CH-21 Cost Accounting Systems – Accounting : Book Guide

Chapter 21: Cost accounting systems Questions and solutions which have a GST version: • Problem 21.22 • Problem 21.29 Discussion questions 1. The production of 100 cartons of cans of soft drinks could be costed as part of a job order costing system or a process costing system. Do you agree? Explain. Discussion should centre around the nature of both job order costing and process costing. Process costing is usually appropriate where there is a continuous production process in a mass-production environment. Output is generally homogeneous, e.g. soft drinks. In job order costing, the identity of each job or product is kept separate and costs are assigned to each job. Output is not homogeneous. In job order costing, costs are assigned directly to each job and hence unit cost is given by reference to total cost of the job. In process costing, total costs are accumulated and divided by the number of equivalent units of production, to give the unit cost of production per unit. For the production of 100 cartons of cans of soft drink, the appropriate costing system would be process costing for the total soft drink output, with total costs assigned to the particular order of 100 cartons, obtained by multiplying unit cost by 100. 2. Marko is studying for a marketing degree at university and when he graduates he would like to work for an international marketing firm. Explain to Marko how an understanding of cost accounting would help him to succeed in his intended career. An important part of Marko succeeding in his chosen profession is being able to charge his clients enough to make reasonable profits but not too much that he loses return business. To achieve this Marko needs to understand how marketing jobs are costed including what are direct costs and how indirect costs are allocated. He needs a good understanding of what overhead costs are being allocated to his clients and the basis of allocation and whether he believes these are reasonable. In tendering for new clients’ work Marko will have to estimate direct material and direct labour costs and understand how his firm allocates overhead costs. Marko will need to have an understanding of how his firm prices marketing jobs and what sort of mark up they require on costs. In preparing marketing campaigns for clients Marko should understand whether the client is using job order costing or process costing and how they determine their price. If Marko wants to use the price of the good or service as part of the marketing campaign then he needs to understand how that price was determined. This will give him an understanding of what mark up is being achieved. 3. Describe the flow of costs in a job order cost accounting system. Use a relevant example to illustrate your answer. In job order cost accounting, manufacturing costs are first accumulated in three accounts: raw materials inventory, factory labour, and manufacturing overhead. The accumulated costs are then assigned to work in process inventory and eventually to finished goods inventory and cost of sales. 4. `If you order a vehicle with special features from a large motor vehicle manufacturer, then it is possible to track the production of your vehicle online so that you know when the manufacturer began building it, where it is roughly in the production process and when it is being finished off. With the special order you can have features that are not on the standard vehicles, although there is only a set range of options — such as colour of paint, type of air conditioning, engine specifications and seat material — from which you can choose the individualised features.’ To what extent would the costing of these special-order vehicles use job order costing and process costing? Generally motor vehicle manufacturing would use process costing because to a large extent the components and manufacturing processes are common to all vehicles. They are manufactured in a similar order on a standard production line. Job order costing would only be relevant where non-standard or optional components are used in a vehicle. Computers allow simple tracking of every part for every vehicle and thus some individual specifications can easily be done for each vehicle. Integrated computer technology is making tracking of parts for each product in a process costing system easy and inexpensive and is used for quality control. 5. ‘With process costing, the need to distinguish between direct and indirect materials and labour is not as important as in a job order costing system.’ Discuss this statement. A cost of production report is designed to show the total costs of production for each process, the total estimated output of each process, and hence a unit cost of each process can be determined. One production report covering all processes could be sufficient to give the final total cost of all processes and, divided by the final output, would give a unit cost of total production. Producing a cost of production report for each process enables better management control, as costs of each process can be accumulated and the efficiency of each process evaluated. If producing a final unit cost is the only purpose, perhaps one cost of production report would suffice. However, if management control aspects are introduced, it is probably more important to accumulate costs and determine unit costs per process. 6. Why is it important to assign costs to equivalent units when such units do not really exist in a physical form? Because of the nature of process costing, it is necessary to calculate the unit cost of output by dividing the total costs accumulated for a process by the number of units of output. At a particular point in time, since the process is a continuing one, there will be a number of units in process at the end of the accounting period as well as recognising that there would have been an opening Work in Process inventory. The total output of the process therefore consists of the identifiable finished units, together with the production effort (work and costs) necessary to complete beginning work in process and completion of the work in process at the end of the current accounting period. While equivalent units do not exist in identifiable form, the concept of equivalent units is important in estimating the unit cost of a completed unit of production. 7. When your motor vehicle is serviced, the account you receive lists such things as labour, part numbers of parts used, consumables, GST and who performed the service. What type of cost accounting system does this suggest is used for motor vehicle servicing, and under what cost heading are the service centre overhead costs likely to be included? Motor vehicle servicing uses job order costing. Direct material is traced to each service job, as is direct labour. In large service centres a job order number is allocated to each motor vehicle being serviced and all direct costs are entered on the computer. Service centre overhead costs are likely to be included under labour. The labour rate charge per hour may be about $80 to $100 per hour while the actual cost of labour for an hour is likely to be less than half that amount. The difference is the allocation of overhead based on labour hours. 8. ‘In service businesses, the principles of costing services are the same as for producing physical products and the same problems exist.’ Do you agree? Explain. Service industries are distinguished because of the nature of the product provided; for example, a service to clients. In order to be able to quote for services and bill clients for services performed, costs associated with each job have to be accumulated. As with product costing, some costs can be identified directly with a particular job, while some costs are common to many jobs (indirect costs) and these must be estimated and assigned to clients. Hence, direct and indirect costs have to be handled in services industries. In assigning common or indirect costs, an overhead application rate has to be determined. The same problems encountered in product costing arise here as well. In assigning costs to jobs and clients, the problems of identifying cost objects are present in both types of business. Billing rates have to be determined. Job costing procedures are more prevalent in service industries, although the principles of process costing can also be used, e.g. in banking, the average cost of processing an ATM transaction. 9. With Surteco Australia, the polymer edges manufacturer in the scene setter, would direct labour be the most appropriate cost driver to allocate overhead given its recent changes to manufacturing? With the shift in emphasis to technology it would be more appropriate for Surteco Australia to use machine hours to allocate overhead costs. With the investment in technology this would be a good opportunity for Surteco Australia to shift to Activity Based Costing as a means of allocating overhead costs. 10. Explain two reasons why the actual overhead cost incurred might not always equal the overhead applied to production. Reasons why the actual overhead cost incurred might not always equal the overhead applied to production may include the following: • poor estimation of overhead at the start of the year • fluctuation of raw material and other costs • wrong cost driver used; uncertainty in environment • budgeted costs were wrong • inclusion of heterogeneous costs in the wrong cost pool • industry factors. Exercises Exercise 21.1 Job costs Fine Furniture Ltd, which specialises in the manufacture of custom-built furniture, uses a job order costing system. On 1 March, the company had no beginning work in process inventory. During March, the following costs were recorded. Factory overhead is applied using a predetermined overhead rate of $7.20 per direct labour hour. No jobs were finished during March. Required (a) Determine work in process inventory on 31 March. (LO3) (a) Direct materials $162 600 Direct labour 151 200 Applied overhead ($7.20*8400) 60 480 Work in process 31 March $374 280 Exercise 21.2 Predetermined overhead rate for service industry As a manager you have been asked by your employer, BestTime Hotels, to determine the overhead rate applicable to each night’s accommodation in one of the hotel’s rooms. The hotel has 150 rooms and achieves an 80% occupancy rate on average over the 365 days of the year. You have determined the overhead costs that cannot be charged direct to each room are as follows. Required (a) Calculate the overhead rate applicable to each room night for the hotel. (b) What are some of the direct labour and direct expenses that are likely to be applicable to a hotel room that will also need to be included in pricing the room rate? (LO7) (a) Depreciation $ 190 600 Gardening and pool maintenance 212 400 Insurance 220 400 Maintenance 246 800 Rates 57 200 Electricity 96 600 Sundry expenses 156 000 Indirect salaries 528 000 $1 708 000 Room nights = 150 rooms  80% occupancy  365 days = 43 800 room nights Overhead rate = $1 708 000 / 43 800 = $39 / room night (b) Direct labour could include cleaning and servicing the room such as restocking the mini bar and turning down the bed. Direct expenses could include laundry on towels and bed linen, flowers, chocolates, bowls of fruit and mini bar refills. Exercise 21.3 Predetermined overhead rates The expected costs and operating data for two manufacturers are presented below. Aloe Ltd applies factory overhead on the basis of units of production, whereas Basil Ltd uses direct labour hours. During the last financial year, Aloe Ltd produced 109 600 units and incurred factory overhead costs of $528 000, and Basil Ltd’s overhead costs were $860 000, using 174 000 direct labour hours. Required (a) Calculate the predetermined factory overhead rate for each company. (b) Indicate whether factory overhead was overapplied or underapplied for each company, and by how much. (LO3) (a) Aloe Ltd $499 200/104 000 = $4.80 per unit Basil Ltd $888 160/164 000 = $5.42 per direct labour hour (b) Aloe Ltd Basil Ltd Actual overhead $528 000 $860 000 Overhead applied: 109 600  $4.80 $526 080 174 000  $5.42 $943 080 Underapplied overhead for Aloe And overapplied for Basil $1920 $83 080 Exercise 21.4 Job order costing procedures Job order cost data for Jobs 125 to 134 are shown below. The costs were incurred by Beejay Ltd during March and April, the company’s first 2 months of operations. • Jobs 125 and 126 were completed in March. • Jobs 127, 128, 129, 130 and 131 were completed in April. • Jobs 132, 133 and 134 were incomplete at 30 April. • Jobs 125, 127, 128, 130 and 131 were sold during April. Required (a) Calculate the following: i. work in process inventory, 1 April ii. work in process inventory, 30 April iii. finished goods inventory, 1 April iv. finished goods inventory, 30 April v. cost of sales for April. (LO3) (a) 1. Work in process inventory, 1 April: $17 920 + $24 200 + $19 600 + $13 000 = $74 720 2. Work in process inventory, 31 April: $30 640 + $9200 + $4550 = $44 390 3. Finished goods inventory, 1 April: $15 640 + $21 000 = $36640 4. Finished goods inventory, 31 April: $21 000 + $31 200 = $52 200 5. Cost of sales for April: $15 640 + $22 720 + $26 600 + $32 000 + $25 200 = $122 160 Exercise 21.5 Job order costing procedures Fine Furniture Ltd uses a job order costing system. The September cost data were as follows. Machine hours for September were 55 700 hours, and the business applies factory overhead to production at a rate of $5.60 per machine hour. The beginning raw materials inventory was $40 000. The beginning work in process inventory was $66 800. The beginning and ending finished goods inventories were $99 000 and $128 000 respectively. Ignore GST. Required (a) Prepare general journal entries to record the September transactions. (b) Was overhead overapplied or underapplied for the month of September? (c) Calculate the ending balances of raw materials and work in process. (Hint: Prepare T accounts for inventories.) (LO3) (a) General Journal September. 1 Raw materials 354 000 Accounts payable 354 000 2 Work in process 366 600 Wages payable 366 600 3 Work in process 329 400 Raw materials 329 400 4 Factory overhead 275 000 Various payables 247 760 Accumulated depreciation 27 240 5 Work in process 311 920 Factory overhead applied 311 920 (55 700  $5.60) 6 Finished goods 944 600 Work in process 944 600 7 Cost of sales 915 600 Finished goods 915 600 ($99 000 + $944 600 – $128 000) 8 Accounts receivable 1 040 200 Sales 1 040 200 (b) Overhead was overapplied: $311 920 – $275 000 = $36 920 (overapplied). (c) Raw Materials Work in Process Bal. 40 000 WIP 329 400 Bal. 66 800 FG 944 600 Purch. 354 000 Bal c/d 64 600 RM 329 400 394 000 394 000 DL 366 600 Bal. b/d 64 600 OH 311 920 Bal. c/d 130 120 1 074 720 1 074 720 Bal b/d 130 120 Raw materials ending balance $ 64 600 Work in process ending balance $130 120 Exercise 21.6 Job order costing procedures Beautiful Bottles Pty Ltd, bottle manufacturer for the food industry, has just installed a job order costing system. The company uses machine hours to apply its overhead to work in process. On 1 May 2019, management estimated that the company would incur $680 000 in manufacturing overhead costs and 64 000 machine hours for the coming year. Required (a) Calculate the predetermined overhead rate. Assume that Beautiful Bottles Pty Ltd uses only 61 000 machine hours and incurs the following costs: (b) Calculate any under- or over-applied overhead. (c) Prepare the journal entry to write off any under- or over-applied overhead against cost of goods sold. (LO3) (a) Predetermined overhead rate = Estimated overhead/estimated machine hours = $680 000/64 000 machine hours = $10.625 per machine hour (b) Applied overhead for 61 000 machine hours = $10.625  61 000 = $648 125 Actual overhead incurred = $64 000 + 210 000 + 84 000 + 172 000 + 92 000 = $622 000 Therefore, overhead is over-applied by $26 125. (c) Factory overhead under/overapplied Dr $26 125 Cost of sales Cr $26 125 Exercise 21.7 Job order costing procedures for service industry Creative Advertisements Pty Ltd, a marketing firm, uses a job order costing system to charge its clients. The firm specialises in marketing work for small local businesses in Melbourne such as tradespeople and small shops that are not associated with national franchises. The cost data for March were as follows. Creative Advertisements Pty Ltd applies office overhead costs to advertising jobs at 90% of the direct labour charge. Once the total cost of a job is determined, the firm marks up the costs by 40% to calculate the amount charged to the client. Required (a) Calculate the total amount charged to clients’ accounts during March. (b) Were office overhead costs over or under applied for the month of March? (c) What factors could cause an over or under application of overhead costs during a particular month? (LO7) (a) Labour charged direct to jobs $80 600 Stationery and consumables charged direct to jobs 38 750 Office overhead charged to jobs ($80 600  90%) 72 540 Total cost of jobs for June $191 890 Mark up on costs 40% 76 756 Total amount charged to clients during June $268 646 (b) Office overheads were overapplied for the month of March. Actual office overhead costs for March were $70 000 but $72 540 were applied to jobs. Overapplied overhead was $2540. (c) Factors that could cause an over- or underapplication of overhead costs during a particular month include: • Seasonality of business activity. There may be more demand for marketing in the lead up to end of year sales and less in other months. • Actual office overheads being different from the budgeted overheads and thus the application rate being incorrectly calculated. • The amount of budgeted labour charged to jobs being different from the actual labour charged to jobs leading to an incorrect application rate. Exercise 21.8 Job order costing procedures Fine Furniture Ltd had a balance in its Work in Process Inventory account on 1 October 2019 of $13 600 made up of two jobs: Job 730, $6400; and Job 731, $7200. At the end of October, costs assigned to production summarised by the source documents are presented below. Factory overhead is applied to jobs at the rate of 100% of direct labour costs. Job 730 was the only job completed during October. Required (a) Show the general journal entries to record the costs as revealed by the source documents and the application of factory overhead. (b) Prepare the Work in Process Inventory account for the month of October. (LO3) (a) General Journal 2019 October 31 Work in process $22 400 Raw materials $22 400 Work in process 29 900 Wages payable 29 900 Factory overhead 6740 Wages payable 4120 Various payable 2620 Work in process 29 900 Factory overhead applied 29 900 Finished goods 25 080 Work in process 