Job Order Costing

Question: Analyze the following T-accounts, and determine the missing amounts.

Raw material inventory

Work in process inventory

Finished goods inventory

Accumulated depreciation

Account payable

Wages payable

Manufacturing overhead

Cost of goods sold

Chance Realtors, a real estate consulting firm, specializes in advising companies on potential new plant sites. The company uses a job order costing system with a predetermined overhead allocation rate, computed as a percentage of direct labor costs.

At the beginning of 2018, managing partner Andrew Chance prepared the following budget for the year:

Maynard Manufacturing, Inc. is inviting several consultants to bid for work. Andrew Chance wants to submit a bid. He estimates that this job will require about 180 direct labor hours.

Requirements

1. Compute Chance Realtors’ (a) hourly direct labor cost rate and (b) predetermined overhead allocation rate.

Chance Realtors, a real estate consulting firm, specializes in advising companies on potential new plant sites. The company uses a job order costing system with a predetermined overhead allocation rate, computed as a percentage of direct labor costs.

At the beginning of 2018, managing partner Andrew Chance prepared the following budget for the year:

Maynard Manufacturing, Inc. is inviting several consultants to bid for work. Andrew Chance wants to submit a bid. He estimates that this job will require about 180 direct labor hours.

Requirements

2. Compute the predicted cost of the Maynard Manufacturing job.

Chance Realtors, a real estate consulting firm, specializes in advising companies on potential new plant sites. The company uses a job order costing system with a predetermined overhead allocation rate, computed as a percentage of direct labor costs.

At the beginning of 2018, managing partner Andrew Chance prepared the following budget for the year:

Maynard Manufacturing, Inc. is inviting several consultants to bid for work. Andrew Chance wants to submit a bid. He estimates that this job will require about 180 direct labor hours.

Requirements

3. If Chance wants to earn a profit that equals 25% of the job’s cost, how much

should he bid for the Maynard Manufacturing job?

Clement Manufacturing makes carrying cases for portable electronic devices. Its costing records yield the following information:

Requirements

1. Which type of costing system is Clement using? What piece of data did you base your answer on?

Clement Manufacturing makes carrying cases for portable electronic devices. Its costing records yield the following information:

Requirements

4. Record the sale of Job 3 for $2,300 on account

Clement Manufacturing makes carrying cases for portable electronic devices. Its costing records yield the following information:

Requirements

5. What is the gross profit for Job 3?

:Clement Manufacturing makes carrying cases for portable electronic devices. Its costing records yield the following information:

Requirements

1. Which type of costing system is Clement using? What piece of data did you base your answer on?

Clement Manufacturing makes carrying cases for portable electronic devices. Its costing records yield the following information:

Requirements

2. Use the dates in the table to identify the status of each job at October 31 and

November 30. Compute Clement’s account balances at October 31 for Work-in-

Process Inventory, Finished Goods Inventory, and Cost of Goods Sold. Compute,

by job, account balances at November 30 for Work-in-Process Inventory, Finished

Goods Inventory, and Cost of Goods Sold.

Clement Manufacturing makes carrying cases for portable electronic devices. Its costing records yield the following information:

Requirements

3. Prepare journal entries to record the transfer of completed jobs from Work-in-

Process Inventory to Finished Goods Inventory for October and November.

Ki Technology Co. manufactures DVDs for computer software and entertainment companies. Ki uses job order costing.

On April 2, Ki began production of 6,000 DVDs, Job 423, for Paradigm Pictures for \(1.20 sales price per DVD. Ki promised to deliver the DVDs to Paradigm Pictures by April 5. Ki incurred the following direct costs:

Ki Technology allocates manufacturing overhead to jobs based on the relation

between estimated overhead of \(574,000 and estimated direct labor costs of \)410,000. Job 423 was completed and shipped on April 3.

Requirements

1. Prepare a job cost record for Job 423. Calculate the predetermined overhead allocation rate (round to two decimal places); then allocate manufacturing overhead to the job.

