Management Accounting Fundamentals [MA1]

Module 2: Job-order costing

Required reading

Chapter 3, pages 82-112

Overview

This module introduces the distinctions between two methods of determining unit costs of production: job-
order costing and process costing; it also presents an overview of the design and operation of a job-order
costing system. (Module 3 focuses on process costing.)

Particular attention is given to the procedures for assigning overhead costs to units of product. The module
illustrates the flow of costs through the system for a typical manufacturing company, and addresses some of
the problems of overhead application.

In this module, you will complete the design of a worksheet to calculate cost of goods manufactured and cost
of goods sold using a spreadsheet program.

Learning objectives

2.1 Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual
overhead costs) are used in the costing process. (Level 1)

2.2 Prepare journal entries to record the flow of direct materials cost, direct labour cost, and
manufacturing overhead cost in a job-order costing system. (Level 1)

2.3 Apply overhead cost to Work in process by use of a predetermined overhead rate.(Level 1)

2.4 Compute any balance of under- or overapplied overhead cost for a period, and prepare the journal
entry needed to close the balance into the appropriate accounts. (Level 1)

2.5 Explain the role of job-order costing in service companies. (Level 1)

2.6 Prepare journal entries to deal with scrap and rework of unacceptable production.(Level 1)

2.7 Construct worksheet templates to calculate schedules of cost of goods manufactured and cost of
goods sold. (Level 1)

2.1 Job-order costing — An overview

LEVEL 1

It is important that you understand the basic differences between the job-order and process costing systems
and the types of companies that would use each method.

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Note the following two important items from the reading for this module:

Discussion of the forms used

The distinction between direct and indirect materials

The job cost sheet (Exhibit 3-2) becomes the inventory subledger card for work in process.

Labour costs may be recorded in many different formats. Observe the document used for recording direct
labour (Exhibit 3-3). Consider how this recording process might be made faster, or made more accurate, if
the machines used in the different tasks were connected to a computer.

The explanation of overhead in the text is crucial to much of the rest of the course. You should clearly
understand the need for, the approach to, and the effect of using predetermined overhead rates.

To consider the question of why a predetermined overhead rate is needed, ask why smoothing is desirable
even though a study of financial accounting might suggest otherwise. Within a fiscal year, production can
and often does fluctuate. If production volume is unusually low for a given month, the unit cost of overhead
assigned to inventory would tend to be very large because some overhead costs would not decrease in
proportion to the decrease in production. Because assets are future benefits, and selling price, less costs to
complete and sell (net realizable value) tends to reflect this, the benefits can be used to justify normalized
(smoothed) overhead.

The greater unit cost resulting from the low production and the fixed overhead costs would likely mean that a
write-down of the inventory to market value (net realizable value) would be required. Smoothing by the use
of a normalized overhead would prevent such fluctuations in monthly inventory costs and incomes (due to
the write-downs). Sufficient accuracy in estimating would be needed for costing and marketing.

Note the following equations:

Predetermined overhead rate × Actual activity base = Overhead charged (or applied) to work in process

Manufacturing overhead is charged to Work in process at a predetermined rate for the reasons mentioned on
page 89.

The comments in the text concerning "cost drivers" and the need for the selection of an appropriate activity
base may no longer be related to direct labour.

2.2 Job-order costing — The flow of costs

LEVEL 1

Activity 2-1 Job costing: The flow of costs

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This activity introduces you to the flow of costs in a manufacturing environment. (You may also benefit
from re-visiting this activity after completing your study of Topic 2.2.)

As it is important to complete Activity 2-1 from start to finish, you should allow 10-15 minutes for this
activity.

The Work in process account is used to capture the costs of manufacturing the products and includes the cost
of direct materials, direct labour, and manufacturing overhead. For direct materials and direct labour, actual
costs are charged to Work in process.

But, actual overhead costs must still be accounted for in some manner. That is where the Manufacturing
overhead account comes into play. It is called a clearing account because it is cleared or emptied on a regular
basis.

The debit side of the Manufacturing overhead clearing account captures the actual cost of the various types
of manufacturing overhead. These costs are, in turn, charged to specific jobs.

2.3 Using predetermined overhead rates

LEVEL 1

The manufacturing overhead clearing account is cleared to Work in process and charged to specific jobs
based on predetermined overhead rates.

Ideally, the amount charged to specific jobs in this entry will equal the actual costs incurred. If so, the
account will have a zero balance — it will have been cleared. Topic 2.4 will describe how to clear any
remaining balance if the amount charged to specific jobs in the above entry does not equal the actual costs
incurred.

Observe in Exhibit 3-11 how the Schedule of Cost of Goods Manufactured handles predetermined overhead.
"Actual" overhead of $95,000 is charged by first "applying" $90,000 and then adjusting for "Underapplied
overhead" of $5,000 (the difference between actual and applied overhead) to Cost of goods sold. If overhead
had been overapplied, the difference would be subtracted from Cost of goods sold.

Activity 2-2 Overhead application and journal entries

This activity will reinforce your understanding of the cost flows for a manufacturing concern.

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2.4 Complications of overhead application

LEVEL 1

Determining whether a variance is underapplied or overapplied is the first difficulty in overhead application.
To determine the answer, relate the actual to the applied overhead. If actual overhead is greater than the
applied, the variance is underapplied. Overapplied overhead is the reverse.

The closing, or disposition, of the overhead variance to Cost of goods sold is illustrated in entry (14) on page
104. This is the common treatment if the variance is small. What if the plant were a fruit processor and only
operated for six months? Proration might be suggested, except that without inventories from production,
there would be nothing to prorate to. If you prepared interim statements, would you want a large loss from
the underapplied overhead or would you defer the overhead on the balance sheet as a deferred charge? While
no definitive answer can be given, many managers prefer to defer the overhead variance.

If, for example, the accountant suspects the predetermined rate is not appropriate for an interim period, when
an error has been made in forecasting the overhead or the activity base and the amount is material, then
proration would be in order. In effect, it converts overhead back to what it would have been if actual
overhead, rather than predetermined overhead, were used.

Method for proration

Current period production costs in

Cost of goods sold

Work in process inventory

Finished goods inventory

are used as the basis for proration. Study the example on page 105 carefully, noting in particular the
adjustments to Cost of goods sold.

If the accountant can determine the exact amount of "overhead applied" in each of the inventories and the
Cost of goods sold, it is slightly more accurate to use these amounts (in the same way as shown for total
costs) in order to allocate the overhead variance. The increase in accuracy results because overhead and total
costs may not be present in exactly the same proportions in inventories and in Cost of goods sold. In practice,
materiality considerations often lead to the more simplified approach shown in the textbook.

The equitable allocation of a single plantwide overhead rate as compared to multiple overhead rates is an
interesting point. The method of working with one is the same as working with many. Testing the effect on a
variety of products would enable an accountant to determine if multiple rates are equitable.

2.5 Job-order costing in service companies

LEVEL 1

The principles of job-order costing apply equally in the service sector. In the service sector, direct labour and
overhead are typically the dominant costs.

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The principles of job-order costing are also applied in the international scene. However, the application of
job-order costing varies from country to country depending on the needs of managers and the sophistication
of the management process. (International job-order costing is non-examinable.)

Online chapter summary

This topic marks the end of the textbook coverage of the job-order costing. To ensure you understand this
material and the corresponding terminology, read the summary on page 112, work through the review
problem on pages 112-115, and go to the Online Learning Centre, click Contents, choose Chapter 3, select
Chapter Summary and review the material thoroughly. If you are unclear on how to access or use this site,
refer to the Online Learning Centre (OLC) Guide in the course navigation pane.

