Solution manual cost accounting 12e by horngren ch 04

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CHAPTER 4
JOB COSTING
4-1

Cost pool––a grouping of individual cost items.
Cost tracing––the assigning of direct costs to the chosen cost object.
Cost allocation––the assigning of indirect costs to the chosen cost object.
Cost-allocation base––a factor that links in a systematic way an indirect cost or group of
indirect costs to a cost object.

4-2
In a job-costing system, costs are assigned to a distinct unit, batch, or lot of a product or
service. In a process-costing system, the cost of a product or service is obtained by using broad
averages to assign costs to masses of identical or similar units.
4-3
An advertising campaign for Pepsi is likely to be very specific to that individual client.
Job costing enables all the specific aspects of each job to be identified. In contrast, the
processing of checking account withdrawals is similar for many customers. Here, process costing
can be used to compute the cost of each checking account withdrawal.
4-4
The seven steps in job costing are: (1) identify the job that is the chosen cost object, (2)
identify the direct costs of the job, (3) select the cost-allocation bases to use for allocating
indirect costs to the job, (4) identify the indirect costs associated with each cost-allocation base,
(5) compute the rate per unit of each cost-allocation base used to allocate indirect costs to the
job, (6) compute the indirect costs allocated to the job, and (7) compute the total cost of the job
by adding all direct and indirect costs assigned to the job.
4-5
Two major cost objects that managers focus on in companies using job costing are (1)
products or jobs, and (2) responsibility centers or departments.

4-6
Three major source documents used in job-costing systems are (1) job cost record or job
cost sheet, a document that records and accumulates all costs assigned to a specific job, starting
when work begins (2) materials requisition record, a document that contains information about
the cost of direct materials used on a specific job and in a specific department; and (3) labor-time
record, a document that contains information about the labor time used on a specific job and in a
specific department.
4-7
The main concern with the source documents of job cost records is the accuracy of the
records. Problems occurring in this area include incorrect recording of quantity or dollar
amounts, materials recorded on one job being ―borrowed‖ and used on other jobs, and erroneous
job numbers being assigned to materials or labor inputs.
4-8
a.
b.

Two reasons for using an annual budget period are
The numerator reason––the longer the time period, the less the influence of seasonal
patterns, and
The denominator reason––the longer the time period, the less the effect of variations in
output levels on the allocation of fixed costs.

4-1


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4-9
Actual costing and normal costing differ in their use of actual or budgeted indirect cost
rates:

Actual
Normal
Costing
Costing
Direct-cost rates
Actual rates
Actual rates
Indirect-cost rates
Actual rates
Budgeted rates
Each costing method uses the actual quantity of the direct-cost input and the actual quantity of
the cost-allocation base.
4-10 A house construction firm can use job cost information (a) to determine the profitability
of individual jobs, (b) to assist in bidding on future jobs, and (c) to evaluate professionals who
are in charge of managing individual jobs.
4-11 The statement is false. In a normal costing system, the Manufacturing Overhead Control
account will not, in general, equal the amounts in the Manufacturing Overhead Allocated
account. The Manufacturing Overhead Control account aggregates the actual overhead costs
incurred while Manufacturing Overhead Allocated allocates overhead costs to jobs on the basis
of a budgeted rate times the actual quantity of the cost-allocation base.
Underallocation or overallocation of indirect (overhead) costs can arise because of (a) the
Numerator reason––the actual overhead costs differ from the budgeted overhead costs, and (b)
the Denominator reason––the actual quantity used of the allocation base differs from the
budgeted quantity.
4-12 Debit entries to Work-in-Process Control represent increases in work in process.
Examples of debit entries under normal costing are (a) direct materials used (credit to Materials
Control), (b) direct manufacturing labor billed to job (credit to Wages Payable Control), and (c)
manufacturing overhead allocated to job (credit to Manufacturing Overhead Allocated).
4-13 Alternative ways to make end-of-period adjustments for underallocated or overallocated
overhead are as follows:

(i) Proration based on the total amount of indirect costs allocated (before proration) in
the ending balances of work in process, finished goods, and cost of goods sold.
(ii) Proration based on total ending balances (before proration) in work in process,
finished goods, and cost of goods sold.
(iii) Year-end write-off to Cost of Goods Sold.
(iv) Restatement of all overhead entries using actual indirect cost rates rather than
budgeted indirect cost rates.
4-14 A company might use budgeted costs rather than actual costs to compute direct labor
rates because it may be difficult to trace direct labor costs to jobs as they are completed (for
example, because bonuses are only known at the end of the year).
4-15 Modern technology such as electronic data interchange (EDI) is helpful to managers
because it provides them with quick and accurate product-cost information that facilitates the
management and control of jobs.