2. Journalize in summary form the requisition of direct materials and the assignment of direct labor and the allocation of manufacturing overhead to Job 423. Wages are not yet paid.

3. Journalize completion of the job and the sale of the 6,000 DVDs on account.

Superior Construction, Inc. is a home builder in Arizona. Superior uses a job order costing system in which each house is a job. Because it constructs houses, the company uses an account titled Construction Overhead. The company applies overhead based on estimated direct labor costs. For the year, it estimated construction overhead of \(1,150,000 and total direct labor costs of \)5,750,000. The following events occurred during August:

a. Purchased materials on account, \(400,000.

b. Requisitioned direct materials and used direct labor in construction. Recorded the materials requisitioned.

c. The company incurred total wages of \)300,000. Use the data from Item b to assign the wages. Wages are not yet paid.

d. Depreciation of construction equipment, \(6,700.

e. Other overhead costs incurred: Equipment rentals paid in cash, \)30,000; Worker liability insurance expired, \(7,000.

f. Allocated overhead to jobs.

g. Houses completed: 402, 404.

h. House sold on account: 404 for \)250,000.

Requirements

1. Calculate Superior’s predetermined overhead allocation rate for the year.

2. Prepare journal entries to record the events in the general journal.

3. Open T-accounts for Work-in-Process Inventory and Finished Goods Inventory.

Post the appropriate entries to these accounts, identifying each entry by letter.

Determine the ending account balances, assuming that the beginning balances

were zero. 

4. Add the costs of the unfinished houses, and show that this total amount equals the ending balance in the Work-in-Process Inventory account.

5. Add the costs of the completed house that has not yet been sold, and show that this equals the ending balance in Finished Goods Inventory.

6. Compute gross profit on the house that was sold. What costs must gross profit

cover for Superior Construction?

Prestige Woods manufactures jewelry boxes. The primary materials (wood, brass, and glass) and direct labor are assigned directly to the products. Manufacturing overhead costs are allocated based on machine hours. Data for 2018 follow:

Requirements

1. Compute the predetermined overhead allocation rate. Round to two decimal places.

2. Post actual and allocated manufacturing overhead to the Manufacturing Overhead T-account.

3. Prepare the journal entry to adjust for underallocated or overallocated overhead.

4. The predetermined overhead allocation rate usually turns out to be inaccurate.

Why don’t accountants just use the actual manufacturing overhead rate?

Mighty Stars produces stars for elementary teachers to reward their students. Mighty Stars’ trial balance on June 1 follows:

June 1 balances in the subsidiary ledgers were as follows:

• Raw Materials Inventory subsidiary ledger: Paper, \(4,000; indirect materials, \)2,000

• Work-in-Process Inventory subsidiary ledger: Job 120, \(40,000; Job 121, \)0

• Finished Goods Inventory subsidiary ledger: Large Stars, \(9,900; Small Stars, \)10,500

June transactions are summarized as follows:

a. Collections on account, \(145,000.

b. Selling and administrative expenses incurred and paid, \)32,000.

c. Payments on account, \(39,000.

d. Materials purchases on account: Paper, \)24,000; indirect materials, \(4,200.

e. Materials requisitioned and used in production:

f. Wages incurred during June, \(39,000. Labor time records for the month: Job 120, \)3,600; Job 121, \(17,000; indirect labor, \)18,400.

g. Wages paid in June include the balance in Wages Payable at May 31 plus \(36,100 of wages incurred during June.

h. Depreciation on plant and equipment, \)2,500.

i. Manufacturing overhead allocated at the predetermined overhead allocation rate of 80% of direct labor costs.

j. Jobs completed during the month: Job 120 with 700,000 Large Stars at a total cost of \(47,430.

k. Sales on account: all of Job 120 for \)104,000.

l. Adjusted for overallocated or underallocated manufacturing overhead.

