CHAPTER 17

JOB ORDER COST SYSTEMS AND

OVERHEAD ALLOCATIONS

OVERVIEW OF EXERCISES, PROBLEMS, CASES,

AND INTERNET ASSIGNMENT
Learning
Exercises Topic Objectives Characteristics
17–1 Terminology 1, 2, 3, 4, 6, 7 Conceptual
17–2 Cost flows in an accounting system 5 Conceptual
17–3 Cost flows in job order costing 1–5 Conceptual, mechanical
17–4 Journal entries in job order costing 1–5 Mechanical
17–5 Selecting appropriate costing 1, 2 Conceptual
methods
17–6 Overhead cost drivers 3, 5 Mechanical, conceptual
17–7 Selecting activity bases 6 Conceptual
17–8 Allocating cost pools 6, 7 Mechanical, conceptual

Problems
17–1 Journal entries in job order costing 1–5 Mechanical
17–2 Journal entries in job order costing 1–5 Mechanical
17–3 A comprehensive job order cost 1–5 Mechanical, conceptual
problem
17–4 A comprehensive job order cost 1–5 Mechanical, conceptual
problem
17–5 Overhead cost drivers 1–5 Analytical
17–6 Activity based costing 6, 7 Mechanical, conceptual
17–7 Activity based costing 6, 7 Mechanical, conceptual,
analytical

Cases
17–1 Business ethics 1, 2, 4 Ethics, group
17–2 Performance evaluation 1, 3, 6, 7 Analytical, ethics
17–3 Implementing ABC 6, 7 Conceptual, ethics

54 © The McGraw-Hill Companies, Inc., 2005

Business Week Learning
Assignment Topic Objectives Characteristics
17–4 Business Week assignment: Cost of 1–5 Conceptual, writing, group
auto repairs
Internet
Assignment
17–1 Costing construction projects 1, 2, 4 Conceptual

DESCRIPTIONS OF PROBLEMS, CASES,

AND INTERNET ASSIGNMENT
Below are brief descriptions of each problem, case, and the Internet assignment. These descriptions are
accompanied by the estimated time (in minutes) required for completion and by a difficulty rating. The time
estimates assume use of the partially filled-in working papers.

Problems
17–1 Chesapeake Sailmakers 20 Easy
Prepare journal entries to record the flow of costs when using job order costing.
Also compute the amount of each cost element which has been assigned to jobs
still in process.

17–2 O’Shaughnessy Mfg. Co. 15 Easy

Prepare journal entries to summarize the flow of costs when using job order
costing.

17–3 Georgia Woods, Inc. 30 Medium

Under job order costing with two production departments, compute the over-
head application rate used in each department and the under- or overapplied
overhead for the year. Also determine the cost of a large order of custom
furniture and record the sale of the finished goods.

17–4 Precision Instruments, Inc. 30 Medium

Under job order costing, compute the overhead application rates used and the
over- or underapplied overhead for the year in each of two departments. Also
determine the cost of a particular job and record the sale of some of the finished
goods.

17–5 Ye Olde Bum & Grind, Inc. 35 Medium

A service business (an automobile body and fender repair shop), rather than a
manufacturing company, illustrates the use and computation of an overhead
application rate and the importance of selecting an appropriate overhead “cost
driver.”

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17–6 Norton Chemical Company 30 Medium
Using ABC, students are asked to identify ways in which overhead costs might be
better controlled. For one product line, supplier relations need to be improved. For
the other product line, inventory needs to be ordered less frequently.

17–7 Dixon Robotics 45 Strong

A comprehensive ABC problem that requires students to allocate several cost
pools to multiple products. Students are also required to allocate overhead to the
same product lines using machine hours as a single activity base. A comparison
of results is also required.
Cases
17–1 The Bidding Wars 25 Medium
A practical ethics problem. Should a company underbid jobs if that is the
industry practice, or just close its doors? Interesting group assignment.

17–2 Classic Cabinets 35 Medium

Student is asked to analyze the impact of an investment decision on the
performance evaluation of two managers and to decide whether the evaluations
are true representations of performance. Also, the information needed to make
the investment decision and who should make the decision are considered.

17–3 Mica Corporation 10 Easy

Students are asked to identify ethical issues involving the selection of an
activity base to allocate costs to production managers. Students are also asked
to propose a solution to the current problem.

Business Week Assignment

17–4 Business Week Assignment: The GM Hummer 30 Medium
Groups of three students identify three extra equipment items added by dealers
to Hummers. The after purchase cost of maintenance and repair jobs for extra
equipment items is considered. Students write a short paragraph explaining how
the design of an automobile or truck can affect the after purchase job cost of
repairs and maintenance.
Internet Assignment
17–1 C. Erickson and Sons, Inc. 30 Medium
Students consider three types of construction products and/or other services
offered by a large Philadelphia based construction company. For these products
or services students describe how cost accounting information can be helpful in
planning and managing the construction work and whether job order or activity
based costing would be useful.

