direct Materials Used $ 33Direct Labor 42Manufacturing Overhead 21Total Manufacturing Costs Incurred during the Year 96Total Manufacturing Costs to Account for 106Ending Work-in-Process Inventory (16)Cost of Goods Manufactured $ 90
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–13
E17-23, cont.
KELLY COMPANYIncome Statement
Year Ended December 31, 2014(in millions)
Sales Revenue $ 225Cost of Goods Sold:
Beginning Finished Goods Inventory $ 8Cost of Goods Manufactured 90Cost of Goods Available for Sale 98Ending Finished Goods Inventory (12)
Cost of Goods Sold 86Gross Profit 139Selling and Administrative Expenses 83Total Operating Expenses 83Net Income $ 56
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–14
E17-24
Item Accounts and Explanation Debit Credita. Website Expenses 2,900
Cash 2,900
b. Work-in-Process Inventory 9,000Manufacturing Overhead 6,000
Wages Payable 15,000
c. Raw Materials Inventory 24,000Accounts Payable 24,000
d. Work-in-Process Inventory 9,500Manufacturing Overhead 4,500
Raw Materials Inventory 14,000
e. Manufacturing Overhead 10,000Accumulated Depreciation—Plant 10,000
Manufacturing Overhead 1,300Prepaid Insurance 1,300
Manufacturing Overhead 4,200Property Tax Payable 4,200
f. Work-in-Process Inventory ($9,000 × 250%) 22,500Manufacturing Overhead 22,500
g. Finished Goods Inventory 38,000Work-in-Process Inventory 38,000
h. Accounts Receivable 20,000Sales Revenue 20,000
h. Cost of Goods Sold 10,000Finished Goods Inventory 10,000
i. Cost of Goods Sold 3,500Manufacturing Overhead 3,500
Actual overhead ($6,000 + $4,500 + $10,000 + $1,300 + $4,200) – allocated overhead ($22,500) = $3,500
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–15
E17-25
a. Purchased materials on account.b. Used direct and indirect materials in production (requisitioned direct and indirect materials).c. Incurred and assigned manufacturing wages as direct and indirect labor.d. Expired insurance on factory plant and/or equipment.e. Allocated manufacturing overhead to jobs.f. Completed jobs (transferred Work-in-Process Inventory to Finished Goods Inventory; Cost
of Goods Manufactured).g. Sold inventory (Cost of Goods Sold).h. Adjusted underallocated balance of Manufacturing Overhead to Cost of Goods Sold.
E17-26
a. Requisitioned Raw Materials in the amount of $23,000.b. Direct Materials assigned to Work-in-Process Inventory, $20,000.c. Completed jobs and assigned costs to Finished Goods Inventory, $36,000.d. Sold and shipped completed jobs, $29,000.e. Labor incurred, $8,000 (direct labor assigned to Work-in-Process, $7,000; indirect labor
accumulated in Manufacturing Overhead, $1,000).f. Manufacturing Overhead adjusted for underallocated overhead, $2,000.g. Jobs sold and costs assigned to Cost of Goods Sold, $29,000.
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–16
E17-27Requirement 1a
Direct labor costs / Direct labor hours = Direct labor cost rate$2,450,000 / 19,600 DLHr = $125 per DLHr
Requirement 1bIndirect costs:
Office rent $ 370,000Support staff salaries 1,282,500Utilities 430,000Total indirect costs $ 2,082,500
Predetermined Overhead
Allocation Rate= Total estimated overhead cost
Total estimated quantity of the overhead allocation base
= $2,082,500 = 0.85 = 85% of direct labor costs$2,450,000
Requirement 2
Direct labor: 240 DLHr × $125 per DLHr $ 30,000Indirect costs: $30,000 × 85% 25,500Total predicted cost $ 55,500
Requirement 3
Predicted cost $ 55,500Desired profit ($55,500 × 45%) 24,975Required service revenue $ 80,475
Martin should bid $80,475
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–17
Problems (Group A)
P17-28ARequirement 1Bluebird uses a job order costing system. We know this because Bluebird’s costing records show costs being accumulated for each job.