25 080 ($5880 + $6400 + $6400 + $6400) (b) Work in Process 2019 2019 1/10 Balance (job 730, 731) 13 600 3/10 Finished goods 25 080 31/10 Raw materials 22 400 (Job 730) Direct labour 29 900 Balance c/d* 70 720 Fac. o’head app. (100%) 29 900 (Job 731, 732) 95 800 95 800 Balance b/d 70 720 * [($7200 + $6360 + $7700 + $10 160 + $15 800 = $47 220 + 100% of ($7700 + $15 800)]. Exercise 21.9 Equivalent units with beginning work in process Delish Ltd produces a dishwashing liquid. At the beginning of January, 126 000 litres of liquid cleaner were in process, 100% complete as to raw materials and 40% complete as to conversion costs. During the month, 920 000 litres of raw materials were placed into production. At the end of the month, 80 000 litres of dishwashing liquid were in work in process inventory, 100% completed as to raw materials and 50% completed in terms of conversion costs. Assume that the following costs were recorded by Delish Ltd for the beginning work in process and the production performance for January. Required (a) Prepare a schedule of equivalent units for January (weighted average method). (b) Calculate the unit cost for each litre of liquid cleaner. (c) Determine the total costs of the litres of liquid cleaner finished during January. What is the balance of the ending work in process inventory? (LO5) (a) Physical units Beginning work in process 126 000 Production units started 920 000 Units to account for 1 046 000 Units completed 966 000 Ending work in process 80 000 Units accounted for 1 046 000 Equivalent units (weighted average) Materials Conversion Total Units completed 966 000 966 000 Ending work in process 80 000 40 000 Equivalent units (a) 1 046 000 1 006 000 Costs to be accounted for: Beginning work in process $48 000 $38 400 $86 400 Current period cost 368 000 761 600 1 129 600 Total costs in process (b) $416 000 $800 000 $1 216 000 (b) Cost per equivalent units (b)  (a) $0.40 $0.80 $1.20 (c) Costs accounted for: Units completed (966 000  $1.20) = $1 159 200 Ending work in process: Materials (80 000  $0.40) = $32 000 Conversion (40 000  $0.80) = $32 000 __ 64 000 Total costs accounted for $1 223 200 Exercise 21.10 Equivalent units with beginning work in process Pizza Cheese Ltd produces cheese topping for the fast pizza industry. At the beginning of April, 40 000 kilograms of cheese topping was in process, 100% complete as to raw materials and 60% complete as to conversion costs. During the month, 920 000 kilograms of raw materials were placed into production. At the end of the month, 80 000 kilograms of cheese topping was in work in process inventory, 80% completed as to raw materials and 40% completed in terms of conversion costs. Assume that the following costs were recorded by Pizza Cheese Ltd for the beginning work in process and the production performance for April. Required (a) Prepare a schedule of equivalent units for April (weighted average method). (b) Calculate the unit cost for each kilogram of cheese topping. (c) Determine the total costs of the kilograms of cheese topping finished during April. What is the balance of the ending work in process inventory? (LO5) (a) Physical units Beginning work in process 40 000 Production units started 920 000 Units to account for 960 000 Units completed 880 000 Ending work in process 80 000 Units accounted for 960 000 Equivalent units (weighted average) Materials Conversion Total Units completed 880 000 880 000 Ending work in process 64 000 32 000 Equivalent units (a) 944 000 912 000 Costs to be accounted for: Beginning work in process $24 000 $9600 $33600 Current period cost 542 400 355 200 897 600 Total costs in process (b) $566 400 $364 800 $931 200 (b) Cost per equivalent units (b)  (a) $0.60 $0.40 $1.00 (c) Costs accounted for: Units completed (880 000  $1.00) = $880 000 Ending work in process: Materials (64 000  $0.60) = $38 400 Conversion (32 000  $0.40) = $12 800 51 200 Total costs accounted for $931 200 Exercise 21.11 Cost of production report Easy Construction Pty Ltd produces a single product, using two production departments — Construction and Packaging. The June cost and operating data for the Construction Department is as follows. The work in process inventory in the Construction Department on 30 June is half complete as to conversion costs and three-quarters complete as to materials. Required (a) Prepare a cost of production report for the June production of the Construction Department. (LO5) (a) EASY CONSTRUCTION PTY LTD Construction Department Cost of Production Report for the month of June Physical units Beginning work in process 0 Production units started 40 500 Units to account for 40 500 Units completed 38 200 Ending work in process 2 300 Units accounted for 40 500 Equivalent units (weighted average) Materials Conversion Total Units completed 38 200 38 200 Ending work in process *1 725 **1 150 Equivalent units (a) 39 925 39 350 *(2 300)3/4 **(2 300)1/2 Costs to be accounted for: Beginning work in process $0 $0 Current period costs 351 340 295 125 Total costs in process (b) $351 340 $295 125 $646 465 Cost per equivalent units (b)  (a) $8.80 $7.50 $16.30 Costs accounted for: Units completed (38 200  $16.30) $622 660 Ending work in process: Materials (1 725  $8.80) $15 180 Conversion (1 150  $7.50) 8 625 23 805 Total costs accounted for $646 465 Exercise 21.12 Process costing procedures Basic Chemicals Ltd incurred the following transactions during the accounting period: 1. Purchased raw materials on account $45 850. 2. Raw materials of $36 400 were requisitioned to the factory. An analysis of the materials requisition slips indicated that $6740 was classified as indirect materials. 3. Factory labour costs incurred were $52 570, of which $49 030 pertained to factory wages payable and $3540 pertained to payroll taxes payable. 4. Time tickets indicated that $47 340 was direct labour and $5230 was indirect labour. 5. Overhead costs incurred on account were $79 360. 6. Manufacturing overhead was applied at the rate of 150% of direct labour cost. 7. Goods costing $87 710 were completed and transferred to finished goods. 8. Finished goods costing $74 970 to manufacture were sold on account for $103 990. Required (a) Prepare general journal entries to record the above transactions (LO5) (a) 1. Dr Raw materials inventory $45 850 Cr Accounts payable $45 850 2. Dr Work in process inventory $29 660 Dr Manufacturing overhead $6740 Cr Raw materials inventory $36 400 3. Dr Factory labour $52 570 Cr Factory wages payable $49 030 Cr Payroll taxes payable $3540 4. Dr Work in process inventory $47 340 Dr Manufacturing overhead $5230 Cr Factory labour $52 570 5. Dr Manufacturing overhead $79 360 Cr Accounts payable $79 360 6. Dr Work in process $71 010 Cr Manufacturing overhead $71 010 7. Dr Finished goods inventory $87 710 Cr Work in process inventory $87 710 8a. Dr Accounts receivable $103 990 Cr Sales $103 990 8b. Dr Cost of sales $74 970 Cr Finished goods inventory $74 970 Exercise 21.13 Charge-out rate Green Consultants Pty Ltd specialise in consulting on landscape design. The company developed a predetermined charge-out rate based on hours for each of its consultants on 1 July 2019 to assign the cost of labour directly associated with each client job for the coming year. The company employs four consultants who each work 40 hours per week for 48 weeks of the year; 20% of each consultant’s total yearly labour time is not directly chargeable to client jobs. The budgeted total labour cost for one of the consultants, G. Smith, is $92 160. Required (a) Determine the hourly charge-out rate to be assigned as labour cost to all client jobs on which G. Smith works to 30 June 2020. (Ignore GST.) If Smith worked for 1 500 hours for clients during the year, what is the total labour cost for Smith? (LO7) (a) Total hours to be worked (Smith) = 40  48 = 1 920 Labour cost per hour = = $48.00 per hour. Total billed directly for 1500 hours = $48.00  1 500 = $72 000 Exercise 21.14 Activity-based costing Imelda Instrument Ltd manufactures two products: missile range instruments and space pressure gauges. During January, 53 range instruments and 360 pressure gauges were produced, and overhead costs of $81 480 were incurred. An analysis of overhead costs reveals the following activities. The cost driver volume for each product was as follows. Required (a) Determine the overhead rate for each activity. (b) Assign the manufacturing costs for January to the two products using activity-based costing. (LO9) (a) Activity Overhead rate Materials handling $25 Machine setups $59 Quality inspections $46 (b) Instruments Gauges Number Cost Number Cost Total cost Requisitions 410 $10 250 610 $15 250 $25 500 Setups 250 $14 750 270 $15 930 $30 680 Inspections 160 $7360 390 $17 940 $25 300 Total cost $32 360 $49 120 $81 480 Total units 53 360 Cost per unit $611 $136 Exercise 21.15 Charge-out rate Professionals Pty Ltd is a firm that offers a wide variety of professional services such as marketing, employment of professionals for other firms and accounting services. The firm has the following annual overhead costs. The firm has six professionals with total salary plus on-costs of $1 248 000. The owners of the firm have invested $1 797 120 in the firm and expect a return on this investment of 25%. Alice is one of the six professionals and her total salary plus on-costs is $104 000. It is assumed by the firm that each professional will charge 40 hours per week for 48 weeks of the year. Professionals are expected to work as many hours as it takes each week to enable them to charge out 40 hours so that there is no cost to the firm of non-chargeable hours. Required Calculate the hourly charge out rate for Alice’s services by allocating the office overhead costs and return on owners’ investment on the basis of total salary plus on costs for each professional. (LO7) (a) Overhead application rate = 998 400 = 80% of salary 1 248 000 Return on investment application = 1 797 120  25% = 36% of salary 1 248 000 Alice: Alice’s salary $104 000 Overhead applied to Alice ($104 000  80%) 83 200 Return on owners’ investment ($104 000  36%) 37 440 Total costs to be covered by charge out rate $224 640 Total hours charge each year = 40 hours  48 weeks = 1920 hours/year Charge out rate = $224 640 / 1920 = $117 per hour Problems Problem 21.16 Job order costing and factory overhead Innovative Products Ltd uses a job order costing system to control costs in its two production departments. Factory overhead is applied on the basis of machine hours in the Construction Department and on the basis of direct labour cost in the Finishing Department. The company prepared the following estimates for its production. The accounting records for Job 431 reveal the following. Required (a) Calculate the predetermined overhead rate for each department. (b) Calculate the total cost of Job 431. (c) If the actual direct labour cost in the Finishing Department was $751 600 and the actual factory overhead was $1 120 000, was the overhead overapplied or underapplied? (LO3) (a) Predetermined departmental overhead rate: Construction $816 000  13 600 = $60 per machine hour Finishing $1 140 000  760 000 = 150% of direct labour cost (b) Total cost of Job 431 Direct materials: ($2600 +$2840) = $5440 Direct labour ($3280+ $3600) = 6880 Factory overhead applied: Construction Dept. 80  $60 = $4800 Finishing Dept. 1.50  $3600 = $5400 = $10 200 Total cost, Job 431 $22 520 (c) Actual overhead = $1 120 000 Applied overhead, 1.5 ($751 600) 1 127 400 Overapplied overhead $7400 Problem 21.17 Job order costing A job order cost sheet for Standish Ltd is shown below. Required (a) What was the balance in Work in Process Inventory on 1 January if this was the only unfinished job? If manufacturing overhead is applied on the basis of direct labour cost, what overhead rate was used last year? (b) Prepare summary entries at 31 January to record the current year’s transactions pertaining to Job 92. (LO3) (a) Work in Process Inventory on 1 January: 20 200 (7000+8000+5200) Overhead rate used: 65% (overhead 5200/ direct labour cost $8000) (b) Date Description Debit Credit Jan. 31 Work in process inventory 9 000 Raw materials 9 000 (to record direct materials) Jan. 31 Work in process inventory 12 000 Factory labour 12 000 (to record direct labour) Jan. 31 Work in process inventory 8 400 Manufacturing overhead applied 8 400 (to record manufacturing overhead) Jan. 31 Finished goods inventory 49 600 Work in process inventory 49 600 (to record units finished) Problem 21.18 Job order costing The April 2019 transactions of Jackson Productions Ltd, which uses a job order costing system, are shown below. (Ignore GST.) 1. Raw materials purchased, $342 000. 2. Raw materials issued to production, $320 000 direct and $42 000 indirect. 3. Factory payroll included $498 000 of direct labour and $96 000 of indirect labour. 4. Other overhead costs incurred were: 5. Depreciation of manufacturing equipment, $57 000. 6. Factory overhead is applied at 80% of direct labour cost. 7. Jobs completed and transferred to finished goods at cost, $1 170 000. 8. Jobs with a cost of $1 100 000 were sold for $1 375 000 cash. 9. Beginning inventories were: Required (a) Prepare the general journal entries to record the transactions. (b) Calculate the ending balances in work in process, raw materials and finished goods. (c) Was overhead underapplied or overapplied in April? By what amount? (LO3) (a) General Journal 2019 1/04 Raw materials $342 000 Accounts payable $342 000 2/04 Work in process 320 000 Factory overhead 42 000 Raw materials 362 000 3/04 Work in process 498 000 Factory overhead 96 000 Factory wages and salaries 594 000 4 & 5/04 Factory overhead 274 300 Accounts payable (various) 217 300 Accumulated depreciation 57 000 6/04 Work in process 398 400 Factory overhead applied 398 400 (0.80  $498 000) 7/04 Finished goods 1 170 000 Work in process 1 170 000 8/04 Cost of sales 1 100 000 Finished goods 1 100 000 Cash at bank 1 375 000 Sales revenue 1 375 000 (b) Raw Materials Work in Process Bal. 43 500 (2) 362 000 Bal. 122 000 (7) 1 170 000 (1) 342 000 Bal c/d 23 500 (2) 320 000 385 500 385 500 (3) 498 000 Bal b/d 23 500 (6) 398 400 Bal. c/d 168 400 1 338 400 1 338 400 Bal. b/d 168 400 Finished Goods Ending Balances Bal. 105 000 (8) 1 100 000 Raw materials $23 500 (7) 1 170 000 Bal c/d 175 000 Work in process 168 400 1 275 000 1 275 000 Finished goods 175 000 Bal. b/d 175 000 (c) Factory overhead (2) $42 000 (3) 96 000 (4) & (5) 274 300 $412 300 Factory overhead applied (6) 398 400 Factory overhead underapplied $ 13 900 Problem 21.19 Process costs, equivalent units and cost of production report Abbott Ltd produces a chemical used to clean showers in a single process in the Production Department. Raw materials in the form of chemicals are added at the beginning of the process, and a litre container is added at the end. The conversion costs (direct labour and factory overhead) are incurred uniformly throughout the process. The following cost and production data are available for the month of October 2019. The ending work in process inventory was 60% complete as to conversion costs. Required (a) Determine equivalent units for both raw materials and conversion costs. (b) Prepare a cost of production report for the October 2019 production. (LO4 and LO5) (a) Physical units Equivalent units Chemicals Containers Conversion costs Work in process at beginning 30 000 Production units started 600 000 Units to account for 630 000 Production units completed 580 000 580 000 580 000 580 000 Work in process at end 50 000 50 000 — 30 000 (50 000  0.6) Units accounted for 630 000 (a) 630 000 (a) 580 000 610 000 (a) Production costs for period (b) $504 000 $87 000 $732 000 (b) Cost per equivalent unit (b ÷ a) $0.80 $0.15 $1.20 (b) ABBOTT LTD Production Department Cost of Production Report for the month ended 31 October 2019 Physical flow schedule Work in process, 1 October 30 000 litres (1/4 complete as conversion costs per unit are $1.20, $9000/($1.2x30 000)) Units started 600 000 litres Units finished 580 000 litres Work in process, 31 October 30 000 litres (60% complete) Costs to be accounted for Equiv. Unit Cost element Beginning Current Total Units* cost Raw materials – chemicals $24 000 $480 000 $504 000 630 000 0.80 Raw materials – containers — 87 000 87 000 580 000 0.15 Conversion costs 9 000 723 000 732 000 610 000 1.20 $33 000 $1 290 000 $1 323 000 $2.15 Costs accounted for Units transferred to finishing department (580 000 litres  $2.15) $1 247 000 Work in process, 31 Oct: Raw materials – chemicals (30 000 litres  $0.80) $40 000 Conversion costs (30 000 litres  60%  $1.20) 36 000 76 000 000 $1 323 000 *Equivalent units Raw materials – chemicals Raw materials – containers Conversion costs Units completed 580 000 580 000 580 000 Work in process 50 000 — 30 000 630 000 580 000 610 000 Problem 21.20 Job order costing Eatern and Sons Ltd accounts for its manufacturing costs using a job order costing system and has provided the following production data during June 2019. • Job Z241 was in process as of 1 June with a cost of $22 000. • The purchases of raw materials on credit during the month amounted to $72 000. Raw materials requisitioned were charged to the following. Job Z241 Job Z242 Job Z243 Indirect materials $17 500 15 000 23 500 9 000 • Payroll of $78 000 was incurred. Each worker earns $12.00 per hour. Ignore income tax and other payroll deductions. • The factory payroll was distributed as follows. Job Z241 Job Z242 Job Z243 Indirect labour $21 000 25 500 22 500 8 500 • Additional factory overhead costs incurred during the month were $11 200 (assume that accounts payable was credited for $8600 and the rest was for accumulated depreciation of factory equipment). • Factory overhead is applied at $4.60 per direct labour hour. • Jobs Z241 and Z242 were completed and transferred to finished goods. • Job Z241 was sold at a mark-up of 50% over cost. • The beginning raw materials were $22 200. Required (a) Prepare the journal entries to record the June 2019 transactions. (b) Determine the balances of the Raw Materials Inventory and Work in Process Inventory accounts at the end of June 2019. (LO3) (a) General Journal 2019 June Raw materials inventory $72 000 Accounts payable $72 000 Work in process 56 000 Factory overhead 9 000 Raw materials inventory 65 000 Wages and salaries 78 000 Wages payable 78 000 Work in process 69 000 Factory overhead 8 500 Wages and salaries 77 500 Factory overhead 11 200 Accounts payable 8 600 Accumulated depreciation 2 600 Work in process 26 450 Factory overhead applied ($4.60  ($69 000  $12.00) 26 450 Finished goods 118 825 Work in process 118 825 $68 550 + $50 275 Job Z241 Job Z242 O/B $22 000 $0 DM 17 500 15 000 DL 21 000 25 500 OH (1) 8 050 $68 550 (2) 9 775 $50 275 (1) $21 000  12.00 4.60 = $8 050 (2) $25 500  12.00  4.60 = $9 775 Cost of sales 68 550 Accounts receivable 102 825 Finished goods 68 550 Sales revenue (1.50  $68 550) 102 825 (b) Raw Materials Work in Process Bal. 22 200 WIP/ FOH 65 000 Bal. 22 000 FG 118 825 Purch. 