MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual CHAPTER 10 SYSTEMS DESIGN: JOB-ORDER COSTING AND PROCESS COSTING I Questions Job-order costing is used in those manufacturing situations where there are many different products produced each period Each product or job is different from all others and requires separate costing Process costing is used in those manufacturing situations where a single, homogeneous product, such as cement, bricks, or gasoline, is produced for long periods at a time The job cost sheet is used in accumulating all costs assignable to a particular job These costs would include direct materials cost traceable to the job, and manufacturing overhead cost allocable to the job When a job is completed, the job cost sheet is used to compute the cost per completed unit The job cost sheet is then used as a control document for: (1) determining how many units have been sold and determining the cost of these units; and (2) determining how many units are still in inventory at the end of a period and determining the cost of these units on the balance sheet Many production costs cannot be traced directly to a particular product or job, but rather are incurred as a result of overall production activities Therefore, in order to be assigned to products, such costs must be allocated to the products in some manner Examples of such costs would include utilities, maintenance on machines, and depreciation of the factory building These costs are indirect production costs A firm will not know its actual manufacturing overhead costs until after a period is over Thus, if actual costs were used to cost products, it would be necessary either (1) to wait until the period was over to add overhead costs to jobs, or (2) to simply add overhead cost to jobs as the overhead cost was incurred day by day If the manager waits until after the period is over to add overhead cost to jobs, then cost data will not be available during the period If the manager simply adds overhead cost to jobs as the overhead cost is incurred, then unit costs may fluctuate from month to month This is because overhead cost tends to be incurred somewhat evenly from month to month (due to the presence 10-1 Chapter 10 Systems Design: Job-Order Costing and Process Costing of fixed costs), whereas production activity often fluctuates For these reasons, most firms use predetermined overhead rates, based on estimates of overhead cost and production activity, to apply overhead cost to jobs An allocation base should act as a cost driver in the incurrence of the overhead cost; that is, the base should cause the overhead cost If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and their costs will be distorted A process costing system is appropriate in those situations where a homogeneous product is produced on a continuous basis In a process costing system, costs are accumulated by department First, the activity performed in a department must be performed uniformly on all units moving through it Second, the output of the department must be homogeneous The reason cost accumulation is simpler is that costs only need to be identified by department - not by separate job Usually there will be only a few departments in a company, whereas there can be hundreds or even thousands of jobs in a job-order costing system 10 A quantity schedule shows the physical flow of units through a department during a period It serves several purposes First, it provides the manager with information relative to activity in his or her department and also shows the manager the stage of completion of any in-process units Second, it serves as an essential guide in computing the equivalent units and in preparing the other parts of the production report II Exercises Exercise (Process Costing and Job Order Costing) b c d e a Job-order costing Process costing Process costing * Job-order costing Job-order costing g h i j f Process costing Process costing Job-order costing Job-order costing Job-order costing * Some of the listed companies might use either a process costing or a joborder costing system, depending on how operations are carried out and how homogeneous the final product is For example, a plywood 10-2 Systems Design: Job-Order Costing and Process Costing Chapter 10 manufacturer might use job-order costing if plywoods are constructed of different woods or come in markedly different sizes Exercise (Applying Overhead with Various Bases) Requirement Predetermined overhead rates: Company X: Predetermined overhead rate = Estimated total manufacturing overhead cost Estimated total amount of the allocation base = P432,000 60,000 DLHs = Estimated total manufacturing overhead cost Estimated total amount of the allocation base = P270,000 90,000 DLHs = Estimated total manufacturing overhead cost Estimated total amount of the allocation base = P384,000 P240,000 materials cost = P7.20 per DLH Company Y: Predetermined overhead rate = P3.00 per MH Company Z: Predetermined overhead rate = 160% of materials cost Requirement Actual overhead costs incurred Overhead cost applied to Work in Process: 58,000* actual hours × P7.20 per hour Underapplied overhead cost P420,000 417,600 P  2,400 * 7,000 hours + 30,000 hours + 21,000 hours = 58,000 hours Exercise (Departmental Overhead Rates) Requirement Milling Department: Predetermined overhead rate = = Estimated total manufacturing overhead cost Estimated 10-3 total amount of the allocation