Assignment Material

Questions

1. 4-1. Define cost pool, cost tracing, cost allocation, and cost-allocation base. 
2. 4-2. How does a job-costing system differ from a process-costing system?
3. 4-3. Why might an advertising agency use job costing for an advertising campaign by PepsiCo, whereas a bank might use process costing to determine the cost of checking account deposits?
4. 4-4. Describe the seven steps in job costing.
5. 4-5. Give examples of two cost objects in companies using job costing.
6. 4-6. Describe three major source documents used in job-costing systems.
7. 4-7. What is the advantage of using computerized source documents to prepare job-cost records?
8. 4-8. Give two reasons why most organizations use an annual period rather than a weekly or monthly period to compute budgeted indirect-cost rates.
9. 4-9. Distinguish between actual costing and normal costing.
10. 4-10. Describe two ways in which a house-construction company may use job-cost information.
11. 4-11. Comment on the following statement: “In a normal-costing system, the amounts in the Manufacturing Overhead Control account will always equal the amounts in the Manufacturing Overhead Allocated account.”
12. 4-12. Describe three different debit entries to the Work-in-Process Control T-account under normal costing.
13. 4-13. Describe three alternative ways to adjust for under- or overallocated overhead costs.
14. 4-14. When might a company use budgeted costs rather than actual costs to compute direct-labor rates?
15. 4-15. Describe briefly why Electronic Data Interchange (EDI) is helpful to managers.

Multiple-Choice Questions

1. 4-16. Which of the following does not accurately describe the application of job costing?
   1. a. Finished goods that are purchased by customers will directly impact cost of goods sold.
   2. b. Indirect manufacturing labor and indirect materials are part of the actual manufacturing costs incurred.
   3. c. Direct materials and direct manufacturing labor are included in total manufacturing costs.
   4. d. Manufacturing overhead costs incurred is used to determine total manufacturing costs.
2. 4-17. Sturdy Manufacturing Co. assembled the following cost data for job #23:

1. What are the total manufacturing costs for job #23 if the company uses normal job costing?
   1. a. $191,500
   2. b. $193,500
   3. c. $194,500
   4. d. $195,500
2. 4-18. For which of the following industries would job costing most likely not be appropriate?
   1. a. Small business printing.
   2. b. Cereal production.
   3. c. Home construction.
   4. d. Aircraft assembly.
3. 4-19. ABC Company uses job costing and has assembled the following cost data for the production and assembly of item X:

1. Based on the above cost data, the manufacturing overhead for item X is
   1. a. $500 overallocated.
   2. b. $600 underallocated.
   3. c. $500 underallocated
   4. d. $600 overallocated.
2. 4-20. Under Stanford Corporation’s job-costing system, manufacturing overhead is applied to work in process using a predetermined annual overhead rate. During November, Year 1, Stanford’s transactions included the following:

1. Stanford had neither beginning nor ending work-in-process inventory. What was the cost of jobs completed and transferred to finished goods in November 20X1?
   1. a. $604,000
   2. b. $644,000
   3. c. $620,000
   4. d. $660,000

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Exercises

1. 4-21. (10 min) JOB COSTING, PROCESS COSTING.
2. Required
3. In each of the following situations, determine whether job costing or process costing would be more appropriate.

1. 4-22. ACTUAL COSTING, NORMAL COSTING, ACCOUNTING FOR MANUFACTURING OVERHEAD. Dakota Products uses a job-costing system with two direct-cost categories (direct materials and direct manufacturing labor) and one manufacturing overhead cost pool. Dakota allocates manufacturing overhead costs using direct manufacturing labor costs. Dakota provides the following information:

1. 1. Required
   2. 1. Compute the actual and budgeted manufacturing overhead rates for 2020.
   3. 2. During March, the job-cost record for Job 626 contained the following information:

1. 1. Compute the cost of Job 626 using (a) actual costing and (b) normal costing.
   2. 3. At the end of 2020, compute the under- or overallocated manufacturing overhead under normal costing. Why is there no under- or overallocated manufacturing overhead under actual costing?
   3. 4. Why might managers at Dakota Products prefer to use normal costing?