72 000 RM 56 000 Bal c/d 29 200 DL 69 000 94 200 94 200 OH 26 450 Bal. 54 625 Bal. 29 200 173 450 173 450 Bal. 54 625 Raw materials balance 30 June $29 200 Work in process ending balance 30 June $54 625 Problem 21.21 Process costs, equivalent units and cost of production report Swiss Chocolates Ltd produces blocks of chocolate. Raw materials in the form of cocoa solids, milk and sugar are added at the beginning of the process, flavouring, fruit and nuts are added half-way through the process and a cardboard box is added at the end. The conversion costs (direct labour and factory overhead) are incurred uniformly throughout the process. The following cost and production data are available for the month of June 2019. The ending work in process inventory was 40% complete as to conversion costs. Required (a) Determine equivalent units for both raw materials and conversion costs. (b) Prepare a cost of production report for the June 2019 production. (LO4 and LO5) (a) Process costing – Weighted average method Units in ending inventory = (60 000 + 600 000 – 620 000) = 40 000 Equivalent units of production (weighted average) Cocoa etc Flavour etc Conversion Boxes Units completed 620 000 620 000 620 000 620 000 Equivalent units in ending inventory *40 000 — **16 000 — 660 000 620 000 636 000 620 000 * (1.0) 40 000 ** (0.40) 40 000 (b) Production Department Cost of Production Report for the month ending 30 June 2019 Physical Flow Schedule Units Work in process, 1 June 60 000 Units started 600 000 Units finished 620 000 Work in process, 30 June (0.40) 40 000 Costs to be accounted for: Cost Element Beginning Current Total Equiv. Units+ Unit Cost Cocoa etc $36 000 $360 000 $396 000 660 000 $0.60 Flavour etc — 124 000 124 000 620 000 $0.20 Conversion costs 12 000 306 000 318 000 636 000 $0.50 Boxes — 62 000 62 000 620 000 $0.10 $48 000 $852 000 $900 000 $1.40 Costs accounted for: Units completed (620 000  $1.40) $ 868 000 Work in process, 30 June: Cocoa etc, 40 000  $0.60 $24 000 Conversion cost, 16 000  $0.50 $8 000 32 000 $900 000 Problem 21.22 Costing for a public accounting firm Non-GST version Newbery and Newstead is a public accounting firm specialising in auditing local medium-sized businesses. Fees charged for each audit are determined on the basis of identifiable hours worked on an audit by each one of the accountants in the firm, an allocation of general overheads via a predetermined rate per chargeable hour, plus a mark-up of 40% on the cost of chargeable hours for the accountants working on the audit. The hourly charge rate for one of its accountants, Michael, set for the year ending 30 June 2019, is $120. The following budgeted information was used at the beginning of the year to determine the overhead application rate per chargeable hour to be assigned to all audit jobs during the year ending 30 June 2019. Total budgeted chargeable hours of all accountants in the firm were 21 600 hours. Estimated overheads were as follows. Required (a) Calculate the application rate for the firm’s overheads (ignore GST.) (b) If Michael was the only accountant to work on the annual audit of APT Ltd, and he recorded90 hours on this audit, determine the total costs (labour and overheads) to be charged to this client. (LO7) (a) Direct labour charge-out rate = $120 Overhead charge-out rate = = = $30 (b) Direct labour charged $120  90 hours = $10 800 + 40% markup on cost of chargeable hours 4 320 = 15 120 $30  90 hours = $2 700 Total charge (before GST) $17 820 If GST would be added, the total charge would be as follows. Total charge (before GST) = $17 820 GST 1 782 Total professional fee $19 602 Problem 21.22 Costing for a public accounting firm GST version Newbery and Newstead is a public accounting firm specialising in auditing local medium-sized businesses. Fees charged for each audit are determined on the basis of identifiable hours worked on an audit by each one of the accountants in the firm, an allocation of general overheads via a predetermined rate per chargeable hour, plus a mark-up of 40% on the cost of chargeable hours for the accountants working on the audit. The hourly charge rate for one of its accountants, Michael, set for the year ending 30 June 2019, is $120. The following budgeted information was used at the beginning of the year to determine the overhead application rate per chargeable hour to be assigned to all audit jobs during the year ending 30 June 2019. Total budgeted chargeable hours of all accountants in the firm were 21 600 hours. Estimated overheads were as follows. Required (a) Calculate the application rate for the firm’s overheads (ignore GST.) (b) If Michael was the only accountant to work on the annual audit of APT Ltd, and he recorded90 hours on this audit, determine the total costs (labour and overheads) to be charged to this client. (c) Determine the total professional fees charged for this audit, after adding GST. (LO7) (a) Direct labour charge-out rate = $120 Overhead charge-out rate = = = $30 (b) Direct labour charged $120  90 hours = $10 800 + 40% markup on cost of chargeable hours 4 320 = 15 120 $30  90 hours = $2 700 Total charge (before GST) $17 820 If GST would be added, the total charge would be as follows. Total charge (before GST) = $17 820 GST 1 782 Total professional fee $19 602 (c) Total charge (before GST) (see B) = $17 820 GST 1 782 Total professional fee $19 602 Problem 21.23 Costing for a human resource management firm EmployUs Pty Ltd is a human resource management firm that specialises in employing middle to senior management staff on behalf of other firms. The charge to employ a person is set at 50% of the first year’s remuneration package for the person being employed. To work out the profitability of each job, EmployUs Pty Ltd charges direct labour, advertising costs, travel costs and any other costs directly traceable to the job. The firm also allocates its overhead costs to jobs based on the first year’s remuneration of the person being employed. EmployUs Pty Ltd expects to successfully employ 200 managers on behalf of its clients in the coming year with an average remuneration package of $150 000. Estimated overheads are shown below. Required (a) Calculate the application rate for the firm’s overheads. (Ignore GST.) (b) Brianna has just successfully employed a new executive manager for Carbone Ltd. on a first year’s remuneration package of $200 000. Brianna is on an $80 000 salary plus 30% on-costs and she estimates that she has spent the equivalent of 3 months employing the new executive. Calculate the profit that EmployUs would attribute to this job. (c) During the year EmployUs Pty Ltd employed managers for clients with total remuneration packages of $25 million. Will EmployUs Pty Ltd have over applied or under applied overhead for the year? (LO7) (a) Overhead Application Rate = Budgeted Overheads Budgeted first year remunerations = 412 500 200  $150 000 = 1.4% (b) Charge to employ new executive ($200 000  50%) $100 000 Brianna’s salary costs ($80 000  1.3  3/12) (26 000) Overhead application ($200 000  1.4%) (2800) Profit attributed to this job $71 200 (c) Allocated overhead ($25m  1.4) $350 000 Budgeted overhead 412 500 Underapplied overhead $62 500 If the actual overhead incurred equals the budgeted overhead then EmployUs Pty Ltd will have underapplied overhead of $62 500. Problem 21.24 Cost of production report for one department Chiu Ltd prepares bulk supplies of Singapore noodles using two departments, a Blending Department and a Packaging Department. The finished product is sold in large quantities to retailers that package it and sell it with their own labels. Raw materials (ingredients) are added at the beginning of each department’s process, and conversion costs are incurred uniformly throughout. The noodles flow from the Blending Department to the Packaging Department and then to finished goods inventory when all the work is completed. Production data in kilograms for the month of August with completed percentages for the conversion costs were as follows. Beginning work in process inventory costs on 1 August was as follows. Production costs incurred during August were the following. Required (a) Prepare a cost of production report for May for the blending department. (Ignore GST.) (LO4 and LO5) (a) Blending Department Cost of Production Report for the month ending 31 August Physical Flow Schedule Units Work in process, 1 August 30 000 (0.40) Units started 280 000 Units finished 270 000 Work in process, 31 August 40 000 (0.30) Costs to be accounted for: Cost Element Beginning Current Total Equiv. Units+ Unit Cost Raw materials $114 000 $1 064 000 $1 178 000 310 000 $3.80 Conversion costs 28 800 648 000 676 800 300 800 $2.40 $142 800 $1 712 000 $1 854 800 $6.20 Costs accounted for: Units transferred to Packaging (270 000  $6.20) 1 674 000 Work in process, 31 August: Raw materials, 40 000  $3.80 $152 000 Conversion cost, 12 000  $2.40 28 800 180 800 $1 854 800 Equivalent units of production (weighted average) Materials Conv. Cost Blending Units completed 270 000 270 000 Equivalent units in ending inventory * 40 000 **12 000 310 000 282 000 * (1.0) 40 000 ** (0.30) 40 000 Problem 21.25 Process costing — journalising transactions Hotbox Ltd produces pizza boxes using two processes — cutting and packaging. The production budget for the year ending 30 June 2019 estimated raw materials use of $400 000, factory overhead of $270 000, direct labour costs of $190 000 and 168 750 machine hours. (Ignore GST.) During April 2019, the following transactions were recorded: 1. Raw materials transferred to cutting, $21 600. Raw materials transferred to packaging, $28 000. 