MATERIAL FOR ASSIGNMENT

Questions

4-1Defina grupo de costos, rastreo de costos, asignación del costo, y baso ds

cost allocation.

4-2 How does a job order counting system differ from a system
costing by processes?

4-3 Why might an advertising agency use job order costing?

I am working to execute a Pepsi advertising campaign, while a
bank could use process costing to determine the cost of the
deposits in checking accounts?

Describe the seven steps involved in job order costing.

4-5 What are the two main cost objects that are focused on?
managers in companies that use job order costing?

4-6 Describe three main source documents used in the systems

costing by work orders.

4-7 What is the main concern regarding the source documents that are
what do they use to prepare the records of a work order?

Provide two reasons why most organizations

they use an annual period instead of a weekly or monthly period for
calculate the budgeted indirect cost rates.

Describe the difference between historical costing and normal costing.

Describe two ways in which a construction company can.

Housing can use the information from job order costing.

4-11 Comment on the following statement: "In a normal costing system, the
amounts recorded in the Indirect Expense Control account
manufacturing will always be equal to the amounts of the Expenses account
 allocated manufacturing overhead.

4-12 Describe three different debit entries in the Control T account

products in process with normal costing.

Describe three alternative ways to eliminate indirect costs.

subassigned or overassigned.

When could a company use budgeted costs instead of

real costs to calculate direct labor rates?

4-15 Briefly describe why modern technology such as Exchange

Electronic Data Interchange (EDI) is useful for the
managers.

Exercises

4-16 Job order costing, process costing. In each of the

in the following situations, determine if it would be more appropriate to perform the costing

by work orders or process costing.

an office of public accountants. A landscaping company.
b. An oil refinery. A cola concentrate producer.
A custom furniture manufacturer. a film studio.
d. A tire manufacturer. A law firm.
A textbook publisher. A manufacturer of commercial airplanes.
A pharmaceutical company. An administrative consulting firm.
a advertising agency. A company that produces breakfast cereals.
a clothing manufacturing plant. A food and beverage supply service.
A flour mill. A paper factory.
a paint manufacturer. a. A mechanical workshop.
a medical office.

4-17 Historical costing, normal costing, accounting for expenses

manufacturing overhead. Destin Products uses a costing system for
work orders with two categories of direct costs (direct materials and
direct manufacturing labor) and a group of indirect expenses of
manufacturing. Destin assigns indirect manufacturing costs using costs
of direct manufacturing labor. Destin provides the following
information:
Budget for the year Actual results
2007 for the year 2007
Costs of direct materials $1,500,000 $1,450,000
Direct labor costs
1,000,000 980,000
of manufacturing
Indirect manufacturing costs 1,750,000 1,862,000

1- Calculate the actual and budgeted rates of indirect expenses

manufacturing for 2007.

2. During March, the registration of a work order for Job 626

it contained the following information:

Direct materials used $40,000

Direct manufacturing labor costs $30,000

Calculate the cost of Work 626 using (a) historical costing and (b) costing
normal.

3- At the end of 2007, calculate the indirect manufacturing costs.

subassigned and overassigned with normal costing. Why are there no expenses?
indirect costs sub-assigned or over-assigned with historical costing?

4-18 Job order costing, normal costing, and historical costing.

Anderson Construction assembles residential houses. It uses a system of
costing by work orders with two categories of direct costs (materials
direct costs and direct labor) and a group of indirect costs (support of
assembly). Direct labor hours are the basis for allocation for
the costs of assembly support. In December 2006, Anderson
budgeted $8,000,000 in assembly support costs for 2007 and
160,000 hours of direct labor also for 2007.

At the end of 2007, Anderson compares the costs of various jobs that are
They started and ended in that year.
 Laguna Model Model
Mission
Construction period February-June 2007 May-October 2007
Direct materials $106,450 $127,604
Direct labor $36,276 $41,410
Direct labor hours 900 1,010

Direct materials and direct labor are paid based on a

contract. The costs of each of these items are known when they are used
direct materials or when the hours of direct labor are worked. The
assembly support costs in 2007 were $6,888,000, and the hours of
direct manufacturing labor was 164,000.