1. 4-23. JOB COSTING, NORMAL AND ACTUAL COSTING. Atkinson Construction assembles residential houses. It uses a job-costing system with two direct-cost categories (direct materials and direct labor) and one indirect-cost pool (assembly support). Direct labor-hours is the allocation base for assembly support costs. In December 2019, Atkinson budgets 2020 assembly-support costs to be $8,800,000 and 2020 direct labor-hours to be 220,000.
2. At the end of 2020, Atkinson is comparing the costs of several jobs that were started and completed in 2020.

1. Direct materials and direct labor are paid for on a contract basis. The costs of each are known when direct materials are used or when direct labor-hours are worked. The 2020 actual assembly-support costs were $8,400,000, and the actual direct labor-hours were 200,000.
   1. Required
   2. 1. Compute the (a) budgeted indirect-cost rate and (b) actual indirect-cost rate. Why do they differ?
   3. 2. What are the job costs of the Laguna Model and the Mission Model using (a) normal costing and (b) actual costing?
   4. 3. Why might Atkinson Construction prefer normal costing over actual costing?

1. 4-24. BUDGETED MANUFACTURING OVERHEAD RATE, ALLOCATED MANUFACTURING OVERHEAD. Taylor Company uses normal costing. It allocates manufacturing overhead costs using a budgeted rate per machine-hour. The following data are available for 2020:

1. 1. Required
   2. 1. Calculate the budgeted manufacturing overhead rate.
   3. 2. Calculate the manufacturing overhead allocated during 2020.
   4. 3. Calculate the amount of under- or overallocated manufacturing overhead. Why do Taylor’s managers need to calculate this amount?

1. 4-25. JOB COSTING, ACCOUNTING FOR MANUFACTURING OVERHEAD, BUDGETED RATES. The Lulu Company uses a normal job-costing system at its Minneapolis plant. The plant has a machining department and an assembly department. Its job-costing system has two direct-cost categories (direct materials and direct manufacturing labor) and two manufacturing overhead cost pools (the machining department overhead, allocated to jobs based on actual machine-hours, and the assembly department overhead, allocated to jobs based on actual direct manufacturing labor costs). The 2020 budget for the plant is as follows:

1. 1. Required
   2. 1. Identify the components of the overview diagram of Lulu’s job-costing system. Compute the budgeted manufacturing overhead rate for each department.
   3. 2. During February, the job-cost record for Job 494 contained the following:

1. 3. At the end of 2020, the actual manufacturing overhead costs were $2,000,000 in machining and $4,100,000 in assembly. Assume that 54,000 actual machine-hours were used in machining and that actual direct manufacturing labor costs in assembly were $2,300,000. Compute the under- or overallocated manufacturing overhead for each department.

1. 4-26. JOB COSTING, CONSULTING FIRM. Wilson Partners, a management consulting firm, has the following condensed budget for 2020:

1. Wilson has a single direct-cost category (professional labor) and a single indirect-cost pool (client support). Indirect costs are allocated to jobs on the basis of professional labor costs.
   1. Required
   2. 1. Identify the components of the overview diagram of the job-costing system. Calculate the 2020 budgeted indirect-cost rate for Wilson Partners.
   3. 2. The markup rate for pricing jobs is intended to produce operating income equal to 10% of revenues. Calculate the markup rate as a percentage of professional labor costs.
   4. 3. Wilson is bidding on a consulting job for Guardian, a wireless communications company. The budgeted breakdown of professional labor on the job is as follows:

1. Calculate the budgeted cost of the Guardian job. How much will Wilson bid for the job if it is to earn its target operating income of 10% of revenues?

1. 4-27. TIME PERIOD USED TO COMPUTE INDIRECT COST RATES. Capitola Manufacturing produces surfboards. The company uses a normal-costing system and allocates manufacturing overhead on the basis of direct manufacturing labor-hours. Most of the company’s production and sales occur in the first and second quarters of the year. The company is in danger of losing one of its larger customers, Pacific Wholesale, due to large fluctuations in price. The owner of Capitola has requested an analysis of the manufacturing cost per unit in the second and third quarters. You have been provided the following budgeted information for the coming year:

1. It takes 2 direct manufacturing labor-hours to make each board. The actual direct material cost is $65.00 per board. The actual direct manufacturing labor rate is $20 per hour. The budgeted variable manufacturing overhead rate is $16 per direct manufacturing labor-hour. Budgeted fixed manufacturing overhead costs are $20,000 each quarter.
   1. Required
   2. 1. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company allocates manufacturing overhead costs based on the budgeted manufacturing overhead rate determined for each quarter.
   3. 2. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company allocates manufacturing overhead costs based on an annual budgeted manufacturing overhead rate.
   4. 3. Capitola Manufacturing prices its surfboards at manufacturing cost plus 20%. Why might Pacific Wholesale be seeing large fluctuations in the prices of boards? Which of the methods described in requirements 1 and 2 would you recommend Capitola use? Explain.

1. 4-28. ACCOUNTING FOR MANUFACTURING OVERHEAD. Seaway Woodworking uses normal costing and allocates manufacturing overhead to jobs based on a budgeted labor-hour rate and actual direct labor-hours. Under- or overallocated overhead, if immaterial, is written off to Cost of Goods Sold. During 2020, Seaway recorded the following:

1. 1. Required
   2. 1. Compute the budgeted manufacturing overhead rate.
   3. 2. Prepare the summary journal entry to record the allocation of manufacturing overhead.
   4. 3. Compute the amount of under- or overallocated manufacturing overhead. Is the amount significant enough to warrant proration of overhead costs, or should Seaway Woodworking write it off to cost of goods sold? Prepare the journal entry to adjust for the under- or overallocated overhead.

1. 4-29. JOB COSTING, JOURNAL ENTRIES. The University of Chicago 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 labor) and one indirect-cost pool (manufacturing overhead, allocated on the basis of direct manufacturing labor costs).
2. The following data (in thousands) pertain to 2020:

1. 1. Required
   2. 1. Prepare an overview diagram of the job-costing system at the University of Chicago Press.
   3. 2. Prepare journal entries to summarize the 2020 transactions. As your final entry, adjust for 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.
   4. 3. Show posted T-accounts for all inventories, Cost of Goods Sold, Manufacturing Overhead Control, and Manufacturing Overhead Allocated.
   5. 4. How did the University of Chicago Press perform in 2020?

1. 4-30. 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 2020:

1. Virtual Co. uses a normal-costing system and allocates overhead to work in process at a rate of $2.50 per direct manufacturing labor dollar. Indirect materials are insignificant so there is no inventory account for indirect materials.
   1. Required 
   2. 1. Prepare journal entries to record the transactions for 2020, including an entry to close out under- or overallocated 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.
   3. 2. Post the journal entries to T-accounts for all of the inventories, Cost of Goods Sold, the Manufacturing Overhead Control Account, and the Manufacturing Overhead Allocated Account.

1. 4-31. JOB COSTING, JOURNAL ENTRIES. Docks Transport assembles prestige manufactured homes. Its job-costing system has two direct-cost categories (direct materials and direct manufacturing labor) and one indirect-cost pool (manufacturing overhead allocated at a budgeted $21 per machine-hour in 2020). The following data (in millions) show operation costs for 2020:

1. 1. Required 
   2. 1. Identify the components of the overview diagram of Docks Transport’s job-costing system.
   3. 2. Prepare journal entries. Number your entries. Explanations for each entry may be omitted. Post to T-accounts. What is the ending balance of Work-in-Process Control?
   4. 3. Show the journal entry for adjusting for under- or overallocated manufacturing overhead directly as a year-end writeoff to Cost of Goods Sold. Post the entry to T-accounts.
   5. 4. How did Docks Transport perform in 2020?

1. 4-32. JOB COSTING, UNIT COST, ENDING WORK IN PROCESS. Robert Company produces pipes for concert-quality organs. Each job is unique. In April 2019, it completed all outstanding orders, and then, in May 2019, it worked on only two jobs, M1 and M2:

1. Direct manufacturing labor is paid at the rate of $26 per hour. Manufacturing overhead costs are allocated at a budgeted rate of $16 per direct manufacturing labor-hour. Only Job M1 was completed in May.
   1. Required 
   2. 1. Calculate the total cost for Job M1.
   3. 2. 1,000 pipes were produced for Job M1. Calculate the cost per pipe.
   4. 3. Prepare the journal entry transferring Job M1 to finished goods.
   5. 4. What is the ending balance in the Work-in-Process Control account?

