Answers

Job Costing: Journal-Entry Emphasis

1.Dexter Corporation, which uses a job costing system, had two jobs in process at the start of 20x1: job
no. 59 (P95,000) and job no. 60 (P39,500). The following information is available:
• The company applies manufacturing overhead on the basis of machine hours. Budgeted
overhead and machine activity for the year were anticipated to be P720,000 and 20,000 hours,
respectively.
• The company worked on three jobs during the first quarter. Direct materials used, direct
labor incurred, and machine hours consumed were:

Job No. Direct Material Direct Labor Machine Hours

59 P18,000 P45,000 900
60 ---- 25,000 600
61 37,000 35,000 1,200

• Manufacturing overhead during the first quarter included charges for depreciation (P20,000),
indirect labor (P50,000), indirect materials used (P4,000), and other factory costs (P108,700).
• Dexter completed job no. 59 and job no. 60. Job no. 59 was sold for cash, producing a profit
of P24,600 for the firm.

Required:
A. Determine the company's predetermined overhead application rate.
B. Prepare journal entries as of March 31 to record the following. (Note: Use summary entries
where appropriate by combining individual job data.)
1. The issuance of direct material to production, and the direct labor incurred.
2. The manufacturing overhead incurred during the quarter.
3. The application of manufacturing overhead to production.
4. The completion of job no. 59 and no. 60.
5. The sale of job no. 59.

Answer:
A. Predetermined overhead rate: P720,000 ÷ 20,000 hours = P36 per machine hour

B. 1. Work-in-Process Inventory 55,000*

Raw-Material Inventory 55,000

Work-in-Process Inventory 105,000**

Wages Payable 105,000
* P18,000 + P37,000 = P55,000
**P45,000 + P25,000 + P35,000 = P105,000

2. Manufacturing Overhead 182,700

Accumulated Depreciation 20,000
Wages Payable 50,000
Manufacturing Supplies Inventory 4,000
Miscellaneous Accounts 108,700

48 Managerial Accounting, Seventh Edition

 3. Work-in-Process Inventory 97,200*
Manufacturing Overhead 97,200
*(900 + 600 + 1,200) x P36 = P97,200

4. Finished-Goods Inventory 276,500*

Work-in-Process Inventory 276,500
*No. 59: P95,000 + P18,000 + P45,000 +
(900 x P36) = P190,400
No. 60: P39,500 + P25,000 + (600 x P36) = P86,100

5. Cash 215,000*
Sales Revenue 215,000
*P190,400 + P24,600 = P215,000

Cost of Goods Sold 190,400

Finished-Goods Inventory 190,400

Fundamentals of Manufacturing Accounting

2. Brickman Corporation, which began operations on January 1 of the current year, reported the
following information:

Estimated manufacturing overhead P 600,000

Actual manufacturing overhead 639,000
Estimated direct labor cost 480,000
Actual direct labor cost 500,000
Total debits in the Work-in-Process account 1,880,000
Total credits in the Finished-Goods account 920,000

Brickman applies manufacturing overhead to jobs on the basis of direct labor cost and adds a 60%
markup to the cost of completed production when finished goods are sold. On December 31, job
no. 18 was the only job that remained in production. That job had direct-material and direct-labor
charges of P16,500 and P36,000, respectively.

Required:
A. Determine the company’s predetermined overhead rate.
B. Determine the amount of under- or overapplied overhead. Be sure to label your answer.
C. Compute the amount of direct materials used in production.
D. Calculate the balance the company would report as ending work-in-process inventory.
E. Prepare the journal entry(ies) needed to record Brickman’s sales, which are all made on
account.

Answer:
A. Predetermined overhead rate: P600,000 ÷ P480,000 = 125% of direct labor cost

B. Actual manufacturing overhead (P639,000) - applied overhead (P500,000 x 125% =

P625,000) = P14,000 underapplied

C. Total debits to Work-in-Process (P1,880,000) - direct labor (P500,000) - applied overhead

(P625,000) = direct materials used (P755,000)
 D. The only job in production is job no. 18, which has direct material of P16,500 and direct
labor of P36,000. Applied overhead amounts to P45,000 (P36,000 x 125%), yielding a total
job cost of P97,500 (P16,500 + P36,000 + P45,000).

