Chapter 4: Chapter 4

Service industry, job costing, two direct- and two indirect-cost categories, law firm (continuation of \(4-37\) ). Kidman has just completed a review of its job-costing system. This review included a detailed analysis of how past jobs used the firm's resources and interviews with personnel about what factors drive the level of indirect costs. Management concluded that a system with two direct-cost categories (professional partner labor and professional associate labor) and two indirect-cost categories (general support and secretarial support) would yield more accurate job costs. Budgeted information for 2017 related to the two direct-cost categories is as follows: $$\begin{array}{lcc} & \text { Professional Partner Labor } & \text { Professional Associate Labor } \\ \hline \text { Number of professionals } & 5 & 25 \\ \text { Hours of billable time per professional } & 1,500 \text { per year } & 1,500 \text { per year } \\ \text { Total compensation (average per } & \$ 210,000 & \$ 75,000 \\ \text { professional) } & & \end{array}$$ Budgeted information for 2017 relating to the two indirect-cost categories is as follows: $$\begin{array}{lcc} & \text { General Support } & \text { Secretarial Support } \\ \hline \text { Total costs } & \$ 2,025,000 & \$ 450,000 \\ \text { Cost-allocation base } & \text { Professional labor-hours } & \text { Partner labor-hours } \end{array}$$ 1\. Compute the 2017 budgeted direct-cost rates for (a) professional partners and (b) professional associates. 2\. Compute the 2017 budgeted indirect-cost rates for (a) general support and (b) secretarial support. 3\. Compute the budgeted costs for the Richardson and Punch jobs, given the following information: $$\begin{array}{lcc} & \text { Richardson, Inc. } & \text { Punch, Inc. } \\ \hline \text { Professional partners } & 48 \text { hours } & 32 \text { hours } \\ \text { Professional associates } & 72 \text { hours } & 128 \text { hours } \end{array}$$ 4\. Comment on the results in requirement 3. Why are the job costs different from those computed in Problem \(4-37 ?\) 5\. Would you recommend Kidman \& Associates use the job-costing system in Problem 4-37 or the jobcosting system in this problem? Explain.

Describe the seven steps in job costing.

Normal costing, overhead allocation, working backward. Gardi Manufacturing uses normal costing for its job-costing system, which has two direct-cost categories (direct materials and direct manufacturing labor) and one indirect- cost category (manufacturing overhead). The following information is obtained for 2017 : \(\cdot\)Total manufacturing costs, \(\$ 8,300,000\) \(\cdot\)Manufacturing overhead allocated, \(\$ 4,100,000\) (allocated at a rate of \(250 \%\) of direct manufacturing labor costs \(\cdot\)Work-in-process inventory on January \(1,2017, \$ 420,000\) \(\cdot\)Cost of finished goods manufactured, \(\$ 8,100,000\) 1\. Use information in the first two bullet points to calculate (a) direct manufacturing labor costs in 2017 and (b) cost of direct materials used in 2017 2\. Calculate the ending work-in-process inventory on December 31,2017

Overview of general ledger relationships. Estevez Company uses normal costing in its job-costing system. The company produces kitchen cabinets. The beginning balances (December 1 ) and ending balances (as of December 30 ) in their inventory accounts are as follows: $$\begin{array}{lcc} & \text { Beginning Balance 12/1 } & \text { Ending Balance 12/30 } \\ \hline \text { Materials Control } & \$ 4,200 & \$ 17,000 \\ \text { Work-in-Process Control } & 13,400 & 18,000 \\ \text { Manufacturing Department 0verhead Control } & \- & 188,000 \\ \text { Finished Goods Control } & 8,800 & 38,800 \end{array}$$ a. Direct materials purchased during December were \(\$ 132,600\). b. cost of goods manufactured for December was \(\$ 468,000\). c. No direct materials were returned to suppliers. d. No units were started or completed on December 31 and no direct materials were requisitioned on December 31 e. The manufacturing labor costs for the December 31 working day: direct manufacturing labor, \(\$ 8,600\), and indirect manufacturing labor, \(\$ 2,800\) f. Manufacturing overhead has been allocated at \(110 \%\) of direct manufacturing labor costs through December 31 1\. Prepare journal entries for the December 31 payroll. 2\. Use T-accounts to compute the following: a. The total amount of materials requisitioned into work in process during December b. The total amount of direct manufacturing labor recorded in work in process during December (Hint. You have to solve requirements \(2 b\) and \(2 c\) simultaneously c. The total amount of manufacturing overhead recorded in work in process during December d. Ending balance in work in process, December 31 e. cost of goods sold for December before adjustments for under- or overallocated manufacturing overhead 3\. Prepare closing journal entries related to manufacturing overhead. Assume that all under- or overallocated manufacturing overhead is closed directly to cost of Goods Sold.

Job costing, ethics. Joseph Underwood joined Anderson Enterprises as controller in October \(2016 .\) Anderson Enterprises manufactures and installs home greenhouses. The company uses a normal-costing system with two direct- cost pools, direct materials and direct manufacturing labor, and one indirect- cost pool, manufacturing overhead. In 2016 , manufacturing overhead was allocated to jobs at \(150 \%\) of direct manufacturing labor cost. At the end of \(2016,\) an immaterial amount of underallocated overhead was closed out to cost of goods sold, and the company showed a small loss. Underwood is eager to impress his new employer, and he knows that in 2017 , Anderson's upper management is under pressure to show a profit in a challenging competitive environment because they are hoping to be acquired by a large private equity firm sometime in 2018 . At the end of 2016 , Underwood decides to adjust the manufacturing overhead rate to \(160 \%\) of direct labor cost. He explains to the company president that, because overhead was underallocated in 2016 , this adjustment is necessary. cost information for 2017 follows: Anderson's revenue for 2017 was \(\$ 5,550,000,\) and the company's selling and administrative expenses were \(\$ 2,720,000\) 1\. Insert the given information in the T-accounts below. Calculate the following amounts to complete the T-accounts: a. Direct materials control, 12/31/2017 b. Manufacturing overhead allocated, 2017 c. cost of goods sold, 2017 2\. Calculate the amount of under-or overallocated manufacturing overhead. 3\. Calculate Anderson's net operating income under the following: a. Under- or overallocated manufacturing overhead is written off to cost of goods sold. b. Under- or overallocated manufacturing overhead is prorated based on the ending balances in work in process, finished goods, and cost of goods sold. 4\. Underwood chooses option 3 a above, stating that the amount is immaterial. Comment on the ethical implications of his choice. Do you think that there were any ethical issues when he established the manufacturing overhead rate for 2017 back in late \(2016 ?\) Refer to the IMA Statement of Ethical Professional Practice.

Give examples of two cost objects in companies using job costing

Describe three major source documents used in job-costing systems.

What is the advantage of using computerized source documents to prepare job- cost records?

Give two reasons why most organizations use an annual period rather than a weekly or monthly period to compute budgeted indirect-cost rates.

Distinguish between actual costing and normal costing.