1. 4-33. JOB COSTING; ACTUAL, NORMAL, AND VARIATION OF NORMAL COSTING. Chico & Partners, a Quebec-based public accounting partnership, specializes in audit services. Its job-costing system has a single direct-cost category (professional labor) and a single indirect-cost pool (audit support, which contains all costs of the Audit Support Department). Audit support costs are allocated to individual jobs using actual professional labor-hours. Chico & Partners employs 10 professionals to perform audit services.
2. Budgeted and actual amounts for 2020 are as follows:

1. 1. Required 
   2. 1. Compute the direct-cost rate and the indirect-cost rate per professional labor-hour for 2020 under (a) actual costing, (b) normal costing, and (c) the variation of normal costing that uses budgeted rates for direct costs.
   3. 2. Which job-costing system would you recommend Chico & Partners use? Explain.
   4. 3. Chico’s 2020 audit of Pierre & Co. was budgeted to take 160 hours of professional labor time. The actual professional labor time spent on the audit was 180 hours. Compute the cost of the Pierre & Co. audit using (a) actual costing, (b) normal costing, and (c) the variation of normal costing that uses budgeted rates for direct costs. Explain any differences in the job cost.

1. 4-34. JOB COSTING; VARIATION ON ACTUAL, NORMAL, AND VARIATION OF NORMAL COSTING. Clayton Solutions designs Web pages for clients in the education sector. The company’s job-costing system has a single direct cost category (Web-designing labor) and a single indirect cost pool composed of all overhead costs. Overhead costs are allocated to individual jobs based on direct labor-hours. The company employs six Web designers. Budgeted and actual information regarding Clayton Solutions follows:

1. 1. Required 
   2. 1. Compute the direct-cost rate and the indirect-cost rate per Web-designing labor-hour for 2020 under (a) actual costing, (b) normal costing, and (c) the variation of normal costing that uses budgeted rates for direct costs.
   3. 2. Which method would you suggest Clayton Solutions use? Explain.
   4. 3. Clayton Solutions’ Web design for Greenville Day School was budgeted to take 95 direct labor-hours. The actual time spent on the project was 80 hours. Compute the cost of the Greenville Day School job using (a) actual costing, (b) normal costing, and (c) the variation of normal costing that uses budgeted rates for direct costs.

1. 4-35. PRORATION OF OVERHEAD. The Row-On-Watershed Company (ROW) produces a line of non-motorized boats. ROW uses a normal-costing system and allocates manufacturing overhead using direct manufacturing labor cost. The following data are for 2020:

1. Inventory balances on December 31, 2020, were as follows:

1. 1. Required 
   2. 1. Calculate the manufacturing overhead allocation rate.
   3. 2. Compute the amount of under- or overallocated manufacturing overhead.
   4. 3. Calculate the ending balances in work in process, finished goods, and cost of goods sold if under- or overallocated manufacturing overhead is as follows:
      1. a. Written off to cost of goods sold

Problems

1. 4-36. JOB COSTING, ACCOUNTING FOR MANUFACTURING OVERHEAD, BUDGETED RATES. The Carlson Company uses a job-costing system at its Dover, Delaware, plant. The plant has a machining department and a finishing department. Carlson uses normal costing with two direct-cost categories (direct materials and direct manufacturing labor) and two manufacturing overhead cost pools (the machining department with machine-hours as the allocation base and the finishing department with direct manufacturing labor costs as the allocation base). The 2020 budget for the plant is as follows:

1. 1. Required 
   2. 1. Identify the components of the overview diagram of Carlson’s job-costing system.
   3. 2. What is the budgeted manufacturing overhead rate in the machining department? In the finishing department?
   4. 3. During the month of January, the job-cost record for Job 431 shows the following:

1. Compute the total manufacturing overhead cost allocated to Job 431.

1. Compute the under- or overallocated manufacturing overhead for each department and for the Dover plant as a whole.
   1. 6. Why might Carlson use two different manufacturing overhead cost pools in its job-costing system?

1. 4-37. SERVICE INDUSTRY, JOB COSTING, LAW FIRM. Kidman & Associates is a law firm specializing in labor relations and employee-related work. It employs 30 professionals (5 partners and 25 associates) who work directly with its clients. The average budgeted total compensation per professional for 2020 is $97,500. Each professional is budgeted to have 1,500 billable hours to clients in 2020. All professionals work for clients to their maximum 1,500 billable hours available. All professional labor costs are included in a single direct-cost category and are traced to jobs on a per-hour basis. All costs of Kidman & Associates other than professional labor costs are included in a single indirect-cost pool (legal support) and are allocated to jobs using professional labor-hours as the allocation base. The budgeted level of indirect costs in 2020 is $2,475,000.
   1. Required 
   2. 1. Prepare an overview diagram of Kidman’s job-costing system.
   3. 2. Compute the 2020 budgeted direct-cost rate per hour of professional labor.
   4. 3. Compute the 2020 budgeted indirect-cost rate per hour of professional labor.
   5. 4. Kidman & Associates is considering bidding on two jobs:
      1. a. Litigation work for Richardson, Inc., which requires 120 budgeted hours of professional labor.
      2. b. Labor contract work for Punch, Inc., which requires 160 budgeted hours of professional labor. Prepare a cost estimate for each job.

1. JOB COSTING, SERVICE INDUSTRY. Emerson Asso4-38. SERVICE INDUSTRY, JOB COSTING, TWO DIRECT- AND TWO INDIRECT-COST CATEGORIES, LAW FIRM (CONTINUATION OF 4-37). Kidman has just completed a review of its job-costing system. This review included a detailed analysis of how past jobs used the firm’s resources and interviews with personnel about what factors drive the level of indirect costs. Management concluded that a system with two direct-cost categories (professional partner labor and professional associate labor) and two indirect-cost categories (general support and secretarial support) would yield more accurate job costs. Budgeted information for 2020 related to the two direct-cost categories is as follows:

1. Budgeted information for 2020 relating to the two indirect-cost categories is as follows:

1. 1. Required
   2. 1. Compute the 2020 budgeted direct-cost rates for (a) professional partners and (b) professional associates.
   3. 2. Compute the 2020 budgeted indirect-cost rates for (a) general support and (b) secretarial support.
   4. 3. Compute the budgeted costs for the Richardson and Punch jobs, given the following information:

1. 1. 4. Comment on the results in requirement 3. Why are the job costs different from those computed in Problem 4-37?
   2. 5. Would you recommend Kidman & Associates use the job-costing system in Problem 4-37 or the job-costing system in this problem? Explain.

1. 4-39. PRORATION OF OVERHEAD. (Z. Iqbal, adapted) The Zaf Radiator Company uses a normal-costing system with a single manufacturing overhead cost pool and machine-hours as the cost-allocation base. The following data are for 2020:

1. Machine-hours data and the ending balances (before proration of under- or overallocated overhead) are as follows:

1. 1. Required
   2. 1. Compute the budgeted manufacturing overhead rate for 2020.
   3. 2. Compute the under- or overallocated manufacturing overhead of Zaf Radiator in 2020. Adjust for this amount using the following:
      1. a. Write-off to Cost of Goods Sold
      2. b. Proration based on ending balances (before proration) in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold
      3. c. Proration based on the overhead allocated in 2020 (before proration) in the ending balances of Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold
   4. 3. Which method do you prefer in requirement 2? Explain.

1. 4-40. NORMAL COSTING, OVERHEAD ALLOCATION, WORKING BACKWARD. Gardi Manufacturing uses normal costing for its job-costing system, which has two direct-cost categories (direct materials and direct manufacturing labor) and one indirect-cost category (manufacturing overhead). The following information is obtained for 2020:
   1. • Total manufacturing costs, $8,300,000
   2. • Manufacturing overhead allocated, $4,100,000 (allocated at a rate of 250% of direct manufacturing labor costs)
   3. • Work-in-process inventory on January 1, 2020, $420,000
   4. • Cost of finished goods manufactured, $8,100,000
   5. Required
   6. 1. Use information in the first two bullet points to calculate (a) direct manufacturing labor costs in 2020 and (b) cost of direct materials used in 2020.
   7. 2. Calculate the ending work-in-process inventory on December 31, 2020.

1. 4-41. GENERAL LEDGER RELATIONSHIPS, UNDER- AND OVERALLOCATION. (S. Sridhar, adapted) Walworth Company uses normal costing in its job-costing system. Partially completed T-accounts and additional information for Walworth for 2020 are as follows:

1. Additional information:
   1. a. Direct manufacturing labor wage rate was $12 per hour.
   2. b. Manufacturing overhead was allocated at $16 per direct manufacturing labor-hour.
   3. c. During the year, sales revenues were $1,080,000, and marketing and distribution costs were $129,000.
   4. Required
   5. 1. What was the amount of direct materials issued to production during 2020?
   6. 2. What was the amount of manufacturing overhead allocated to jobs during 2020?
   7. 3. What was the total cost of jobs completed during 2020?
   8. 4. What was the balance of work-in-process inventory on December 31, 2020?
   9. 5. What was the cost of goods sold before proration of under- or overallocated overhead?
   10. 6. What was the under- or overallocated manufacturing overhead in 2020?
   11. 7. Adjust for the under- or overallocated manufacturing overhead using the following:
       1. a. Write-off to Cost of Goods Sold
       2. b. Proration based on ending balances (before proration) in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold
   12. 8. Using each of the approaches in requirement 7, calculate Walworth’s operating income for 2020.
   13. 9. Which approach in requirement 7 do you recommend Walworth use? Explain your answer briefly.

1. 4-42. PRORATION OF OVERHEAD. Oregon Outfitters, a manufacturer of fly fishing flies, uses a normal-costing system with a single overhead cost pool and direct labor cost as the cost-allocation base. The following data are for 2020:

1. Manufacturing overhead allocated data and the ending balances (before proration of under- or overallocated overhead) in each account are as follows:

1. 1. Required
   2. 1. Compute the budgeted manufacturing overhead rate for 2020.
   3. 2. Compute the under- or overallocated manufacturing overhead of Oregon Outfitters in 2020. Adjust for this amount using the following:
      1. a. Write-off to Cost of Goods Sold
      2. b. Proration based on ending balances (before proration) in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold
      3. c. Proration based on the overhead allocated in 2020 (before proration) in the ending balances of Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold
   4. 3. Which method do you prefer in requirement 2? Explain.

1. 4-43. OVERVIEW OF GENERAL LEDGER RELATIONSHIPS. Brane Company uses normal costing in its job-costing system. The company produces custom bikes for toddlers. The beginning balances (December 1) and ending balances (as of December 30) in their inventory accounts are as follows:

1. Additional information:
   1. a. Direct materials purchased during December were $66,400.
   2. b. Cost of goods manufactured for December was $235,000.
   3. c. No direct materials were returned to suppliers.
   4. d. No units were started or completed on December 31 and no direct materials were requisitioned on December 31.
   5. e. The manufacturing labor costs for the December 31 working day: direct manufacturing labor, $4,350, and indirect manufacturing labor, $1,450.
   6. f. Manufacturing overhead has been allocated at 140% of direct manufacturing labor costs through December 31.
   7. Required
   8. 1. Prepare journal entries for the December 31 payroll.
   9. 2. Use T-accounts to compute the following:
      1. a. The total amount of materials requisitioned into work in process during December
      2. b. The total amount of direct manufacturing labor recorded in work in process during December (Hint: You have to solve requirements 2b and 2c simultaneously)
      3. c. The total amount of manufacturing overhead recorded in work in process during December
      4. d. Ending balance in work in process, December 31
      5. e. Cost of goods sold for December before adjustments for under- or overallocated manufacturing overhead
   10. 3. Prepare closing journal entries related to manufacturing overhead. Assume that all under- or overallocated manufacturing overhead is closed directly to Cost of Goods Sold.

1. 4-44. ALLOCATION AND PRORATION OF OVERHEAD. Grade A prints custom training material for corporations. The business was started January 1, 2020. The company uses a normal-costing system. It has two direct-cost pools, materials and labor, and one indirect-cost pool, overhead. Overhead is charged to printing jobs on the basis of direct labor cost. The following information is available for 2020.

1. There were two jobs in process on December 31, 2020: Job 11 and Job 12. Costs added to each job as of December 31 are as follows:

1. Grade A has no finished-goods inventories because all printing jobs are transferred to cost of goods sold when completed.
   1. Required
   2. 1. Compute the overhead allocation rate.
   3. 2. Calculate the balance in ending work in process and cost of goods sold before any adjustments for under- or overallocated overhead.
   4. 3. Calculate under-or overallocated overhead.
   5. 4. Calculate the ending balances in work in process and cost of goods sold if the under- or overallocated overhead amount is as follows:
      1. a. Written off to cost of goods sold
      2. b. Prorated using the overhead allocated in 2020 (before proration) in the ending balances of cost of goods sold and work-in-process control accounts
   6. 5. Which of the methods in requirement 4 would you choose? Explain.

1. 4-45. JOB COSTING, ETHICS. Beth Bledsoe joined Baker Brothers, Inc. as controller in October 2019. Baker Brothers manufactures and installs custom kitchen countertops. The company uses a normal-costing system with two direct-cost pools, direct materials and direct manufacturing labor, and one indirect-cost pool, manufacturing overhead. In 2019, manufacturing overhead was allocated to jobs at 150% of direct manufacturing labor cost. At the end of 2019, an immaterial amount of underallocated overhead was closed out to cost of goods sold, and the company showed a small loss.
2. Bledsoe is eager to impress her new employer, and she knows that in 2020, Baker Brothers’ upper management is under pressure to show a profit in a challenging competitive environment because they are hoping to be acquired by a large private equity firm sometime in 2021. At the end of 2019, Bledsoe decides to adjust the manufacturing overhead rate to 160% of direct labor cost. She explains to the company president that, because overhead was underallocated in 2019, this adjustment is necessary. Information for 2020 follows:

1. The ending balances (before proration of under- or overallocated overhead) in each account are as follows:

1. Baker Brothers’ revenue for 2020 was $5,580,000, and the company’s selling and administrative expenses were $2,790,000.
   1. Required
   2. 1. Calculate the amount of under- or overallocated manufacturing overhead in 2020.
   3. 2. Calculate Baker Brothers’ net operating income for 2020 under the following:
      1. a. Under- or overallocated manufacturing overhead is written off to cost of goods sold.
      2. b. Under- or overallocated manufacturing overhead is prorated based on the ending balances in work in process, finished goods, and cost of goods sold.
   4. 3. In your own words, describe how you expect net operating income in future periods to compare under scenarios 2a and 2b above.
   5. 4. Bledsoe chooses option 2a above, stating that the amount is immaterial. Comment on the ethical implications of her choice. Do you think that there were any ethical issues when she established the manufacturing overhead rate for 2020 back in late 2019? Refer to the IMA Statement of Ethical Professional Practice.

1. 4-46. JOB COSTING, SERVICE INDUSTRY. Emerson Associates (EA) provides market analysis services for clients. Consultants contract with clients to perform jobs for predetermined fees. All jobs feature the work of one professional consultant, and some larger jobs include additional support labor. Because of this, EA’s normal-costing system includes two direct cost pools, professional labor and support labor, and one indirect cost pool, overhead. EA charges $80/hour to jobs for professional labor and charges $50/hour for support labor. Overhead is applied to jobs at a rate of $30 per labor-hour, whether professional or support. This rate was determined based on an annual estimated overhead cost of $600,000 and estimated labor-hours of 20,000 (10,000 professional hours and 10,000 support hours). Actual overhead in May was $50,000. EA tracks job costs in an account titled Jobs in Process (JIP). When the job is completed, costs are closed out to Cost of Completed Jobs (COCJ). Following is cost information for May 2020:

1. As of May 1, there were two jobs in progress: Peterson Products and Jacobson, Inc.. The job for Best Foods was started and completed in May.
   1. Required
   2. 1. Calculate JIP at the end of May.
   3. 2. Calculate COCJ for May.
   4. 3. Calculate under- or overallocated overhead in May.
   5. 4. Calculate the ending balances in JIP and COCJ if the under- or overallocated overhead amount is prorated based on the ending balances (before proration) in JIP and COCJ.
   6. 5. Ann Baker, the controller of Emerson Associates, is concerned about the validity of allocating overhead equally for professional and support hours. She believes that overhead related to professional labor is approximately twice as costly as overhead related to support labor. Calculate new overhead rates per professional labor-hour and per support labor-hour that would address this issue. How would the cost of the Best Foods job be affected by this change? (Ignore the impact of under- or overallocated overhead.)