56 © The McGraw-Hill Companies, Inc., 2005

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1. A cost accounting system consists of the procedures and techniques used by enterprises to track
resources consumed in the production and delivery of products and services to customers.
2. The objectives of a cost accounting system are to: 1) provide employees with information useful in
managing activities that consume resources, 2) furnish managers with information to evaluate and
reward performance, and 3) provide information necessary for external reporting requirements such as
inventory valuations and cost of goods sold.
3. A manufacturing company should choose job order costing depending upon the nature of the
company’s manufacturing operations. Job order costing is used when each unit of product (or batch of
products) has unique characteristics that may affect its manufacturing cost. The unique product (or
batch of products) is called a job, and the costs of completing each job are accumulated separately.
Thus, this method recognizes the fact that the cost of one job may differ significantly from the cost of
another.
If all of the manufactured units are essentially identical, it is neither practical nor necessary to measure
the cost of each unit or of small batches of units. Thus, companies that produce a “steady stream” of
nearly identical units, with each unit passing through the same manufacturing process, use process
costing, which is described in the following chapter.
A company may use job order costing in accounting for some of its products and process costing in
accounting for others.
4. An overhead application rate is a device used to assign appropriate amounts of manufacturing
overhead to specific units of manufactured products. Although overhead is part of the total cost of
manufacturing products, it is an indirect cost that cannot be directly (or conveniently) traced to specific
units of product. Thus, overhead costs are assigned to units of product in proportion to some activity
base (such as direct labor costs or machine hours) that can be traced directly to specific units. The
overhead application rate expresses the amount of overhead cost to be assigned per unit in the activity
base, such as $4 of overhead cost per machine hour used in the production process.
5. An overhead cost driver is a measurement that (1) can be traced directly to units of manufactured
product, and (2) is a causal factor in the incurrence of overhead costs. The cost driver is used as the
activity base (or the denominator) in computing the overhead application rate.
6. Possible cost drivers (two required in each case):
a.) Direct labor cost, direct labor hours, direct materials cost or quantity of direct material used. (In
this case, these appear to be the only measurements that can be traced directly to units produced.
Of these, direct labor hours probably are the major cost driver.)
b.) Machine-hours, computer time, or number of components assembled. (In this situation, direct labor
does not appear to be a significant cost driver.)
7. Three elements of cost are entered on the job cost sheet. The cost of material used on the job is
determined from material requisitions drawn on the stores department. Labor is determined from
timekeeping and payroll records; it is the total wages for all employees who worked directly on a given
job. Overhead cost is computed as a function of some other variable such as direct labor cost or
machine-hours. The overhead rate is predetermined at the beginning of an accounting period. Job cost
sheets are subsidiary records in support of the Work in Process account.
8. The materials requisition forms issued by the production departments are used as the basis for charging
the costs of direct materials used in production to work in process.
9. Employees’ time cards show the time spent by each employee on different jobs or activities and are
used as the basis for charging direct labor costs to work in process.
10. Underapplied overhead refers to the debit balance that results in the Manufacturing Overhead account

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 when the amount of overhead applied to production of the period is less than the total amount of
overhead expenditures incurred. Thus, the overhead costs incurred have not been fully applied to the
production of the period.
Overapplied overhead is the credit balance that results in the Manufacturing Overhead account when
the amount of overhead applied to production exceeds the actual overhead expenditures for the period.
A credit balance in the overhead account indicates that too much overhead has been applied to
production.
Small amounts of under- or overapplied overhead are to be expected in any given month. These
amounts, however, should tend to balance out over time if the company is using an appropriate
overhead application rate.
11. The credit balance indicates that a greater amount of manufacturing overhead has been applied to
production than has been incurred during the year. This may be caused by the fact that the production
for the year exceeded the estimate used in arriving at the overhead application rate. It may stem from
the fact that actual overhead was less than estimated overhead, as a result of savings in overhead costs.
Either of these factors or a combination of both would cause the overhead application rate to be too
high and would result in overapplied overhead at the end of the year. If overhead has been overapplied,
this means that the work in process inventory, the finished goods inventory, and the cost of goods sold
are all overstated in terms of actual cost incurred.
The disposition of the amount of overapplied overhead depends on its materiality. If the amount of
overapplied overhead is large, a revised rate should be computed and the work in process and finished
goods inventory accounts should be adjusted downward. If the overapplied overhead is not material in
amount, it should be credited to cost of goods sold, thus reflecting the benefit of high production or
unusual cost savings in the income of the current period.
12. Job order concepts are appropriate to the operations of a law firm. The law firm should view each
client as a separate “job,” as the work done for each client is somewhat unique, and the costs of the
services rendered may vary greatly from one client to the next.
13. An activity base is a measurable component of the manufacturing process (such as machine hours,
direct labor hours, etc.) used as a basis in applying manufacturing overhead costs to products. For
instance, if machine hours is used as an activity base, unit manufacturing overhead costs will be
measured and expressed in terms of dollars per machine hour.
14. To be reliable, an activity base must be a significant cost driver. To be a cost driver means that changes
in the activity base cause proportional changes in manufacturing overhead costs incurred.
15. The use of a single activity base may be inappropriate for companies that manufacture a diverse line of
products. Problems associated with a single activity base stem from the fact that each product line is
likely to have unique characteristics that require several unique activity bases. The use of a single
activity base in these situations can lead to cost allocation distortions.
16. Activity-based costing uses multiple activity bases to assign manufacturing overhead costs to multiple
product lines. In doing so, management can assign overhead costs to a diverse group of products using
activity bases that are unique cost drivers of each product line. The use of activity-based costing can
help control cost distortions and thereby improve managerial decisions.
17. An activity cost pool is a specific aspect of the production process to which manufacturing overhead
costs can be traced. Activity cost pools often include set-up costs, repair costs, utility costs, inspection
costs, engineering costs, etc.
18. In a highly automated facility, manufacturing overhead costs may not change in proportion to changes
in direct labor hours. In other words, direct labor hours may not be a significant cost driver of overhead
costs in highly automated facilities. As a result, the use of direct labor hours as an activity base may
lead to unrealistic conclusions regarding product costs.