4-2


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4-16
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

k.

Job costing
Process costing
Job costing
Process costing
Job costing
Process costing
Job costing
Job costing (but some process costing)
Process costing
Process costing
Job costing

4-17

1.

(10 min) Job order costing, process costing.
l.
m.
n.
o.
p.
q.
r.
s.
t.
u.

Job costing
Process costing
Job costing
Job costing
Job costing
Job costing
Process costing
Job costing
Process costing
Job costing

(20 min.) Actual costing, normal costing, accounting for manufacturing overhead.

Budgete d manufactur ing
overhead rate

Actual manufactur ing
overhead rate

=

Budgeted manufactur ing
overhead costs
Budgeted direct manufactur ing
labor costs

=

$1,750 ,000
= 1.75 or 175%

$1,000 ,000

=

Actual manufactur ing
overhead costs
Actual direct manufactur ing
labor costs

$1,862 ,000
= 1.9 or 190%
$980 ,000
Costs of Job 626 under actual and normal costing follow:

=

2.

Actual
Costing
Direct materials
Direct manufacturing labor costs
Manufacturing overhead costs
$30,000 1.90; $30,000 1.75
Total manufacturing costs of Job 626

4-3

Normal
Costing

$ 40,000
30,000

$ 40,000
30,000

57,000
$127,000

52,500
$122,500


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3.

Total manufacturing overhead
allocated under normal costing =

Actual manufacturing
labor costs

= $980,000

Budgeted
overhead rate

1.75

= $1,715,000
Underallocated manufacturing =
overhead

Actual manufacturing – Manufacturing
overhead costs
overhead allocated

= $1,862,000

$1,715,000 = $147,000

There is no under- or overallocated overhead under actual costing because overhead is
allocated under actual costing by multiplying actual manufacturing labor costs and the actual
manufacturing overhead rate. This, of course equals the actual manufacturing overhead costs. All
actual overhead costs are allocated to products. Hence, there is no under- or overallocatead
overhead.

4-18
1.

(20 -30 min.) Job costing, normal and actual costing.
Budgeted indirectcost rate

=

Budgeted indirect costs
$8,000,000
=

Budgeted direct labor-hours 160,000 hours

= $50 per direct labor-hour
Actual indirectcost rate

=

$6,888,000
Actual indirect costs
=
164,000 hours
Actual direct labor-hours

= $42 per direct labor-hour
These rates differ because both the numerator and the denominator in the two calculations are
different—one based on budgeted numbers and the other based on actual numbers.
2a.
Normal costing
Direct costs
Direct materials
Direct labor
Indirect costs
Assembly support ($50
Total costs

900; $50

4-4

1,010)

Laguna
Model

Mission
Model

$106,450
36,276
142,726

$127,604
41,410
169,014

45,000
$187,726

50,500
$219,514


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2b. Actual costing
Direct costs
Direct materials
Direct labor
Indirect costs
Assembly support ($42

Total costs

900; $42

1,010)

$106,450
36,276
142,726

$127,604
41,410
169,014

37,800
$180,526

42,420
$211,434

3.
Normal costing enables Anderson to report a job cost as soon as the job is completed,
assuming that both the direct materials and direct labor costs are known at the time of use. Once
the 900 direct labor-hours are known for the Laguna Model (June 2007), Anderson can compute
the $187,726 cost figure using normal costing. Anderson can use this information to manage the
costs of the Laguna Model job as well as to bid on similar jobs later in the year. In contrast,
Anderson has to wait until the December 2007 year-end to compute the $180,526 cost of the
Laguna Model using actual costing.
Although not required, the following overview diagram summarizes Anderson
Construction’s job-costing system.