E. The company’s cost of goods sold equals P920,000, resulting in sales revenues of P1,472,000
(P920,000 x 160%). Thus:

Accounts Receivable 1,472,000

Sales Revenue 1,472,000

Cost of Goods Sold 920,000

Finished-Goods Inventory 920,000

Job-Costing Computations, Overhead Application

3. Montgomery, Inc., which uses a job-costing system, is a labor-intensive firm, with many skilled
craftspeople on the payroll. Job no. 789 was the only job in process on January 1, having costs of
P22,500 as of that date. Direct materials used and direct labor incurred during January were:

Job No. Direct Materials Direct Labor

789 P 2,000 P 6,000
790 9,000 10,000
791 14,000 8,000

Job no. 791 was the only job in production as of January 31.

Required:
A. Should Montgomery use direct labor or machine hours as a cost driver. Why?
B. Assume that the company decided to use direct labor as its cost driver. If the budgeted
amounts of direct labor and manufacturing overhead are anticipated to be P200,000 and
P300,000, respectively, what is the firm's predetermined overhead rate?
C. Compute the cost of work-in-process inventory as of January 31.
D. Compute the cost of jobs completed during January.
E. Suppose that the company sold all of its completed jobs, adding a 40% markup to cost. How
much would the firm report as sales revenue?

Answer:
A. The company should use direct labor because it is a labor-intensive firm, with many
skilled craftspeople on the payroll. More than likely, a majority of overhead is
"driven" by people rather than machine operation.

B. P300,000  P200,000 = 150% of direct labor cost

C. Direct material P14,000

Direct labor 8,000
Manufacturing overhead (P8,000 x 150%) 12,000
Total cost of job no. 791 P34,000
 D. Beginning work in process P22,500
Direct material (P2,000 + P9,000) 11,000
Direct labor (P6,000 + P10,000) 16,000
Manufacturing overhead (P16,000 x 150%) 24,000
Total cost of job nos. 789 and 790 P73,500

E. Sales revenue: P102,900 (P73,500 x 140%)

Overview of Job-Costing Systems, Overhead Accounting

4. Rockville, Inc., which uses a job-costing system, began business on January 1, 20x3 and applies
manufacturing overhead on the basis of direct-labor cost. The following information relates to
20x3:
• Budgeted direct labor and manufacturing overhead were anticipated to be P200,000 and
P250,000, respectively.
• Job nos. 1, 2, and 3 were begun during the year and had the following charges for direct
material and direct labor:

Job No. Direct Materials Direct Labor

1 P145,000 P35,000
2 320,000 65,000
3 55,000 80,000

• Job nos. 1 and 2 were completed and sold on account to customers at a profit of 60% of cost.
Job no. 3 remained in production.
• Actual manufacturing overhead by year-end totaled P233,000. Rockville adjusts all under-
and overapplied overhead to cost of goods sold.

Required:
A. Compute the company's predetermined overhead application rate.
B. Compute Rockville's ending work-in-process inventory.
C. Determine Rockville's sales revenue.
D. Was manufacturing overhead under- or overapplied during 20x3? By how much?
E. Present the necessary journal entry to handle under- or overapplied manufacturing overhead
at year-end.
F. Does the presence of under- or overapplied overhead at year-end indicate that Rockville's
accountants made a serious error? Briefly explain.

Answer:
A. P250,000 ÷ P200,000 = 125% of direct labor cost

B. Job no. 3:
Direct material P 55,000
Direct labor 80,000
Manufacturing overhead (P80,000 x 125%) 100,000
Total cost of job no. 3 P235,000

C. Job nos. 1 and 2:

Direct material (P145,000 + P320,000) P465,000
Direct labor (P35,000 + P65,000) 100,000
Manufacturing overhead (P100,000 x 125%) 125,000
 Total cost of job nos. 1 and 2 P690,000

Sales revenue: P1,104,000 (P690,000 x 160%)

D. Actual overhead P233,000

Applied overhead: [(P35,000 + P65,000 +
P80,000) x 125%] 225,000
Underapplied overhead P 8,000

E. Cost of Goods Sold 8,000

Manufacturing Overhead 8,000

F. No. Companies use a predetermined application rate for several reasons, including
the fact that manufacturing overhead is not easily traced to jobs and products. The
predetermined rate is based on estimates of both overhead and an appropriate cost
driver, and situations where these amounts coincide precisely with actual
experiences are rare. As a result, under- or overapplied overhead typically arises at
year-end.