58 © The McGraw-Hill Companies, Inc., 2005

19. The stages in implementing activity-based costing typically include the following:
a. Overhead costs are assigned to various activity cost pools. An activity cost pool is a specific aspect
of the production process to which overhead costs can be traced.
b. The costs assigned to each activity cost pool are then allocated to product lines using multiple
activity bases as cost drivers.
20. There are many potential benefits associated with the use of ABC: (1) more accurate cost allocations
lead to more realistic pricing decisions, (2) the use of multiple activity bases improves management’s
understanding of overhead cost behavior, (3) the identification of significant cost drivers helps isolate
areas of production inefficiency, and (4) the allocation of overhead based on resource consumption
enables managers to evaluate the relative profitability of each product line.

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 SOLUTIONS TO EXERCISES

Ex. 17–1 a. Cost driver

b. Cost of finished goods manufactured
c. Overhead application rate
d. None (this statement describes underapplied overhead)
e. Job order costing or activity-based costing
f. Activity-based costing

Ex. 17–2 a. (1) Materials Inventory................................................................... XXX

Accounts Payable........................................................... XXX
To record the purchase of direct materials.
(2) Work in Process Inventory ....................................................... XXX
Materials Inventory ....................................................... XXX
To record cost of direct materials used.

b. (1) Direct Labor............................................................................... XXX

Cash ................................................................................ XXX
To record factory payroll paid to direct workers.
(2) Work in Process Inventory ....................................................... XXX
Direct Labor................................................................... XXX
To record cost of direct labor applied to production of the
period.

c. (1) Manufacturing Overhead ......................................................... XXX

Cash (or Accounts Payable).......................................... XXX
To record factory overhead cost (such as payroll for
indirect labor) incurred.
(2) Work in Process Inventory ....................................................... XXX
Manufacturing Overhead ............................................. XXX
To record factory overhead costs applied to production of
the period.

d. (1) Finished Goods Inventory......................................................... XXX

Work in Process Inventory ........................................... XXX
To record transfer of cost of completed goods to the
Finished Goods Inventory account.
(2) Cost of Goods Sold..................................................................... XXX
Finished Goods Inventory............................................. XXX
To record cost of goods sold.

60 © The McGraw-Hill Companies, Inc., 2005

Ex. 17–3 a. $3,150 ($900 + $2,250 = jobs no. 103 and 104)
b. $7,440 ($4,200 + $3,240 = jobs no. 101 and 102)
c. $13,690 ($4,200 + $3,240 + $6,250 = jobs no. 101, 102, and 104)
d. $9,700 ($6,000 + $3,700 = jobs no. 105 and 106)
e. $2,900 (job no. 103)

Ex. 17–4 a. Work in Process Inventory.............................................................. 12,200

Materials Inventory ............................................................. 7,720
Direct Labor ......................................................................... 1,400
Manufacturing Overhead.................................................... 3,080
Manufacturing costs incurred on job no. 321.

b. Finished Goods Inventory ............................................................... 12,200

Work in Process Inventory.................................................. 12,200
To record completion of job no. 321.

c. Accounts Receivable......................................................................... 10,500

Sales ....................................................................................... 10,500
To record credit sale of 2,100 units from job no. 321 @ $5 per
unit.
Cost of Goods Sold ........................................................................... 6,405
Finished Goods Inventory ................................................... 6,405
To record cost of sales for 2,100 units from job no. 321 (2,100 ×
$3.05 per unit).

Ex. 17–5 a. Job order costing can be used to track batches or individual orders. ABC can be used
to identify overhead costs and trace them to batches or individual orders.

b. Job order costing and ABC. Job order costing is appropriate because most costs can be
traced directly to particular clients. ABC would be useful assuming the different ser-
vices (e.g., consulting and auditing) provided by the CPAs consume differing amounts
and/or types of resources.

c. Job order costing. Job order costing is appropriate because most costs can be traced to
individual construction projects. ABC may not be warranted due to the small amount
of overhead used per job relative to direct materials and direct labor.

d. Job order costing is not appropriate because costs are more easily traced to large
batches of identical products instead of individual customers or jobs. Since different
types of paint products are likely to require similar processes, ABC may not be
necessary.

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 e. Job order costing is not appropriate because costs are more easily traced to large
batches of identical products instead of individual customers or jobs. Many oil and gas
refineries produce products that require quite different manufacturing processes and
consume differing amounts of resources. In this environment, ABC would be useful.

f. Job order costing. Job order costing is appropriate because most costs are easily
traceable to individual customers. ABC may not be warranted since each job will
likely consume overhead resources (e.g., space, heat, light) in a similar manner.

g. Job order costing is not appropriate because costs are more easily traced to large
batches of vitamins instead of individual customers or jobs. However, if several
varieties of vitamins are produced in batches with many machine set-ups, then ABC
may be useful to trace additional overhead costs by batch.

h. Job order costing is not appropriate because costs are more easily traced to large
batches of products instead of individual customers or jobs. If many different types of
shampoos are produced, ABC may be useful to trace overhead by product line.

Ex. 17–6 a. $111,960 [($26,400 × 75%) + (2,880 hours × $32/hour)]

b. $38.11 [($26,400 + $318,960 + $111,960) ÷ 12,000 units]

c. The purpose in using more than one application rate is to more precisely apply over-
head costs to the units generating those costs. In the manufacture of keyboards, it ap-
pears that some overhead costs are driven by direct labor, but other types of overhead
costs are driven primarily by machine-hours.

d. Examples of overhead costs:

Driven by direct labor (two required):
Indirect labor
Many types of factory supplies
Factory safety costs
Driven by machine-hours (two required):
Machinery repairs
Depreciation on machinery
Utilities (electricity)

e. In part a, $92,160 in overhead costs were assumed driven by machine hours cost,
whereas only $19,800 were assumed driven by direct labor cost. Therefore, machine
hours appears to be the primary cost driver of overhead costs.

f. Gross profit on sale of 2,000 keyboards at $75:

Sale price (2,000 units × $75)............................................................................... $ 150,000
Cost of goods sold [2,000 units × $38.11 per part b].......................................... 76,220
Gross profit........................................................................................................... $ 73,780

62 © The McGraw-Hill Companies, Inc., 2005

Ex. 17–7 Suggested activity bases for allocating the company’s activity-cost pools are listed below:
Production set-up costs: The number of set-ups required (or, perhaps, number of
production runs)
Heating costs: The square feet of production space occupied by each product line
Machine power costs: The total machine hours required to manufacture each product line
Purchasing department costs: The number of purchase orders related to each product line
Maintenance costs: The number of work orders related to each product line
Design and engineering costs: The number of design or engineering change orders
Materials warehouse costs: The percent of total square feet in the materials warehouse
occupied by each product line (number of component parts per product line)
Product inspection costs: The number of inspections related to each product line (rate
of defects)

Ex. 17–8 a. The most likely cost drivers for each cost pool are:
Power-cost pool: Machine hours
Inspection-cost pool: Number of inspection hours
Thus, the amount of total manufacturing overhead cost assigned to each pool is com-
puted as follows:

Allocation of power-cost pool to each product line:

Step 1: Establish the percent of power-cost pool to be allocated to each product line
using the number of machine hours as an activity base.
% of total
Machine hours used for machine-made costumes....................... 96,000 96%
Machine hours used for hand-made costumes ............................ 4,000 4%
Total machine hours ...................................................................... 100,000 100%

Step 2: Allocate $32,000 in power-cost pool to each product line based on the percen-
tages computed in step 1.
Costs allocated to machine-made costumes ($32,000 × 96%) .......................... $ 30,720
Costs allocated to hand-made costumes ($32,000 × 4%) .................................. 1,280
Total power costs allocated to products ............................................................. $ 32,000

Allocation of inspection-cost pool to each product line:

Step 1: Establish the percent of power-cost pool to be allocated to each product line
using the number of inspection hours as an activity base.
% of total
Inspection hours for machine-made costumes 2,000 80%
Inspections for hand-made costumes 500 20%
Total inspection hours 2,500 100%

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 Step 2: Allocate $48,000 in inspection-cost pool to each product line based on the per-
centages computed in step 1.
Costs assigned to machine-made costumes ($48,000 × 80%) ........................... $38,400
Costs assigned to hand-made costumes ($48,000 × 20%) ................................. 9,600
Total inspection costs allocated to products ...................................................... $48,000

b. Machine-Made Hand-Made
Costumes Costumes
Direct labor and materials............................................. $ 120,000 $ 96,000
Manufacturing overhead costs:
Power (from a)............................................................ 30,720 1,280
Inspection (from a)..................................................... 38,400 9,600
Total manufacturing costs............................................. $ 189,120 $ 106,880
Number of units.............................................................. ÷ 48,000 ÷ 16,000
Manufacturing cost per unit ......................................... $ 3.94 $ 6.68

c. Machine-Made Hand-Made
Costumes Costumes
Sales ................................................................................. $240,000 $ 160,000
Less: Direct labor and materials.................................. 120,000 96,000
Manufacturing overhead costs:
Power (from a)................................................. 30,720 1,280
Inspection (from a) .......................................... 38,400 9,600
Profit generated by product line................................... $ 50,880 $ 53,120
Number of units.............................................................. ÷ 48,000 ÷ 16,000
Profitability per unit ...................................................... $ 1.06 $ 3.32

64 © The McGraw-Hill Companies, Inc., 2005

 SOLUTIONS TO PROBLEMS
20 Minutes, Easy PROBLEM 17–1
CHESAPEAKE SAILMAKERS
a.

Manufacturing overhead charged to jobs in process, June 30:

Direct labor charged to jobs in process, June 30 $ 2 1 0 0
Overhead application rate 1 5 0%
Manufacturing overhead applied to jobs in process, June 30 $ 3 1 5 0

Direct materials charged to jobs in process, June 30:

Total cost of jobs in process $ 8 5 0 0

Less: Direct labor included $ 2 1 0 0
Manufacturing overhead included 3 1 5 0 5 2 5 0
Direct materials charged to jobs in process, June 30 $ 3 2 5 0

b.
General Journal

(1) Work in Process Inventory 3 4 5 0 0

Materials Inventory 1 2 0 0 0
Direct Labor 9 0 0 0
Manufacturing Overhead 1 3 5 0 0
To record costs charged to jobs during June.

(2) Finished Goods Inventory 3 3 2 0 0

Work in Process Inventory 3 3 2 0 0
To transfer cost of jobs completed in June to Finished
Goods Inventory.

(3) Cash 4 6 5 0 0
Sales 4 6 5 0 0
To record cash sale of 90% of goods completed in June.