INDIRECT
COST
POOL

Assembly
Support

COST
ALLOCATION
BASE

Direct
Labor-Hours

COST OBJECT:
RESIDENTIAL
HOME

Indirect Costs
Direct Costs

DIRECT
COSTS

Direct
Materials

4-5

Direct

Manufacturing
Labor


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4-19

(10 min.) Budgeted manufacturing overhead rate, allocated manufacturing overhead.

1.

Budgeted manufacturing overhead rate =

=

Budgeted manufacturing overhead
Budgeted machine hours
$2,850, 000
= $15/machine-hour
190, 000 machine-hours

2.
Manufacturing overhead allocated = Actual machine-hours × Budgeted manufacturing
overhead rate = 195,000 × $15 = $2,925,000
3.
Since manufacturing overhead allocated is greater than the actual manufacturing overhead
costs, Waheed overallocated manufacturing overhead:
Manufacturing overhead allocated
Actual manufacturing overhead costs

Overallocated manufacturing overhead

4-6

$2,925,000
2,910,000
$ 15,000


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4-20

(20-30 min.) Job costing, accounting for manufacturing overhead, budgeted rates.

1.

An overview of the product costing system is
INDIRECT
COST
POOL

COST
ALLOCATION
BASE

Machining Department
Manufacturing Overhead

Assembly Department

Manufacturing Overhead

Machine-Hours

Indirect Costs

COST OBJECT:
PRODUCT

DIRECT
COST

Direct Manuf.
Labor Cost

Direct Costs

Direct
Manufacturing
Labor

Direct
Materials

Budgeted manufacturing overhead divided by allocation base:
Machining overhead
Assembly overhead:
2.

$1,800 ,000

= $36 per machine-hour
50,000
$3,600 ,000
= 180% of direct manuf. labor costs
$2,000 ,000

Machining department, 2,000 hours $36
Assembly department, 180% $15,000
Total manufacturing overhead allocated to Job 494

3.

$72,000
27,000
$99,000

Machining
Assembly
$2,100,000
$ 3,700,000

Actual manufacturing overhead
Manufacturing overhead allocated,
55,000 $36
180% $2,200,000
Underallocated (Overallocated)

1,980,000
—
$ 120,000

4-7

—
3,960,000
$ (260,000)


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4-21

(20 25 min.) Job costing, consulting firm.

1.

Budgeted indirect-cost rate = $13,000,000 ÷ $5,000,000 = 260% of professional labor costs

INDIRECT
COST
POOL

Consulting
Consulting
Support
Support

COST
ALLOCATION
BASE

COST OBJECT:
JOB FOR
CONSULTING
CLIENT

Professional
Professional
Labor
LaborCosts
Costs

Indirect Costs
Direct Costs

DIRECT
COSTS

2.

Professional
Labor

At the budgeted revenues of $20,000,000, Taylor’s operating income of $2,000,000
equals 10% of revenues.
Markup rate = $20,000,000 ÷ $5,000,000 = 400% of direct professional labor costs

4-8

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3.

Budgeted costs
Direct costs:
Director, $200 3
$ 600
Partner, $100 16
1,600
Associate, $50 40
2,000
Assistant, $30 160
4,800
Indirect costs:
Consulting support, 260% $9,000
Total costs

$ 9,000
23,400
$32,400

As calculated in requirement 2, the bid price to earn a 10% income-to-revenue margin is 400%
of direct professional costs. Therefore, Taylor should bid 4 $9,000 = $36,000 for the Red
Rooster job.
Bid price to earn target operating income-to-revenue margin of 10% can also be
calculated as follows:

or,

Let R = revenue to earn target income
R – 0.10R = $32,400
0.90R = $32,400
R = $32,400 ÷ 0.90 = $36,000
Direct costs
$ 9,000
Indirect costs
23,400
Profit (0.40 9,000)
3,600
Bid price
$36,000

4-9


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4-22

(15–20 min.) Service industry, time period used to compute indirect cost rates.