1. Calculate (a) the budgeted indirect cost rate and (b) the actual rate of
indirect costs. Why are they different?
2. What are the labor costs of the Laguna and Misión models if...
does it use (a) normal costing, and (b) historical costing?
3. Why does Anderson Construction prefer normal costing over costing?
historic?

4-19 Budgeted overhead rate for manufacturing expenses, expenses

allocated manufacturing overhead. Waheed Company uses costing
normal. Assigns its indirect manufacturing costs by means of a rate
budgeted by machine hour. The following information is available
for 2006.

Budgeted manufacturing overhead costs $2,850,000

Budgeted machine hours 190,000
Actual indirect manufacturing costs $2,910,000
Real machine hours 195,000

Calculate the budgeted rate of indirect manufacturing costs.

2. Calculate the manufacturing overhead costs assigned during 2006.
 3. Calculate the amount of the assigned indirect manufacturing costs or
overassigned.

4-20 Job order costing, accounting for expenses

manufacturing overhead, budgeted rates. Lynn Company uses a
job order costing system in your Minneapolis plant. The plant
It has a machining department and an assembly one. Its system of
job order costing has two categories of direct costs
(direct materials and direct labor) and two groups of indirect expenses from
manufacturing (the indirect costs of the machining department, assigned to
the work based on actual machine hours, and the indirect costs of
assembly department, assigned to jobs based on costs
direct labor costs of manufacturing). The 2007 budget for the
planta es:
Department
or of of
machining assembly
Indirect manufacturing costs $1,800,000 $3,600,000
Direct labor cost of manufacturing $1,400,000 $2,000,000
Direct labor hours of manufacturing 100,000 200,000
Machine hours 50,000 200,000

1. Present a general diagram of Lynn's costing system. Calculate the

budgeted rate of manufacturing overhead costs for each
department.
2. During February, the registration of a work order for Work 494
it contained the following:
Department
or of the assembly
machining
Direct materials used $45,000 $70,000
Direct labor costs of manufacturing $14,000 $15,000
Direct manufacturing labor hours 1,000 1,500
Machine hours 2,000 1,000
Calculate the total manufacturing indirect costs assigned to Job 494.

At the end of 2007, the actual indirect manufacturing expenses were

$2,100,000 in machining, and $3,700,000 in assembly. Assume that
In machining, 55,000 actual machine hours were used, and the costs
the actual direct manufacturing labor for assembly was
$2,200,000. Calculate the overallocated manufacturing indirect expenses or
suballocated for each department.

4-21 Job Order Costing, consulting company. Taylor &

Associates, a consulting firm, has the following budget for the
2007:
Income $20,000,000
Total costs:
Direct costs
Professional workforce $ 5,000,000
Indirect costs
Consulting support 13,000,000 18,000,000
Operating income $ 2,000,000

Taylor has only one category of direct costs (professional labor) and
a single group of indirect costs (customer support). Indirect costs are
they assign jobs based on the costs of professional labor.

1. Prepare a general diagram of the job order costing system.

Calculate the budgeted indirect cost rate for 2007 for Taylor.
& Associates.

2. The profit margin rate for setting the price for the work aims to
generate an operating profit equal to 10% of the income. Calculate the rate of
profit margin as a percentage of labor costs
profesional.

3. Taylor participates in a bidding for a consulting job for Red

Rooster, a fast food chain that specializes in poultry.
the budget breakdown of the professional labor of the work is as follows
 continue:

Hand category of Budgeted rate

Budgeted hours
professional work for now

Director $200 3
Socio 100 16
Associate 50 40
Assistant 30 160

Calculate the budgeted cost of the work for Red Rooster. How much is it?
Will Taylor quote the job if he wants to obtain an operating profit of 10%?
income?

