Midterm - Ch.

4
4-27 (Job Costing, Journal Entries)
Doodly Ltd. manufactures and installs kitchen cabinetry. It uses normal job costing with two direct cost
categories (direct materials and direct manufacturing labour) and one indirect cost pool for manufacturing
overhead (MOH), applied on the basis of machine-hours (MH). At the beginning of the year, the company
estimated that it would work 990,000 MH and had budgeted $74,500,000 for MOH. The following data (in
$ millions) pertain to operations for the year 2019:
Materials control (beg balance), Dec 31, 2018 $13,000,000
Work-in-process control (beg balance, Dec 31, 2018 5,000,000
Finished goods control (beg balance), Dec 31, 2018 11,000,000
Materials and supplies purchased on account 245,000,000
Direct materials used 203,000,000
Indirect materials (supplies) issued to various production departments 37,000,000
Direct manufacturing labour 129,000,000
Indirect manufacturing labour incurred by various departments 20,000,000
Depreciation on plant and manufacturing equipment 24,000,000
Miscellaneous manufacturing overhead incurred (credit Various Liabilities; ordinarily
would be detailed as repairs, utilities, etc.) 12,000,000
Manufacturing overhead allocated (982,000 actual MH) ?
Cost of goods manufactured 375,000,000
Revenues 522,000,000
Cost of goods sold 345,000,000
Prepare general journal entries. Post to T-accounts. What is the ending balance of Work-in-Process
Control? Show the journal entry for disposing of over- or underallocated manufacturing overhead directly
as a year-end write-off to Cost of Goods Sold. Post the entry to T-accounts.
a) Record the purchase of materials, $245 million.
Materials Control 245
Accounts Payable Control 245
b) Record the direct materials used, $203 million.
Work-in-Process Control 203
Materials Control 203
c) Record the indirect materials used, $37 million.
Manufacturing Overhead Control 37
Materials Control 37
d) Record the cost of the direct and indirect labour used in production of $129 million and $20 million,
respectively.
Work-in-Process Control 129
Manufacturing Overhead Control 20
Wages Payable Control 149
e) Record the depreciation expense of $24 million.
Manufacturing Overhead Control 24
Accumulated Depreciation - Buildings and Manufacturing Equipment 24
f) Record the miscellaneous manufacturing overhead costs of $12 million.
Manufacturing Overhead Control 12
Various Liabilities 12
g) Now record the entry to allocate the manufacturing overhead. (Round to one decimal place)
Work-in-Process Control 73.9????
Manufacturing Overhead Allocated 73.9???
h) Record the cost of goods manufactured of $375 million.
Finished Goods Control 375
Work-in-Process Control 375
i) Record the revenues of $522 million.
Accounts Receivable Control 522
Revenues 522
j) Record the cost of goods sold to $345 million.
Cost of Goods Sold 345
Finished Goods Control 345
k) Dispose of the year-end under- overallocated manufacturing overhead. (Round to one decimal place)
Manufacturing Overhead Allocated 73.9???
Cost of Goods Sold 19.1
Manufacturing Overhead Control 93*
*Add up all of the “Manufacturing Overhead Control” entries (37 + 20 + 24 + 12 = $93)
l) Now post entries (1) through (11) to the accounts below and then calculate the ending balance in each
account.

4-28 (Costing, Unit Cost, Ending Work in Process)

Roger Company produces pipes for concert-quality organs. Each job is unique. In April 2016, it completed
all outstanding orders, and then, in May 2016, it worked on only two jobs, M1 and M2:

Roger Company, May 2016 Job M1 Job M2

Direct materials $71,000 $51,000

Direct manufacturing labour $276,000 $208,000

Direct manufacturing labour is padi at the rate of $32 per hour. Manufacturing overhead costs are
allocated at a budgeted rate of $18 per direct manufacturing labour-hour. Only Job M1 was completed in
May.
a) Calculate the total cost for Job M1.
Job Costs May 2016 Job M1
Direct materials $71,000
Direct manufacturing labour $276,000
Manufacturing overhead allocated $155,250*
Total costs $502,250
*$276,000 / $32 per hour = 8,625 hours worked
8,625 hours worked X $18 per hour = $155,250
b) 1,500 pipes were produced for Job M1. Calculate the cost per pipe.
$502,250 total cost / 1,500 pipes = $334.83 per piep = $335 rounded price per pipe
c) Prepare the journal entry transferring Job M1 to finished goods.
Finished Goods Control 502,250
Work-in-Process Control 502,250
d) What is the ending balance in the Work-in-Process Control account?
Direct material $51,000
Direct manufacturing labour $208,000
Manufacturing overhead cost (6,500* X $18) $117,000
Total cost for Job 2 $376,000
*$208,000 / $32 per hour = 6,500 hours
Therefore, the ending balance for Work-in-Process is $376,000
4-17 (Job Costing, Process Costing) In each of the following situations, determine whether job costing
or process costing would be more appropriate.
a) A public accounting firm Job Costing
b) An oil refinery Process Costing
c) A custom furniture manufacturer Job Costing
d) A tire manufacturer Process Costing (unless specialty)
e) A textbook publisher Job Costing
f) A pharmaceutical company Process Costing
g) An advertising agency Job Costing
h) An apparel manufacturing factor Job or Process (depending on production)
i) A flour mill Process Costing
j) A paint manufacturer Process Costing
k) A medical care facility Job Costing
l) A landscaping company Job Costing
m) A cola-drink-concentrate producer Process Costing
n) A movie studio Job Costing
o) A law firm Job Costing
p) A commercial aircraft manufacturer Job Costing
q) A management consulting firm Job Costing
r) A breakfast cereal company Process Costing
s) A catering service Job Costing
t) A paper mill Process Costing
u) An auto repair garage Job Costing
4-21 (Job Costing, Normal, and Actual Costing)
Avery Construction assembles residential homes. It uses a job-costing system with two direct cost
categories (direct materials and direct labour) and one indirect cost pool (assembly support). The
allocation base for assembly support costs is direct labour-hours. In December 2018, Avery budgets 2019
assembly support costs to be $7,150,000 and 2019 direct labour-hours to be 130,000. At the end of 2019,
Anderson is comparing the costs of several jobs that were started and completed in 2019. Information for
a couple of jobs follows:
Construction Period Laguna Model Feb-June 2019 Mission Model May-Oct 2019

Direct materials $106,840 $127,081

Direct labour $35,344 $39,420

Direct labour-hours 870 930

Direct materials and direct labour are paid for on a contract basis. The costs of each are known when
direct materials are used or direct labour-hours are worked. The 2019 actual assembly support costs
were
$7,788,000, while the actual direct labour-hours were 177,000.
a) Compute the (a) budgeted and (b) actual indirect cost rates. Why do they differ?
Budgeted Indirect Cost Rate = Budgeted Indirect Costs / Budgeted Direct Labour-Hours
= $7,150,000 / 130,000
= $55
Actual Indirect Cost Rate = Actual Indirect Costs / Actual Direct Labour-Hours
= $7,788,000 / 177,000
= $44
These rates differ because both the cost and hour amounts in the two calculations are different.
b) What is the job cost of the Laguna Model and the Mission Model using (a) normal costing and (b)
actual costing?
(Normal Costing) Budgeted Indirect Cost Rate x Actual Direct Labour-Hours = Indirect Costs
Laguna $55 x 870 = $47,850
Mission $55 x 930 = $51,150
Normal Costing Laguna Model Mission Model
Direct costs $142,184* $166,501**
Indirect costs 47,850 51,150
$190,034 $217,651
*$106,840 + $35,344 = $142,184
**$127,081 + $39,420 = $166,501
(Actual Costing) Actual Indirect Cost Rate x Actual Direct Labour-Hours = Indirect Costs
Laguna $44 x 870 = $38,280
Mission $44 x 930 = $40,920
Actual Costing Laguna Model Mission Model
Direct costs $142,184 $166,501
Indirect costs 38,280 40,920
$180,464 $207,421
c) Why might Avery Construction prefer normal costing over actual costing?
Avery Construction might prefer normal costing over actual costing because normal costing enables Avery to report
a job cost as soon as the job is completed. Avery can use this information to manage the costs of its current jobs and
bid on similar jobs later in the year.
4-25 (Job Costing, Consulting Firm)
Maynard Partners, a management consulting firm, has the following condensed budget for 2017:
Revenues $20,500,000
Total Costs:
Direct Costs
Professional Labour $5,000,000
Indirect Costs
Client Support 13,040,000 18,040,000
Operating Income $2,460,000
Maynard has a single direct-cost category (professional labour) and a single indirect-cost pool (client
support). Indirect costs are allocated to jobs on the basis of professional labour costs.
a) Identify the components of the overview diagram of the job-costing system. Calculate the 2017
budgeted indirect-cost rate for Maynard Partners.

Budgeted Indirect Cost Rate = Budgeted client support costs / allocation base
= $13,040,000 / $5,000,000
= 260.8%
b) The markup rate for pricing jobs is intended to produce operating income equal to 12% of revenues.
Calculate the markup rate as a percentage of professional labour costs.
Markup Rate = Revenues / Budgeted Professional Labour Costs
= $20,500,000 / $5,000,000
= 410%
c) Maynard is bidding on a consulting job for SuperWire, a wireless communications company. The
budgeted breakdown of professional labour on the job is as follows:

Professional Labour Category Budgeted Rate per Hour Budgeted Hours

Director $199 2

Partner 104 15

Associate 52 41

Assistant 35 151

Calculate the budgeted cost of the SuperWire job. How much will Maynard bid for the job if it is to earn its
target operating income of 12% of revenues?
Budgeted professional labour costs $9,375*
Budgeted consulting support costs 24,450**
Budgeted total costs $33,825
*($199 x 2) + ($104 x 15) + ($52 X 41) + ($35 X 151) = $9,375
**$9,375 X 260.8% = $24,450
Maynard will need to bid $38,437.50 for the job if it is to earn its target operating income of 12% of revenues.
4-30 (Job Costing, Journal Entries, T-Accounts, Source Documents) Production Company produces
gadgets for the coveted small appliance market. The following data reflect activity for the most recent
year, 2019:
Costs Incurred Price
Purchases of direct materials (net) on account $124,000
Direct manufacturing labour cost 80,000
Indirect labour 54,500
Depreciation, factory equipment 30,000
Depreciation, office equipment 7,000
Maintenance, factory equipment 20,000
Miscellaneous factory overheads 9,500
Rent, factory building 70,000
Advertising expense 90,000
Sales commissions 30,000
Beginning and ending inventories for the year were as follows:
Jan 1, 2019 Dec 31, 2019

Direct materials $9,000 $11,000

Work-in-process 6,000 21,000

Finished goods 69,000 24,000

Production Company uses a normal job-costing system and allocates overhead to work-in-process at a
rate of $2.50 per direct manufacturing labour dollar. Indirect materials are insignificant, so there is no
inventory account for indirect materials.
a) Prepare journal entries to record the 109 transactions including an entry to close out over or
underallocated overhead to the cost of goods sold. For each journal entry, indicate the source document
that would be used to authorize each entry. Also note which subsidiary ledger, if any, should be
referenced as backup for the entry.
(1) Direct Materials Control 124,000
Accounts Payable Control 124,000
(2) Work-in-Process Control 122,000*
Direct Materials Control 122,000
(3) Work-in-Process Control 80,000
Manufacturing Overhead Control 54,500
Wages Payable Control 134,500
(4) Manufacturing Overhead Control 129,500
Salaries Payable 20,000
Accounts Payable Control 9,500
Accumulated Amortization Control 30,000
Rent Payable Control 70,000
(5) Work-in-Process Control 200,000**
Manufacturing Overhead Allocated 200,000
(6) Finished Goods Control 387,000***
Work-in-Process Control 387,000
(7) Cost of Goods Sold 432,000****
Finished Goods Control 432,000
(8) Manufacturing Overhead Allocated 200,000
Manufacturing Overhead Control 184,000
Cost of Goods Sold 16,000
(9) Administrative Expense 7,000
Marketing Expense 120,000
Salaries Payable Control 30,000
Accounts Payable Control 90,000
Accumulated Amortization, Office Equipment 7,000
*Materials Used = Beg DM Inv + Purchases - End DM Inv
= 9,000 + 124,000 - 11,000
= $122,000
**80,000 x $2.50 = $200,000
***COGM = Beg WIP Inv + Manufacturing Cost - End Inv
= 6,000 + (122,000 + 80,000 + 200,000) - 21,000
= 387,000
****COGS = Beg FG Inv + COGM - End FG Inv
= 69,000 + 387,000 - 24,000
= 432,000
4-33 (Job Costing, Journal Entries)
The University of Laval Press is wholly owned by the university. It performs the bulk of its work for other
university departments, which pay as though the press were an outside business enterprise. The press
also publishes and maintains a stock of books for general sale. The press uses normal costing to cost
each job. Its job-costing system has two direct-cost categories (direct materials and direct manufacturing
labour) and one indirect-cost pool (manufacturing overhead, allocated on the basis of direct
manufacturing labour costs). The following data (in thousands) pertain to 2017:

Direct materials and supplies purchased on credit $890

Direct materials used 780
Indirect materials issued to various production departments 120
Direct manufacturing labour 1,320
Indirect manufacturing labour incurred by various production departments 930
Depreciation on building and manufacturing equipment 450
Miscellaneous manufacturing overhead incurred by various production departments 550
Manufacturing overhead allocated at 160% of direct manufacturing labour costs ?
Cost of goods manufactured 4,130
Revenues 8,400
Cost of goods sold 4,070
Inventories, December 31, 2016:
Materials control 140
Work-in-process control 70
Finished goods control 530
a) Identify the components of the overview diagram of the job-costing system at the University of Laval
Press.

b) Prepare journal entries to summarize the 2017 transactions. As your finalentry, dispose of the year-end
under- or overallocated manufacturing overhead as a write-off to Cost of Goods Sold. Number your
entries. Explanations for each entry may be omitted.
Materials Control 890
Accounts Payable Control 890
Work-In-Process Control 780
Materials Control 780
Manufacturing Overhead Control 120
Materials Control 120
Work-in-Process Control 1,320
Manufacturing Overhead Control 930
Wages Payable Control 2,250
Manufacturing Overhead Control 450
Accum Depr. - Build. & Man Equ 450
Manufacturing Overhead Control 550
Miscellaneous Accounts 550
Work-in-Process Control 2,508
Manufacturing Overhead Allocated 2,508
Finished Goods Control 4,130
Work-in-Process Control 4,130
Accounts Receivable Control 8,400
Revenues 8,400
Cost of Goods Sold 4,070
Finished Goods Control 4,070
Manufacturing Overhead Allocated 2,508
Manufacturing Overhead Control 2,050
Cost of Goods Sold 458
c) Show posted T-accounts for all inventories, Cost of Goods Sold, Manufacturing Overhead Control, and
Manufacturing Overhead Allocated.

d) How did the University of Laval Press perform in 2017?

Laval Press’ gross margin percentage of 57% is very good. This indicates that the University of Laval Press
performed very well in 2017. Gross margins above 30% are generally considered very goods.
4-38 (Journal Entries, T-Accounts, and Source Documents)
Virtual Company produces gadgets for the coveted small appliance market. The following data reflect
activity for the year 2017:
Costs incurred:
Purchases of direct materials (net) on credit $128,000
Direct manufacturing labour costs 81,000
Indirect labour 54,000
Depreciation, factory equipment 39,000
Depreciation, office equipment 7,400
Maintenance, factory equipment 23,000
Miscellaneous factory overhead 9,200
Rent, factory building 75,000
Advertising expense 96,000
Sales commissions 31,000
Inventories:
Jan 1, 2017 Dec 31, 2017
Direct materials $9,900 $14,000
Work in process 6,700 23,000
Finished goods 69,000 33,000
Virtual Co. uses a normal-costing system and allocates overhead to work in process at a rate of
$3.00 per direct manufacturing labour dollar. Indirect materials are insignificant so there is no inventory
account for indirect materials.
a) Prepare journal entries to record the transactions for 2017 including an entry to close out over- or
underallocated overhead to cost of goods sold. For each journal entry, indicate the source document that
would be used to authorize each entry. Also note which subsidiary ledger, if any, should be referenced as
backup for the entry.
Materials Control 128,000
Accounts Payable Control 128,000
Source documents Subsidiary ledgers
Purchase invoice direct material records
Work-in-Process Control 123,900
Materials Control 123,900
Source documents Subsidiary ledgers
Materials requisition records direct material records
Job-cost records work-in-process inventory records by job
Work-in-process Control 81,000
Manufacturing Overhead Control 54,000
Wages Payable Control 135,000
Source documents Subsidiary ledgers
Labour-time records work-in-process inventory records by job
Job-cost records manufacturing overhead records
Employee labour records
Manufacturing Overhead Control 146,200
Wages Payable Control 23,000
Accounts Payable Control 9,200
Accumulated Depreciation Control 39,000
Rent Payable Control 75,000

Source documents Subsidiary ledgers

Depreciation schedule manufacturing overhead records
Rent schedule
Maintenance wage records
Vendor invoices
Work-in-Process Control 243,000
Manufacturing Overhead Allocated 243,000
Source documents Subsidiary ledgers
Labour-time record work-in-process inventory records by job
Job-cost records
Finished Goods Control 431,600
Work-in-Process Control 431,600
Source documents Subsidiary ledgers
Job-cost records work-in-process inventory record by job
Completed job-cost records finished goods inventory records by job
Cost of Goods Sold 467,600
Finished Goods Control 467,600
Source documents Subsidiary ledgers
Sales invoices finished goods inventory records by job
Completed job-cost records
Administrative Expense 7,400
Advertising Expense 96,000
Salary Expense (Sales Commissions) 31,000
Salary Payable Control 31,000
Accounts Payable Control 96,000
Accumulated Depreciation Control 7,400
Source documents Subsidiary ledgers
Depreciation schedule cost records for advertising
Payroll request employee salary records
Sales commissions schedule cost records for commissions
Vendor invoices cost records for administrative
Manufacturing Overhead Allocated 243,000
Manufacturing Overhead Control 200,200
Cost of Goods Sold 42,800
Source documents Subsidiary ledgers
Prior journal entries
b) Post the journal entries to T-accounts for all of the inventories, Cost of GoodsSold, the Manufacturing
Overhead Control Account, and the Manufacturing Overhead Allocated Account.

4-43 (Disposition of Underallocated or Overallocated Overhead - Advanced)

Home Radiator Company uses a normal costing system with a single manufacturing overhead (MOH)
cost pool and machine-hours (MH) as the cost allocation base. The following data are for 2019.
Budgeted manufacturing overhead (MOH) $5,850,000
Overhead allocation base machine hours
Budgeted machine-hours (MH) 90,000
Manufacturing overhead (MOH) incurred $5,950,000
Actual machine-hours (MH) 85,000
Machine-hours data and the ending balances (before probation of under- or overallocated overhead) are
as follows.
Actual Machine-Hours (MH) 2019 End-of-Year Balance
Cost of Goods Sold 68,000 $8,800,000
Finished Goods Control 10,000 $1,650,000
Work-in-Process Control 7,000 $550,000
a) Compute the budgeted manufacturing overhead rate for Home.
Budgeted Manufacturing Overhead Rate = Budgeted Manufacturing Overhead / Budgeted Machine-Hours
= $5,850,000 / 90,000
= $65
b) Compute the under- or overallocated manufacturing overhead of Home Radiator in 2019.
MOH Underallocated (Overalocated) = MOH Incurred - MOHd Allocated
= $5,950,000 - $5,525,000
= $425,000
Dispose of this under- or overallocated amount using the following:
i) Write-off to Cost of Goods Sold
Account Balance After Proration
Work-in-Process Control 550,000
Finished Goods Control 1,650,000
Cost of Goods Sold $9,225,000
ii) Probation based on ending balances (before probation) in Work-in-Process Control, Finished
Goods Control, and Cost of Goods Sold.
Proportion (decimal) x (Over-) Underallocated OH = Adjustment
WIP 0.05* x $425,000 = 21,250
FG 0.15** x $425,000 = 63,750
COGS 0.8*** x $425,000 = $340,000
*$550,000 / ($8,800,000 + $1,650,000 + $550,000) = 0.05
**$1,250,000 / ($8,800,000 + $1,650,000 + $550,000) = 0.15
***$8,000,000 / ($8,800,000 + $1,650,000 + $550,000) = 0.80
Account Balance After Proration
Work-in-Process Control 571,250
Finished Goods Control 1,713,750
Cost of Goods Sold $9,140,000
iii) Probation based on the allocated overhead amount (before proration) in the ending balance of
Work-in=Process Control, Finished Goods Control, and Cost of Goods Sold.
Proportion (decimal) x (Over-) Underallocated OH = Adjustment
WIP 0.0824* x 425,000 = 35,020
FG 0.1176** x 425,000 = 49,980
COGS 0.8*** x $425,000 = $340,000
*7,000 machine hours/ $85,000 = 0.0824
Account Balance After Proration
Work-in-Process Control 585,020
Finished Goods Control 1,699,980
Cost of Goods Sold $9,140,000

c) Which method do you prefer in part b)? Explain.

Alternative iii) is theoretically preferred over i) and ii). This alternative yields the same ending balances in Work-in-
Process, Finished Goods, and Cost of Goods Sold that would have been reported had actual indirect-cost rates been
used.
4-37 (Disposition of Overhead Overallocation or Underallocation, Two Indirect Cost Pools)
Warmth Corporation manufactures precision equipment made to order for the semiconductor industry.
Warmth uses two manufacturing overhead cost pools—one for the overhead costs incurred in its highly
automated Machining Department and another for overhead costs incurred in its labour-based Assembly
Department. Warmth uses a normal costing system. It allocates Machining Department overhead costs to
jobs based on actual machine-hours using a budgeted machine-hour overhead rate. It allocates Assembly
Department overhead costs to jobs based on actual direct manufacturing labour-hours using a budgeted
direct manufacturing labour-hour rate. The following data are for the year 2019:
Machining Assembly
Department Department
Budgeted overhead $5,225,000 $7,010,000
Budgeted machine-hours (MH) 70,000 0
Budgeted direct manufacturing labour-hours (DMLH) 0 121,000
Actual manufacturing overhead costs $5,175,000 $7,110,000
Machine-hours and direct manufacturing labour-hours and the ending balances (before probation of
underallocated overhead) are as follows:
Actual Direct Balance Before
Actual Machine Manufacturing Proration,
Hours Labour-Hours December 31, 2019
Cost of Goods Sold 60,000 79,200 $21,800,000
Finished Goods 12,000 11,000 $2,800,000
Work-in-Process 15,900 30,500 $7,400,000
a) Compute the budgeted overhead rates for the year in the Machining and Assembly Departments.
Machining Department
Budgeted Overheads $5,225,000
Budgeted Machine Hours 70,000
Budgeted Rate per Hour 75 (rounded)
Assembly Department
Budgeted Overheads $7,010,000
Budgeted Direct Labour Hours 121,000
Budgeted Rate per Hour 58 (rounded)
b) Compute the under- or overallocated overhead in each department for the year. Dispose of the under-
or overallocated amount in each department using the following:
i) Immediate write-off to Cost of Goods Sold.
Machining Department
Over- or Underallocation = Actual Manufacturing Overhead Costs - Manufacturing Overhead Allocated
= $5,175,000 - $6,592,500
= $(1,417,500)
Assembly Department
Over- or Underallocation = Actual Manufacturing Overhead Costs - Manufacturing Overhead Allocated
= $7,110,000 - $7,000,600
= $109,400
ii) Proration based on ending balances (before proration) in Cost of Goods Sold, Finished Goods,
and Work in Process
Proration of Proration of
Underallocation or Underallocated or
Account Overallocation Overallocation Account Balance
Balance OH Machining Dept. OH Assembly Dept. After Proration
WIP 7,400,000 (327,797) 25,299 $7,097,502
FG 2,800,000 (124,031) 9,573 2,685,542
COGS 21,800,000 (965,672) 74,529 20,908,857
Total $32,000,000 $(1,417,500) $109,400 $30,691,901

iii) Proration based on the allocated overhead amount (before proration) in the ending balances of
Cost of Goods Sold, Finished Goods, and Work-in-Process
Machining Department
Total Amount of Proration of
 Overallocated or Underallocation or
Underallocated OH x Proration = Overallocation OH
WIP (1,417,500) x 0.18088737* = (256,408)
FG (1,417,500) x 0.13651877 = (193,515)
COGS (1,417,500) x 0.68259386 = (967,577)
Total $(1,417,500)
*Proration is shown in the above question
Assembly Department
Total Amount of Proration of
Overallocated or Underallocation or
Underallocated OH x Proration = Overallocation OH
WIP 109,400 x 0.25269263 = 27,645
FG 109,400 x 0.09113505 = 9,970
COGS 109,400 x 0.65617233 = 71,785
Total $109,400
c) Which disposition method do you prefer in part b)? Explain.
Alternative iii) is theoretically preferred over i) and ii). This alternative yields the same ending balances in Work-in-
Process, Finished Goods, and Cost of Goods Sold that would have been reported had actual indirect cost rates been
used.
4-Capstone
Helen and Eagle Co, a law firm, had the following costs last year:
Direct professional labour $15,000,000
Overhead 21,000,000
Total costs $36,000,000
The following costs were included in overhead:
France benefits for direct professional labour $5,000,000
Paralegal costs 2,700,000
Telephone call time with clients (estimated) 600,000
Computer time 1,800,000
Photocopying 900,000
Total overhead $11,000,000
The firm recently improved its ability to document and trade costs to individual cases. Revised
bookkeeping procedures now allow the firm to trace fringe benefit costs for direct professional labour,
paralegal charges, computer time, and photocopying costs to each case individually. The managing
partner news to decide whether more costs than just direct professional labour should be traced directly
to jobs to allow the firm to better justify billings to clients.
If during the past year, more costs were traced to client engagements, two of the case records should
have showed the following:
Client Case Client Case
#878 #879
Direct professional labour $20,000 $20,000
Fringe benefits for direct labour 3,000 3,000
Paralegal costs 2,000 6,000
Telephone call time with clients 1,000 2,000
Computer time 2,000 4,000
Photocopying 1,000 2,000
Total costs $29,000 $37,000

The three methods are being considered for allocating overhead this year:
1) Allocate overhead based on direct professional labour costs. Calculate the allocation rate using
last year’s direct professional labour costs of $15 million and overhead costs of $21 million
 2) Allocate overhead based on direct professional labour costs. Calculate the allocation rate using
last year’s direct professional labour costs of $15 million and overhead costs of $10 million ($21
million less $11 million in direct costs that should be traced this year).
3) Allocate the $10 million overhead based on total direct costs. Calculate the allocation rate using
last year’s direct costs.
Required
a) Using each of the three methods, compute the total costs of cases 878 and 879.
Method 1 Method 2 Method 3
Indirect Cost $21m $10m $10m
Allocation Base $15m (DL) $15m (DL) $26m (Total Direct Costs: $15 + $11)
Actual Allocation Rate 21/15 = $1.4 10/15 = $0.67 10/26 = $0.38
Job #878
Direct Cost:
DL $20,000 $20,000 $20,000
Other Direct Cost 0 $9,000 $9,000
Total Direct Cost $20,000 $29,000 $29,000
Indirect Cost: 1.4x20k = $28k 0.67x20k=13.4k 0.38x29k= $11,020
Total Cost $48,000 $42,400 $40,020
Job #879
Direct Cost:
DL $20,000 $20,000 $20,000
Other Direct Cost $0 $17,000 $17,000
Total Direct Cost $20,000 $37,000 $37,000
Indirect Cost: $28,000 $13,400 $0.38 x $37k = $14,060
Total Cost $48,000 $50,400 $51,060
b) Which method is better? Explain.
Method 3 is better. Method 1 has the same total cost. Method 2 has the same indirect cost allocated. The indirect
costs are not the same between both jobs. Method 3 follows the proper indirect allocation and is why method 3 is the
best option.
4-DGD (Predetermined OH Rates)
Cairo Products applies overhead using a combined rate for fixed and variable overhead. The rate has
been established at 175 percent of direct labor cost. During the first three months of the current year,
actual costs were incurred as follows:
Direct Labour Cost Actual Overhead
January $360,000 $640,000
February $330,000 $570,400
March $340,000 $600,000
a) What amount of overhead was applied to production in each of the three months?
January February March
$360,000 x 1.75 = $630,000 $330,000 x 1.75 = $577,500 $340,000 x 1.75 = $595,000
Applied OH = $630,000 + $577,500 + $595,000 = $1,802,500
b) What was the underapplied or overapplied for each of the three months and for the first quarter?
Applied OH Actual OH Result Over / Under
January $630,000 $640,000 $(10,000) Underapplied
February $577,500 $570,400 $7,100 Overapplied
March $595,000 $600,000 $(5,000) Underapplied
$(7,900)
Therefore, Cairo underapplied the overhead for production by $7,900 in the first quarter.