1.
Direct labor costs
Variable costs as
percentage of direct labor
costs
Variable overhead costs
(Percentage direct
labor costs)

Fixed overhead costs
Total overhead costs
Total overhead costs as a
percentage of direct labor
costs

Jan–March
$400,000

April–June
$280,000

90%

60%

$360,000
300,000
$660,000

165%

Job 332
Direct materials
Direct labor costs
Overhead allocated (variable + fixed)
(165%; 180%; 170% of $6,000)
Full cost of Job 332

July–Sept

$250,000

60%

$168,000
300,000
$468,000

$150,000
300,000
$450,000

167%

180%

Oct–Dec
$270,000

Total
$1,200,000

60%

$162,000
300,000
$462,000

$ 840,000
1,200,000

$2,040,000

171%

170%

Budgeted Overhead Rate Used
Jan–March
July–Sept
Average
Rate
Rate
Yearly Rate
$10,000
$10,000
$10,000
6,000
6,000
6,000
9,900
$25,900

10,800
$26,800

10,200
$26,200

(a)

The full cost of Job 332, using the budgeted overhead rate of 165% for January–March, is
$25,900.

(b)

The full cost of Job 332, using the budgeted overhead rate of 180% for July–September,
is $26,800.

(c)

The full cost of Job 332, using the annual budgeted overhead rate of 170%, is $26,200.

2.
Budgeted fixed overhead rate based on annual fixed overhead costs and annual
direct labor costs = $1,200,000 $1,200,000 = 100%

Job 332
Direct materials
Direct labor costs
Variable overhead allocated
(90%; 60%; of $6,000)
Fixed overhead allocated
(100% of $6,000)
Full cost of Job 332

Budgeted Variable Overhead Rate Used
January–March
July–Sept
rate
rate

$10,000
$10,000
6,000
6,000

4-10

5,400

3,600

6,000
$27,400

6,000
$25,600


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(a)
The full cost of Job 332, using the budgeted variable overhead rate of 90% for January–
March and an annual fixed overhead rate of 100%, is $27,400.
(b)
The full cost of Job 332, using the budgeted variable overhead rate of 60% for July–
September and an annual fixed overhead rate of 100%, is $25,600.
3.
If Printers, Inc. sets prices at a markup of costs, then prices based on costs calculated as
in Requirement 2 (rather than as in Requirement 1) would be more effective in deterring clients
from sending in last-minute, congestion-causing orders in the January–March time frame. In this

calculation, more variable manufacturing overhead costs are allocated to jobs in the first quarter,
reflecting the larger costs of that quarter caused by higher overtime and facility and machine
maintenance. This method better captures the cost of congestion during the first quarter.

4-23
1.

(10–15 min.) Accounting for manufacturing overhead.
Budgeted manufacturing overhead rate =

$7,000 ,000
200,000

= $35 per machine-hour
2.

3.

Work-in-Process Control
6,825,000
Manufacturing Overhead Allocated
(195,000 machine-hours $35 per machine-hour = $6,825,000)

6,825,000

$6,825,000 – $6,800,000 = $25,000 overallocated, an insignificant amount.
Manufacturing Overhead Allocated
Manufacturing Department Overhead Control
Cost of Goods Sold

4-11

6,825,000
6,800,000
25,000


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4-24

(35 45 min.) Job costing, journal entries.

Some instructors may also want to assign Exercise 4-25. It demonstrates the relationships of the
general ledger to the underlying subsidiary ledgers and source documents.
1.

An overview of the product costing system is:

INDIRECT
COST
POOL

COST
ALLOCATION
BASE

Manufacturing Overhead

Direct Manufacturing

Labor Costs

Indirect Costs

COST OBJECT:
PRINT JOB

DIRECT
COST

Direct Costs

Direct
Materials

4-12

Direct
Manuf.
Labor


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2. & 3.
This answer assumes COGS given of $4,020 does not include the writeoff of overallocated
manufacturing overhead.
2.

(1) Materials Control

Accounts Payable Control
(2) Work-in-Process Control
Materials Control
(3) Manufacturing Overhead Control
Materials Control
(4) Work-in-Process Control
Manufacturing Overhead Control
Wages Payable Control
(5) Manufacturing Overhead Control
Accumulated Depreciation––buildings and
manufacturing equipment
(6) Manufacturing Overhead Control
Miscellaneous accounts
(7) Work-in-Process Control
Manufacturing Overhead Allocated
(1.60 $1,300 = $2,080)
(8) Finished Goods Control
Work-in-Process Control
(9) Accounts Receivable Control (or Cash)
Revenues
(10) Cost of Goods Sold
Finished Goods Control
(11) Manufacturing Overhead Allocated
Manufacturing Overhead Control
Cost of Goods Sold