4-22 Service industry, period of time used to calculate the

indirect cost rates. Printers, Inc. produces annual reports and
marketing materials for large companies. There are three categories of
costs in your normal costing system: direct materials, labor
direct costs, indirect expenses (both variable and fixed) assigned based on
the costs of direct labor. Jill Liu, the controller, is concerned that a
increasing number of customers wait until the last minute to send their
final orders, which causes congestion and an increase in the expenditure rate
variable manufacturing overhead due to increased overtime
maintenance of machinery and facilities. This peak occurs during the
"allocated" months of January, February, and March, when many companies
they rush to complete their annual reports and their materials
marketing. Liu obtains the following budgeted data for the year 2006:
A B. C E F
1 January-Hand April-June Jul-Sept Oct-Dec. Total

2 Direct materials $900,000 $620,000 $595,000 $605,000 $2,720,000

3 Labor costs $400,000 $280,000 $250,000 $270,000 $1,200,000

direct
4 Variable indirect costs 90% 60% 60% 60%
as a percentage of the
labor costs
direct
5 Fixed indirect costs $300,000 $300,000 $300,000 $300,000 $1,200,000

If you want to use Excel to solve this exercise, go to Excel Practices at

[Link]/horngren/ydownload the template for the
exercise 4-22.
1. Consider Job 332, an order of 100,000 sales catalogs for the
local shopping center. The actual direct material costs for this
work amounts to $10,000, and the actual labor costs amount to
$6,000. Calculate the cost of Work 332 (a) if it is completed in January-March of
2006 using the budgeted indirect cost rate for that
quarter to allocate indirect costs, (b) if it is carried out in
July-September 2006 applying the budgeted expense rate
indirect costs for that quarter to allocate indirect expenses, and (c) if it is used
the average budgeted indirect expense rate for the year 2006 for
assign indirect expenses.
2. To cost each job, Printers, Inc. currently uses the rate
budgeted variable indirect costs for the quarter in which it
complete the work and a budgeted rate of fixed indirect expenses with
base en los gastos indirectos fijos anuales y los costos presupuestados de
annual direct labor. Calculate the cost of Work 332 with this.
method if carried out in (a) January-March 2006 and (b) July-September
2006.
3. Printers, Inc. sets the price of each job at 125% of the costs. What
What method would you recommend for costing work for the purpose of fixation?
Of prices? Why? Briefly explain your answer.

4-23 Accounted!! for indirect manufacturing expenses. Consider the

Next information selected for Pittsburgh Forging Company for the
2006.

Budgeted indirect manufacturing costs $7,000,000

Budgeted machine hours 200,000
Actual manufacturing overhead costs $6,800,000
Actual machine hours 195,000
The company uses normal costing. Its job order costing system
the work has a single group of indirect manufacturing costs. The costs are
They assign jobs using a budgeted machine-hour rate.
Any amount that has been undersigned or oversigned is canceled.
against the cost of goods sold.

1. Calculate the budgeted indirect cost rate.

2. Prepare the journal entries to record the allocation of expenses
manufacturing indirect costs.
3. Calculate the amount of the assigned indirect manufacturing costs.
overassigned. Is this amount relevant? Prepare a journal entry
to eliminate this amount.
Gastos indirectos de fabricación presupuestados $7,000,000
Budgeted machine hours 200,000
Actual manufacturing overhead costs $6,800,000
Actual machine hours 195,000

4-24 Job order costing, journal entries. University of Chicago

Press, the Universal publisher? of Chicago, is wholly owned by the
university. It does most of its work for other departments thus
university, which pays them as if it were an external company.
The editorial also publishes and keeps stocks of books for general sale.
Use normal costing to cost each job. Your costing system
work orders have two categories of direct costs (direct materials and
direct manufacturing labor) and a group of indirect costs (expenses
manufacturing overhead, allocated based on direct labor costs
of manufacturing.

The following data (in thousands of dollars) belongs to the year 2007:
Direct materials and supplies purchased on credit $ 800
Direct materials used 710
Indirect materials delivered to various departments of 100
production
Direct manufacturing labor 1,300
Indirect labor incurred in manufacturing 900
 various
production departments 400
Various indirect manufacturing expenses incurred in
various
production departments (usually they
they would detail how

repairs, photocopying, public services, etc. 550

Indirect manufacturing expenses allocated at 160% of the
costs
direct manufacturing labor ?
Cost of goods manufactured 4,120
Income 8,000
Cost of goods sold 4,020
Inventories, December 31, 2006 (not 2007):
Material control 100
Control of work in progress 60
Finished product control 500

The term indirect manufacturing costs is not used uniformly. Others

common terms in printing presses include indirect costs of work and expenses
indirect libraries.

1. Prepare a general diagram of the job order costing system

what is used in Chicago University Press.
2. Prepare journal entries to summarize the transactions of the year 2007.
As a final entry, I canceled the expenses against the cost of goods sold.
indirect manufacturing costs underassigned or overassigned at the end of
exercise. Number your seats. You can skip the explanations for each.
seat.
3. Show the T accounts of all inventories, Cost of goods sold
sold, Control of indirect manufacturing costs, and Indirect expenses of
assigned manufacturing.

4-25 Job order costing, journal entries, and source documents

(continuation of exercise 4-24). For each journal entry prepared in your
response to exercise 4-24, (a) indicate the source document that with the most
probabilidad autorizaría el asiento, y (b) proporcione una descripción del asiento
in the auxiliaries, if any entry is necessary.

4-26 Costing by work orders, journal entries. Donnell Transpon

dedicated to assembling prestigious prefabricated houses. Its costing system for
work orders have two categories of direct costs (direct materials and
direct manufacturing labor) and a group of indirect costs (expenses
budgeted manufacturing overhead assigned at $30 per machine hour
2007). The following data (in millions of dollars) belong to the
operations of 2007:
{"Control de materiales, saldo inicial, 1 de enero de 2007":"Material control, initial balance, January 1, 2007"} $ 12
Control of products in process, initial balance, January 1, 2007 2
Control of finished products, initial balance, January 1, 2007 6
Materials and supplies purchased on credit 150
Direct materials used 145
Indirect materials (supplies) delivered to various 10
production departments
Direct manufacturing labor 90
Indirect manufacturing labor incurred for various 30
production departments
Depreciation of manufacturing plant and equipment 19
Various indirect manufacturing expenses incurred (in such a way)
ordinary would be detailed as repairs, utilities,
etc., with a corresponding credit to various liability accounts) 9
Expenses indirect of manufacturingassigned, 2,100,000
actual machine hours ?
Cost of goods manufactured 294
Income 400
Cost of goods sold 292

1. Prepare a general diagram of the costing system of Donnell Transport.

2. Prepare journal entries and number them; transfer them to the T-accounts. What is the
final balance of the Work in Process account?
3. Show the journal entry to eliminate manufacturing indirect costs
 subassigned or overassigned directly as a cancellation at the end
from the exercise against Cost of Goods Sold. Pass this entry to the
T accounts.

4.27 Cost per work orders, unit cost, products in process.

Raymond Company produces 'musical hand tubes' with concert quality.
Each job is unique. In April 2007, he completed all his pedi-Paraenc|People, and
later, in May 2007, he focused only on two jobs, M1 and M2:
A B C
1 Raymond Company, May 2007 Work M1 Job M2
2 Direct materials $ 75,000 $50,000
3 Direct manufacturing labor 275,000 200,000

The direct manufacturing labor is paid at a rate of $25 per hour.

indirect manufacturing costs are allocated at a budgeted rate of $20 per
direct labor hours of manufacturing. Only the Work

My semester ended in May.

If you want to use Excel to solve this exercise, go to Excel Practices at

[Link]/

I downloaded the template for exercise 4-27.

1 Calculate the total cost of Work M1.

1,500 tubes were produced for Work MI. Calculate the cost per tube.
Prepare the journal entry when transferring Work M1 to products.
finished.
4 What is the final balance of the Work in Progress Control account?