4-DGD (Job Costing)

Czech Corporation uses a job order accounting system for its production costs. A predetermined
overhead rate based on direct labour-hours is used to apply overhead to individual jobs. An estimate of
overhead costs was prepared for the current year as follows:
Direct labour-hours 120,000
Variable overhead costs $420,000
Fixed overhead costs 216,000
Total overhead $636,000
The following information is for November. Jobs 50 and 51 were completed during November.
Inventories, November 1:
Raw materials and supplies $10,500
Work in process (Job 50) 54,000
Finished goods 12,500
Purchases of raw materials and supplies:
Raw materials $135,000
Supplies 15,000
Materials and supplies requisitioned for production:
Job 50 $45,000
Job 51 37,500
Job 52 25,500
Supplies 6,000
$114,000
Factory direct labour-hours (DLH):
Job 50 3,500 DLH
Job 51 3,000 DLH
Job 52 2,000 DLH
Labor Costs:
Direct labor wages $68,000
Indirect labor wages (4,000 hours) 17,000
Supervisory salaries 6,000
Building occupancy costs (heat, light, depreciation, etc):
Factory facilities $6,500
Sales and administrative offices 2,500
$9,000
Factory equipment costs:
Power $4,000
Repairs and maintenance 1,500
Other 2,500
$8,000
a) What is the predetermined overhead rate (combined fixed and variable) to be used to apply overhead
to individual jobs during the year?
Estimated Fixed + Variable Cost: $636,000
Estimated Direct Labour Hours: 120,000
$636,000 / 120,000 = $5.30 per direct labour-hour
Assume the predetermined overhead rate is $4.50 per direct labour-hour. Use this amount in answering
requirements b) through d).
b) Compute the total cost of Job 50 when it is finished.

Direct Labour = ( Direct Labour Wages / Total Factory DLH) x Job 50 DLH
= ($68,000 / 8,500) x 3,500
= $28,000
Direct Materials = $45,000
Applied OH = POHR x Job 50 DLH
= $4.50 x 3,500
= $15,750

COGM = DL + DM + Applied OH
 = $28,000 + $45,000 + $15,750
= $88,750
Beg WIP Inv = $54,000
Cost of Job 50 = Beg WIP Inv + COGM
= $54,000 + $88,750
= $142,750
c) Compute the factory overhead costs applied to Job 52 during November.
Applied OH = POHR x Job 52 DLH
= $4.50 x 2,000
= $9,000
d) How much is the total amount of overhead applied to jobs during November?
Total OH for Nov= POHR x (Job 50 DLH + Job 51 DLH + Job 52 DLH)
= $4.50 x (3,500 + 3,000 + 2,000)
= $38,250