2.6 Scrap and rework

LEVEL 1

A general problem in job costing is how to handle rejected units, rework labour, and scrap recovery. Note
carefully the method shown in Example 2-1 following.

Example 2-1

1,000 units were started for Job 610.

940 good units were finished for Job 610.

The total cost for Job 610 was $2,400. This cost has already been recorded in Work in process.

Situation A: Assuming no recovery on 60 bad units

Alternative approaches:

1. Charge rejects to good units. Under this approach, Work in process for Job 610 will report the full cost
of $2,400. Therefore, the actual cost of producing a good unit is $2.553, calculated as $2,400 ÷ 940.

or

2. Charge rejects to all jobs. Under this approach, the cost of the defective units will be charged to
Manufacturing overhead and not to Job 610. The following entry will be made to remove the cost of
the defective units from Work in process for Job 610:

In the end, the cost of Job 610 will be reported at $2,256, that is, $2,400 – $144. The unit cost for the
940 good units is $2.40.

Technically, the second approach reallocates applied overhead back to actual overhead because the 60
units have an applied overhead component included in their cost. This could be avoided (if significant)
by removing only the material and labour costs for the rejects and charging only these two elements in
the preceding journal entry.

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Situation B: If scrap is recovered

2.7 Computer illustration 2-1: Cost schedules

LEVEL 1

The following illustration uses a spreadsheet program to help us prepare these schedules. The spreadsheet
demonstrates how to organize information related to cost of goods manufactured and cost of goods sold so
that a change can be readily incorporated without redoing the actual schedules.

Material provided

A prebuilt worksheet M2P1, which you will complete.

A completed solution worksheet M2P1S, to which you can compare your work.

Description

The information required to prepare the schedules of cost of goods manufactured and cost of goods sold for
the Rand Company is explained in detail in Chapter 3 (pages 93-102).

Required

Complete the schedule of cost of goods manufactured and cost of goods sold using this procedure.

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Procedure: Cost schedules

First familiarize yourself with the information in the textbook on Rand Company and how the various costs
are calculated and recorded. Then perform the following steps:

1. Open the Excel file MA1M2P1.xls. (Before you begin working on the data files in this course, you
must first download them and save them to your hard drive. Click the Data files link in the navigation
pane, then follow the instructions for downloading and saving the files.)

2. Study the layout of the worksheet. Observe that cells A6 to D27 form the data table. Next examine the
schedule of cost of goods manufactured, starting with row 28. Cells D51 to D55 are currently empty.

3. Study the formulas in the worksheet (for example, refer to the formula in cell C33). Pay particular
attention to how the formulas in the schedule of cost of goods manufactured reference the cells in the
data table (for example, refer to the reference in cell C31).

4. Enter the missing formulas in cells D51 to D55. Do not enter numeric values in these cells. You must
enter formulas that will result in the values shown in Exhibit 3-11 (page 102) of the text.

5. Enter formulas in cells D63 to D67 to complete the schedule of cost of goods sold, which starts in row
59.

6. Save your completed worksheet.

7. Print a copy of your worksheet and compare it with the solution worksheet by clicking on the sheet tab
M2P1S. If you do not obtain the same results, proceed to step 9; otherwise, go to step 10.

8. Print a copy of the formulas and compare them with the formulas of the solution worksheet M2P1S.
Correct any errors.

9. Assume management decided that two changes were necessary in the data table:

Direct labour — from $60,000 to $70,000

Amortization — from $18,000 to $15,000

Click the M2P1S sheet tab for the solution. Change the values in cells C15 and C22 to the new values.
The cost of goods manufactured (cell D55) should now show $168,000 instead of $158,000, and the
adjusted cost of goods sold (cell D67) should show $130,500 instead of $123,500.

Note: Amortization and depreciation are terms which are used interchangeably. The CICA Handbook
recommends the term amortization, and these modules follow this standard.

Audio lectures
Audio lectures are available for this module. System requirements and instructions on how to access the
online lectures are included.

