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Managerial Accounting (14th Edition)

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Chapter3,Problem20E

ON

Problem

ApplyingOverheadinaServiceCompany
PearsonArchitecturalDesignbeganoperationsonJanuary2.Thefollowingactivitywas
recordedinthecompany'sWorkinProcessaccountforthefirstmonthofoperations:
WorkinProcess

Costsofsubcontractedwork

90,000 Tocompletedprojects 570,000

Directstaffcosts

200,000

Studiooverhead

320,000

PearsonArchitecturalDesignisaservicefirm,sothenamesoftheaccountsitusesare
differentfromthenamesusedinmanufacturingcompanies.CostsofSubcontractedWorkis
comparabletoDirectMaterialsDirectStaffCostsisthesameasDirectLaborStudio
OverheadisthesameasManufacturingOverhead:andCompletedProjectsisthesameas
FinishedGoods.Apartfromthedifferenceinterms,theaccountingmethodsusedbythe
companyareidenticaltothemethodsusedbymanufacturingcompanies.
PearsonArchitecturalDesignusesajobordercostingsystemandappliesstudiooverheadto
WorkinProcessonthebasisofdirectstaffcosts.AttheendofJanuary,onlyonejobwasstill
inprocess.Thisjob(theKrimmerCorporationHeadquartersproject)hadbeenchargedwith
$13,500indirectstaffcosts.
Required:
1.ComputethepredeterminedoverheadratethatwasinuseduringJanuary.
2.CompletethefollowingjobcostsheetforthepartiallycompletedKrimmerCorporation
Headquartersproject.
JobCostSheetKrimmerCorporationHeadquartersProjectAsofJanuary31

Costsofsubcontractedwork

$?

Directstaffcosts

Studiooverhead

TotalcosttoJanuary31

$?

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Step1of2
PredeterminedOverheadrate:
Predeterminedoverheadrateisusefulinapplyingmanufacturingoverheadtoworkinprocess
inventory.Usually,thispredeterminedoverheadrateiscalculatedinthebeginningofthe
period.Thisrateisusedtochargeoverheadcoststojobinproduction.Predetermined
overheadrateiscalculatedbyusingthefollowingformula:

Predeterminedoverheadrateiscalculatedas,

Therefore,predeterminedoverheadrateis$160ofdirectstaffcost.

Comments(1)

Step2of2
1)
Beforethecostsheetcanbecompleted,firstdeterminecostsofsubtractedworkandstudio
overhead.
Costsofsubtractedwork:
SincethereisonlyonejobremaininginWIP,theentire$40,000inthataccountmustbeforthis
job.Directstaffcostsisgivenas$13,500.Itisknownthatthepredeterminedoverheadrateis
160%ofdirectstaffcosts,thatis,

Therefore,thecostofthesubcontractedworkis,

Costsofsubcontractedwork $4,900

Directstaffcosts

$13,500

Studiooverhead

21,600

TotalcosttoJanuary31

$40,000

Therefore,thetotalcostonJanuary31is$40,000.

Comment

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