Cost of Goods Sold 2 9 8 8 0

Finished Goods Inventory 2 9 8 8 0
To record cost of goods sold ($33,200 × 90%).

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15 Minutes, Easy PROBLEM 17–2
O’SHAUGHNESSY MFG. CO.
General Journal

a. Materials Inventory 5 9 7 0 0
Accounts Payable 5 9 7 0 0
To record purchases of direct materials during March.

b. Work in Process Inventory 5 6 2 0 0

Materials Inventory 5 6 2 0 0
To record materials placed into production during March, per
materials requisitions.

c. Work in Process Inventory 3 0 0 0 0

Direct Labor 3 0 0 0 0
To record direct labor costs applicable to production in March,
per employees’ time cards.

d. Direct Labor 2 6 3 0 0
Cash 2 6 3 0 0
To record direct labor payrolls paid in March.

e. Manufacturing Overhead 3 4 9 0 0
Accounts Payable 3 4 9 0 0
To record actual overhead costs in March.

f. Work in Process Inventory 3 6 0 0 0

Manufacturing Overhead 3 6 0 0 0
To record overhead applied to production during March
($18 per labor hour × 2,000 hours = $36,000).

g. Finished Goods Inventory 1 1 6 0 0 0

Work in Process Inventory 1 1 6 0 0 0
To record cost of completed jobs in March.

h. Accounts Receivable 2 1 0 0 0 0
Sales 2 1 0 0 0 0
To summarize credit sales in March.

Cost of Goods Sold 1 2 8 0 0 0

Finished Goods Inventory 1 2 8 0 0 0
To record cost of units sold during March.

66 © The McGraw-Hill Companies, Inc., 2005

30 Minutes, Medium PROBLEM 17–3
GEORGIA WOODS, INC.

a. Department One overhead application rate based on machine-hours:

Manufacturing Overhead $420,000
= = $35 per machine-hour
Machine-Hours 12,000

Department Two overhead application rate based on direct labor hours:

Manufacturing Overhead $337,500
= = $22.50 per direct labor hour
Direct Labor Hours 15,000

b. Job no. 58:

Dept. One Dept. Two Total

Direct materials $ 1 0 1 0 0 $ 7 6 0 0 $ 1 7 7 0 0
Direct labor 1 6 5 0 0 1 1 1 0 0 2 7 6 0 0
Manufacturing overhead:
750 machine-hours × $35 per hour 2 6 2 5 0 2 6 2 5 0
740 direct labor hours × $22.50 per hour 1 6 6 5 0 1 6 6 5 0
Total cost of job no. 58 $ 8 8 2 0 0

c.
General Journal

Cost of Goods Sold 8 8 2 0 0

Finished Goods Inventory 8 8 2 0 0
To record cost of goods sold (job no. 58) to City Furniture.

Accounts Receivable (City Furniture) 1 4 7 0 0 0

Sales 1 4 7 0 0 0
To record revenue from sale to City Furniture.

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 d.

Dept. One Dept. Two

Actual manufacturing overhead for January $ 3 9 0 1 0 $ 2 6 5 4 0
Manufacturing overhead applied to jobs:
1,100 machine-hours × $35 per hour 3 8 5 0 0
1,200 direct labor hours × $22.50 per hour 2 7 0 0 0
Underapplied manufacturing overhead—Dept. One $ 5 1 0
Overapplied manufacturing overhead—Dept. Two $ 4 6 0

68 © The McGraw-Hill Companies, Inc., 2005

30 Minutes, Medium PROBLEM 17–4
PRECISION INSTRUMENTS, INC.

a. Department A overhead application rate:

Manufacturing Overhead $540,000
= = $30.00 per machine-hour
Machine-Hours 18,000 hours

Department B overhead application rate:

Manufacturing Overhead $412,500
= = $16.50 per direct labor hour
Direct Labor Hours 25,000 hours

b. Job no. 399:

Dept. A Dept. B Total

Direct materials used $ 6 8 0 0 $ 4 5 0 0 $ 1 1 3 0 0
Direct labor 8 1 0 0 7 2 0 0 1 5 3 0 0
Manufacturing overhead:
250 machine-hours × $30 7 5 0 0 7 5 0 0
600 direct labor hours × $16.50 9 9 0 0 9 9 0 0
Total cost of job no. 399 $ 4 4 0 0 0

Unit cost, $44,000 ÷ 4,000 units $ 1 1

c.
General Journal

Cost of Goods Sold 1 1 0 0 0

Finished Goods Inventory 1 1 0 0 0
Sold 1,000 units from job no. 399
(1,000 units × $11 = $11,000).

Accounts Receivable (SkiCraft Boats) 1 9 5 0 0

Sales 1 9 5 0 0
Sale on account to SkiCraft Boats.

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 d.