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Module 2 summary
Job-order costing is used in organizations that offer a great variety of different products or services.

One of the major issues is how to apply overhead to each order. Topic 2.1 addresses the issue by introducing
the rationale of the predetermined overhead rate which is based on estimates.

Topic 2.2 tracks the three basic cost components for each job.

Topic 2.3 shows how to apply overhead cost to work in process.

Since the actual cost incurred during a period may differ from the overhead applied, a difference usually
occurs. Topic 2.4 deals with the under or over application of overhead including how to dispose of these
differences.

The job-order costing method is versatile, and Topic 2.5 introduces its use in service companies that have a
great variety of services.

Topic 2.6 deals with how to handle flawed units in job-order systems.

Topic 2.7 consists of a computer exercise that aims to summarize the flow of costs in a job-order system and
to prepare the schedules of cost of goods manufactured and cost of goods sold that are essential components
of the income statement.

Module 2 self-test
Question 1

Computer question

Before you attempt this question, you should work through the computer illustration in Module 2, Topic 6.

Description

The Atlantic Manufacturing Company operates a job-order cost system and applies overhead cost to jobs on
the basis of direct labour cost. In computing an overhead rate for the year, the company's estimates were:
manufacturing overhead cost, $480,000; and direct labour cost, $640,000. The company's inventory accounts
at the beginning and end of the year were as follows:

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January 1, December 31,

(beginning of year) (end of year)

Raw Materials $34,000 $26,000

Work in Process 84,000 78,000

Finished Goods 152,000 144,000

The following actual costs were incurred during the year:

Purchase of raw materials (all direct) $540,000

Direct labour cost......................... 680,000

Manufacturing overhead costs:

......................... Insurance, factory 35,000

............. Amortization of equipment 65,000

.............................. Indirect labour 160,000

.............................. Property taxes 42,000

................................. Maintenance 50,000

................................ Rent, building 160,000

Required

Answer requirements 1, 4, and 5 manually. Use the following procedure to answer requirements 2 and 3.

1. a. Compute the predetermined overhead rate for the year.

b. Compute the amount of under- or overapplied overhead for the year.

2. Prepare a schedule of cost of goods manufactured for the year.

3. Compute the cost of goods sold for the year. (Do not include any under- or overapplied overhead in
your cost of goods sold figure.) What options are available for disposing of under- or overapplied
overhead? If you choose to adjust cost of goods sold, what would be your adjusted figure?

4. Job 189 was started and completed during the year. What price would have been charged to the
customer if the job required $4,300 in materials and $6,600 in direct labour cost, and the company
priced its jobs at 40% above cost to manufacture?

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5. Direct labour made up $29,640 of the $78,000 ending Work in process inventory balance. Supply
the information missing below:
Direct materials $ ?
Direct labour 29,640
Manufacturing overhead ?
Work in process $ 78,000

Procedure

1. Open the Excel file MA1M2Q1.

2. Examine the layout of the worksheet. Rows 6 to 24 form the data table and contain the data from the
problem. Rows 26 to 48 contain a schedule of cost of goods manufactured and rows 52 to 60 contain a
schedule of cost of goods sold.

To complete requirement 2

3. Enter in cell C23 the overhead rate and in cell C24 the amount of overapplied or underapplied
overhead for the year as calculated in requirement 1.

4. Enter in cells C29 to C32, D33, D34, C36 to C43, and D44 to D48 the appropriate formulas to
complete the schedule of cost of goods manufactured.

To complete requirement 3

5. Enter the formulas in column D of rows 54 to 60 to complete the schedule of cost of goods sold, and
save your completed worksheet.

6. Answer the rest of requirement 3.

Source: Ray H. Garrison, Eric W. Noreen, G.R. Chesley, and Raymond F. Carroll, Managerial
Accounting, Sixth Canadian Edition, Problem 3-19, page 129. Copyright © 2004, by McGraw-Hill
Ryerson Limited. Adapted with permission.