base P510,000 60,000 machine-hours = P8.50 per machine-hour Chapter 10 Systems Design: Job-Order Costing and Process Costing Assembly Department: Predetermined overhead rate = Estimated total manufacturing overhead cost Estimated total amount of the allocation base = P800,000 P640,000 direct labor cost = 125% of direct labor cost Requirement Milling Department: 90 MHs × P8.50 per MH Assembly Department: P160 × 125% Total overhead cost applied Overhead Applied P765 200 P965 Requirement Yes; if some jobs required a large amount of machine time and little labor cost, they would be charged substantially less overhead cost if a plantwide rate based on direct labor cost were being used It appears, for example, that this would be true of job 123 which required considerable machine time to complete, but required only a small amount of labor cost Exercise (Process Costing Journal Entries) Work in Process—Mixing 330,000 Raw Materials Inventory 330,000 Work in Process—Mixing 260,000 Work in Process—Baking 120,000 Wages Payable 380,000 Work in Process—Mixing 190,000 Work in Process—Baking 90,000 Manufacturing Overhead 280,000 Work in Process—Baking 760,000 10-4 Systems Design: Job-Order Costing and Process Costing Chapter 10 Work in Process—Mixing 760,000 Finished Goods 980,000 Work in Process—Baking 980,000 Exercise (Quantity Schedule, Equivalent Units, and Cost per Equivalent Unit – Weighted Average Method) Requirement Weighted-Average Method Quantity Schedule Gallons to be accounted for: Work in process, May (materials 80% complete, labor and overhead 75% complete) Started into production Total gallons accounted for 80,000 760,000 840,000 Equivalent Units Materials Labor Overhead Gallons accounted for as follows: Transferred to the next department Work in process, May 31 (materials 60% complete, labor and overhead 20% complete) Total gallons accounted for 790,000 790,000 790,000 790,000 50,000 840,000 30,000 820,000 10,000 800,000 10,000 800,000 Requirement Total Costs Materials Cost to be accounted for: Work in process, May P 146,600 P 68,600 Cost added during the month 1,869,200 907,200 Total cost to be accounted for (a) P2,015,800 P975,800 Equivalent units (b) — 820,000 Cost per equivalent unit (a) ÷ (b) P1.19 Labor P 30,000 370,000 P400,000 800,000 + P0.50 Overhead P 48,000 592,000 P640,000 800,000 + P0.80 Whole Unit = P2.49 Exercise (Quantity Schedule, Equivalent Units, and Cost per Equivalent Unit – FIFO Method) Requirement 10-5 Chapter 10 Systems Design: Job-Order Costing and Process Costing FIFO Method Quantity Schedule Gallons to be accounted for: Work in process, May (materials 80% complete, labor and overhead 75% complete) Started into production Total gallons accounted for 80,000 760,000 840,000 Equivalent Units Material s Labor Overhead Gallons accounted for as follows: Transferred to the next department: From the beginning inventory Started and completed this month** Work in process, May 31 (materials 60% complete, labor and overhead 20% complete) Total gallons accounted for 80,000 710,000 16,000* 710,000 20,000* 710,000 20,000* 710,000 50,000 840,000 30,000 756,000 10,000 740,000 10,000 740,000 * Work required to complete the beginning inventory ** 760,000 gallons started – 50,000 gallons in ending work in process = 710,000 gallons started and completed Requirement Total Costs Materials Cost to be accounted for: Work in process, May 31 P 146,600 Cost added during the month (a) 1,869,200 P907,200 Total cost to be accounted for P2,015,800 Equivalent units (b) 756,000 Cost per equivalent unit (a) ÷ (b) P1.20 Labor Overhead P370,000 + 740,000 P0.50 P592,000 + 740,000 P0.80 III Problems Problem Requirement a Raw Materials Inventory 210,000 10-6 Whole Unit = P2.50 Systems Design: Job-Order Costing and Process Costing Chapter 10 Accounts Payable 210,000 b Work in Process 178,000 Manufacturing Overhead 12,000 Raw Materials Inventory 190,000 c Work in Process 90,000 Manufacturing Overhead 110,000 Salaries and Wages Payable 200,000 d Manufacturing Overhead 40,000 Accumulated Depreciation 40,000 e Manufacturing Overhead 70,000 Accounts Payable 70,000 f Work in Process 240,000 Manufacturing Overhead 240,000 30,000 MH x P8 per MH = P240,000 g Finished Goods 520,000 Work in Process 520,000 h Cost of Goods Sold 480,000 Finished Goods 480,000 Accounts Receivable 600,000 Sales 600,000 P480,000 × 1.25 = P600,000 Requirement (b) (c) (d) (e) Manufacturing Overhead 12,000 240,000 (f) 110,000 40,000 70,000 8,000 (Overapplied overhead) Problem 10-7 Bal (b) (c) (f) Bal Work in Process 42,000 510,000 178,000 90,000 240,000 30,000 (g) Chapter 10 Systems Design: Job-Order Costing and Process Costing Requirement The costing problem does, indeed, lie with manufacturing overhead cost, as suggested Since manufacturing overhead is mostly fixed, the cost per unit increases as the level of production decreases The problem can be solved by use of predetermined overhead rates, which should be based on expected activity for the entire year Many students will use units of product in computing the predetermined overhead rate, as follows: Estimated manufacturing overhead cost, P840,000 = P4.20 per unit Estimated units to be produced, 200,000 The predetermined overhead rate could also be set on the basis of either direct labor cost or direct materials cost The computations are: Estimated manufacturing overhead cost, P840,000 = 350% of direct Estimated direct labor cost, P240,000 