2. Direct labour costs incurred by cutting, $15 800. Direct labour costs incurred by packaging, $20 200. 3. Machine hours used by cutting, 13 800 hours. Machine hours used by packaging, 17 600 hours. 4. Other production costs for April were as follows. 5. Product with an assigned cost of $61 400 was transferred from cutting to packaging. 6. Overhead was applied in each department based on machine hours used. (A predetermined rate based on estimated overheads and total machine hours over both departments is to be calculated.) 7. Raw material purchases were $56 000. 8. Goods with an assigned cost of $136 000 were transferred from packaging to finished goods. 9. Finished goods with an assigned cost of $140 000 were sold on credit for $162 000. 10. Beginning inventory as at 1 April comprised the following amounts. Required (a) Prepare journal entries to record the April transactions. Assume all expenses were paid in cash. Use Factory Overhead and Factory Overhead Applied accounts. (b) Calculate ending work in process and finished goods balances in each process. (c) Was overhead underapplied or overapplied in April? By what amount? (LO5) (a) General Journal 2019 1/4 Work in process – cutting $21 600 Work in process – packaging 28 000 Raw materials 49 600 2/4 Work in process – cutting 15 800 Work in process – packaging 20 200 Wages payable 36 000 4/4 Factory overhead 49 800 Cash at bank 33 300 Accumulated depreciation 16 500 5/4 Work in process – packaging 61 400 Work in process – cutting 61 400 6/4 Work in process – cutting (1) 22 080 Work in process – packaging (2) 28 160 Factory overhead applied 50 240 (FOH application rate = $270 000  168 750= 1.60/MH) 1. 1.6 (13 800 hrs) = $22 080 2. 1.6 (17 600) = $28 160 7/4 Raw Materials 56 000 Accounts Payable 56 000 8/4 Finished goods 136 000 Work in process – packaging 136 000 9/4 Accounts receivable 162 000 Sales revenue 162 000 Cost of sales 140 000 Finished goods 140 000 (b) Work in process – cutting $16 780 Work in process – packaging $23 560 Finished goods $10 000 Work in Process – Cutting Work in Process – Packaging Bal. 18 400 (5) 61 400 Bal. 21 800 (8) 136 000 (1) 21 600 Bal c/d 16 480 (1) 28 000 Bal. c/d 23 560 (2) 15 800 (2) 20 200 (6) 22 080 (5) 61 400 (6) 28 160 77 880 77 880 Bal. b/d 16 480 159 560 159 560 Bal. b/d 23 560 Finished Goods Bal. 14 000 (9) 140 000 (8) 136 000 Bal c/d 10 000 150 000 150 000 Bal. b/d 10 000 Note: Departmental finished goods accounts do not apply. (c) Actual overhead (4) $49 800 Applied overhead (6) $50 240 Overapplied $ 440 Problem 21.26 Process costing — choice of cost accounting system Refer to the Hotbox Ltd production process details in problem 21.25. Required (a) Explain in detail, using the facts from Problem 21.25 why it is most appropriate for Hotbox Ltd to use a process costing system rather than a job order costing system. Your answer should be no less than 250 words and should relate to the steps evident in the construction of cardboard pizza boxes. (LO4, LO5 and LO6) (a) Process costing is used by manufacturing entities with the continuous production flows usually found in mass-production industries such as cardboard pizza boxes. The homogeneity of the production output means units or groups of units cannot be identified like they are in job order costing. The focal point of process costing is the processing centre in which the work is performed during a specified period of time. In the case of Hotbox Ltd the processing centres for which costs are accumulated are cutting and packaging. Output would be measured by the number of cardboard pizza boxes produced. Unit costs are calculated for raw materials and conversion costs in both the cutting and packaging processing centres. The flow of costs for Hotbox Ltd go from the cutting to the packaging department and then to finished goods. Actual costs of materials, labour and factory overheads are recorded in the same way as for job order costing. Then the costs of raw materials, direct labour and factory overhead are accumulated within both the cutting and packaging processing centres. It is possible that for a company like Hotbox Ltd that they use some aspects of job costing as they may manufacture some cardboard boxes to specific requirements of some clients that require particular sizes and shapes. Problem 21.27 Unit costs and total costs — process costing Internet Inhand Ltd began producing netbooks on 1 July 2019. A unit of production passes through two processes — manufacturing and finishing. Production data for the month of July are presented below. Required (a) Prepare a cost of production report for July for each department, showing the unit cost on completed units for each process assuming that materials are added at the beginning of the process, and conversion costs are incurred continuously. The company uses the average cost method. (LO4 and LO5) (a) Manufacturing Department Cost of Production Report for the month ending 31 July 2019 Physical Flow Schedule Units Work in process, 1 July 0 Units started 98 000 Units finished 82 000 Work in process, 31 July 16 000 (0.50) Costs to be accounted for: Cost Element Beginning Current Total Equiv. Units+ Unit Cost Raw materials $— $7 840 000 $7 840 000 98 000 $80 Conversion costs — 5 850 000 5 850 000 90 000 65 $— $13 690 000 $13 690 000 $145 Costs accounted for: Units transferred to Finishing (82 000  $145) $11 890 000 Work in process, 31 July: Raw materials, 16 000  $80 $1 280 000 Conversion cost, 8 000  $65 520 000 1 800 000 $13 690 000 Equivalent units of production (weighted average) Materials Conv. Cost Manufacturing Units completed 82 000 82 000 Equivalent units in ending inventory * 16 000 **8 000 98 000 90 000 * (1.0) 16 000 ** (0.50) 16 000 Finishing Department Cost of Production Report for the month ending 31 July 2019 Physical Flow Schedule Units Work in process, 1 July 0 Units started (from prev. dept) 82 000 Units finished 76 000 Work in process, 31 July 6 000 (0.25) Costs to be accounted for: Cost Element Beginning Current Total Equiv. Units+ Unit Cost Conversion costs $— $4 417 500 $4 417 500 77 500 $57 Costs from preceding dept. — 11 890 000 11 890 000 82 000 145 $— $16 307 500 $16 307 500 $202 Costs accounted for: Units transferred to Finishing (76 000  $202) $15 352 000 Work in process, 31 July: Conversion cost, 1 500  $57 $85 500 Costs, preceding dept., 6 000  $145 870 000 955 500 $16 307 500 Equivalent units of production (weighted average) Conv. Cost Preceding Dept Finishing Units completed 76 000 76 000 Units in ending inventory * 1 500 **6 000 77 500 82 000 * (0.25) 6000 ** (1.00) 6000 Problem 21.28 Unit costs and total costs — process costing Cakemix Ltd produces cakes. Production is carried out in three processes — mixing, baking and packaging. The work in process accounts for the three processes for the month of April are set out below. Cost and production data for the final two processes are set out below. Required (a) Calculate the unit materials cost, unit conversion cost, and total manufacturing cost per equivalent unit for the packaging process. (b) Calculate the costs assigned to units transferred out and units in ending work in process for April for baking and packaging. (LO5) All answers to parts (a) and (b) can be readily obtained from the relevant cost of production reports. These are prepared in order to provide the required answers. Baking Department Cost of Production Report for the month ending 30 April Physical Flow Schedule Units Work in process, 1 April 4 000 (0.40) Units started 176 000 Units finished 180 000 Work in process, 30 April 0 Costs to be accounted for: Cost Element Beginning Current Total Equiv. Units Unit Cost All costs $4 800 $124 800 $129 600 180 000 $0.72 Costs accounted for: Units completed (180 0000  $0.72) $129 600 Equivalent units of production (weighted average) Materials Conv. Cost Units completed 180 000 180 000 Packaging Department Cost of Production Report for the month ending 30 April Physical Flow Schedule Units Work in process, 1 April 3 200 (0.50) Units started 180 000 Units finished 179 400 Work in process, 30 April 3 800 (0.60) Costs to be accounted for: Cost Element Beginning Current Total Equiv. Units Unit Cost Raw materials $512 $28 800 $29 312 183 200 $0.16 Conversion costs 320 36 016 36 336 181 680 0.20 Previous dept. 2 304 129 600 131 904 183 200 0.72 $3 136 $194 416 $197 552 $1.08 Costs accounted for: Units completed (179 400  1.06) $193 752 Work in process 30 April: Raw materials, 3 800  0.16 $608 Conversion cost, 2 280  0.20 456 Previous dept. costs, 3 800  0.72 2 736 3 800 $197 552 (a) Packaging: Unit materials cost ($0.72 + $0.16) $0.88 Unit conversion costs $0.20 Total unit manufacturing cost $1.08 (b) Baking: Units transferred out $129 600 Ending work in progress $0 Packaging: Units transferred out $193 752 Ending work in progress $3 800 Problem 21.29 Costing for architectural consultants Non-GST version Tsoulos, Tsoulakis and Associates