Requirement 2
BLUEBIRD MANUFACTURINGComputation of Work-in-Process Inventory, Finished Goods Inventory,
and Cost of Goods Sold for October and November
DateWork-in-Process
InventoryFinished
Goods Inventory Cost of Goods SoldJob Cost Job Cost Job Cost
October 31: 3 $ 400 2 $ 1,800 1 $ 1,9004 800
Total $ 1,200 $ 1,800 $ 1,900
November 30: 6 $700 4 $ 2,000 2 $ 1,8003 1,9005 550
Total $ 700 Total $ 2,000 Total $ 4,250
Requirement 3
Date Accounts and Explanation Debit CreditOct. 31 Finished Goods Inventory (Jobs 1 & 2) 3,700
Work-in-Process Inventory 3,700
Nov. 30 Finished Goods Inventory (Jobs 3, 4 & 5) 4,450Work-in-Process Inventory 4,450
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–18
P17-28A, cont.Requirement 4
Date Accounts and Explanation Debit CreditNov. 30 Accounts Receivable 2,100
Sales Revenue 2,100
30 Cost of Goods Sold 1,900Finished Goods Inventory 1,900
Requirement 5
The gross profit for Job 3 is:
Sales revenue
Cost of goods soldGross profit
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–19
P17-29ARequirement 1
JOB COST RECORD
Job Number 423Customer Stick People PicturesJob Description 5,900 DVDs
Direct Materials Direct Labor Manufacturing Overhead
DateRequisition
Number Amount Date
Labor Time
RecordNumber Amount Date Rate Amount
4/2 63 $ 341 4/2 655 $140 4/3 125% of DL costs*
$5004/2 64 6754/3 74 126 4/3 656 260
Cost SummaryDirect Materials $1,142Direct Labor 400Manufacturing Overhead 500
Total Cost $2,042Unit Cost $0.35**
*$540,000 / $432,000 = 125%**$2,042 / 5,900 DVDs = $0.35 per DVD (rounded)
Requirement 2
Date Accounts and Explanation Debit CreditApr. 3 Work-in-Process Inventory 1,142
Raw Materials Inventory 1,142
3 Work-in-Process Inventory 400Wages Payable 400
3 Work-in-Process Inventory 500Manufacturing Overhead 500
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–20
P17-29A, cont.Requirement 3
Date Accounts and Explanation Debit CreditApr. 3 Finished Goods Inventory 2,042
Work-in-Process Inventory 2,042
3 Accounts Receivable (5,900 DVDs × $1.30/DVD) 7,670Sales Revenue 7,670
3 Cost of Goods Sold 2,042Finished Goods Inventory 2,042
P17-30ARequirement 1
Predetermined Overhead
Allocation Rate= Total estimated overhead costs
Total estimated quantity of the overhead allocation base
= $1,100,000 = 0.40 = 40% of direct labor cost$2,750,000
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–21
P17-30A, cont.Requirement 2
Date Accounts and Explanation Debit CreditAug. 31
a. Raw Materials Inventory 400,000Accounts Payable 400,000
b. Work-in-Process Inventory1 270,000Raw Materials Inventory 270,000
c. Work-in-Process Inventory2 187,000Construction Overhead3 13,000
Wages Payable 200,000
d. Construction Overhead 6,200Accumulation Depreciation—Equipment 6,200
e. Construction Overhead 40,000Cash 37,000Prepaid Insurance 3,000
f. Work-in-Process Inventory4 74,800Construction Overhead 74,800
g. Finished Goods Inventory5 255,600Work-in-Process Inventory 255,600
h. Accounts Receivable 250,000Sales Revenue 250,000
Cost of Goods Sold6 142,800Finished Goods Inventory 142,800
1$54,000 + $68,000 + $63,000 + $85,000 = $270,0002$42,000 + $35,000 + $57,000 + $53,000 = $187,0003$200,000 – $187,000 = $13,0004 $187,000 × 40% = $74,8005 House 402: $54,000 + $42,000 + ($42,000 × .40) = $112,800 House 404: $63,000 + $57,000 + ($57,000 × .40) = $142,800 Total: $112,800 + $142,800 = 255,600 6From above, House 404 = $142,800
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–22
P17-30A, cont.Requirement 3
Work-in-Process Inventory Finished Goods Inventory(b) DM 270,000 255,600 (g) COGM (g) COGM 255,600 142,800 (h) COGS(c) DL 187,000 Bal. 112,800(f) OH 74,800Bal. 276,200
Requirement 4
QUAINT CONSTRUCTION, INC.Reconciliation of Work-in-Process Inventory Subsidiary
and Control AccountsHouse #403
House #405
Total WIP Balance
Unfinished houses:Direct Materials $ 68,000 $ 85,000Direct Labor 35,000 53,000Construction Overhead (40% of direct labor) 14,000 21,200
Total cost equals Ending Work-in-Process Inventory $ 117,000 $ 159,200 $ 276,200
Requirement 5
QUAINT CONSTRUCTION, INC.Reconciliation of Finished Goods Inventory Subsidiary
and Control AccountsHouse #402
Completed, unsold house:Direct Materials $ 54,000Direct Labor 42,000Construction Overhead (40% of direct labor) 16,800
Total cost equals Ending Finished Goods Inventory $ 112,800
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–23
P17-30A, cont.Requirement 6
QUAINT CONSTRUCTION, INC.Gross Profit on Homes Sold in August
House #404Sales revenue $ 250,000Cost of goods sold 142,800 Gross profit $ 107,200
The gross profit must cover these types of costs: selling and administrative expenses, income tax expense, and other expenses.
P17-31ARequirement 1
Predetermined Overhead
Allocation Rate= Total estimated overhead costs
Total estimated quantity of the overhead allocation base
= $211,000* = $8.44 per MHr25,000 MHrs
*$12,000 + $47,000 + $24,000 + $41,000 + $87,000 = $211,000
Requirement 2
*32,100 MHrs × $8.44 per MHr
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–24
Manufacturing Overhead28,500 270,924*48,00045,00096,85083,000
Bal. 30,426
P17-31A, cont.Requirement 3
Date Accounts and Explanation Debit CreditDec. 31 Cost of Goods Sold 30,426
Manufacturing Overhead 30,426
Requirement 4The actual manufacturing overhead rate is not known until the end of the period. Managers need to make decisions throughout the period. Accountants use predetermined overhead allocation rates to give managers product cost information when they need it—today.