labor cost Estimated manufacturing overhead cost, P840,000 140% of direct Estimated direct materials cost, P600,000 = materials cost Requirement Using a predetermined overhead rate, the unit costs would be: Quarter First Second Third Direct materials P240,000 P120,000 P 60,000 Direct labor 96,000 48,000 24,000 Manufacturing overhead: Applied at P4.20 per units; 350% of direct labor cost, or 140% of direct materials cost 336,000 168,000 84,000 Total cost P672,000 Number of units produced 80,000 Estimated cost per unit P8.40 Problem Weighted-Average Method 10-8 Fourth P180,000 72,000 252,000 P336,000 P168,000 P504,000 40,000 P8.40 20,000 P8.40 60,000 P8.40 Systems Design: Job-Order Costing and Process Costing Chapter 10 Pounds to be accounted for: Work in process, May (all materials, 55% labor and overhead added last month) Started into production during May Total pounds Quantity Schedule 30,000 480,000 510,000 Equivalent Units Labor & Materials Overhead Pounds accounted for as follows: Transferred to Department Work in process, May 31 (all materials, 90% labor and overhead added this month) Total pounds 490,000* 490,000 490,000 20,000 510,000 20,000 510,000 18,000 508,000 * 30,000 + 480,000 - 20,000 = 490,000 Problem (Weighted-Average Method; Interpreting a Production Report) Requirement Weighted-Average Method The equivalent units for the month would be: Units accounted for as follows: Transferred to next department Work in process, April 30 (75% materials, 60% conversion cost added this month) Total units and equivalent units of production Quantity Schedule Equivalent Units Materials Conversion 190,000 190,000 190,000 40,000 30,000 24,000 230,000 220,000 214,000 Conversion P 30,200 Whole Unit Requirement Work in process, April Total Cost P 98,000 10-9 Materials P 67,800 Chapter 10 Systems Design: Job-Order Costing and Process Costing Cost added during the month Total cost (a) Equivalent units of production (b) Cost per EU (a)  (b) 827,000 P925,000 579,000 P646,800 248,000 P278,200 – 220,000 214,000 – P2.94 + P1.30 = P4.24 Requirement Total units transferred Less units in the beginning inventory Units started and completed during April 190,000 30,000 160,000 Requirement No, the manager should not be rewarded for good cost control The reason for the Mixing Department’s low unit cost for April is traceable to the fact that costs of the prior month have been averaged in with April’s costs in computing the lower, P2.94 per unit figure This is a major criticism of the weighted-average method in that the figures computed for product costing purposes can’t be used to evaluate cost control or measure performance for the current period Problem (Preparation of Production Report from Analysis of Work in Process T-account – Weighted-Average Method) Requirement Weighted-Average Method Quantity Schedule and Equivalent Units Quantity Schedule Pounds to be accounted for: Work in process, May (materials all complete, labor 10-10 Systems Design: Job-Order Costing and Process Costing Chapter 10 and overhead 4/5 complete) Started into production Total pounds to be accounted for 35,000 280,000 315,000 Equivalent Units (EU) Labor & Materials Overhead Pounds accounted for as follows: Transferred to Blending* Work in process, May 31 (materials all complete, labor and overhead 2/3 complete) Total pounds accounted for 270,000 270,000 270,000 45,000 315,000 45,000 315,000 30,000 300,000 Whole Unit * 35,000 + 280,000 – 45,000 = 270,000 Cost per Equivalent Unit Cost to be accounted for: Work in process, May Cost added during the month Total cost to be accounted for (a) Total Materials Labor & Overhead P 63,700 P 43,400 P 20,300 587,300 397,600 189,700 P651,000 P441,000 P210,000 315,000 300,000 Equivalent units (b) Cost per equivalent unit (a)  (b) P1.40 + P0.70 = P2.10 Cost Reconciliation Total Cost Cost accounted for as follows: Transferred to Blending: 270,000 pounds x P2.10 per pound Work in process, May 31: Materials, at P1.40 per EU Labor and overhead, at P0.70 per EU Total work in process, May 31 10-11 Equivalent Units (EU) Materials Conversion P567,000 270,000 63,000 45,000 21,000 84,000 270,000 30,000 Chapter 10 Systems Design: Job-Order Costing and Process Costing Total costs accounted for P651,000 Requirement In computing unit costs, the weighted-average method mixes costs of the prior period with current period costs Thus, under the weighted-average method, unit costs are influenced to some extent by what happened in a prior period This problem becomes particularly significant when attempting to measure performance in the current period Good (or bad) cost control in the current period might be concealed to some degree by the costs that have been brought forward in the beginning inventory IV Multiple Choice Questions D D D C D 10 D A C C B 11 12 13 14 15 A D B D C 10-12 16 17 18 19 20 A D A C D ... Total gallons accounted for 80,000 710, 000 16,000* 710, 000 20,000* 710, 000 20,000* 710, 000 50,000 840,000 30,000 756,000 10, 000 740,000 10, 000 740,000 * Work required to complete the... Requirement a Raw Materials Inventory 210, 000 10- 6 Whole Unit = P2.50 Systems Design: Job-Order Costing and Process Costing Chapter 10 Accounts Payable 210, 000 b Work in Process 178,000... 12,000 240,000 (f) 110, 000 40,000 70,000 8,000 (Overapplied overhead) Problem 10- 7 Bal (b) (c) (f) Bal Work in Process 42,000 510, 000 178,000 90,000 240,000 30,000 (g) Chapter 10 Systems Design: