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PROBLEM: JOB ORDER
2. Richards Company employs a job order costing system. Only three jobs-Job #205, Job #206, and Job #207-were worked
on during January and February. Job #205 was completed February 10; the other two jobs were still in production on
February 28, the end of the company's operating year. Job cost sheets on the three jobs follow:

Job Cost Sheet

Job #205 Job #206 Job #207

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January costs incurred:
Direct material Twitter$16,500 $ 9,300 $ —
Direct labor 13,000 7,000 —
Manufacturing overhead 20,800 11,200 —

$
February costs incurred:
Direct materials — 8,200 21,300
Direct labor 4,000 6,000 10,000
Manufacturing overhead ? ? ?

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The following additional information is available:
a. Manufacturing overhead is assigned to jobs on the basis of direct labor cost.

b. Balances in the inventory accounts at January 31 were as follows:

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Raw Material $40,000
in Process ?
Finished Goods 85,000
Required
a. Prepare T-accounts for Raw Material, Work in Process Inventory, Finished Goods
Inventory, and Manufacturing Overhead Control. Enter the January 31 inventory
balances given previously; in the case of Work in Process Inventory, compute the
January 31 balance and enter it into the Work in Process Inventory T-account.

b. Prepare journal entries for February as follows:

1. Prepare an entry to record the issue of materials into production and post the entry to
appropriate T-accounts. (In the case of direct material, it is not necessary to make a
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separate entry for each job.) Indirect materials used during February totaled $4,000.

2. Prepare an entry to record the incurrence of labor cost and post the entry to appropriate T-
accounts. (In the case of direct labor, it is not necessary to make a separate entry for each
job.) Indirect labor cost totaled $8,000 for February.

3. Prepare an entry to record the incurrence of $19,000 in various actual manufacturing

overhead costs for February (credit Accounts Payable).

c. What apparent predetermined overhead rate does the company use to assign
overhead cost to jobs? Using this rate, prepare a journal entry to record the
application of overhead cost to jobs for February (it is not necessary to make a
separate entry for each job). Post this entry to appropriate T-accounts.

d. As stated earlier, Job #205 was completed during February. Prepare a journal entry
to show the transfer of this job off of the production line and into the finished good
warehouse. Post the entry to appropriate T-accounts.

e. Determine the balance at February 28 in the Work in Process inventory account.

How much of this balance consists of the cost of Job #206? Job #207?

99

ANS:
a.

Raw Materials Work in Process

Inventory Inventory
BB 40,000 BB 77,800
29,500 60,700
31,500 20,000
32,000
98,600

Finished Goods Manufacturing

Inventory Overhead Control
BB 85,000 4,000
60,700 8,000 32,000
19,000

b. 1. Work in Process Inventory 29,500

Manufacturing Overhead 4,000
Control
Raw Materials Inventory 33,500

2. Work in Process Inventory 20,000

Manufacturing Overhead
8,000
Control
Payroll 28,000

3. Manufacturing Overhead
19,000
Control
Accounts Payable 19,000

c. 160%/DL COST ! $20,000 = $32,000

Work in Process Inventory 32,000

Manufacturing Overhead Control 32,000

d. Finished Goods Inventory 60,700

Work in Process Inventory 60,700

e. WIP INV 98,600

Job 206 =
Job 207 = $47,300
$51,300

JOB #205 JOB #206 JOB #207

Beg WIP $50,300 $27,500 -
Direct Mat 0 8,200 $21,300
Direct Labor 4,000 6,000 10,000
Factory Overhead 6,400 9,600 16,000
$60,700 $51,300 $47,300

DIF: Moderate OBJ: 4-4

100

3. The Pittman Company manufactures special purpose machines to order. On January 1, there were two jobs in
process, #705 and #706. The following costs were applied to these jobs in the prior year:

Job No.
705 706
Direct material $ 5,000 $ 8,000
Direct labor 4,000 3,000
Overhead 4,400 3,300
Total $13,400 $14,300

During January, the following transactions took place:

* Raw material costing $40,000 was purchased on account.
* Jobs #707, #708, and #709 were started and the following costs were applied to
them:

JOB
707 708 709
Direct materials $3,000 $10,000 $7,000
Direct labor 5,000 6,000 4,000

* Job #705 and Job #706 were completed after incurring additional direct labor costs
of $2,000 and $4,000, respectively
* Wages paid to production employees during January totaled $25,000.
* Depreciation for the month of January totaled $10,000.
* Utilities bills in the amount of $10,000 were paid for operations during December.
* Utilities bills totaling $12,000 were received for January operations.
* Supplies costing $2,000 were used.
* Miscellaneous overhead expenses totaled $24,000 for January.

Actual overhead is applied to individual jobs at the end of each month using a rate based on actual direct labor costs
Required
a. Determine the January overhead rate.

b. Determine the cost of each job.

c. Prepare a statement of cost of goods manufactured.

ANS:
a. MOH $4,000 + $10,000 + $12,000 + $2,000 + $24,000 = $52,000 = $2.4762/dl cost
$21,000 dl cost

b JOB JOB JOB JOB JOB

. #705 #706 #707 #708 #709
DM - - $ 3,000 $10,000 $ 1,000 = $ 20,000
DL $ 2,000 $ 4,000 5,000 6,000 4,000 = 21,000
MOH 4,952 9,905 12,381 14,857 9,905 = 52,000
Beg WIP 13,400 14,300 - - - = 27,700
$20,352 $28,205 $20,381 $30,857 $20,905 $120,700

c. Beg WIP $27,700

+ DM 20,000
+ DL 21,000
+ MOH 52,000
- End WIP 72,143
$48,557

101

4. The Western Corporation, began operations on October 1. It employs a job order costing system. Overhead is charged at
a normal rate of $2.50 per direct labor hour. The actual operations for the month of October are summarized as follows:

a. Purchases of raw material, 25,000 pieces @ $1.20/piece.

b. Material and labor costs charged to production:

Direct Direct
Job No. Units Material labor cost labor hours
101 10,000 $4,000 $6,000 3,000
102 8,800 3,600 5,400 2,700
103 16,000 7,000 9,000 4,500
104 8,000 3,200 4,800 2,400
105 20,000 8,000 3,600 1,800

c. Actual overhead costs incurred:

Variable $18,500
Fixed 15,000

d. Completed jobs: 101, 102, 103, and 104

e. Sales-$105,000. All units produced on Jobs 101, 102, and 103 were sold.

Required: Compute the following balances on October 31:

a. Material inventory

b. Work in process inventory

c. Finished goods inventory

d. Cost of goods sold

e. Under- or overapplied overhead

ANS:

a. $30,000 - ($4,000 + $3,600 + $7,000 + $3,200 + $8,000) = $4,200

b. Job #105 $8,000 + $3,600 + ($1,800 ! 2.50) = $16,100

c. Job #104 $3,200 + $4,800 + ($2,400 ! 2.50) = $14,000

d. Job # 101 $4,000 + $6,000 + ($3,000 ! 2.50) = $17,500

102 $3,600 + $5,400 + ($2,700 ! 2.50) = 15,750
103 $7,000 + $9,000 + ($4,500 ! 2.50) = 27,250
$60,500

e. Applied 14,400 ! $2.50 = $36,000

Actual 33,500
Overapplied $ 2,500

DIF: Moderate OBJ: 4-4

102

Steel Company.

Steel Company uses a job order costing system and develops its predetermined overhead rate based on machine hours.
The company has two jobs in process at the end of the cycle, Jobs #177 and #179.

Budgeted overhead $100,300

Budgeted machine hours 85,000
Raw material $ 63,000
Labor cost $ 50,000

5. Refer to Steel Company. What amount of overhead is charged to Jobs #177 and #179? Machine hours are split between
Jobs #177 and #179-65 percent and 35 percent, respectively. Actual machine hours equal budgeted machine hours.

ANS:
OH Applied = MH Cost ! POHR
Job #177: 85,000 MH ! 65%= 55,250 ! $1.18 = $65,195
Job #179: 85,000 MH ! 35%= 29,750 ! $1.18 = $35,105

DIF: Easy OBJ: 4-4

6. Refer to Steel Company. Fifty-four percent of raw material belongs to Job 17 and 38 percent belongs to Job 179, and the
balance is considered indirect material. What amount of raw material used was allocated to overhead as indirect material?

ANS:
54% + 38% = 92%; this means that 8% is indirect or $5,040
(.08 ! $63,000).

DIF: Easy OBJ: 4-4

7. Refer to Steel Co. Labor cost was split 25 percent and 70 percent, respectively, between Jobs #177 and #179 for direct
labor. The remainder was indirect labor cost. What are the total costs of Jobs #177 and #179?

ANS:

Job #177 Job #179

DM $ 34,020 $23,940
DL 12,500 35,000
MOH 65,195 35,105
$111,715 $94,045

DIF: Moderate OBJ: 4-4

103

8. Sanderson Company manufactures custom-built conveyor systems for factory and commercial operations. Erin Smith is
the cost accountant for Sanderson and she is in the process of educating a new employee, Heather Fontenot about the job
order costing system that Sanderson uses. (The system is based on normal costs; overhead is applied based on direct labor
cost and rounded to the next whole dollar.) Lisa gathers the following job order cost records for July:

Direct Direct Total

Job No. Materials Labor Applied OH Cost
667 $ 5,901 $1,730 $ 1,990 $ 9,621
669 18,312 1,810 2,082 22,204
670 406 500 575 1,481
671 51,405 9,500 10,925 71,830
672 9,615 550 633 10,798

To explain the missing job number, Erin informed Heather that Job #668 had been completed in June. She also told her
that Job #667 was the only job in process at the beginning of July. At that time, the job had been assigned $4,300 for
direct material and $900 for direct labor. At the end of July, Job #671 had not been completed; all others had. Erin asked
Heather several questions to determine whether she understood the job order system.

Required: Help Heather answer the following questions:

a. What is the predetermined overhead rate used by ABC Company?

b. What was the total cost of beginning Work in Process inventory?

c. What was total prime cost incurred for the month of July?

d. What was cost of goods manufactured for July?

ANS:

a. Use any job started in July:

Rate = MOH JOB $670 $575 = 115%/DL Cost

DL COST $500

b. DM $4,300
DL 900
FOH 1,035 ($900 ! 115%)
$6,235

c. Prime Cost =DM + DL

DM = $85,639 - 4,300 = $81,339

DL = 14,090 - 900 = 13,190
$94,529

d. COGM = $9,621 + 22,204 + 1,481 + 10,798 = $44,104

DIF: Easy OBJ: 4-4

104

9. Perry Company uses a job order costing system and has the following information for the first week of June:

1. Direct labor and direct materials used:

Job No. Direct Material Direct Labor Hours

498 $1,500 116
506 960 16
507 415 18
508 345 42
509 652 24
511 308 10
512 835 30
Total $5,015 256

2. The direct labor wage rate is $4 per hour.

3. The overhead rate is $5 per direct labor hour.

4. Actual overhead costs for the week, $1,480.

5. Jobs completed: Nos. 498, 506, and 509.

6. The factory had no work in process at the beginning of the week.

Required:
a. Prepare a summary that will show the total cost assigned to each job.

b. Compute the amount of overhead over- or underapplied during the week.

c. Calculate the cost of the work in process at the end of the week.

ANS:
a. Job No. DM DL OH Total
498 $1,500 $ 464 $ 580 $2,544
506 960 64 80 1,104
507 415 72 90 577
508 345 168 210 723
509 652 96 120 868
511 308 40 50 398
512 835 120 150 1,105
$5,015 $1,024 $1,280 $7,319

b. Actual MOH $1,480

Applied MOH 1,280
Underapplied $ 200

c. JOB 507 $ 577

508 723
511 398
512 1,105
Ending WIP $2,803

105

11. Beauty Company manufactures picture frames of all sizes and shapes and uses a job order costing system. There is always
some spoilage in each production run. The following costs relate to the current run:

Estimated overhead (exclusive of spoilage) $160,000

Spoilage (estimated) $ 25,000
Sales value of spoiled frames $ 11,500
Labor hours 100,000

The actual cost of a spoiled picture frame is $7.00. During the year 170 frames are considered spoiled. Each spoiled frame
can be sold for $4. The spoilage is considered a part of all jobs.

a. Labor hours are used to determine the predetermined overhead rate. What is the predetermined
overhead rate per direct labor hour?
b. Prepare the journal entry needed to record the spoilage.
c. Prepare the journal entry if the spoilage relates only to Job #12 rather than being a part of all
production runs.