Solution

Question 2

Multiple choice

a. The predetermined overhead rate is $12.20 per direct-labor hour. Job 360 required 415 direct-labour
hours, of which 300 were incurred during October. How much overhead should be applied to Job 360
during October?

1. $1,403
2. $3,660
3. $4,392
4. $5,063

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b. Production reports for the second quarter show the following data:

Month Direct machine- hours Direct labour- hours Labour cost Materials cost
January 18,000 24,000 $120,000 $64,000
February 24,000 20,000 100,000 57,000
March 20,000 18,000 88,000 90,000

Actual overhead for January, February, and March was $45,020, $60,000, and $50,100 respectively.
Which variable above would be the most likely basis for allocating overhead?

1. Direct labour-hours
2. Labour cost
3. Direct machine-hours
4. Materials cost

c. A job has been completed and has incurred $10,000 of direct material costs and $16,000 of direct
labour. The customer wants to take delivery of the completed job but actual factory overhead costs will
not be known until the end of the month. Which of the following should the company do?

1. Charge the customer $26,000 plus a mark-up on direct materials and direct labour.
2. Withhold the product until actual overhead costs are known.
3. Allocate overhead to job using a predetermined overhead rate.
4. Send an adjusted invoice to the customer when actual overhead costs are known.

d. The following information is available for April:

Job A Job B Job C

Balance, April 1 $4,000 $6,400
April manufacturing costs 8,000 $3,600

Jobs A and B were finished and delivered to the clients. Job C was not completed at April 30. What
was April's Cost of goods sold?

1. $3,600
2. $11,600
3. $14,400
4. $18,400

e. Job 621 is the only job remaining in Work in process at the end of June. The June 30 balance in Work
in process is $24,000 of which $6,000 is direct material. Manufacturing overhead is allocated at the
rate of $1.50 per $1.00 of direct labour. What is the amount of direct labour charged to Job 621?

1. $7,200
2. $10,800
3. $12,000
4. $18,000

f. When overhead is underapplied, the correct adjusting entry is which of the following?

1. Dr. Work in process and Cr. Cost of goods sold

2. Dr. Cost of goods sold and Cr. Manufacturing overhead

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3. Dr. Manufacturing overhead and Cr. Cost of goods sold

4. Dr. Cost of goods sold and Cr. Work in process

g. Direct labour was $90,000 and factory overhead applied on the basis of direct labour cost was $63,000.
What was the predetermined overhead rate?

1. 30%
2. 43%
3. 70%
4. 143%

Use the following information to answer (h) and (i).

The following is an excerpt from DellCo's accounting information system:

Indirect factory materials $ 48,000

Direct manufacturing materials 114,000
Indirect office wages 14,000
Manufacturing overhead applied 182,000
Factory amortization 86,000
Office amortization 14,000
Direct office wages 32,000
Factory supervisors, salaries 36,000
Supplies, factory 7,000

h. Based on the information above, what value will be debited to the Manufacturing overhead account?

1. $177,000
2. $182,000
3. $191,000
4. $205,000

i. Based on the information above, what value will be debited to the work in process account regarding
manufacturing overhead?

1. $177,000
2. $182,000
3. $191,000
4. $205,000

j. The following data is available for the month of January:

January
Labour Cost $232,500
Actual Manufacturing Overhead $273,060

If Manufacturing overhead is applied at the rate of 120% of direct manufacturing labour costs, what
would be the under- or overapplied overhead?

1. $5,940 overapplied
2. $40,560 overapplied
3. $54,612 underapplied

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4. $95,172 overapplied

k. The overapplied balance of manufacturing overhead is $720,000, a significant amount. The ending
balances of work in process, finished goods, and cost of goods sold are $232,000, $162,400, and
$185,600, respectively. Assuming that $720,000 is to be allocated to each of these accounts based on
ending balances, which of the following is correct?

