Chapter 7, Problem 59P

Cost Flows through Accounts

Brighton Services repairs locomotive engines. It employs 100 full-time workers at $20 per hour. Despite operating at capacity, last year’s performance was a great disappointment to the managers. In total, 10 jobs were accepted and completed, incurring the following total costs:

Of the $1,040,000 manufacturing overhead, 30 percent was variable overhead and 70 percent was fixed.

This year, Brighton Services expects to operate at the same activity level as last year, and overhead costs and the wage rate are not expected to change. For the first quarter of this year, Brighton Services completed two jobs and was beginning the third (Job 103). The costs incurred follow:

You are a consultant associated with Lodi Consultants, which Brighton Services has asked for help. Lodi’s senior partner has examined Brighton Services’s accounts and has decided to divide actual factory overhead by job into fixed and variable portions as follows:

In the first quarter of this year, 40 percent of marketing and administrative cost was variable and 60 percent was fixed. You are told that Jobs 101 and 102 were sold for $850,000 and $550,000, respectively. All over- or underapplied overhead for the quarter is written off to Cost of Goods Sold.

Required

1. a.      Present in T-accounts the actual manufacturing cost flows for the three jobs in the first quarter of this year.
2. b.      Using last year’s overhead costs and direct labor-hours as this year’s estimate, calculate predetermined overhead rates per direct labor-hour for variable and fixed overhead.
3. c.       Present in T-accounts the normal manufacturing cost flows for the three jobs in the first quarter of this year. Use the overhead rates derived in requirement (b).
4. d.      Prepare income statements for the first quarter of this year under the following costing systems:
   1. (1) Actual.
   2. (2) Normal.

To determine

Compute in T-accounts: the actual manufacturing cost flows for the three jobs in the first quarter of this year.

Explanation of Solution

T-accounts in job costing: The ledger accounts are also termed as T-accounts which are prepared after the recording of the journal entry of the transactions. The balances of raw materials, work-in-process, finished goods inventory and overheads from the journal book are transferred to the respective T-accounts.

T-account of materials inventory:

Materials inventory
Date	Particulars	Amount	Date	Particulars	Amount
					$ 137,200
					$ 93,000
					$ 94,000

Table: (1)

T-account of wages payable:

Wages payable
Date	Particulars	Amount	Date	Particulars	Amount
					$ 490,000
					$ 312,400
					$ 197,600

Table: (2)

T-account of variable manufacturing overhead:

Variable manufacturing overhead
Date	Particulars	Amount	Date	Particulars	Amount
		$ 62,000			$ 29,900
					$ 27,500
					$ 4,600

Table: (3)

T-account of fixed manufacturing overhead:

Fixed manufacturing overhead
Date	Particulars	Amount	Date	Particulars	Amount
		$ 209,200			$ 104,000
					$ 88,200
					$ 17,000

Table: (4)

T-account of work-in-process inventory:

Work-in-process inventory
Date	Particulars	Amount	Date	Particulars	Amount
		$ 324,200			$ 761,100
		$ 1,000,000			$ 521,100
		$ 62,000
		$ 209,200

Table: (5)

T-account of finished goods inventory:

Finished goods inventory
Date	Particulars	Amount	Date	Particulars	Amount
		$ 761,100
		$ 521,100			$ 1,282,200

Table: (6)

T-account of the cost of goods sold:

Cost of goods sold
Date	Particulars	Amount	Date	Particulars	Amount
		$ 1,282,200

Table: (7)

To determine

Calculate predetermined overhead rates per direct labor-hour for variable and fixed overhead by using last year’s overhead costs and direct labor-hours.

Explanation of Solution

Predetermined overhead rate: The predetermined overhead rate is the rate computed for applying manufacturing overheads to the work-in-process inventory. This rate can be computed by dividing the total amount of manufacturing overheads by the base of allocation. The formula for calculating the predetermined overhead rate is:

$\text{Predetermined}\text{overhead}\text{rate}\text{=}\frac{\text{Estimated}\text{total}\text{manufacturing}\text{overhead}\text{cost}}{\text{Estimated}\text{total}\text{amount}\text{ofallocation}\text{base}}$

Compute the predetermined variable overhead rate:

$\begin{array}{c}\text{Predetermined}\text{variable}\text{overhead}\text{rate}\text{=}\frac{\text{Variable}\text{manufacturing}\text{overhead}}{\text{Number}\text{of}\text{hours}}\\ \text{=}\frac{\text{\$312,000}\text{(2)}}{\text{200,000}\text{(1)}}\\ \text{=}\text{\$1}\text{.56}\end{array}$

Compute the predetermined fixed overhead rate:

$\begin{array}{c}\text{Predetermined}\text{fixed}\text{overhead}\text{rate}\text{=}\frac{\text{Fixed}\text{manufacturing}\text{overhead}}{\text{Number}\text{of}\text{hours}}\\ \text{=}\frac{\text{\$728,000}\text{(3)}}{\text{200,000}\text{(1)}}\\ \text{=}\text{\$3}\text{.64}\end{array}$

Working note 1:

Compute the total direct labor-hours:

$\begin{array}{c}\text{Total}\text{direct}\text{labor-hours}\text{=}\frac{\text{Total}\text{direct}\text{labor}\text{costs}}{\text{Direct}\text{labor}\text{rate}}\\ \text{=}\frac{\text{\$4,000,000}}{\text{\$20}}\\ \text{=}\text{200,000}\end{array}$

Working note 2:

Compute the variable manufacturing overhead:

$\begin{array}{c}\text{Variable}\text{manufacturing}\text{overhead}\text{=}\text{Application}\text{rate}\text{×}\text{Manufacturing}\text{overhead}\\ \text{=}\text{30\%}\text{×}\text{\$1,040,000}\\ \text{=}\text{\$312,000}\end{array}$

Working note 3:

Compute the fixed manufacturing overhead:

$\begin{array}{c}\text{Fixed}\text{manufacturing}\text{overhead}\text{=}\text{Application}\text{rate}\text{×}\text{Total}\text{manufacturing}\text{overhead}\\ \text{=}\text{70\%}\text{×}\text{\$1,040,000}\\ \text{=}\text{\$728,000}\end{array}$

To determine

Present in T-accounts the normal manufacturing cost flows for the three jobs in the first quarter of this year by using the overhead rates derived as per the previous part.

Explanation of Solution

T-accounts in job costing: The ledger accounts are also termed as T-accounts which are prepared after the recording of the journal entry of the transactions. The balances of raw materials, work-in-process, finished goods inventory and overheads from the journal book are transferred to the respective T-accounts.

T-account of materials inventory:

Materials inventory
Date	Particulars	Amount	Date	Particulars	Amount
					$ 137,200
					$ 93,000
					$ 94,000

Table: (8)

T-account of wages payable:

Wages payable
Date	Particulars	Amount	Date	Particulars	Amount
					$ 490,000
					$ 312,400
					$ 197,600

Table: (9)

T-account of variable manufacturing overhead:

Variable manufacturing overhead
Date	Particulars	Amount	Date	Particulars	Amount
		$ 62,000			$ 38,220
		$ 16,000			$ 24,367
					$ 15,413

Table: (10)

T-account of fixed manufacturing overhead:

Fixed manufacturing overhead
Date	Particulars	Amount	Date	Particulars	Amount
		$ 182,000			$ 89,180
					$ 56,857
					$ 35,963
					$ 27,200

Table: (11)

T-account of work-in-process inventory:

Work-in-process inventory
Date	Particulars	Amount	Date	Particulars	Amount
		$ 324,200			$ 754,600
		$ 1,000,000			$ 486,624
		$ 78,000
		$ 182,000

Table: (12)

T-account of finished goods inventory:

Finished goods inventory
Date	Particulars	Amount	Date	Particulars	Amount
		$ 754,600
		$ 486,624			$ 1,241,224

Table: (13)

T-account of the cost of goods sold:

Cost of goods sold
Date	Particulars	Amount	Date	Particulars	Amount
		$ 1,241,224

Table: (14)

T-account of under-or over-applied overhead

Under-or over-applied overhead
Date	Particulars	Amount	Date	Particulars	Amount
		$ 27,200			$ 16,000

Table: (15)

To determine

Prepare the income statement for the first quarter of this year using actual and normal systems.

Explanation of Solution

Normal system of costing: Under normal costing, the cost of a job is determined by using the actual direct material, and the labor cost by adding overhead applied using a predetermined rate and an actual allocation base.

Actual system of costing: The cost of a job is determined by using the actual direct material, and the labor cost by adding overhead applied using an actual overhead rate and an actual allocation base under actual costing.

Income statement using actual system:

Particulars	Amount
Sales Revenue	$ 1,400,000
Less: Cost of goods sold	($ 1,282,200)
Gross margin	$ 117,800
Less: (Under-) Over applied overhead	$ 0
Marketing and administrative costs	($ 112,000)
Operating profit (loss)	$ 5,800

Income statement using normal system:

Particulars	Normal
Sales Revenue	$ 1,400,000
Less: Cost of goods sold	($ 1,241,224)
Gross margin	$ 158,776
Less: (Under-) Over applied overhead	$ 11,200
Marketing and administrative costs	($ 112,000)
Operating profit (loss)	$ 35,576