16.3.5: Calculating the Cost of Job WPP 298

Calculating the Cost of Job WPP 298

The next step in a job-costing system (Step 6, see Chapter 4) is to compute the indirect costs allocated to a job. For the WPP 298 job, Robinson actually uses 40 machine-hours in the Machining Department and 55 labor-hours in the Assembly Department (out of 88 direct manufacturing labor-hours). The overhead costs allocated to the WPP 298 job under the three methods would be

$\begin{array}{llcccc} Direct: & $ 3,833 ($60.20 & \times & 40 & + & $25.90 \times 55) \\ Step‐down: & $ 3,777 ($55 & \times & 40 & + & $28.12 \times 55) \\ Reciprocal: & $ 3,793 ($57.02 & \times & 40 & + & $27.49 \times 55) \end{array} \begin{matrix} \end{matrix}$

The manufacturing overhead costs allocated to WPP 298 differ only a little under the three methods because the WPP 298 job requires roughly equal amounts of machine-hours and assembly labor-hours. These differences would be larger if a job required many more machine-hours than assembly hours or vice versa.

Using normal costing and multiple cost-allocation bases results in higher indirect manufacturing costs allocated to Job WPP 298, $3,793 (under the reciprocal method) compared to $3,520 allocated using direct manufacturing labor-hours as the sole allocation base in Chapter 4. By using two cost-allocation bases—machine-hours and assembly labor-hours—Robinson is better able to model the drivers of manufacturing overhead costs.

The final step (Step 7, see Chapter 4) computes the total cost of the job by adding all direct and indirect costs assigned to the job. Under the reciprocal method, the total manufacturing costs of the WPP 298 job are

<p>A table shows direct manufacturing costs and manufacturing overhead costs for Robinson</p>

The table depicts direct manufacturing costs and manufacturing overhead costs for Robinson. The details of the table are as follows:

1. Direct manufacturing costs

• Direct materials: 4,606 dollars

• Direct manufacturing labor: 1,579 dollars

• Total: 6,185 dollars

2. Manufacturing overhead costs

• Machining department, 57.02 dollars per machine-hour times 40 machine-hours: 2,281 dollars

• Assembly department, 27.49 dollars per labor-hour times 55 labor-hours: 1,512 dollars

• Total: 3,793 dollars

3. Total manufacturing costs of job WPP 298: 9,978 dollars

Note that the costs in Step 7 have four dollar amounts, each corresponding respectively to the two direct-cost and two indirect-cost categories in the costing system.

At the end of the year, actual manufacturing overhead costs of the Machining Department and the Assembly Department would be compared to the manufacturing overhead allocated for each department. To calculate the actual manufacturing overhead costs of the Machining and Assembly Departments, Robinson would need to allocate the actual (rather than budgeted) costs of the Materials Management and Engineering and Production Control Departments to the actual costs of the Machining and Assembly Departments using the methods described in this chapter. Management accountants would then make end-of-year adjustments (see Chapter 4, Budgeted Indirect Costs and End-of-Accounting-Year Adjustments) separately for each cost pool for under- or overallocated overhead costs.

Try It! 16-2

Traxx Tours provides guided educational tours to college alumni associations. The company is divided into two operating divisions: domestic tours and world tours. Each of the tour divisions uses the services of the company’s two support departments: Administration and Information Technology. Additionally, the Administration and Information Technology departments use the services of each other. Data concerning the past year are as follows:

The table depicts budgeted overhead costs before any interdepartment cost allocations and support work furnished. The details of the table are as follows:

1. Budgeted overhead costs before any interdepartment cost allocations

• Support department, administration: 400,000 dollars

• Support department, information technology: 300,000 dollars

• Operating department, domestic tours: 1,350,000 dollars

• Operating department, world tours: 1,860,000 dollars

• Total: 3,910,000 dollars

2. Support work furnished by administration, budgeted administration salaries:

• Support department, administration: Blank

• Support department, information technology: 80,000 dollars

• Operating department, domestic tours: 50,000 dollars

• Operating department, world tours: 70,000 dollars

• Total: 200,000 dollars

3. Support work furnished by administration, percentage:

• Support department, administration: Blank

• Support department, information technology: 40 percent

• Operating department, domestic tours: 25 percent

• Operating department, world tours: 35 percent

• Total: 100 percent

4. Support work furnished by information technology, budgeted IT service hours:

• Support department, administration: 400

• Support department, information technology: Blank

• Operating department, domestic tours: 2,800

• Operating department, world tours: 800

• Total: 4,000

5. Support work furnished by information technology, percentage:

• Support department, administration: 10 percent

• Support department, information technology: Blank

• Operating department, domestic tours: 70 percent

• Operating department, world tours: 20 percent

• Total: 100 percent

What are the total overhead costs of the operating departments (domestic and world tours) after the support department costs of Administration and Information Technology have been allocated using (1) the direct method, (2) the step-down method (allocate Administration first), (3) the step-down method (allocate Information Technology first), and (4) the reciprocal method using the method of repeated iterations and linear equations?