1. Work in process will be debited for $232,000.

2. Finished goods will be credited for $201,600.
3. Finished goods will be credited for $162,400.
4. Cost of goods sold will be credited for $185,600.

l. A $516,000 credit balance in Manufacturing overhead at the end of the period means which of the
following?

1. Manufacturing overhead is $516,000 overapplied.

2. Manufacturing overhead applied is $516,000.
3. Manufacturing overhead is $516,000 underapplied.
4. Actual overhead is $516,000.

Solution

Question 3

Textbook, Exercise 3-5, pages 119-120.

Solution

Question 4

Textbook, Problem 3-27, Requirement 1 only, pages 135-136.

Solution

Question 5

Textbook, Problem 3-13, page 124.

Solution

Question 6

Textbook, Case 3-29, pages 136-137.

Solution

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Self-test - Content Links

Solution 1

Computer solution

Requirement 1

a. Estimated overhead cost ÷ Estimated direct labour cost = $480,000 ÷ $640,000 = 75%

b.

Requirement 2 and Solution printout

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Requirement 3 and Formula printout

The underapplied overhead cost can either be closed out directly to cost of goods sold or allocated among
work in process, finished goods, and cost of goods sold in proportion to the amount of overhead applied to
each of these accounts during the month. Under- or overapplied overhead can be deferred to the Balance
Sheet when interim financial statements are produced during the year or where large seasonal variations
occur in output, but relatively constant overhead costs exist and predetermined overhead amounts are used to
smooth out fluctuations in overhead costs. Significant debits or credits that result can be carried forward to

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year end, and a final disposition of these amounts can be made using either of the other two methods
discussed above.

Requirement 4

Direct materials $ 4,300

Direct labour 6,600
Overhead applied ($6,600 × 75%) 4,950
Cost to manufacture $ 15,850

$15,850 × 140% = $22,190 price to the customer

Requirement 5

The amount of overhead cost in ending work in process would be:

$29,640 direct labour cost 75% = $22,230

The amount of direct material cost in ending work in process would be:

Total ending work in process $ 78,000

Deduct: Direct labour $ 29,640
Manufacturing overhead 22,230 51,870
$ 26,130

The completed schedule of costs in ending work in process would be:

Direct materials $ 26,130

Direct labour 29,640
Manufacturing overhead 22,230
Total work in process $ 78,000

Source: Ray H. Garrison, Eric W. Noreen, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to
accompany Managerial Accounting, Sixth Canadian Edition. Copyright © 2004, by McGraw-Hill Ryerson
Limited. Adapted with permission.

Solution 2

Multiple choice

a. 2)

$12.20 × 300 = $3,660

b. 3)

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Calculating an overhead rate based on machine-hours is the most constant (about $2.50), which
indicates a strong cause and effect relationship between the two costs.

c. 3)

Using a predetermined overhead rate provides a mechanism for assigning overhead costs to jobs as
they are completed.

d. 4)

$4,000 + $6,400 + $8,000 = $18,400 cost of goods sold for April.

e. 1)

$18,000 = 1.5x + x
$18,000 = 2.5x
x = $7,200 direct labour

f. 2)

When overhead is underapplied, actual overhead incurred is greater than what has been applied.
Therefore, the underapplied amount, equal to the difference between actual and applied, is added or
debited to cost of goods sold and credited to the manufacturing overhead account.

g. 3)

$63,000 ÷ $90,000 = .70 or 70% predetermined overhead rate.

h. 1)

The manufacturing overhead account is debited for actual overhead costs, which include the following:
Indirect factory materials $48,000 + Factory amortization $86,000 + Factory supervisors' salaries
$36,000 + Supplies, factory $7,000 = $177,000 debited to manufacturing overhead.

i. 2)

The work in process account is debited for applied overhead of $182,000.

j. 1)

$232,500 × 1.2 = $279,000 applied; $279,000 – $273,060 = $5,940 overapplied.