4-13

800
800

710
710
100
100
1,300
900
2,200
400
400
550
550
2,080
2,080
4,120
4,120
8,000
8,000
4,020
4,020
2,080
1,950
130


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3.
Bal. 12/31/2006
(1) Purchases
Bal. 12/31/2007

Bal. 12/31/2006
(2) Direct materials
(4) Direct manuf. labor
(7) Manuf. overhead
allocated
Bal. 12/31/2007

Bal. 12/31/2006
(8) Goods completed
Bal. 12/31/2007

(10) Goods sold
Bal. 12/31/2007

(3)
(4)
(5)
(6)
Bal.

Indirect materials
Indirect manuf. labor
Depreciation
Miscellaneous

(11) To close

Materials Control
100

(2) Issues
800
(3) Issues
90
Work-in-Process Control
60
(8)Goods completed
710
1,300

710
100

4,120

2,080
30
Finished Goods Control
500
(10) Goods sold
4,120
600
Cost of Goods Sold
4,020 (11) Adjust for over-allocation

4,020

130

3,890

Manufacturing Overhead Control
100
(11) To close
900
400
550
0
Manufacturing Overhead Allocated
2,080 (7) Manuf. overhead allocated
Bal.

4-14

1,950

2,080
0


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4-25

(20 min.) Job costing, journal entries, and source documents (continuation of 4-24).

The analysis of source documents and subsidiary ledgers follows:
1. a. Approved purchase invoice
b. dr. Materials record, ―received‖ column
cr. Accounts payable subsidiary ledger, account for creditor
2. a. Materials requisition record

b. dr. Job cost records
cr. Materials record, ―issued‖ column
3. a. Materials requisition record
b. dr. Department overhead cost records, appropriate column
cr. Materials record, ―issued‖ column
4. a. Summary of labor-time records or daily time analysis. This summary is
sometimes called a labor cost distribution summary.
b. dr. Job cost records
dr. Department overhead cost records, appropriate columns for
various classes of indirect labor
cr. Wages payable subsidiary ledger
5. a. Special authorization from the responsible accounting officer
b. dr. Department overhead cost records, appropriate columns
cr. Accumulated depreciation subsidiary ledger
6. a. Various approved invoices and special authorizations
b. dr. Department overhead cost records, appropriate columns
7. a. Use of an authorized budgeted manufacturing overhead rate
b. dr. Job cost record
8. a. Completed job cost records
b. dr. Finished goods records, received column
cr. Job cost record, completed column
9. a. Approved sales invoice
b. dr. Accounts receivable subsidiary ledger
cr. Sales ledger, if any
10. a. Costed sales invoice
b. cr. Finished goods records, issued column
11. a. Special authorization from the responsible accounting officer
b. Subsidiary records are generally not used for these entries

4-15

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4-26

(45 min.) Job costing, journal entries.

Some instructors may wish to assign Problem 4-24. It demonstrates the relationships of journal
entries, general ledger, subsidiary ledgers, and source documents.
1.

An overview of the product-costing system is
INDIRECT
COST
POOL

Manufacturing
Overhead

COST
ALLOCATION
BASE

Machine-Hours

Indirect Costs
Direct Costs

COST OBJECT

PRODUCT

DIRECT
COSTS

2.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10a)
(10b)

Direct
Materials

Direct
Manuf. Labor

Amounts in millions.
Materials Control
Accounts Payable Control
Work-in-Process Control
Materials Control
Manufacturing Department Overhead Control

Materials Control
Work-in-Process Control
Wages Payable Control
Manufacturing Department Overhead Control
Wages Payable Control
Manufacturing Department Overhead Control
Accumulated Depreciation
Manufacturing Department Overhead Control
Various liabilities
Work-in-Process Control
Manufacturing Overhead Allocated
Finished Goods Control
Work-in-Process Control
Cost of Goods Sold
Finished Goods Control
Accounts Receivable Control (or Cash )
Revenues

4-16

150
150
145
145
10
10
90
90
30
30

19
19
9
9
63
63
294
294
292
292
400
400


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The posting of entries to T-accounts is as follows:

Bal.
(1)

Materials Control
12 (2)
150 (3)

Bal.
(9)

Finished Goods Control
6 (10a)

294

(3)
(5)
(6)
(7)

Manufacturing Department
Overhead Control
10 (11)
30
19
9

145
10

292

150

Accumulated Depreciation
(6)

19

Work-in-Process Control
2 (9)
145
90

63
6

(10a)
(11)

Cost of Goods Sold
292
5

Accounts Receivable Control
(10b)
400

Wages Payable Control
(4)
(5)

90
30

Various Liabilities
(7)

9

Revenues
(10b)

400

The ending balance of Work-in-Process Control is $6.
3.