Dept. A Dept. B
Actual overhead for the year $ 5 1 7 0 0 0 $ 4 2 4 4 0 0
Overhead applied:
17,000 machine-hours × $30 5 1 0 0 0 0
26,000 direct labor hours × $16.50 4 2 9 0 0 0
Underapplied overhead—Dept. A $ 7 0 0 0
Overapplied overhead—Dept. B $ 4 6 0 0

70 © The McGraw-Hill Companies, Inc., 2005

35 Minutes, Medium PROBLEM 17–5
YE OLDE BUMP & GRIND, INC.

a. (1) Overhead application rate based on direct labor hours:

Estimated total overhead........................................................................................ $ 123,000
Estimated direct labor hours.................................................................................. 10,000
Overhead application rate per direct labor hour ($123,000 ÷ 10,000 hours) .... $12.30

(2) Overhead application rate based upon number of repair jobs:

Estimated total overhead.............................................................................................. $123,000
Estimated number of repair jobs................................................................................. 300
Overhead application rate per direct labor hour ($123,000 ÷ 300 jobs) .................. $410

b. (1) Overhead applied using direct labor hours:

Job 1:
Direct materials used ................................................................................................ $25.00
Direct labor costs....................................................................................................... 75.00
Overhead applied (5 hr × $12.30 per hr)................................................................. 61.50
Total cost of Job 1 .................................................................................................. $161.50
Job 2:
Direct materials used ................................................................................................ $3,800
Direct labor costs....................................................................................................... 3,000
Overhead applied (200 hr × $12.30 per hr)............................................................. 2,460
Total cost of Job 2 ................................................................................................. $9,260

(2) Overhead applied on a per-job basis:

Job 1:
Direct materials used ................................................................................................ $25
Direct labor costs....................................................................................................... 75
Overhead applied ($410 per job) ............................................................................. 410
Total cost of Job 1 ................................................................................................. $510
Job 2:
Direct materials used ................................................................................................ $3,800
Direct labor ................................................................................................................ 3,000
Overhead applied ($410 per job) ............................................................................. 410
Total cost of Job 2 ................................................................................................. $7,210

c. Comments on the alternative overhead applications:

Allocating overhead based upon the number of jobs assumes that each repair job should be
charged with an equal amount ($410) of overhead. This allocation method ignores the fact that a
large job, such as Job 2, generates more overhead costs than does a small job, such as Job 1.
Relative to Job 1, Job 2 probably requires more indirect materials, more indirect labor, and more
usage of utilities, and causes higher rental payments. Therefore, Job 2 clearly should be charged
with more overhead costs than Job 1.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 71
 PROBLEM 17–5
YE OLDE BUMP & GRIND, INC. (concluded)

In this business, direct labor hours appear to be the major causal factor in the incurrence of overhead
costs. The use of indirect materials (sandpaper, welding materials, and metal putty) is likely to be
greater on jobs requiring more direct labor hours. As rent is a percentage of gross revenue, large jobs
cause the business to incur higher rent costs than do small jobs. Larger jobs also require more indirect
labor, such as ordering more parts and paperwork in filing insurance claims. Even such costs as
property taxes and depreciation are “driven” by the direct labor hours needed to complete a job. Jobs
that require many hours to complete “tie up” the physical facilities of the business longer than do the
short jobs.

In conclusion, allocating overhead costs in proportion to direct labor hours provides much more
realistic results than does allocating an equal dollar amount of overhead costs to each repair job.

72 © The McGraw-Hill Companies, Inc., 2005

30 Minutes, Medium PROBLEM 17–6
NORTON CHEMICAL COMPANY

a. Assigning purchasing department costs to activity pools:

Step 1: Establish the percent of purchasing department costs to be assigned to each activity cost
pool using the number of employees as an activity base.
% of total
Employees responsible for ordering................................................................... 1 20%
Employees responsible for inspecting ................................................................ 4 80%
Employees in the department ............................................................................. 5 100%

Step 2: Assign total purchasing department costs of $80,000 to each activity cost pool based on the
percentages computed in step 1.
Costs assigned to the order cost pool ($80,000 × 20%)......................................................... $16,000
Costs assigned to the inspection cost pool ($80,000 × 80%)................................................. 64,000
Total costs assigned to cost pools............................................................................................ $80,000

b. Order cost pool allocated to product lines:

Step 1: Establish the percent of order cost pool to be allocated to each product line using the
number of purchase orders as an activity base.
% of total
Purchase orders for Amithol .............................................................................. 2,000 20%
Purchase orders for Bitrite ................................................................................. 8,000 80%
Total purchase orders.......................................................................................... 10,000 100%

Step 2: Allocate $16,000 in the order cost pool to each product line based on the percentages
computed in step 1.
Costs assigned to Amithol ($16,000 × 20%) .......................................................................... $ 3,200
Costs assigned to Bitrite ($16,000 × 80%) ............................................................................. 12,800
Total order costs allocated to products.................................................................................. $16,000

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 73
 PROBLEM 17–6
NORTON CHEMICAL COMPANY (concluded)

c. Inspection cost pool allocated to product lines:

Step 1: Establish the percent of inspection cost pool to be allocated to each product line using the
number of inspections as an activity base.
% of total
Inspections for Amithol....................................................................................... 1,800 75%
Inspections for Bitrite.......................................................................................... 600 25%
Total inspections .................................................................................................. 2,400 100%

Step 2: Allocate $64,000 in the inspection cost pool to each product line based on the percentages
computed in step 1.
Costs allocated to Amithol ($64,000 × 75%) ......................................................................... $48,000
Costs allocated to Bitrite ($64,000 × 25%) ............................................................................ 16,000
Total inspection costs allocated to products .......................................................................... $64,000

d. Norton might control manufacturing overhead costs incurred by the purchasing department in
two ways:
(1) The company needs to work more closely with the supplier of materials used to make Amithol
in an attempt to improve the quality of materials being received. If this quality control prob-
lem can be solved, fewer quality control inspections will be needed, and the $48,000 of related
costs can be reduced.
(2) If possible, the company needs to consider making larger orders of Bitrite material on a less
frequent basis. This might enable the company to cut costs by replacing the full-time order
clerk with a part-time order clerk and to thereby reduce the $16,000 cost currently assigned to
the order cost pool.