ANS:

a. $160,000 + $25,000 - $11,500 = $173,500

$173,500/100,000 = $1.735 per DLH
b. Disposal Value of Spoiled Work 680
Manufacturing Overhead 510
Work in Process Inventory 1,190
c. Disposal Value of Spoiled Work 680
Work in Process Inventory-Job #12 680

Fundamentals of Manufacturing Accounting

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

Estimated manufacturing overhead $ 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 $16,500 and $36,000,
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.

LO: 2, 4, 5 Type: A

Answer:
A. Predetermined overhead rate: $600,000 ÷ $480,000 = 125% of direct labor cost

106

B. Actual manufacturing overhead ($639,000) - applied overhead ($500,000 x 125% = $625,000) = $14,000
underapplied

C. Total debits to Work-in-Process ($1,880,000) - direct labor ($500,000) - applied overhead ($625,000) = direct
materials used ($755,000)

D. The only job in production is job no. 18, which has direct material of $16,500 and direct labor of $36,000.
Applied overhead amounts to $45,000 ($36,000 x 125%), yielding a total job cost of $97,500 ($16,500 +
$36,000 + $45,000).

E. The company’s cost of goods sold equals $920,000, resulting in sales revenues of $1,472,000 ($920,000 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 Applicatio

64. 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 $22,500 as of that date. Direct
materials used and direct labor incurred during January were:

Job No. Direct Materials Direct Labor

789 $ 2,000 $ 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 $200,000 and $300,000, 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. $300,000 " $200,000 = 150% of direct labor cos
C. Direct material $14,000
Direct labor 8,000
Manufacturing overhead ($8,000 x 150%) 12,000
Total cost of job no. 791 $34,000

D. Beginning work in process $22,500

Direct material ($2,000 + $9,000) 11,000
Direct labor ($6,000 + $10,000) 16,000
Manufacturing overhead ($16,000 x 150%) 24,000
Total cost of job nos. 789 and 790 $73,500

E. Sales revenue: $102,900 ($73,500 x 140%)

107

Overview of Job-Costing Systems, Overhead AccountinG

65. 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 $200,000 and $250,000,
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 $145,000 $35,000
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 $233,000. 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. $250,000 ÷ $200,000 = 125% of direct labor cost

B. Job no. 3:
Direct material $ 55,000
Direct labor 80,000
Manufacturing overhead ($80,000 x 125%) 100,000
Total cost of job no. 3 $235,000

C. Job nos. 1 and 2:

Direct material ($145,000 + $320,000) $465,000
Direct labor ($35,000 + $65,000) 100,000
Manufacturing overhead ($100,000 x 125%) 125,000
Total cost of job nos. 1 and 2 $690,000

Sales revenue: $1,104,000 ($690,000 x 160%)

D. Actual overhead $233,000

Applied overhead: [($35,000 + $65,000 +
$80,000) x 125%] 225,000
Underapplied overhead $ 8,000

E. Cost of Goods Sold 8,000

Manufacturing Overhea 8,000

108

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

66. 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 $800,000 and
50,000, respectively, for 20x1. Actual costs incurred follow.

Direct material used $250,000

Direct labor 300,000
Manufacturing overhead 816,000

The manufacturing overhead figure presented above excludes $27,000 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 $2,960,000.
These goods were sold to customers for $3,720,000. 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?

LO: 4, 5, 6 Type: A, N

Answer:
A. $800,000 ÷ 50,000 = $16 per machine hour

B. Applied overhead (51,500 x $16) $ 824,000

Actual overhead 816,000
Overapplied overhead $ 8,000

C. Cost of goods sold, as reported $2,960,000

Less: Overapplied overhead 8,000
Cost of goods sold, adjusted $2,952,000

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

67. 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:

109

Budgeted manufacturing overhead $8,000,000

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 $64,800

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: $8,000,000 ÷ 500,000 hours = $16 per machine hour

B. The ending work in process is carried at a cost of $107,200, computed as follows:

Direct materials $ 64,800

Direct labor 35,200
Manufacturing overhead (450 x $16) 7,200
Total cost $107,200

C. Actual overhead in the Machining Department amounted to $7,975,000, whereas applied overhead totaled
$8,160,000 (510,000 hours x $16). Thus, overhead was overapplied by $185,000 during the year.

D. The department's manufacturing overhead was overapplied by $185,000. 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 $8,160,000.

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.