294

Manufacturing Overhead Allocated
(11)
63 (8)
63

68

Accounts Payable Control
(1)

Bal.
(2)
(4)
(8)
Bal.

(11) Manufacturing Overhead Allocated
Cost of Goods Sold
Manufacturing Department Overhead Control
Entry posted to T-accounts in Requirement 2.

4-17

63

5
68


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4-27

(15 min.) Job costing, unit cost, ending work in progress.

1.
Direct manufacturing labor rate per hour
Manufacturing overhead cost allocated
per manufacturing labor-hour

$25

Direct manufacturing labor costs
Direct manufacturing labor hours
($275,000 $25; $200,000 $25)
Manufacturing overhead cost allocated
(11,000 $20; 8,000 $20)
Job Costs May 2007
Direct materials
Direct manufacturing labor
Manufacturing overhead allocated
Total costs
2.
Number of pipes produced for Job M1
Cost per pipe ($570,000 1,500)

$20
Job M1
$275,000

Job M2
$200,000

11,000

8,000

$220,000

$160,000

Job M1
$ 75,000
275,000
220,000
$570,000

Job M2
$ 50,000
200,000
160,000
$410,000

1,500
$380

3.
Finished Goods Control
Work-in-Process Control

570,000
570,000

4. Raymond Company began May 2007 with no work-in-process inventory. During May, it
started and finished M1. It also started M2, which is still in work-in-process inventory at the end
of May. M2’s manufacturing costs up to this point, $410,000, remain as a debit balance in the
Work-in-Process Inventory account at the end of May 2007.

4-18


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4-28
1.

(20 30 min.) Job costing; actual, normal, and variation from normal costing.
Actual direct cost rate for professional labor = $58 per professional labor-hour
$744,000
15,500 hours

= $48 per professional labor-hour

=

$960,000
16,000 hours

= $60 per professional labor-hour

Budgeted indirect cost rate =

$720,000
16,000 hours

= $45 per professional labor-hour

Actual indirect cost rate =
Budgeted direct cost rate
for professional labor

Direct-Cost Rate
Indirect-Cost Rate

2.

Direct Costs
Indirect Costs
Total Job Costs

$58
48

(a)
(b)

Actual
Normal
Costing
Costing
$58
$58
(Actual rate)
(Actual rate)
$48
$45
(Actual rate) (Budgeted rate)

(a)
Actual
Costing
120 = $ 6,960 $58
120 = 5,760 45
$12,720

(c)
Variation of
Normal Costing
$60
(Budgeted rate)
$45
(Budgeted rate)

(b)
(c)
Normal

Variation of
Costing
Normal Costing
120 = $ 6,960 $60 120 = $ 7,200
120 = 5,400 45 120 =
5,400
$12,360
$12,600

All three costing systems use the actual professional labor time of 120 hours. The budgeted 110
hours for the Pierre Enterprises audit job is not used in job costing. However, Chirac may have
used the 110 hour number in bidding for the audit.
The actual costing figure of $12,720 exceeds the normal costing figure of $12,360
because the actual indirect-cost rate ($48) exceeds the budgeted indirect-cost rate ($45). The
normal costing figure of $12,360 is less than the variation of normal costing (based on budgeted
rates for direct costs) figure of $12,600, because the actual direct-cost rate ($58) is less than the
budgeted direct-cost rate ($60).

4-19


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Although not required, the following overview diagram summarizes Chirac’s job-costing
system.
INDIRECT
COST
POOL

COST

ALLOCATION
BASE

Audit
Support

Professional
Labor-Hours

COST OBJECT:
JOB FOR
AUDITING
PIERRE
& CO.