74 © The McGraw-Hill Companies, Inc., 2005

45 Minutes, Strong PROBLEM 17–7
DIXON ROBOTICS

a. Maintenance department costs allocated to each product line on a per-unit basis using machine hours
(MH):

Step 1: Compute total machine hours at “normal” levels of production:

A3B4............................................................................................................................. 20,000 MH
BC11............................................................................................................................. 15,000 MH
C3PO............................................................................................................................ 5,000 MH
Total MH at normal production levels ..................................................................... 40,000 MH

Step 2: Compute the overhead application rate per MH:

Overhead application rate ($100,000 ÷ 40,000 MH)................................................ $2.50 per MH

Step 3: Compute required machine hours on a per-unit basis:

A3B4 (20,000 MH ÷ 6,250 units) .................................................................. 3.2 MH per unit
BC11 (15,000 MH ÷ 5,000 units) .................................................................. 3.0 MH per unit
C3PO (5,000 MH ÷ 2,500 units).................................................................... 2.0 MH per unit

Step 4: Compute maintenance costs allocated to each product on a per-unit basis:

A3B4 (3.2 MH per unit × $2.50 per MH)..................................................... $8.00 per unit
BC11 (3.0 MH per unit × $2.50 per MH)..................................................... $7.50 per unit
C3PO (2.0 MH per unit × $2.50 per MH).................................................... $5.00 per unit

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 75
 PROBLEM 17–7
DIXON ROBOTICS (continued)

b. Assigning maintenance department costs to activity pools:

Step 1: Establish the percent of maintenance department costs to be assigned to each activity cost
pool using the number of work orders as an activity base.
% of total
Work orders for repair activities ....................................................................... 400 20%
Work orders for janitorial activities .................................................................. 1,600 80%
Total work orders issued..................................................................................... 2,000 100%

Step 2: Assign total maintenance department costs of $100,000 to each activity cost pool based on
the percentages computed in step 1.
Costs assigned to the repairs cost pool ($100,000 × 20%).................................................... $ 20,000
Costs assigned to the janitorial cost pool ($100,000 × 80%) ................................................ 80,000
Total costs assigned to cost pools............................................................................................ $ 100,000

Allocating repairs cost pool to product lines:

Step 1: Establish the percent of repairs cost pool to be allocated to each product line using the
number of production runs as an activity base.
% of total
Production runs for A3B4................................................................................... 50 12.5%
Production runs for BC11................................................................................... 150 37.5%
Production runs for C3PO.................................................................................. 200 50.0%
Total production runs ......................................................................................... 400 100.0%

Step 2: Allocate $20,000 in the repairs cost pool to each product line based on the percentages
computed in step 1.
Costs allocated to A3B4 ($20,000 × 12.5%)........................................................................... $ 2,500
Costs allocated to BC11 ($20,000 × 37.5%)........................................................................... 7,500
Costs allocated to C3PO ($20,000 × 50.0%) .......................................................................... 10,000
Total order costs allocated to products.................................................................................. $ 20,000

76 © The McGraw-Hill Companies, Inc., 2005

 PROBLEM 17–7
DIXON ROBOTICS (concluded)

Allocating janitorial cost pool to product lines:

Step 1: Establish the percent of janitorial cost pool to be allocated to each product line using
square footage occupied as an activity base.
% of total
Square feet occupied by A3B4 ............................................................................ 5,000 12.5%
Square feet occupied by BC11 ............................................................................ 10,000 25.0%
Square feet occupied by C3PO ........................................................................... 25,000 62.5%
Total square feet occupied .................................................................................. 40,000 100.0%

Step 2: Allocate $80,000 in the janitorial cost pool to each product line based on the percentages
computed in step 1.
Costs allocated to A3B4 ($80,000 × 12.5%)........................................................................... $10,000
Costs allocated to BC11 ($80,000 × 25.0%)........................................................................... 20,000
Costs allocated to C3PO ($80,000 × 62.5%) .......................................................................... 50,000
Total order costs allocated to products.................................................................................. $80,000

Determining maintenance costs per unit using ABC:

A3B4 BC11 C3PO Total
From repairs cost pool..................................... $ 2,500 $ 7,500 $ 10,000 $ 20,000
From janitorial cost pool................................. 10,000 20,000 50,000 80,000
Total costs allocated......................................... $ 12,500 $ 27,500 $ 60,000 $ 100,000
Units produced ................................................. ÷ 6,250 ÷ 5,000 ÷ 2,500
Maintenance cost per unit............................... $ 2.00 $ 5.50 $ 24.00

c. Using machine hours as a single activity base is likely to result in significant cost distortions for
Dixon. The largest distortion, related to C3PO, results from two underlying reasons: (1) the C3PO
line requires relatively few machine hours, yet it requires a relatively large number of production
runs to produce, and (2) the C3PO line represents a relatively small portion of total production on
a per-unit basis, yet it requires a relatively large proportion of square footage to produce. Since
production runs and square footage represent the company’s primary cost drivers of maintenance
costs, the amount allocated to C3PO on a per-unit basis using machine hours is significantly
understated, as shown below:
A3B4 BC11 C3PO
Maintenance cost per unit (Using ABC) ........................................ $2.00 $5.50 $24.00
Maintenance cost per unit (Using MH).......................................... $8.00 $7.50 $ 5.00

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 77
 SOLUTIONS TO CASES
25 Minutes, Medium CASE 17–1
THE BIDDING WARS

It is tempting to say that underbidding is an unethical practice. But on the other hand, if it is the stan-
dard and accepted practice, a company that does not “play the game” will win no contracts. Of course
the company has an ethical obligation to be “honest” in the bidding process, but it also has an ethical
obligation to its employees and its stockholders to participate competitively “within the rules.”
We do not like Kendahl’s situation, because we believe there is no satisfactory answer. When an entire
industry exists at the mercy of a single customer, we believe it is the customer’s responsibility to
demand ethical conduct and not to reward the less ethical participants. Therefore, we think NASA
should encourage realistic bidding by penalizing unnecessary cost overruns. Kendahl might well lobby
toward this end.