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–25
P17-32ARequirement 1
Date Accounts and Explanation Debit Credita. Cash 152,000
Accounts Receivable 152,000
b. Selling and Administrative Expenses 28,000Cash 28,000
c. Accounts Payable 36,000Cash 36,000
d. Raw Materials Inventory ($22,900 + $3,800) 26,700 Accounts Payable 26,700
e. Work-in-Process Inventory ($850 + $7,650) 8,500Manufacturing Overhead 1,000
Raw Materials Inventory 9,500
f. Work-in-Process Inventory ($3,500 + $16,600) 20,100Manufacturing Overhead 14,900
Wages Payable 35,000
g. Wages Payable ($1,700 + $32,200) 33,900Cash 33,900
h. Manufacturing Overhead 2,600Accumulated Depreciation 2,600
i. Work-in-Process Inventory 10,050Manufacturing Overhead ($20,100 × 50%) 10,050
j. Finished Goods Inventory 45,500Work-in-Process Inventory 45,500
k. Accounts Receivable 111,000Sales Revenue 111,000
Cost of Goods Sold 45,500Finished Goods Inventory 45,500
l. Cost of Goods Sold 8,450Manufacturing Overhead 8,450
($1,000 + $14,900 + $2,600 – $10,050)
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–26
P17-32A, cont.Requirement 2
Cash Accounts ReceivableBal. 14,000 28,000 (b) Bal. 155,000 152,000 (a)(a) 152,000 36,000 (c) (k) 111,000
33,900 (g) Bal. 114,000Bal. 68,100
Raw Materials Inventory Work-in-Process InventoryBal. 5,700 9,500 (e) Bal. 39,400 45,500 (j)(d) 26,700 (e) 8,500Bal. 22,900 (f) 20,100
(i) 10,050Bal. 32,550
Finished Goods Inventory Plant AssetsBal. 20,400 45,500 (k) Bal. 200,000(j) 45,500Bal. 20,400
Accumulated Depreciation Accounts Payable72,000 Bal. (c) 36,000 127,000 Bal. 2,600 (h) 26,700 (d)74,600 Bal. 117,700 Bal.
Wages Payable Common Stock(g) 33,900 1,700 Bal. 142,000 Bal. 35,000 (f)
2,800 Bal.
Retained Earnings Sales Revenue91,800 Bal. 111,000 (k)
Cost of Goods Sold(k) 45,500(l) 8,450Bal. 53,950
Manufacturing Overhead Selling and Administrative Expenses(e) 1,000 10,050 (i) (b) 28,000(f) 14,900 8,450 (l)(h) 2,600Bal. 0
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–27
P17-32A, cont.Requirement 2, cont.
Raw Materials Inventory subsidiary ledger:
Paper Indirect MaterialsBal. 4,700 8,500 (e) Bal. 1,000 1,000 (e)(d) 22,900 (d) 3,800Bal. 19,100 Bal. 3,800
Total balances equal balance of Raw Materials Inventory, $22,900 ($19,100 + $3,800).
Work-in-Process Inventory subsidiary ledger:
Job 120 Job 121Bal. 39,400 45,500 (j) Bal.
(e)0
7,650(e) 850(f) 3,500 (f) 16,600(i) 1,750 (i) 8,300Bal. 0 Bal. 32,550
Balance equals balance of Work-in-Process Inventory, $32,550 ($0 + $32,550).
Finished Goods Inventory subsidiary ledger:
Large Stars Small StarsBal. 9,400 45,500 (k)45,500 Bal. 11,000(j) 45,500Bal. 9,400
Total balances equal balance of Finished Goods Inventory, $20,400 ($9,400 + $11,000).
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–28
P17-32A, cont.Requirement 3
HOWIE STARSTrial BalanceJune 30, 2014
Account Debit CreditCash $ 68,100Accounts Receivable 114,000Inventories:
Raw Materials 22,900Work-in-Process 32,550Finished Goods 20,400
Plant Assets 200,000Accumulated Depreciation $ 74,600Accounts Payable 117,700Wages Payable 2,800Common Stock 142,000Retained Earnings 91,800Sales Revenue 111,000Cost of Goods Sold 53,950Manufacturing OverheadSelling and Administrative Expenses 28,000Totals $ 539,900 $ 539,900
Requirement 4
HOWIE STARSSchedule of Cost of Goods Manufactured
Month Ended June 30,2014
Beginning Work-in-Process Inventory $ 39,400Direct Materials Used (Trans. e) $ 8,500Direct Labor (Trans. f) 20,100Manufacturing Overhead:
Indirect Materials (Trans. e) 1,000Indirect Labor (Trans. f) 14,900Depreciation—Plant and Equipment (Trans. h) 2,600
Total Manufacturing Overhead 18,500Total Manufacturing Costs Incurred during the month 47,100Total Manufacturing Costs to Account for 86,500Ending Work-in-Process Inventory (32,550)Cost of Goods Manufactured $ 53,950
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–29
P17-32A, cont.Requirement 5
HOWIE STARSIncome Statement
Month ended June 30, 2014
Sales Revenue $ 111,000Cost of Goods Sold:
Beginning Finished Goods Inventory $ 20,400Cost of Goods Manufactured 53,950Cost of Goods Available for Sale 74,350Ending Finished Goods Inventory (20,400)
Cost of Goods Sold 53,950Gross Profit $57,050 Selling and Administrative Expenses 28,000Net Income $ 29,050
P17-33ARequirement 1
Hourly rateto the employer = $1,800,000 per year = $288 per hour6,250 hours per year
Predetermined Overhead
Allocation Rate= Total estimated overhead costs
Total estimated quantity of the overhead allocation base
= $900,000* = 0.50 = 50% of direct labor costs$1,800,000
*$765,000 + $46,000 + $27,000 + $62,000 = $900,000
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–30
P17-33A, cont.Requirement 2
CROW DESIGN, INC.Estimated Cost of Delicious Treats’ and Mesilla Chocolates’ Jobs
Delicious Treats
Mesilla Chocolates
Direct Costs:Direct Labor
700 hours × $288 per hour $ 201,600100 hours × $288 per hour $ 28,800
Software licensing costs 4,000Travel costs 8,000
Total Direct Costs $ 213,600 $ 29,200Allocated Indirect Costs:
50% × $201,600 100,80050% × $ 28,800 14,400
Total Costs $ 314,400 $ 43,600
Requirement 3
Service Revenue – Total costs = ProfitService Revenue = Total costs / 50%
Delicious Treats: $628,800Service Revenue = Total costs / 50%Service Revenue = $314,400 / 50% Service Revenue = $628,800
Mesilla Chocolates: $87,200 Service Revenue = Total costs / 50%Service Revenue = $43,600 / 50% Service Revenue = $87,200
Requirement 4Crow Design, Inc. assigns costs to jobs to help the company set fees that cover all costs and contribute to profit. Assigning costs to individual clients can also help Crow Design, Inc. control costs.