is a small firm of architectural consultants. At 1 July 2018, three architects other than the principals, Tony Tsoulos and Maria Tsoulakis, are employed. The following information is relevant for the 2018–2019 financial year. It is expected that each of the five architects in the firm will work an average of 46 weeks, working a 40-hour week. All hours worked on client jobs are charged at a charge-out rate determined for each architect. Only 70% of the total hours worked by the principals and 85% of the total hours worked by others are assigned directly to client jobs. The total labour costs of all five architects for the year ended 30 June 2016 are $530 000 (Tsoulos and Tsoulakis $300 000, other architects $230 000). Expected overheads of the firm for the year (except for the labour costs of architects not directly charged to clients) are: During the year, the firm completed a consultancy for one of its regular clients, Superior Homes Ltd. Tony Tsoulos and one other architect, Tung Thanh Tran, worked on this particular job. Tony charges his time to clients at $100 per hour. Tung Thanh’s gross salary and other costs amount to $93 840. Tony worked on the job for 20 hours and payroll time sheets showed that Tung Thanh had spent 60 hours on the job. Required (a) Determine the costs to be charged to Superior Homes Ltd for labour and overheads. (b) If the firm has a mark-up of 25% on total costs charged to a job in determining gross fees, what was the total professional fee (ignore GST) shown on the tax invoice sent to Superior Homes Ltd? (LO7) (a) Costs charged for direct labour per hour: Tony Tsoulos = $100 per hour Tung Thanh Tran = = = $51 per hour.  Total labour cost = ($100  20) + ($51  60) = $2 000 + $3 060 = $5 060 Overhead charge-out rate: Total overheads = $275 240 + labour cost not charged to jobs = $275 240 + [($300 000  30%) + ($230 000  15%)] = $275 240 + $90 000 + $34 500 = $399 740 Overhead charge-out rate = = = = $43.45 Total overheads charged = $43.45  80 hrs = $3 476 (b) Invoice total — Superior Homes Ltd Total direct labour = $5 060 (see Part A) Total overhead charge = $3 476 ($43.45  80 hours) = $8 536 + 25% markup $2 134 Total Fee charged $10 670 Problem 21.29 Costing for architectural consultants GST version Tsoulos, Tsoulakis and Associates is a small firm of architectural consultants. At 1 July 2018, three architects other than the principals, Tony Tsoulos and Maria Tsoulakis, are employed. The following information is relevant for the 2018–2019 financial year. It is expected that each of the five architects in the firm will work an average of 46 weeks, working a 40-hour week. All hours worked on client jobs are charged at a charge-out rate determined for each architect. Only 70% of the total hours worked by the principals and 85% of the total hours worked by others are assigned directly to client jobs. The total labour costs of all five architects for the year ended 30 June 2016 are $530 000 (Tsoulos and Tsoulakis $300 000, other architects $230 000). Expected overheads of the firm for the year (except for the labour costs of architects not directly charged to clients) are: During the year, the firm completed a consultancy for one of its regular clients, Superior Homes Ltd. Tony Tsoulos and one other architect, Tung Thanh Tran, worked on this particular job. Tony charges his time to clients at $100 per hour. Tung Thanh’s gross salary and other costs amount to $93 840. Tony worked on the job for 20 hours and payroll time sheets showed that Tung Thanh had spent 60 hours on the job. Required (c) Determine the costs to be charged to Superior Homes Ltd for labour and overheads. (d) If the firm has a mark-up of 25% on total costs charged to a job in determining gross fees, what was the total professional fee (ignore GST) shown on the tax invoice sent to Superior Homes Ltd? (LO7) (a) Costs charged for direct labour per hour: Tony Tsoulos = $100 per hour Tung Thanh Tran = = = $51 per hour.  Total labour cost = ($100  20) + ($51  60) = $2 000 + $3 060 = $5 060 Overhead chargeout rate: Total overheads = $275 240 + labour cost not charged to jobs = $275 240 + [($300 000  30%) + ($230 000  15%)] = $275 240 + $90 000 + $34 500 = $399 740 Overhead chargeout rate = = = = $43.45 Total overheads charged = $43.45  80 hrs = $3 476 (b) Invoice total — Superior Homes Ltd Total direct labour = $5 060 (see Part A) Total overhead charge = $3 476 ($43.45  80 hours) = $8 536 + 25% markup $2 134 $10 670 + 10% GST $1 067 Total Fee charged $11 737 Problem 21.30 Activity-based costing Melaleuca Manufacturing Ltd produces timber felling machines for the forestry industry around the world. Its two machines are the Tree Toppler, which cuts down trees and clears undergrowth, and the Melaleuca Muncher that pulps the timber into woodchips. The costs, volumes and cost drivers for the year ended 30 June 2019 are as follows. Required (a) Calculate the unit cost of each machine if all overhead costs are allocated on the basis of direct labour hours. (b) Calculate the unit cost of each machine using activity-based costing. (c) Which machine is likely to be overpriced using the single overhead allocation method of direct labour hours and which machine is likely to be underpriced? (LO9) (a) Overhead application rate = $12 280 000 = $500/DLH 24 560 Tree Toppler Melaleuca Muncher $ $ Raw Materials 86 000 72 000 Direct Labour 1 755 1 152 Overhead Costs 24 375* 16 000** Total Costs $112 130 $89 152 *48.75  $500 **32  $500 (b) Overhead application rates for activity-based costing: Set up costs $720 000 = $24 000 per production run 30 Machine costs $2 918 400 = $80 per machine hour 36 480 Receiving $1 958 400 = $60 per receipt of goods 32 640 Shipment $5 160 000 = $8 600 per delivery 600 Engineering $1 523 200 = $5 600 per production order 272 Machine Costs Tree Toppler Melaleuca Muncher $ $ Direct materials 86 000 72 000 Direct labour 1 755 1 152 Set up costs 1 050 *1 371 Machine costs 5 340 4 320 Receiving 3 600 2 880 Shipment 8 600 8 600 Engineering 2 800 2 240 Total cost per machine $109 145 $92 563 * Rounded to nearest dollar. (c) The Tree Toppler is likely to be overpriced using a single overhead application rate and the Melaleuca Muncher is likely to be underpriced. When using ABC the cost of the Tree Toppler is likely to be lower and so its price may be lower, where as the Melaleuca Muncher is likely to cost more and therefore have a higher price. Case studies Decision analysis Allocation of factory overheads Macquarie Manufacturing Ltd prepared the following planned production data for the forthcoming year ending 30 June 2019. Required (a) Prepare a table showing the predetermined factory overhead rate based on each of the following: direct materials cost, direct labour cost, direct labour hours, machine hours, and units of production. (b) The following data relate to Job 6543, which was completed during the year: materials costs $280, direct labour costs $720, direct labour hours 45, machine hours used 1200. Job 6543 consisted of 400 identical units. Prepare a table summarising the amount of factory overhead that would have been assigned to Job 6543 using each of the bases given in requirement A. Calculate the cost per unit for Job 6543 using each of the factory overhead bases. (c) Which overhead rate is the most appropriate and why? (d) Management is considering introducing an activity-based costing (ABC) system. How would such a system affect the way the cost of Job 6543 is determined? Should management introduce an ABC system? Explain your answer. (a) Overhead application rates: Direct Materials Direct Labour Costs DLH Machine Hours Units of Production $1 296 000 $1 296 000 $1 296 000 $1 296 000 $1 296 000 $648 000 $324 000 20 250 432 000 1 800 000 $2.00 per DM$ $4.00 per DL$ $64 per DLH $3.00 per MH $0.72 per unit (b) Factory Overhead allocated to Job 6543 under various bases: Direct Materials Direct Labour Costs DLH Machine Hours Units of Production $280  $2.00 $720  $4.00 45  $64 1 200  $3 400  $0.72 = $560 = $2 880 = $2 880 = $3 600 = $288 =$1.40/unit = $7.20/unit = $7.20/unit = $11.50/unit = $0.72/unit Costs per unit = $3.90 = $9.70 $9.70 = $13.70 = 3.22 Direct material costs per unit = $280/400 = $0.70 Direct labour costs per unit = $720/400 = $1.80 (c) Without further detailed information on overhead costs, the nature of the production process, the product itself, it is impossible to determine the ‘best’ allocation base. All the above are appropriate cost drivers but which one provides the best correlation between actual costs and the cost driver is not known. Other cost drivers such as materials orders placed may be more relevant to some overhead items. One of the above bases may be selected on the basis of ease of use, e.g. direct labour hours which has been traditionally used. There also remains the question of using only one application rate, which again has been the traditional approach. As can be seen from part B, the choice of cost driver makes a significant difference with the overhead allocation ranging between $288 and $3600. (d) ABC is based on the concept of having multiple application rates based on establishing a number of cost drivers and establishment of a high correlation between the cost driver and individual components of overhead costs. If these relationships can be established and multiple application rates used to assign costs, then ABC could produce a more reliable