MANAGEMENT ACCOUNTING - Solutions Manual

CHAPTER 8

SYSTEMS DESIGN: JOB-ORDER COSTING AND

PROCESS COSTING

I. Questions
1. 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.
2. 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.
3. 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.
4. 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

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incurred somewhat evenly from month to month (due to the presence 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.
5. 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.
6. A process costing system is appropriate in those situations where a
homogeneous product is produced on a continuous basis.
7. In a process costing system, costs are accumulated by department.
8. 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.
9. 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.
11. By definition, manufacturing overhead consists of costs that cannot be
practically traced to products or jobs. Therefore, if these costs are to be
assigned to products or jobs, they must be allocated rather than traced.
12. Assigning manufacturing overhead costs to jobs does not ensure a profit.
The units produced may not be sold and if they are sold, they may not be
sold at prices sufficient to cover all costs. It is a myth that assigning
costs to products or jobs ensures that those costs will be recovered. Costs
are recovered only by selling to customers—not by allocating costs.
13. (a) Job-order costing and process costing have the same basic purposes
—to assign materials, labor, and overhead cost to products and to
provide a mechanism for computing unit product costs.

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(b) Both systems use the same basic manufacturing accounts.

(c) Costs flow through the accounts in basically the same way in both
systems.
14. The company will want to distinguish between the costs of the metals
used to make the medallions, but the medals are otherwise identical and
go through the same production processes. Thus, operation costing is
ideally suited for the company’s needs.

II. Exercises

Exercise 1 (Process Costing and Job Order Costing)

a. Job-order costing f. Process costing

b. Process costing g. Process costing
c. Process costing * h. Job-order costing
d. Job-order costing i. Job-order costing
e. Job-order costing j. Job-order costing
* Some of the listed companies might use either a process costing or a job-
order costing system, depending on how operations are carried out and
how homogeneous the final product is. For example, a plywood
manufacturer might use job-order costing if plywoods are constructed of
different woods or come in markedly different sizes.

Exercise 2 (Applying Overhead with Various Bases)

Requirement 1

Predetermined overhead rates:

Company X:

Predetermined Estimated total manufacturing overhead cost

= Estimated total amount of the allocation base
overhead rate
P432,000
= 60,000 DLHs = P7.20 per DLH

Company Y:

Predetermined Estimated total manufacturing overhead cost

= Estimated total amount of the allocation base
overhead rate
P270,000
= 10-3
90,000 DLHs = P3.00 per MH
Chapter 10 Systems Design: Job-Order Costing and Process Costing

Company Z:

Predetermined Estimated total manufacturing overhead cost

= Estimated total amount of the allocation base
overhead rate
P384,000
= P240,000 materials cost = 160% of materials cost

Requirement 2

Actual overhead costs incurred......................................... P420,000

Overhead cost applied to Work in Process:......................
58,000* actual hours × P7.20 per hour......................   417,600
Underapplied overhead cost............................................. P  2,400

* 7,000 hours + 30,000 hours + 21,000 hours = 58,000 hours

Exercise 3 (Departmental Overhead Rates)

Requirement 1

Milling Department:

Predetermined Estimated total manufacturing overhead cost

= Estimated total amount of the allocation base
overhead rate
P510,000
= 60,000 machine-hours = P8.50 per machine-hour

Assembly Department:

Predetermined Estimated total manufacturing overhead cost

= Estimated total amount of the allocation base
overhead rate
P800,000
= P640,000 direct labor cost = 125% of direct labor cost

Requirement 2
Overhead Applied
Milling Department: 90 MHs × P8.50 per MH P765
Assembly Department: P160 × 125%  200
Total overhead cost applied P965

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Requirement 3

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 4 (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
Work in Process—Mixing...............................................................................
760,000

Finished Goods.......................................................................................................
980,000
Work in Process—Baking...............................................................................
980,000

Exercise 5 (Quantity Schedule, Equivalent Units, and Cost per

Equivalent Unit – Weighted Average Method)

Requirement 1

Weighted-Average Method
Quantity
Schedule

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Gallons to be accounted for:

Work in process, May 1 (materials 80%
complete, labor and overhead 75%
complete) 80,000
Started into production 760,000
Total gallons accounted for 840,000

Equivalent Units
Material
s Labor Overhead
Gallons accounted for as follows:
Transferred to the next department............. 790,000 790,000 790,000 790,000
Work in process, May 31 (materials 60%
complete, labor and overhead 20%
complete)................................................  50,000  30,000  10,000  10,000
Total gallons accounted for.............................. 840,000 820,000 800,000 800,000

Requirement 2

Total Costs Materials Labor Overhead Whole Unit

Cost to be accounted for:
Work in process, May 1..............................................
P  146,600 P  68,600 P 30,000 P  48,000
Cost added during the month.....................................
  1,869,200   907,200   370,000   592,000
Total cost to be accounted for (a)....................................
P2,015,800 P975,800 P400,000 P640,000
Equivalent units (b)..........................................................
— 820,000 800,000 800,000
Cost per equivalent unit (a) ÷ (b)..................................... P1.19 + P0.50 + P0.80 = P2.49

Exercise 6 (Quantity Schedule, Equivalent Units, and Cost per

Equivalent Unit – FIFO Method)

Requirement 1

FIFO Method
Quantity
Schedule
Gallons to be accounted for:

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Work in process, May 1 (materials 80%

complete, labor and overhead 75%
complete) 80,000
Started into production 760,000
Total gallons accounted for 840,000

Equivalent Units
Material
s Labor Overhead
Gallons accounted for as follows:
Transferred to the next department:
From the beginning inventory................ 80,000 16,000* 20,000* 20,000*
Started and completed this month**..... 710,000 710,000  710,000  710,000 
Work in process, May 31 (materials 60%
complete, labor and overhead 20%
complete)................................................  50,000  30,000  10,000  10,000
Total gallons accounted for.............................. 840,000 756,000 740,000 740,000

* 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 2

Total Costs Materials Labor Overhead Whole Unit

Cost to be accounted for:
Work in process, May 31............................................
P  146,600
Cost added during the month (a)................................
  1,869,200 P907,200   P370,000   P592,000
Total cost to be accounted for..........................................
P2,015,800
Equivalent units (b).......................................................... 756,000 740,000 740,000
Cost per equivalent unit (a) ÷ (b)..................................... P1.20 + P0.50 + P0.80 = P2.50

Exercise 7

Requirement (1)

The direct materials and direct labor costs listed in the exercise would have
been recorded on four different documents: the materials requisition form for
Job KC123, the time ticket for Kristine, the time ticket for Clarisse, and the
job cost sheet for Job KC123.

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Requirement (2)

The costs for Job KC123 would have been recorded as follows:

Materials requisition form:

Quantity Unit Cost Total Cost
Blanks 40 P80.00 P3,200
Nibs 960 P6.00   5,760
P8,960

Time ticket for Kristine

Time Job
Started Ended Completed Rate Amount Number
9:00 AM 12:15 3.25 P120.00 P390.00 KC123
PM

Time ticket for Clarisse

Time Job
Started Ended Completed Rate Amount Number
2:15 PM 4:30 PM 2.25 P140.00 P315.00 KC123

Job Cost Sheet for Job KC123

Direct materials.............. P8,960.00
Direct labor:
Kristine..................... 390.00
Clarisse.....................     315.00
P9,665.00

Exercise 8

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead.....................................P586,000

÷ Estimated total direct labor hours (DLHs)...............................   40,000 DLHs
= Predetermined overhead rate....................................................   P14.65 per DLH

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Exercise 9

Weighted-Average Method
Materials Labor Overhead Total
Work in process, May 1................................ P  14,550 P23,620 P118,100
Cost added during May.................................     88,350   14,330    71,650
Total cost (a).................................................
P102,900 P37,950 P189,750

Equivalent units of
production (b)............................................ 1,200 1,100 1,100
Cost per equivalent unit
(a) ÷ (b).....................................................P85.75 P34.50 P172.50 P292.75

Exercise 10

FIFO Method
Materials Conversion
To complete beginning work in process:
Materials: 400 units x (100% – 75%).............................................................
100
Conversion: 400 units x (100% – 25%).......................................................... 300
Units started and completed during the period
(42,600 units started – 500 units in ending
inventory).........................................................................................................
42,100 42,100
Ending work in process
Materials: 500 units x 80% complete.............................................................
    400
Conversion: 500 units x 30% complete..........................................................     150
Equivalent units of production...............................................................................
42,600 42,550

III. Problems

Problem 1

Requirement 1

a. Raw Materials Inventory.............................................210,000

Accounts Payable.................................................... 210,000

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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 2

Manufacturing Overhead Work in Process

(b) 12,000 240,000 (f) Bal. 42,000 510,000 (g)
(c) 110,000 (b) 178,000
(d) 40,000 (c) 90,000
(e) 70,000 (f) 240,000
8,000 Bal. 30,000
(Overapplied
overhead)

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Problem 2

Requirement 1

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 2

Using a predetermined overhead rate, the unit costs would be:

Quarter
First Second Third Fourth
Direct materials................... P240,000 P120,000 P 60,000 P180,000
Direct labor......................... 96,000 48,000 24,000 72,000
Manufacturing overhead:
Applied at P4.20 per
units; 350% of direct
labor cost, or 140% of

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direct materials cost 336,000 168,000 84,000 252,000

Total cost...................... P672,000 P336,000 P168,000 P504,000

Number of units
produced.......................... 80,000 40,000 20,000 60,000
Estimated cost per unit........ P8.40 P8.40 P8.40 P8.40

Problem 3

Weighted-Average Method
Quantity
Schedule
Pounds to be accounted for:
Work in process, May 1
(all materials, 55% labor and
overhead added last month).......... 30,000
Started into production during
May................................................ 480,000
Total pounds............................ 510,000

Equivalent Units
Labor &
Materials Overhead
Pounds accounted for as follows:
Transferred to Department 2............ 490,000* 490,000 490,000
Work in process, May 31
(all materials, 90% labor and
overhead added this month).......... 20,000 20,000 18,000
Total pounds............................ 510,000 510,000 508,000
* 30,000 + 480,000 - 20,000 = 490,000.
Problem 4 (Weighted-Average Method; Interpreting a Production
Report)

Requirement 1

Weighted-Average Method

The equivalent units for the month would be:

Quantity Equivalent Units

Schedule Materials Conversio
n

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Units accounted for as follows:

Transferred to next department. . . 190,000 190,000 190,000
Work in process, April 30
(75% materials, 60%
conversion cost added this
month)...................................... 40,000 30,000 24,000
Total units and equivalent
units 230,000 220,000 214,000
of production............................

Requirement 2

Total Cost Materials Conversion Whole Unit

Work in process, April 1..... P 98,000 P 67,800 P 30,200
Cost added during the
month............................... 827,000 579,000 248,000
Total cost (a).................... P925,000 P646,800 P278,200

Equivalent units of
production (b) – 220,000 214,000
..........................................
Cost per EU (a)  (b)........... – P2.94 + P1.30 = P4.24

Requirement 3

Total units transferred....................................................... 190,000

Less units in the beginning inventory............................... 30,000
Units started and completed during April......................... 160,000

Requirement 4

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.

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Problem 5 (Preparation of Production Report from Analysis of Work in

Process T-account – Weighted-Average Method)

Requirement 1

Weighted-Average Method

Quantity Schedule and Equivalent Units

Quantity
Schedule
Pounds to be accounted for:
Work in process, May 1
(materials all complete, labor
and overhead 4/5 complete)..... 35,000
Started into production................ 280,000
Total pounds to be accounted for..... 315,000

Equivalent Units (EU)

Labor &
Materials Overhead
Pounds accounted for as follows:
Transferred to Blending*............ 270,000 270,000 270,000
Work in process, May 31
(materials all complete, labor
and overhead 2/3 complete)..... 45,000 45,000 30,000
Total pounds accounted for.............. 315,000 315,000 300,000
* 35,000 + 280,000 – 45,000 = 270,000.

Cost per Equivalent Unit Labor & Whole

Total Materials Overhead Unit
Cost to be accounted for:
Work in process, May 1... P 63,700 P 43,400 P 20,300
Cost added during the
month 587,300 397,600 189,700
......................................
Total cost to be accounted
for (a) P651,000 P441,000 P210,000
..........................................

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Equivalent units (b)............. 315,000 300,000

Cost per equivalent unit
(a)  (b)............................ P1.40 + P0.70 = P2.10

Cost Reconciliation

Total Equivalent Units (EU)

Cost Materials Conversio
n
Cost accounted for as follows:
Transferred to Blending:
270,000 pounds x P2.10
per pound............................. P567,000 270,000 270,000
Work in process, May 31:
Materials, at P1.40 per EU...... 63,000 45,000
Labor and overhead, at P0.70
per EU................................... 21,000 30,000
Total work in process, May 31.... 84,000
Total costs accounted for................. P651,000

Requirement 2

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

1. D 6. D 11. A 16. A
2. D 7. A 12. D 17. D
3. D 8. C 13. B 18. A
4. C 9. C 14. D 19. C
5. D 10. B 15. C 20. D

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