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–31
Problems (Group B)
P17-34BRequirement 1Stratton Manufacturing uses a job order costing system. We know this because Stratton’s costing records show costs being accumulated for each job.
Requirement 2
STRATTON MANUFACTURINGComputation of Work-in-Process Inventory, Finished Goods Inventory,
and Cost of Goods Sold for October and November
DateWork-in-Process
InventoryFinished Goods
InventoryCost of Goods
SoldJob Cost Job Cost Job Cost
October 31: 3 $ 700 2 $ 1,100 1 $ 1,0004 300
Total $1,000 Total $ 1,100 Total $ 1,000
November 30: 6 $500 4 $ 1,800 2 $ 1,1003 2,1005 650
Total $ 500 Total $ 1,800 Total $ 3,850
Requirement 3
Date Accounts and Explanation Debit CreditOct. 31 Finished Goods Inventory (Jobs 1 & 2) 2,100
Work-in-Process Inventory 2,100
Nov. 30 Finished Goods Inventory (Jobs 3, 4, & 5) 4,550Work-in-Process Inventory 4,550
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–32
P17-34B, cont.Requirement 4
Date Accounts and Explanation Debit CreditNov. 30 Accounts Receivable 2,200
Sales Revenue 2,200
30 Cost of Goods Sold 2,100Finished Goods Inventory 2,100
Requirement 5
The gross profit for Job 3 is:
Sales Revenue $ 2,200Cost of Goods Sold 2,100Gross Profit $ 100
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–33
P17-35BRequirement 1
JOB COST RECORD
Job Number 423Customer Leopard PicturesJob Description 5,500 DVDs
Direct Materials Direct Labor Manufacturing Overhead
DateRequisition
Number Amount Date
Labor Time
RecordNumber Amount Date Rate Amount
11/2 63 $372 11/2 655 $180 11/3 110% of DL costs*
$50611/2 64 72511/3 74 144 11/3 656 280
Cost SummaryDirect Materials $1,241Direct Labor 460Manufacturing Overhead 506
Total Cost $2,207Unit Cost $0.40**
*$550,000 / $500,000 = 110%**$2,207 / 5,500 DVDs = $0.40 per DVD (rounded)
Requirement 2
Date Accounts and Explanation Debit CreditNov. 3 Work-in-Process Inventory 1,241
Raw Materials Inventory 1,241
3 Work-in-Process Inventory 460Wages Payable 460
3 Work-in-Process Inventory 506Manufacturing Overhead 506
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–34
P17-35B, cont.Requirement 3
Date Accounts and Explanation Debit CreditNov. 3 Finished Goods Inventory 2,207
Work-in-Process Inventory 2,207
3 Accounts Receivable (5,500 DVDs × $1.60 per DVD) 8,800Sales Revenue 8,800
3 Cost of Goods Sold 2,207Finished Goods Inventory 2,207
P17-36BRequirement 1
Predetermined Overhead
Allocation Rate= Total estimated overhead costs
Total estimated quantity of the overhead allocation base
= $1,050,000 = 0.30 = 30% of direct labor cost$3,500,000
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–35
P17-36B, cont. Requirement 2
Date Accounts and Explanation Debit CreditAug. 31
a. Raw Materials Inventory 460,000 Accounts Payable 460,000
b. Work-in-Process Inventory1 273,000
Raw Materials Inventory 273,000
c. Work-in-Process Inventory2 186,000 Construction Overhead3 24,000
Wages Payable 210,000
d. Construction Overhead 6,000 Accumulated Depreciation––Equipment 6,000
e. Construction Overhead 44,000 Cash 36,000Prepaid Insurance 8,000
f. Work-in-Process Inventory4 55,800
Construction Overhead 55,800
g. Finished Goods Inventory5 247,300 Work-in-Process Inventory 247,300
h. Accounts Receivable 200,000 Sales Revenue 200,000
Cost of Goods Sold6 138,800
Finished Goods Inventory 138,800
1$50,000 + $69,000 + $66,000 + $88,000 = $273,0002$45,000 + $30,000 + $56,000 + $55,000 = $186,0003$210,000 – $186,000 = $24,0004 $186,000 × 30% = %55,8005 House 402: $50,000 + $45,000 + ($45,000 × 0.30) = $108,500 House 404: $66,000 + $56,000 + ($56,000 × 0.30) = $138,800 Total: $108,500 + $138,800 = $247,3006From above, House 404 = $138,800
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–36
P17-36B, cont. Requirement 3