Overhead Accounting: Working Backwards

68. Kent Products uses a predetermined overhead application rate of $18 per labor hour. A review of the company's
accounting records revealed budgeted manufacturing overhead for the period of $621,000, applied manufacturing
overhead of $590,400, and overapplied overhead of $11,900.

Required:

110

A. Determine Kent's actual labor hours, budgeted labor hours, and actual manufacturing overhead.
B. Present the necessary year-end journal entry to handle the overapplied overhead, assuming that the firm
allocates over- or underapplied overhead to Cost of Goods Sold.

LO: 4, 5 Type: A

Answer:
A. Actual labor hours: $590,400 ÷ $18 per hour = 32,800 hours
Budgeted labor hours: $621,000 ÷ $18 per hour = 34,500 hours
Actual manufacturing overhead: $590,400 - $11,900 = $578,500

B. Manufacturing Overhead 11,900

Cost of Goods Sold 11,900
Analysis of Accounts to Derive Overhead Figures; Working Backwards

69. A review of the records of Milgrim, Inc., a new company, disclosed the following year-end information:
# Manufacturing Overhead account: Contained debits of $872,000, which included $20,000 of sales
commissions.
# Work-in-Process Inventory account: Contained charges for overhead of $875,000.
# Cost-of-Goods-Sold account: Contained a year-end debit balance of $3,680,000. This amount was computed
prior to any year-end adjustment for under- or overapplied overhead.

Milgrim applies manufacturing overhead to production by using a predetermined rate of $20 per machine hour.
Budgeted overhead for the period was anticipated to be $900,000.

Required:
A. Determine the actual manufacturing overhead for the year.
B. Determine the amount of manufacturing overhead applied to production.
C. Is overhead under- or overapplied? By how much?
D. Compute the adjusted cost-of-goods-sold figure that should be disclosed on the company's income statement.
E. How many machine hours did Milgrim actually work during the year?
F. Compute budgeted machine hours for the year.

LO: 4, 5, 6 Type: A

Answer:
A. $872,000 - $20,000 sales commissions = $852,000

B. $875,000 (given)

C. Manufacturing overhead is overapplied by $23,000 ($875,000 - $852,000).

D. Cost of goods sold $3,680,000

Less: Overapplied overhead 23,000
Cost of goods sold, adjusted $3,657,000

E. Milgrim would have applied overhead to production by using the actual machine
hours worked and the $20 application rate. Thus, the actual hours worked total
43,750 ($875,000 ÷ $20).

F. $900,000 ÷ $20 = 45,000 hours

111

Project Costing in a Service Business

70. Fine & Associates is an interior decorating firm in Tucson. The following costs were incurred in a project to
redecorate the mayor's offices:

Direct material $ 29,000

Direct professional labor 42,000

The firm's budget for the year included the following estimates:

Budgeted overhead $800,000

Budgeted direct professional labor 640,000

Overhead is applied to contracts by using a predetermined overhead rate that is based on direct professional labor
cost. Actual professional labor during the year was $655,000 and actual overhead was $793,000.

Required:
A. Determine the total cost to redecorate the mayor's offices.
B. Calculate the under- or overapplied overhead for the year. Be sure to label your answer.

LO: 8 Type: A

Answer:
A. Direct material $ 29,000
Direct professional labor 42,000
Applied overhead ($42,000 x 125%*) 52,500
Total cost to redecorate $123,500

*$800,000 " $640,000 = 125%

B.
Applied overhead ($655,000 x 125%) $818,750
Actual overhead 793,000
Overapplied overhead $ 25,750
Project Costing, Architecture Firm

71. Boswell and Associates designs relatively small sports stadiums and arenas at various sites throughout the
country. The firm’s accountant prepared the following budget for the upcoming year:

Professional staff salaries $3,000,000

Administrative support staff 800,000
Other operating costs 200,000

Eighty percent of professional staff salaries are directly traceable to client projects, a figure that falls to 60% for
the administrative support staff and other operating costs. Traceable costs are charged directly to client projects;
nontraceable costs, on the other hand, are treated as firm overhead and charged to projects by using a
predetermined overhead application rate.

Boswell had one project in process at year-end: an arena that was being designed for Charlotte County. Costs
directly chargeable to this project were:

Professional staff salaries $90,000

Administrative support staff 17,300
Other operating costs 6,700

Required:

112

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