Requirements

1. Journalize the transactions for the company.

2. Open T-accounts for the general ledger, the Raw Materials Inventory subsidiary ledger, the Work-in-Process Inventory subsidiary ledger, and the Finished Goods Inventory subsidiary ledger. Insert each account balance as given, and use the reference Bal. Post the journal entries to the T-accounts using the transaction letters as a reference.

3. Prepare a trial balance at June 30, 2018.

4. Use the Work-in-Process Inventory T-account to prepare a schedule of cost of goods manufactured for the month of June.

5. Prepare an income statement for the month of June.

Bluebird Design, Inc. is a Web site design and consulting firm. The firm uses a job order costing system in which each client is a different job. Bluebird Design assigns direct labor, licensing costs, and travel costs directly to each job. It allocates indirect costs to jobs based on a predetermined overhead allocation rate, computed as a percentage of direct labor costs.

At the beginning of 2018, managing partner Sally Simone prepared the following budget estimates:

In November 2018, Bluebird Design served several clients. Records for two clients appear here:

Requirements

1. Compute Bluebird Design’s direct labor rate and its predetermined overhead allocation rate for 2018.

2. Compute the total cost of each job.

3. If Simone wants to earn profits equal to 50% of service revenue, what fee should she charge each of these two clients?

4. Why does Bluebird Design assign costs to jobs?

Sutherland Manufacturing makes carrying cases for portable electronic devices. Its costing records yield the following information:

Requirements

1. Which type of costing system is Sutherland using? What piece of data did you base your answer on?

2. Use the dates in the table to identify the status of each job at October 31 and November 30. Compute Sutherland’s account balances at October 31 for Work-in-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold. Compute, by job, account balances at November 30 for Work-in-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.

3. Prepare journal entries to record the transfer of completed jobs from Work-in-Process Inventory to Finished Goods Inventory for October and November.

4. Record the sale of Job 3 for $2,200 on account.

5. What is the gross profit for Job 3?

Ye Technology Co. manufactures DVDs for computer software and entertainment companies. Ye uses job order costing.

On November 2, Ye began production of 5,200 DVDs, Job 423, for Prototype

Pictures for \(1.70 sales price per DVD. Ye promised to deliver the DVDs to Prototype by November 5. Ye incurred the following direct costs:

Ye Technology allocates manufacturing overhead to jobs based on the relation

between estimated overhead of \(550,000 and estimated direct labor costs of \)440,000. Job 423 was completed and shipped on November 3.

Requirements

1. Prepare a job cost record for Job 423. Calculate the predetermined overhead allocation rate (round to two decimal places); then allocate manufacturing overhead to the job.

2. Journalize in summary form the requisition of direct materials and the assignment of direct labor and the allocation of manufacturing overhead to Job 423. Wages are not yet paid.

3. Journalize completion of the job and the sale of the 5,200 DVDs on account.

Meadow Construction, Inc. is a home builder in Arizona. Meadow uses a job order costing system in which each house is a job. Because it constructs houses, the company uses an account titled Construction Overhead. The company applies overhead based on estimated direct labor costs. For the year, it estimated construction overhead of \(1,150,000 and total direct labor costs of \)5,750,000. The following events occurred during August:

a. Purchased materials on account, \(450,000.

b. Requisitioned direct materials and used direct labor in construction. Recorded the materials requisitioned.

c. The company incurred total wages of \)240,000. Use the data from Item b to

assign the wages. Wages are not yet paid.

d. Depreciation of construction equipment, \(6,300.

e. Other overhead costs incurred: Equipment rentals paid in cash, \)40,000; Worker liability insurance expired, \(5,000.

f. Allocated overhead to jobs.

g. Houses completed: 402, 404.

h. House sold on account: 404 for \)250,000.

Requirements

1. Calculate Meadow’s predetermined overhead allocation rate for the year.

2. Prepare journal entries to record the events in the general journal.

3. Open T-accounts for Work-in-Process Inventory and Finished Goods Inventory.

Post the appropriate entries to these accounts, identifying each entry by letter.