Work-in-Process Inventory Finished Goods Inventory(b) DM 273,000 247,300 (g) COGM (g) COGM 247,300 138,800 (h) COGS(d) DL 186,000 Bal. 108,500(f) OH 55,800Bal. 267,500
Requirement 4
COTTAGE CONSTRUCTION, INC.Reconciliation of Work-in-Process Inventory Subsidiary
and Control Accounts
House #403 House #405Total WIPBalance
Unfinished houses:Direct Materials $ 69,000 $ 88,000 *Direct Labor 30,000 55,000 *Construction Overhead (30% of direct labor) 9,000 16,500 *
Total cost equals Ending Work-in-Process Inventory $ 108,000 $ 159,500 * $ 267,500
Requirement 5
COTTAGE CONSTRUCTION, INC.Reconciliation of Finished Goods Inventory Subsidiary
and Control AccountsHouse #402
Completed, unsold house:Direct Materials $ 50,000Direct Labor 45,000Construction Overhead (30% of direct labor) 13,500
Total cost equals Ending Finished Goods Inventory $ 108,500
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–37
P17-36B, cont. Requirement 6
COTTAGE CONSTRUCTION, INC.Gross Profit on Homes Sold in August
House #404Sales Revenue $ 200,000Cost of Goods Sold 138,800Gross Profit $ 61,200
The gross profit must cover these types of costs: selling and administrative expenses, income tax expense, and non-operating expenses.
P17-37BRequirement 1
Predetermined Overhead
Allocation Rate= Total estimated overhead costs
Total estimated quantity of the overhead allocation base
= $210,000* = $7.50 per MHr28,000 MHrs
*$16,000 + $46,000 + $23,000 + $42,000 + $83,000 = $210,000
Requirement 2
*32,400 MHrs × $7.50 per MHr
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–38
Manufacturing Overhead26,500 243,000*47,00046,00093,85082,000
Bal. 52,350
P17-37B, cont.Requirement 3
Date Accounts and Explanation Debit CreditDec 31 Cost of Goods Sold 52,350
Manufacturing Overhead 52,350
Requirement 4The actual manufacturing overhead rate is not known until the end of the period. Managers need to make decisions throughout the period. Accountants use predetermined overhead allocation rates to give managers product cost information when they need it—today.
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–39
P17-38BRequirement 1
Date Accounts and Explanation Debit Credit June 30
a. Cash 155,000 Accounts Receivable 155,000
b. Selling and Administrative Expenses 22,000
Cash 22,000
c. Accounts Payable 37,000 Cash 37,000
d. Raw Materials Inventory ($26,600 + $4,200) 30,800
Accounts Payable 30,800
e. Work-in-Process Inventory ($900 + $7,850) 8,750 Manufacturing Overhead 1,600
Raw Materials Inventory 10,350
f. Work-in-Process Inventory ($4,800 + $18,500) 23,300 Manufacturing Overhead 19,700
Wages Payable 43,000
g. Wages Payable ($3,300 + $39,900) 43,200 Cash 43,200
h. Manufacturing Overhead 2,700
Accumulated Depreciation 2,700
i. Work-in-Process Inventory 20,970 Manufacturing Overhead ($23,300 × 90%) 20,970
j. Finished Goods Inventory 53,020
Work-in-Process Inventory 53,020
k. Accounts Receivable 133,000 Sales Revenue 133,000
Cost of Goods Sold 53,020
Finished Goods Inventory 53,020
l. Cost of Goods Sold 3,030 Manufacturing Overhead 3,030
($1,600 + $19,700 + $2,700 − $20,970)
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–40
P17-38B, cont.Requirement 2
Cash Accounts ReceivableBal. 17,000 22,000 (b) Bal. 170,000 155,000 (a)(a) 155,000 37,000 (c) (k) 133,000
43,200 (g) Bal. 148,000Bal. 69,800
Raw Materials Inventory Work-in-Process InventoryBal. 6,200 10,350 (e) Bal. 43,000 53,020 (j)(d) 30,800 (e) 8,750Bal. 26,650 (f) 23,300
(i) 20,970Bal. 43,000
Finished Goods Inventory Plant AssetsBal. 21,300 53,020 (k) Bal. 250,000(j) 53,020Bal. 21,300
Accumulated Depreciation Accounts Payable71,000 Bal. (c) 37,000 133,000 Bal. 2,700 (h) 30,800 (d)73,700 Bal. 126,800 Bal.
Wages Payable Common Stock(g) 43,200 3,300 Bal. 144,000 Bal. 43,000 (f)
3,100 Bal.
Retained Earnings Sales Revenue156,200 Bal. 133,000 (k)
Cost of Goods Sold(k) 53,020(l) 3,030Bal. 56,050
Manufacturing Overhead Selling and Administrative Expenses(e) 1,600 20,970 (i) (b) 22,000(f) 19,700 3,030 (l)(h) 2,700Bal. 0
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–41
P17-38BA, cont.Requirement 2, cont.
Raw Materials Inventory subsidiary ledger:
Paper Indirect MaterialsBal. 4,300 8,750 (e) Bal. 1,900 1,600 (e)(d) 26,600 (d) 4,200Bal. 22,150 Bal. 4,500
Total balances equal balance of Raw Materials Inventory, $26,650 ($22,150 + $4,500).
Work-in-Process Inventory subsidiary ledger:
Job 120 Job 121Bal. 43,000 53,020 (j) Bal. 0(e) 900 (e) 7,850(f) 4,800 (f) 18,500(i) 4,320 (i) 16,650Bal. 0 Bal. 43,000
Balance equals balance of Work-in-Process Inventory, $43,000 ($0 + $43,000).
Finished Goods Inventory subsidiary ledger:
Large stars Small starsBal. 9,300 53,020 (k) Bal. 12,000(j) 53,020 Bal. 12,000Bal. 9,300
Total balances equal balance of Finished Goods Inventory, $21,300 ($9,300 + $12,000).
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–42
P17-38B, cont.Requirement 3
SCHOOL STARSTrial BalanceJune 30, 2014
Account Title Debit CreditCash $ 69,800Accounts Receivable 148,000Inventories:
Raw Materials 26,650Work-in-Process 43,000Finished Goods 21,300
Plant Assets 250,000Accumulated Depreciation $ 73,700Accounts Payable 126,800Wages Payable 3,100Common Stock 144,000Retained Earnings 156,200Sales Revenue 133,000Cost of Goods Sold 56,050Manufacturing Overhead 0Selling and Administrative Expenses 22,000Totals $ 636,800 $ 636,800
Requirement 4
SCHOOL STARSSchedule of Cost of Goods Manufactured
Month Ended June 30, 2014
Beginning Work-in-Process Inventory $ 43,000Direct Materials Used (Trans. e) $ 8,750Direct Labor (Trans. f) 23,300Manufacturing Overhead:
Indirect Materials (Trans. e) $ 1,600Indirect Labor (Trans. f) 19,700Depreciation—Plant and Equipment (Trans. h) 2,700
Total Manufacturing Overhead 24,000Total Manufacturing Costs Incurred during the Month 56,050Total Manufacturing Costs to Account for 99,050Ending Work-in-Process Inventory (43,000)Cost of Goods Manufactured $ 56,050
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–43
P17-38B, cont.Requirement 5
SCHOOL STARSIncome Statement
Month Ended June 30, 2014
Sales Revenue $ 133,000Cost of Goods Sold:
Beginning Finished Goods Inventory $ 21,300 Cost of Goods Manufactured 56,050Cost of Goods Available for Sale 77,350 Ending Finished Goods Inventory (21,300)
Cost of Goods Sold 56,050Gross Profit 76,950 Selling and Administrative Expense 22,000Net Income $ 54,950
P17-39BRequirement 1
Hourly rateto the employer = $2,000,000 per year = $250 per hour8,000 hours per year
Predetermined Overhead
Allocation Rate= Total estimated overhead costs
Total estimated quantity of the overhead allocation base
= $800,000* = 0.40 = 40% of direct labor costs$2,000,000
*$664,000 + $47,000 + $23,000 + $66,000 = $800,000
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–44
P17-39B, cont.Requirement 2
SKYLARK DESIGN, INC.Estimated Cost of Food Coops’ and Martin Chocolates’ Jobs
Food Coop
Martin Chocolates
Direct Costs: Direct labor
900 hours × $250 per hour $ 225,000 100 hours × $250 per hour $ 25,000
Software licensing costs 3,500 100Travel costs 11,000 0
Total Direct Costs $ 239,500 $ 25,100 Allocated Indirect Costs:
40% × $225,000 90,000 40% × $ 25,000 10,000
Total Costs $ 329,500 $ 35,100
Requirement 3
Service Revenue – Total costs = ProfitService Revenue = Total costs / 50%
Food Coop: $659,000Service Revenue = Total costs / 50%Service Revenue = $329,500 / 50% Service Revenue = $659,000
Martin Chocolates: $70,200Service Revenue = Total costs / 50%Service Revenue = $35,100 / 50%Service Revenue = $70,200
Requirement 4Skylark Design, Inc. assigns costs to jobs to help the company set fees that cover all costs and contribute to profit. Assigning costs to individual clients also can help Skylark Design, Inc. control costs.
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–45
Continuing Problem
P17-40Requirement 1
Predetermined Overhead
Allocation Rate= Total estimated overhead costs
Total estimated quantity of the overhead allocation base
= $198,000 = 0.20 = 20%$990,000
*$105,000 +48,000 + $15,000 + $30,000 = $198,000
Requirement 2
DAVIS CONSULTING, INC.Estimated Cost of Tommy’s Trains and Marcia’s Cookies Jobs
Tommy’s
TrainsMarcia’s Cookies
Direct Costs: Direct labor
730 hours × $180 per hour* $131,400 300 hours × $180 per hour* $54,000
Meal per diem 2,600 600Travel costs 11,000 0
Total Direct Costs 145,000 54,600Allocated Indirect Costs:
20% × $131,400 26,280 20% × $ 54,000 10,800
Total Cost $171,280 $65,400
*$990,000 estimated direct labor costs / 5,500 estimated direct labor hours = $180 per hour
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–46
P17-40, cont.Requirement 3
Service Revenue – Total costs = ProfitService Revenue = Total costs / 75%
Tommy’s Trains: $228,373Service Revenue = Total costs / 75% Service Revenue = $171,280 / 75% Service Revenue = $228,373
Marcia’s Cookies: $87,200Service Revenue = Total costs / 75% Service Revenue = $65,400 / 75%Service Revenue = $87,200
Requirement 4Davis assigns costs to jobs to help the company set fees that cover all costs and contribute to profit. Assigning costs to individual clients can also help Davis Consulting to control costs.
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–47
Critical Thinking
Decision Case 17-1Requirement 1The cost analysis for the second order is correct. The problem tells us that overhead is allocated “based on direct labor cost,” and we can see from the first order that the allocation rate is 50% of direct labor cost. Some students may point out that labor costs have gone up during the year, but overhead costs presumably have not. This situation could result in an overallocation of overhead. However, overallocated or underallocated amounts are adjusted at the end of the year.
Furthermore, all amounts, including both overhead costs and labor costs, were estimated at the beginning of the year to calculate the predetermined overhead allocation rate. Estimates are, by their nature, only “educated guesses.” They may very well include “contingency amounts” or “cushions” for unknown factors, and it is expected that actual costs will differ from the amounts estimated. (Alternatively, it may be pointed out that companies are free to revise their allocation rates at any time if they feel it is warranted.)
Requirement 2Hiebert should account for each order as a separate job. The orders were received at different times, for different amounts, and the costs per box of the orders are not the same.
Requirement 3Student responses will vary. Answers should make it clear that Hiebert is free to price his products any way he sees fit. He may choose to keep the price per box the same as it was before, and sacrifice a portion of the gross profit in order to keep his sales volume up and maintain customer loyalty. Or, he could “pass along” the cost increases by raising his prices, risking a reduction in sales. Or, he could pick a price strategy somewhere in between these two points. Hiebert will have to consider a number of factors such as supply and demand, current market conditions, competition, and customer relations before deciding on whether to change the price of the product.
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–48
Decision Case 17-2Requirement 1
Consider the computation of the predetermined overhead allocation rate:
Total estimated overhead costsTotal estimated quantity of the allocation base
The advantages of monthly rates are:
The controller only has to estimate overhead costs and the allocation base (direct labor hours) for the next month.
If the controller’s cost and allocation base estimates are more accurate, there will be less overallocated or underallocated manufacturing overhead.
The disadvantages of monthly rates are:
The controller has to spend time estimating these amounts each month. (Although this might help the controller keep a closer eye on costs.)
Monthly manufacturing overhead rates will vary significantly for reasons beyond managers’ control. For example, the December predetermined overhead allocation rate could be twice as high as other months’ rates. While the costs should be approximately the same as in other months, there are only half as many direct labor hours over which to spread the overhead costs. It is not clear why a jar of preserves produced November 30 should have a much lower cost than a jar produced on December 1.
Similarly, if Nature’s Own incurs particularly high air conditioning costs in July, then July’s manufacturing overhead costs (numerator of the predetermined overhead allocation rate) will be higher than in more temperate months, leading to a higher predetermined overhead allocation rate.
Requirement 2 Most companies adopt a yearly approach to “smooth out” seasonal effects and the effects of other costs that do not occur on a regular basis so that all products produced during the year will bear an equal burden of overhead costs. This not only prevents wild up and down swings in Cost of Goods Sold, but also prevents similar swings in gross profit. Such swings can give a distorted and misleading appearance to cost and profit data.
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–49
Ethical Issues 17-1Requirement 1
Farley’s pricing policy states that the bid price should be based on:Design cost + manufacturing cost + distribution cost + customer service cost + profit margin.
Using only manufacturing cost rather than full costs understates the cost of the job and results in a lower bid price. By excluding the several hundred thousand dollars of design costs, the company may submit a bid price that is too low. If the contract is executed at the current price, Farley’s profit margin will be lower than expected, and the company may even incur a loss.
Requirement 2
Assuming that this error will have a significant negative impact on company profits, York will have to discuss the situation with the company president, and he will have to make a recommendation.
Possible alternatives are:
a. Farley, Inc. will live up to the contract, and absorb the losses in order to maintain good relations with its customer.
b. Farley, Inc. will approach the customer and discuss renegotiating the contract.c. Farley, Inc. will attempt to use legal tactics to annul the contract.
Each party would likely be affected by York’s decision:
The Controller, Paul York, may be fired, demoted, or in some other way penalized for not catching the mistake before the contract was signed. On the other hand, he may be able to handle the situation without any negative consequences if the customer is willing to renegotiate.
CompWest.com would prefer to pay the lowest price and may not want to renegotiate the contract. CompWest.com could sue Farley if Farley simply refuses to honor the contract.
The first thing York should do is to immediately inform the president. It is possible that the president may be able to offer other ideas as to how to resolve the situation.