Overhead Calculations

5. Athens Corporation uses a job-cost system and applies manufacturing overhead to products on
the basis of machine hours. The company's accountant estimated that overhead and machine
hours would total P800,000 and 50,000, respectively, for 20x1. Actual costs incurred follow.

Direct material used P250,000

Direct labor 300,000
Manufacturing overhead 816,000

The manufacturing overhead figure presented above excludes P27,000 of sales commissions
incurred by the firm. An examination of job-cost records revealed that 18 jobs were sold during
the year at a total cost of P2,960,000. These goods were sold to customers for P3,720,000.
Actual machine hours worked totaled 51,500, and Athens adjusts under- or overapplied overhead
at year-end to Cost of Goods Sold.

Required:
A. Determine the company's predetermined overhead application rate.
B. Determine the amount of under- or overapplied overhead at year-end. Be sure to indicate
whether overhead was under- or overapplied.
C. Compute the company's cost of goods sold.
D. What alternative accounting treatment could the company have used at year-end to adjust for
under- or overapplied overhead? Is the alternative that you suggested appropriate in this
case? Why?

Answer:
A. P800,000 ÷ 50,000 = P16 per machine hour

B. Applied overhead (51,500 x P16) P 824,000

 Actual overhead 816,000
Overapplied overhead P 8,000

C. Cost of goods sold, as reported P2,960,000

Less: Overapplied overhead 8,000
Cost of goods sold, adjusted P2,952,000

D. The company could have allocated the overapplication to work in process, finished
goods, and cost of goods sold. Although this method is acceptable, it is not
suggested in this case because of the immaterial dollar amount in relation to cost of
goods sold.

Job Costing: Focus on Overhead

6. Packard Products uses a job-costing system for its units, which pass from the Machining
Department, to the Assembly Department, to finished-goods inventory. The Machining
Department is heavily automated; in contrast, the Assembly Department performs a number of
manual-assembly activities. The following information relates to the Machining Department for
the year just ended:

Budgeted manufacturing overhead P8,000,000

Actual manufacturing overhead 7,975,000
Budgeted machine hours 500,000
Actual machine hours 510,000

The Machining Department data that follow pertain to job no. 243, the only job in production at
year-end.

Direct materials P64,800

Direct labor cost 35,200
Machine hours 450

Required:
A. Assuming the use of normal costing, calculate the predetermined overhead rate that is used in
the Machining Department.
B. Compute the cost of the Machining Department's year-end work-in-process inventory.
C. Determine whether overhead was under- or overapplied during the year in the Machining
Department.
D. If Packard disposes of the Machining Department's under- or overapplied overhead as an
adjustment to Cost of Goods Sold, would the company's Cost-of-Goods-Sold account
increase or decrease? Explain.
E. How much overhead would have been charged to the Machining Department's Work-in-
Process account during the year?
F. Comment on the appropriateness of direct labor cost to apply manufacturing overhead in the
Assembly Department.

Answer:
A. Machining overhead rate: P8,000,000 ÷ 500,000 hours = P16 per machine hour

B. The ending work in process is carried at a cost of P107,200, computed as follows:

 Direct materials P 64,800
Direct labor 35,200
Manufacturing overhead (450 x P16) 7,200
Total cost P107,200

C. Actual overhead in the Machining Department amounted to P7,975,000, whereas applied

overhead totaled P8,160,000 (510,000 hours x P16). Thus, overhead was overapplied by
P185,000 during the year.

D. The department's manufacturing overhead was overapplied by P185,000. As a result of this

situation, excessive overhead flowed from Work in Process, to Finished Goods, to Cost of
Goods Sold, meaning that the Cost-of-Goods-Sold account must be decreased at year-end.

E. The Work-in-Process account is charged with applied overhead, or P8,160,000.

F. The firm's selection of application bases is likely appropriate. The bases should "drive" the
costs, meaning there should be a strong cause-and-effect relationship between the base that is
used and the amount of overhead incurred. In the Assembly Department, a considerable
portion of the overhead incurred is related to manual-assembly (i.e., labor) operations.