Indirect Costs
Direct Costs

DIRECT
COST
Professional
Labor

4-20


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4-29

(20–30 min.) Research project costs, variation in overhead rates.

1.
Cost Category
($000s)
Direct costs
Professors’ salaries
Graduate students’ stipends
Total direct labor costs
Overhead costs
Overhead rate (overhead
costs total direct labor costs)

Departments
Natural
Sciences Engineering Business
$5,000
$5,500
$2,100
1,600
1,500
2,000
1,500
2,500
500
$3,100
$4,000
$2,500
8,030
9,600

5,250

Liberal
Arts
$1,200
1,000
700
$1,700
850
50%

259%

240%

Total
$13,800
6,100
5,200
$11,300
23,730

210%

210%

2.
Cost Category
($000s)
Direct costs

Total direct labor costs
Budgeted overhead (210% of
total direct labor costs)
Budgeted costs of research
projects submitted to funding
agencies

Departments
Liberal Natural
Arts
Sciences Engineering Business
$1,200
$5,000
$5,500
$2,100
1,700
3,100
4,000
2,500

Total
$13,800
11,300

3,570

6,510

8,400

5,250

23,730

$6,470

$14,610

$17,900

$9,850

$48,830

3.
Cost Category
($000s)
Direct costs
Total direct labor costs
Overhead costs
Budgeted costs of research
projects

Departments
Liberal Natural
Arts
Sciences Engineering
$1,200 $ 5,000
$ 5,500
1,700

3,100
4,000
850
8,030
9,600
$3,750

$16,130

$19,100

Business
$2,100
2,500
5,250

Total
$13,800
11,300
23,730

$9,850

$48,830

4.
(All dollar figures in 000s). The liberal arts professors are required to submit proposals
for research grants that incorporate overheads that are 210% of the direct labor cost. From
requirements 2 and 3, they are, on average, bidding about 73% ($6,470 $3,750 = 1.73), more
than their budgeted costs. In effect, they are sharing some of the overhead burden from natural

sciences and engineering, but as a result, their proposals are uncompetitive in the researchfunding marketplace. The danger is that if the liberal arts professors do not get the funding they
need because their bids are uncompetitive, then they may not be able to support their own
graduate students and their use of university resources.

4-21


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5.
(All dollar figures in 000s). If the liberal arts professors charge their own overhead rate of
50%, then, they will charge $850 in overhead costs. The remaining overhead costs will be
$22,880 ($23,730 – $850). The remaining total direct labor costs will be $9,600 ($3,100 +
$4,000 + $2,500). This will result in an average overhead rate of about 238% ($22,880 $9,600)
for the other three departments.
6.
If liberal arts is allowed to charge its own rate of 50%, it is unlikely that the business
department would be happy to share the overhead burdens arising from the research in the
natural sciences and in engineering. It would want to apply its own overhead rate of 210%. Then,
engineering will want to apply its own relatively lower rate of 240% leaving the natural sciences
having to apply their rate of 259%. This may make engineering and natural sciences, in
particular, uncompetitive in the research-funding marketplace, and may, over time, weaken the
university’s prestige.

4-30

(20 30 min) Job costing, accounting for manufacturing overhead, budgeted rates.

1.

An overview of the job-costing system is:
INDIRECT
COST
POOL

COST
ALLOCATION
BASE

Machining Department
Manufacturing Overhead

Finishing Department
Manufacturing Overhead

Machine-Hours
in Machining Dept.

Direct Manufacturing
Labor Costs
in Finishing Dept.

Indirect Costs

COST
COSTOBJECT:
OBJECT:
PRODUCT
JOB

DIRECT
COST

2.

Direct Costs

Direct
Materials

Direct
Manufacturing
Labor

Budgeted manufacturing overhead divided by allocation base:
a. Machining Department:
$10,000,000
= $50 per machine-hour
200,000

b. Finishing Department:
$8,000,000
$4,000,000

= 200% of direct manufacturing labor costs

4-22


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3.

Machining Department overhead, $50 130 hours
Finishing Department overhead, 200% of $1,250
Total manufacturing overhead allocated

4.