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–50
Fraud Case 17-1Requirement 1
The company is using direct labor hours as a cost driver to allocate overhead. By showing more hours spent on military jobs, more overhead would be allocated to these jobs over civilian contracts.
Requirement 2
By shifting costs from other contracts to the government contracts, the company is overcharging the government and violating the contract agreement.
Requirement 3
Lower costs translate into higher profits. Additionally, the company can place bids lower than its competitors because they have lower costs, thereby increasing their chances of being awarded contracts.
Team Project 17-1Requirement 1a
The total cost of Flight 1247, assuming a full plane (100% load factor):
Costs other than food and beverage:Number of available seat miles × Cost per seat mile
[142 seats × 1,000 miles] × $0.084142,000 seat miles × $0.084 = $11,928
Food and beverage costs:Number of meals × Cost per meal
142 seats × $10 = 1,420
Total cost of flight 1247 $13,348
Requirement 1bThe revenue generated by Flight 1247, assuming a 100% load factor and average revenue per one-way ticket of $102:
Number of seats × Average revenue per seat = Revenue142 seats × $102.00 = $14,484
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–51
Team Project 17-1, cont.Requirement 1cThe profit per Flight 1247, given the responses to 1a and 1b:
Revenue – Cost = Profit$14,484 (1b) – $13,348 (1a) = $1,136
Requirement 2a
The total cost of Flight 53, assuming a full plane (100% load factor)Costs other than food and beverage:Number of available seat miles × Cost per seat mile
(162 seats × 1,000 miles) × $0.053162,000 seat miles × $0.053 = $8,586
Food and beverage costs:Number of snacks × Cost per snack
162 seats × $5 = 810
Total cost of flight 53 $9,396
Requirement 2b
The revenue generated by Flight 53, assuming a 100% load factor:
Number of seats × Revenue per seat = Revenue162 seats × $75.00 = $12,150
The profit per Flight 53, given the responses to a. and b:
Revenue – Cost = Profit$12,150 (2b) – $9,396 (2a) = $2,754
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–52
Team Project 17-1, cont.Requirement 3
Delta Flight 1247 JetBlue Flight 53Revenues $ 14,484 $ 12,150 Costs 13,348 9,396Profits $ 1,136 $ 2,754
1. Do nothing and wait until the budget carriers run out of money.Given its lower cost, JetBlue is making profits ($2,754) even with the low airfare of $75 a ticket. So the data do not support the vice president of operations’ opinion that JetBlue cannot continue to operate with its existing low fare structure. While Delta is currently making a smaller profit ($1,136) on this same route, the vice president of marketing is concerned that failure to match other airlines’ lower airfares will result in a loss of market share. As a result, Delta’s profits may decline and even disappear. Thus, doing nothing is not a good alternative.
2. Cut airfares to match the competition.Delta offers a range of fares, including some that are close to those of the budget carriers. For example, on Flight 1247 Delta offers some seats at $80. However, if Delta simply matched JetBlue’s $75 airfare on this route, Flight 1247’s revenue would drop to $10,650 and result in a loss because revenues would be less than costs:
Number of seats × Revenue per seat = Total Revenue142 seats × $75.00 = $10,650
3. Institute a cost-cutting program.Cost cutting would enable Delta to increase the profitability of its flights and, at the same time, respond to competition with lower airfares. Comparing the costs of Delta’s Flight 1247 with JetBlue’s Flight 53 suggests there is potential for Delta to cut costs. Delta’s total costs are 42% [($13,348 − $9,396) / $9,396] higher than JetBlue’s. Delta should consider pursuing a cost-cutting strategy.
4. Start a new budget airline.This might be an acceptable strategy, especially if Delta has difficulty cutting the cost of its existing airline operations. For this strategy to succeed, however, the new airline would have to operate with far lower costs than Delta does at present. Delta would also have to carefully consider the effect the new airline would have on the business of their existing airline. This would be a significant change in corporate strategy that would require considerably more analysis.
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–53
Team Project 17-1, cont.Requirement 4
Simplifying assumptions include:
A. Each airline has a 100% load factor. This is unlikely to hold and average load factors differ between airlines. If JetBlue has a higher load factor than Delta, this would further increase JetBlue’s profitability advantage over Delta.
B. Revenue is the same for each seat filled by an airline. (For Delta, the calculations that were done using a single price of $102.)This is not the case for Delta, because it offers a range of airfares. Therefore, Delta could try to sell more of the higher-priced seats. C. Airlines only compete on price. Airlines offer other features to attract customers. For example, JetBlue emphasizes the comfort of its leather seats, while Delta has a frequent flyer program and serves more destinations. Customer service could also be a factor influencing the consumer’s choice.
D. Other factors may have a major impact, such as the routes being offered, times of flights, which cities are being used as hubs, etc.
Communication Activity 17-1Student responses will vary. A sample response: We use a predetermined overhead allocation rate in order to estimate costs before work is done. The rate is multiplied by the actual quantity of the allocation base to determine manufacturing overhead allocated. Manufacturing Overhead is adjusted at the end of period for overallocated and underallocated overhead. Waiting until the “real” rate is determined at the end of the accounting period does not provide cost data in a timely manner during the accounting period.
Horngren’s Financial & Managerial Accounting 4/e Solutions Manual 17–54