cost. Critical thinking Costing procedures for Harwood Furniture Ltd Hardwood Furniture Ltd produces standard dining-room tables and chairs on a production line that includes a cutting department, a shaping department, a construction department and a finishing department. This dining-room furniture is sold to mid-priced retailers around the country. They are a standard product and over 25 000 dining-room settings are produced and sold each year. Hardwood Furniture Ltd also takes special one-off orders for custom-built dining-room settings that are produced to the customer’s specifications in consultation with the company’s master carpenter. This furniture is hand-finished and French-polished, and is not made on the company’s production line. Required (a) Should the company use the same costing procedures for materials used in the production of both products? Would this always be necessary? (b) Should the company use the same costing procedures for factory wages and salaries in the production of both products? Is this necessary in all circumstances? (c) Why would the company use a predetermined overhead application rate for costing the production of custom-built dining-room settings? (d) When would it be necessary to use a predetermined overhead application rate in costing the production of the standard dining-room settings? Would there be some circumstances where actual overhead costs could be used rather than a predetermined overhead application rate? Explain. (a) and (b) The costing procedure used depends on how goods are manufactures. Job order costing is used by manufacturers that manufacture products in response to customer orders and specifications. A job order is a request from a customer to provide a given quantity of specifically designed made-to-order products. Hence, it would be suitable for the custom-built dining-room settings. Process costing is appropriate for manufacturers of large quantities of standard products on a continuous production line. It would be suitable for the standard dining-room furniture sold to mid-priced retailers. (c) The purpose of the predetermined overhead application rate is to relate the overhead cost to production output. Since factory overhead is a common cost incurred for the benefit of all products, it cannot be traced directly to individual products. Instead, it must be related to the jobs on some production activity basis that closely relates the cost to the work performed. A predetermined overhead rate is used to apply the cost to jobs as they are worked on. (d) The focal point of interest is the processing centre in which the work is performed during a specified period of time. This means that factory overhead are charged for each different stage of the production process. In some situations where factory overhead and production output are relatively constant from month to month, actual overhead may be used for costing purposes rather than a predetermined overhead rate. Ethics and governance Allocation of costs to overheads Tom Shanks, production manager for Innovative Products Ltd, had just finished his annual performance appraisal with the managing director, May Martin. May had indicated that, although Tom’s performance as production manager was satisfactory, she and other senior managers were concerned with the continuing high levels of production costs. As a result, Tom was informed that he would receive a smaller bonus this year as compared with the past. In this regard, May had remarked: ‘You will need to pay close attention to production costs over the next quarter. I am confident that your production costs will improve. You obviously need to get costs down a little. Why don’t you talk to the management accountant and work something out? If things improve we might be able to do something about that bonus.’ Tom approached the management accountant, Jerry Flynn, and explained his position in the following manner: ‘Jerry, I have just had lengthy discussions with May and we agreed that I should get together with you and work out ways of reducing production costs. I suggested several options, and May was very supportive. I have carefully examined costs assigned to production, and research and development costs and rent on the factory part of the total building complex cause me some concern. Both of these costs, which are fairly significant, are currently included in factory overheads and applied as production costs. Research and development is an ongoing cost but should be regarded as a period cost — likewise rent of the factory. I therefore propose that for the coming quarter these costs be excluded from overheads and be written off against revenues.’ Jerry responded that given the nature of the business and its emphasis on innovative products, he believed that research and development costs should be included in overheads. Likewise, he believed that factory rent was a product cost. He thought that perhaps he should discuss the proposal with May. Tom then said: ‘I appreciate your position, Jerry, but, as I have said, May is supportive of my suggestions to reduce costs of production. She is very upset about this whole issue, and I would caution you about raising this subject with her again. It’s up to you to do your job as management accountant. I’m positive it will be okay.’ Required (a) Who are the stakeholders in this situation? (b) Discuss the ethical issue or issues involved in this situation. (c) What would you do if you were Jerry Flynn? (a) The stakeholders in this situation are: May Martin (Managing Director), who is being misrepresented in relation to her attitude on cost of production; Tom Shanks (Production Manager), whose future bonuses depend on an improved performance in relation to production costs; and Jerry Flynn (Accountant), who is being asked to make changes to the cost allocation system. It could also be argued that owners/shareholders are also stakeholders, in that increases in bonuses expense could occur without any real savings in production costs. (b) The Production Manager, Tom Shanks, is exerting pressure on the accountant to change the cost allocation methods used by the company to ensure that his future bonus is increased. He is misrepresenting the position of the Managing Director in relation to the issue of production costs; in short, he is being dishonest to improve his chances of personal gain and using the authority of the Managing Director to obtain such gain. Jerry Flynn, the accountant, is being pressured to change the company policy in regard to recording costs associated with rent and research and development. (c) Jerry should discuss the issue further with the Production Manager, seeking clarification on what the Managing Director’s position in relation to costs of production really is, and seeking support for changing the established company policy. Jerry should be emphatic with the Production Manager that he is unable to change company policy in regard to accounting policy in regard to costs of production, and emphasise that he is only able to change policy if a directive in writing is to come from the Managing Director. A suggestion by Jerry that he would discuss the issue of cost classification of particular items raised by the Production Manager with May Martin may be enough to dissuade Tom Shanks from the approach he is currently taking. Financial analysis Refer to the latest financial report of JB Hi-Fi Limited on its website, www.jbhifi.com.au, and answer the following questions. 1. Is it likely that JB Hi-Fi Limited would have to confront such questions as to how to design a job cost order or a cost of production report? Explain your conclusion. 2. Would JB Hi-Fi Limited be able to avail itself of the advantages offered by just-in-time processing? Why or why not? 3. Could activity-based costing principles have any applicability within JB Hi-Fi Limited? Explain. 1. It is unlikely that JB Hi-Fi Ltd would have to confront such questions as to how to design a job cost order. A cost of production report is applicable under process costing. There is no evidence to suggest that JB Hi-Fi Ltd is in any way involved in production. 2. Just-in-time (JIT) processing is aimed at eliminating the holding of excess inventories of raw materials, work in process and finished goods. Hence, JIT processing as such does not lend itself to the retail and wholesale activities of JB Hi-Fi Ltd. However, sound inventory management is all about eliminating as far as possible, the non-value adding costs of acquiring and holding inventory whilst ensuring customer supply and satisfaction. To this end the principles of JIT are applicable. Online sales by JB Hi-Fi Ltd could be conducted using JIT ordering where the company back orders the inventory after it has received the online purchase from the customers. 3. Yes! Activity based costing (ABC) isn’t confined to the manufacturing sector. All organisations incur overhead costs. Where it can be identified that overhead costs are driven by activities (cost drivers) relating to a department, division, segment or activity conducted by the organisation, the relevant overhead costs can be applied to the costing of that activity. This can provide advantages through more accurate cost allocations over activities, departments, etc. Solution Manual for Accounting John Hoggett, John Medlin, Claire Beattie, Keryn Chalmers, Andreas Hellmann, Jodie Maxfield 9780730344568