Total costs of Job 431:
Direct costs:
Direct materials––Machining Department
––Finishing Department
Direct manufacturing labor —Machining Department
—Finishing Department
Indirect costs:
Machining Department overhead, $50 130
Finishing Department overhead, 200% of $1,250
Total costs

$6,500
2,500
$9,000

$14,000
3,000
600
1,250
$6,500
2,500

$18,850

9,000
$27,850

The per-unit product cost of Job 431 is $27,850 ÷ 200 units = $139.25 per unit
The point of this part is (a) to get the definitions straight and (b) to underscore that
overhead is allocated by multiplying the actual amount of the allocation base by the budgeted
rate.
5.
Manufacturing overhead incurred (actual)

Machining
Finishing
$11,200,000
$7,900,000

Manufacturing overhead allocated
220,000 hours $50
11,000,000
200% of $4,100,000
8,200,000
Underallocated manufacturing overhead
$ 200,000
Overallocated manufacturing overhead
$ 300,000
Total overallocated overhead = $300,000 – $200,000 = $100,000
6.
A homogeneous cost pool is one where all costs have the same or a similar cause-andeffect or benefits-received relationship with the cost-allocation base. Solomon likely assumes

that all its manufacturing overhead cost items are not homogeneous. Specifically, those in the
Machining Department have a cause-and-effect relationship with machine-hours, while those in
the Finishing Department have a cause-and-effect relationship with direct manufacturing labor
costs. Solomon believes that the benefits of using two cost pools (more accurate product costs
and better ability to manage costs) exceeds the costs of implementing a more complex system.

4-23


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4-31

(15 20 min.) Service industry, job costing, law firm.

1.
INDIRECT
COST
POOL

Legal
Support

COST
ALLOCATION
BASE

Professional
Labor-Hours

COST OBJECT:
JOB FOR
CLIENT

DIRECT
COST

Indirect Costs
Direct Costs

}
Professional
Labor

2.

Budgeted professional = Budgeted direct labor compensation per professional
labor-hour direct cost rate
Budgeted direct labor-hours per professional
$104,000
=
1,600 hours
= $65 per professional labor-hour

Note that the budgeted professional labor-hour direct-cost rate can also be calculated by
dividing total budgeted professional labor costs of $2,600,000 ($104,000 per professional 25
professionals) by total budgeted professional labor-hours of 40,000 (1,600 hours per professional
25 professionals), $2,600,000 40,000 = $65 per professional labor-hour.
3.

Budgeted total costs in indirect cost pool
Budgeted total professional labor-hours
$2,200,000
=
1,600 hours 25
$2,200,000
=
40,000 hours
= $55 per professional labor-hour

Budgeted indirect =
cost rate

4.
Direct costs:
Professional labor, $65 100; $65 150
Indirect costs:
Legal support, $55 100; $55 150

4-24

Richardson

Punch

$ 6,500

$ 9,750

5,500

$12,000

8,250
$18,000


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4-32

(25–30 min.) Service industry, job costing, two direct- and indirect-cost categories,
law firm (continuation of 4-31).

Although not required, the following overview diagram is helpful to understand Keating’s jobcosting system.
INDIRECT
COST
POOL
COST
ALLOCATION
BASE

General
Support

Secretarial
Support

Professional
Labor-Hours

Partner
Labor-Hours

COST OBJECT:
JOB FOR
CLIENT

Indirect Costs
Direct Costs

DIRECT
COST

}
Professional
Associate Labor

Professional
Partner Labor

1.
Budgeted compensation per professional
Divided by budgeted hours of billable
time per professional
Budgeted direct-cost rate
*Can also be calculated as
†

Can also be calculated as

Professional
Professional
Partner Labor Associate Labor
$ 200,000
$80,000
÷1,600
$125 per hour*

÷1,600
$50 per hour†

$200,000 5 $1,000,000
=
1,600 5
8,000

= $125

Total budgeted associate labor costs
$80,000 20 $1,600,000
=
=
1,600 20
32,000
Total budgeted associate labor - hours

= $ 50

Total budgeted partner labor costs
Total budgeted partner labor - hours

2.
Budgeted total costs
Divided by budgeted quantity of allocation base
Budgeted indirect cost rate

4-25

=

General
Secretarial
Support
Support
$1,800,000
$400,000
÷ 40,000 hours ÷ 8,000 hours
$45 per hour
$50 per hour