Determine the ending account balances, assuming that the beginning balances

were zero.

4. Add the costs of the unfinished houses, and show that this total amount equals the ending balance in the Work-in-Process Inventory account.

5. Add the cost of the completed house that has not yet been sold, and show that this equals the ending balance in Finished Goods Inventory.

6. Compute gross profit on the house that was sold. What costs must gross profit

cover for Meadow Construction?

Elegant Woods manufactures jewelry boxes. The primary materials (wood, brass, and glass) and direct labor are assigned directly to the products. Manufacturing overhead costs are allocated based on machine hours. Data for 2018 follow:

Requirements

1. Compute the predetermined overhead allocation rate. Round to two decimal places.

2. Post actual and allocated manufacturing overhead to the Manufacturing Overhead T-account.

3. Prepare the journal entry to adjust for underallocated or overallocated overhead.

4. The predetermined overhead allocation rate usually turns out to be inaccurate.

Why don’t accountants just use the actual manufacturing overhead rate?

Hero Stars produces stars for elementary teachers to reward their students. Hero Stars’ trial balance on June 1 follows:

June 1 balances in the subsidiary ledgers were as follows:

• Raw Materials Inventory subsidiary ledger: Paper, \(5,000; indirect materials,

\)1,300

• Work-in-Process Inventory subsidiary ledger: Job 120, \(39,400; Job 121, \)0

• Finished Goods Inventory subsidiary ledger: Large Stars, \(9,900; Small Stars,

\)11,400

June transactions are summarized as follows:

a. Collections on account, \(141,000.

b. Selling and administrative expenses incurred and paid, \)22,000.

c. Payments on account, \(35,000.

d. Materials purchases on account: Paper, \)25,500; indirect materials, \(4,100.

e. Materials requisitioned and used in production:

f. Wages incurred during June, \(40,000. Labor time records for the month: Job 120,

\)3,800; Job 121, \(18,800; indirect labor, \)17,400.

g. Wages paid in June include the balance in Wages Payable at May 31 plus \(37,200 of

wages incurred during June.

h. Depreciation on plant and equipment, \)3,100.

i. Manufacturing overhead allocated at the predetermined overhead allocation rate of

50% of direct labor cost.

j. Jobs completed during the month: Job 120 with 700,000 Large Stars at a total cost

of \(45,900.

k. Sales on account: all of Job 120 for \)104,000.

l. Adjusted for overallocated or underallocated manufacturing overhead.

Requirements

1. Journalize the transactions for the company.

2. Open T-accounts for the general ledger, the Raw Materials Inventory subsidiary

ledger, the Work-in-Process Inventory subsidiary ledger, and the Finished Goods

Inventory subsidiary ledger. Insert each account balance as given, and use the reference

Bal. Post the journal entries to the T-accounts using the transaction letters

as a reference.

3. Prepare a trial balance at June 30, 2018.

4. Use the Work-in-Process Inventory T-account to prepare a schedule of cost of

goods manufactured for the month of June.

5. Prepare an income statement for the month of June.

Skylark Design, Inc. is a Web site design and consulting firm. The firm uses a job order costing system in which each client is a different job. Skylark Design assigns direct labor, licensing costs, and travel costs directly to each job. It allocates indirect costs to jobs based on a predetermined overhead allocation rate, computed as a percentage of direct labor costs.

At the beginning of 2018, managing partner Judi Jacquin prepared the following

budget estimates:

In November 2018, Skylark Design served several clients. Records for two clients

appear here:

Requirements

1. Compute Skylark Design’s direct labor rate and its predetermined overhead

allocation rate for 2018.