78 © The McGraw-Hill Companies, Inc., 2005

35 Minutes, Medium CASE 17–2
CLASSIC CABINETS

a. If the machine is purchased, yearly depreciation will increase by $50,000 ($500,000/10 years).
Thus, total overhead will increase to $396,000. Production of 10,000 wood cabinets will require
20,000 hours of direct labor and production of 7,500 metal cabinets will require 18,750 hours of
direct labor. The resulting overhead application rate will be:

$396,000
= $10.22 per direct labor hour
38,750 dl hours

The resulting cost per unit for each type of cabinet is:
Wood Metal
Direct materials.................................................................................................... $50 $35
Direct labor........................................................................................................... 20 25
Manufacturing overhead..................................................................................... 20.44 25.55
Total cost/unit................................................................................................... $90.44 $85.55

b. From Mary’s point of view, her per unit costs will decrease if the machine is purchased. Since she
is evaluated on per unit costs, the decision to purchase seems justified. However, if she purchases
the machine, the per unit cost to produce wood cabinets will increase even though there has been
no change in the use of resources by the Wood Division. As equipment purchases affect the per
unit costs of both divisions (through overhead allocation), both managers should be involved in
such decisions.

c. The information needed to evaluate the purchase is whether the direct labor costs saved per unit is
more than the additional per unit cost of using the machine. Since the machine will be used for 10
years and will produce 7,500 cabinets per year, the cost per cabinet of using the machine is
calculated as:
$500,000/75,000 total units produced = $6.67 per cabinet
The direct labor reduction per cabinet by using the machine is .5 hours. Thus, the labor cost
reduction per cabinet is:
.5 hours × $10/hr = $5.00 per cabinet
Thus, although $5.00 in labor cost is saved per unit, the added cost of the machine is $6.67 per
unit, resulting in an overall increase of $1.67 per unit.

d. If each manager’s performance evaluation is based on the unit costs calculated in part a, Walter
will appear to have performed poorly relative to the initial estimated unit costs, while Mary will
appear to have performed extremely well. However, as shown in part c, Mary’s true cost of
producing a metal cabinet would have been $1.67 higher than the initial estimates if the machine
were purchased. Since there would be no real change in the resources used by Walter to produce
wood cabinets, his cost per unit should equal the estimated amount. Thus, the total unit costs as
calculated in part a would not be a fair or accurate representation of either manager’s
performance.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 79
10 Minutes, Easy CASE 17–3
MICA CORPORATION

Under the current bonus system, unethical production managers could increase their bonuses by
purposely understating the square footage occupied by their respective product lines. To prevent this
from happening, each production area should be measured by an independent third party. There is a
second issue to consider here as well. Heating costs are not directly under the “control” of the pro-
duction managers. In other words, managers have very limited power to reduce or eliminate heating
costs. Thus, the company may wish to exclude such costs from the bonus calculation.

80 © The McGraw-Hill Companies, Inc., 2005

30 Minutes, Medium CASE 17–4
BUSINESS WEEK ASSIGNMENT:
THE GM HUMMER

Options or gadgets added on to basic sticker prices include things like luggage racks, chrome wheels,
sun roof, global tracking systems, special interior design equipment, extra speakers, etc. These options
will also need maintenance in the long run and can be costly to maintain because they are not
standard. So getting appropriate replacement parts and finding service technicians that can provide
the direct labor service for the options and gadgets all add to the job cost of repairing an automobile.
In general additional options and gadgets can create significant additional service costs for auto
owners.

When automobiles and trucks are designed, the cost of after purchase services are considered. For
example, automobile companies have recently designed cars with more and more modular
components (e.g. rear wheel component). If some small part of the component stops working properly,
the entire component must be replaced. These modular components can be more costly to replace
than the individual part that stops working. So the initial design of the automobile can have a
significant impact on the cost of after purchase repair work.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 81
 SOLUTION TO INTERNET ASSIGNMENT
30 Minutes, Medium INTERNET 17–1
C. ERICKSON AND SONS, INC.

a. Examples from the web site of products include: restaurants, building conversions, building
renovations, law offices, corporate headquarters, hospital, community center, water treatment
facility. Examples of services provided include construction management (e.g. scheduling,
procurement, budgeting, quality control, reporting); design (value engineering, program, safety);
service agreements to maintain (on call service, quality programs, in-house manpower).

b. Cost accounting will help price products and services, create budgets, procure supplies and track
the financial costs of projects as they are being constructed.

c. It is likely that job order costing is used for construction projects since each building is unique.
However, some service contracts may not require job order costing (for example regular
maintenance services). Both product and service offerings could benefit from ABC because
tracking overhead by cost driver provides management with information that helps them control
costs.

82 © The McGraw-Hill Companies, Inc., 2005