k. 2)

Work in process will be credited for a 40% share ($232,000 ÷ $580,000 = 40%) of the $720,000 =
$288,000; finished goods will be credited for a 28% share ($162,400 ÷ $580,000 = 28%) of the
$720,000 = $201,600; and cost of goods sold will be credited for a 32% share ($185,600 ÷ $580,000 =
32%) of the $720,000 = $230,400.

l. 2)

The balance in manufacturing overhead at the end of the period reflects under- or overapplied
overhead. A credit balance of $516,000 indicates that overhead applied was greater than actual

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manufacturing overhead by $516,000 (in other words, $516,000 overapplied).

Solution 3

Exercise 3-5

Requirement 1

1. Milling Department:

Assembly Department:

Requirement 2

2. Overhead
applied
Milling Department: 90 MHs × $8.50 per MH $765
Assembly Department: $160 × 125% 200
Total overhead cost applied $965

Requirement 3

3. Yes; if some jobs required a large amount of machine time and little labour cost, they would be
charged substantially less overhead cost if a plantwide rate based on direct labour cost were being
used. It appears, for example, that this would be true of job 407 which required considerable machine
time to complete, but required only a small amount of labour cost.

Source: Ray H. Garrison, Eric W. Noreen, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to
accompany Managerial Accounting, Sixth Canadian Edition. Copyright © 2004, by McGraw-Hill Ryerson
Limited. Reproduced with permission.

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Solution 4

Problem 3-27

Requirement 1

1.

$150,000 direct materials cost × 160% = $240,000 applied.

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Source: Ray H. Garrison, Eric W. Noreen, G.R. Chesley, and Raymond F. Carroll, Solutions Manual
to accompany Managerial Accounting, Sixth Canadian Edition. Copyright © 2004, by McGraw-Hill
Ryerson Limited. Reproduced with permission.

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Solution 5

Problem 3-13

1. and 2.

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3. Manufacturing overhead was overapplied by $3,000 for the year. This balance would be allocated
between Work in Process, Finished Goods, and Cost of Goods Sold in proportion to the current period
costs in these accounts. The allocation would be:

4.

Source: Ray H. Garrison, Eric W. Noreen, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to
accompany Managerial Accounting, Sixth Canadian Edition. Copyright © 2004, by McGraw-Hill Ryerson
Limited. Reproduced with permission.

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Solution 6

Case 3-29

Requirements 1-7

1. Work in process inventory, April 30 ........................... $ 5,300

2. Raw materials purchased during April ......................... $42,000
3. Overhead applied to work in process ......................... $15,600
4. Cost of goods sold for April ..................................... $84,000
5. Overapplied overhead ............................................. $800
6. Raw materials usage during April ............................... $43,000
7. Raw materials inventory, April 30 .............................. $11,000

Entries given in the T-accounts are derived from the information given in the problem, and are keyed
according to source (a, b, etc.).

a. Predetermined overhead rate: $180,000 ÷ 60,000 DLHs = $3 per DLH.

b. Work in process balance at April 30 consists of:

Materials. ............................................................... $2,600

Direct labour (300 hours × $6 per hour)......................... $1,800
Overhead applied (300 hours × $3 per hour)................... $900
Total ...................................................................... $5,300

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* 5,200 DLHs * $6 = $31,200

** 5,200 DLHs * $3 = $15,600

Entries for which no information was provided:

g. The direct materials can be computed from what is already known about the Work in process account.

h. The April 30 balance in Raw materials can be determined after entry (g) is entered into the account.

i. The cost of goods sold can be computed from the amounts already determined in the Finished goods
inventory account.

Source: Ray H. Garrison, Eric W. Noreen, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to
accompany Managerial Accounting, Sixth Canadian Edition. Copyright © 2004, by McGraw-Hill Ryerson
Limited. Reproduced with permission.

Quiz 1
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 Management Accounting Fundamentals [MA1]

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