2. Compute the total cost of each job.

3. If Judi wants to earn profits equal to 50% of service revenue, what fee should she charge each of these two clients?

4. Why does Skylark Design assign costs to jobs?

Granite Construction Incorporated is a major construction firm whose projects include roads, highways, bridges, dams, tunnels, mass transit facilities, and airports. Suppose Granite Construction wants to bid on a project to construct a bridge in Nevada. Estimators have projected the expected direct materials costs to be \(55 million and the direct labor costs (including design and construction) to be \)30 million. The company uses a predetermined overhead allocation rate of 50% of direct labor costs and a markup of 20% of total costs.

Requirements

1. What items would most likely be included in direct materials?

2. Calculate the estimated direct costs, the indirect costs, and the total costs for the project.

3. What amount should Granite Construction bid for the project?

4. Why does Granite Construction include both direct and indirect costs when calculating the markup?

This problem continues the Piedmont Computer Company situation from Chapter 16. Piedmont Computer Company uses a job order costing system in which each batch manufactured is a different job. Piedmont Computer Company assigns direct materials and direct labor to each job. The company assigns labor costs at \(25 per hour. It allocates manufacturing overhead to jobs based on a predetermined overhead allocation rate, computed as a percentage of direct labor costs. 

At the beginning of 2020, the controller prepared the following budget:

In November 2020, Piedmont Computer Company worked on several jobs.

Records for two jobs appear here:

Requirements

1. Compute Piedmont Computer Company’s predetermined overhead allocation rate for 2020.

2. Compute the total cost of each job.

3. Why does Piedmont assign costs to jobs?

Hiebert Chocolate, Ltd. is located in Memphis. The company prepares gift boxes of chocolates for private parties and corporate promotions. Each order contains a selection of chocolates determined by the customer, and the box is designed to the customer’s specifications. Accordingly, Hiebert uses a job order costing system and allocates manufacturing overhead based on direct labor cost. One of Hiebert’s largest customers is the Goforth and Leos law firm. This organization sends chocolates to its clients each Christmas and also provides them to employees at the firm’s gatherings. The law firm’s managing partner, Bob Goforth, placed the client gift order in September for 500 boxes of cream-filled dark chocolates. But Goforth and Leos did not place its December staff-party order until the last week of November. This order was for an additional 100 boxes of chocolates identical to the ones to be distributed to clients.

Hiebert budgeted the cost per box for the original 500-box order as follows:

Ben Hiebert, president of Hiebert Chocolate, Ltd., priced the order at \(20 per box.

In the past few months, Hiebert has experienced cost increases for both dark chocolate and direct labor. All other costs have remained the same. Hiebert budgeted the cost per box for the second-order as follows:

Requirements 

1. Do you agree with the cost analysis for the second-order? Explain your answer. 
2. Should the two orders be accounted for as one job or two in Hiebert’s system? 
3. What sales price per box should Ben Hiebert set for the second-order? What are the advantages and disadvantages of this sales price?

Jerry never imagined he’d be sitting there in Washington being grilled mercilessly by a panel of congressmen. But a young government auditor picked up on his scheme last year. His company produced high-tech navigation devices that were sold to both military and civilian clients. The military contracts were “cost-plus,” meaning that payments were calculated based on actual production costs plus a profit markup. The civilian contracts were bid out in a very competitive market, and every dollar counted. Jerry knew that because all the jobs were done in the same factory, he could manipulate the allocation of overhead costs in a way that would shift costs away from the civilian contracts and into the military “cost-plus” work. That way, the company would collect more from the government and be able to shave its bids down on civilian work. He never thought anyone would discover the alterations he had made in the factory workers’ time sheets, but one of his accountants had noticed and tipped off the government auditor. Now, as the congressman from Michigan rakes him over the coals, Jerry is trying to figure out his chances of dodging jail time.

Requirements 

1. Based on what you have read above, what was Jerry’s company using as a cost driver to allocate overhead to the various jobs? 
2. Why does the government consider Jerry’s actions fraudulent? 
3. Name two ways that reducing costs on the civilian contracts would benefit the company and motivate Jerry to commit fraud.