4-28 Job order costing; historical costing, normal costing, and

variation of normal costing. Chirac & Partners, an accounting firm
publics based in Quebec, specializes in audit services. Its
job order costing system has a single cost category
direct costs (professional labor) and a single group of indirect costs (support)
of auditing, which contains all the costs of the support department
audit). The audit support costs are allocated to individual jobs
through hours of real professional labor. Chirac & Partners employs
ten professionals who provide audit services. The amounts
budgeted and actual for 2007 are as follows:
A B C
1 Chirac & Partners
2 Budget for the year 2007
3 Remuneration of professional labor $960.000
4 Costs of the audit support department $720.000
5 Hours of professional labor billed to clients 16,000 hours
6
7 Actual results for the year 2007
8 Costs of the audit support department $744.000
9 Hours of professional labor billed to clients 15,500 hours
10 Real cost rate of professional labor $58 per hour

If you want to use Excel to solve this exercise, go to Excel Practices in

[Link]/ horngrenand downloaded the template for the
exercise 4-28.

1. Calculate the rate of direct costs and the rate of indirect costs by
hour of professional labor for 2007 with (a) historical costing, (b)
the normal costing, and (c) the variation of the normal costing that uses the rates
budgeted for direct costs.
2. For the 2007 audit of Pierre & Co., 110 hours were budgeted.
professional labor time. The professional labor time
The actual time spent on the audit was 120 hours. Calculate the cost of the
audit of Pierre & Co., through (a) historical costing, (b) costing
normal, and (c) the variation of normal costing that uses budgeted rates
for direct costs. Explain any differences in the cost of the
work.

4-29 Costs of research projects, variation in rates of

indirect costs. Prentiss University is well known for its research.
pioneering academic. Their professors regularly participate in tenders and
grants are awarded for research projects financed by the government and by
private institutions. Research teams use resources from the
university such as laboratories, computers, office space and
libraries. By 2006, the research dean of Prentiss has compiled
the following budgeted costs of research projects in four
academic departments:

_A B C D E F
1 Cost category Department
in thousands) Arts Sciences Engineering Business Total
2 Liberals Natural s
Direct costs (travel, $2.10
$1,200 $5,000 $5,500 $13,800
3 materials) 0
4 Salaries of teachers 1,000 1,600 6,100
Remuneration of the 50
700 1,500 2,500 5,200
5 graduates 0
Indirect expenses such as
as an office space,
850 8,030 9,600 5,250 23,730
library, computers
6e facilities

When a professor applies for a grant, Prentiss University gives them

request to present a cost budget in which to use the following
cost categories: direct costs (for example, travel and materials)
specific to the project), direct labor costs (for the time of
the teachers and the graduates), and indirect expenses (for the use of resources of the
university). Indirect costs should be calculated at a rate I of expenses.
210% indirect costs of the budgeted direct labor costs of
project.

If you want to use Excel to solve this exercise, go to Excel Practices at

[Link].netl1horngren/y download the template for the
exercise 4-29.
1. Calculate a single common indirect expense rate for all
departments based on total budgeted indirect expenses and
the total budgeted costs of direct labor.
2. Calculate the budgeted cost for the research projects
 presented to the financing entities by each department
academic in 2006, using the method required by Prentiss University.
1
3. Calculate the budgeted cost of the research projects in each
academic department in 2006.1
4. The professors of the Liberal Arts Department at Prentiss are
starting to lose many research projects to others
small liberal arts schools based on cost. Which one do you consider?
What could be the reason for this?

5. If Liberal Arts professors were allowed to charge their own fees

of indirect costs of 50% of direct labor costs, what would it be?
the common rate of indirect expenses that would need to be applied
departments of Natural Sciences, Engineering, and Business based on the
budgeted indirect costs and direct labor costs of
these departments?
6. What problems, if any, do you think would arise if the approach is adopted?
proposed in requirement 5?

Problems

4-30 Costing by work orders, accounted for the expenses

manufacturing overhead, budgeted rates. Solomon Company uses
a job order costing system in your plant in Dover, Delaware.
The plant has a machining department and a finishing one. Solomon
uses standard costing with two categories of direct costs (materials
direct materials and direct labor) and two groups of indirect manufacturing costs
(the machining department, with machine hours as the basis of
assignment, and the finishing department, with direct labor costs
manufacturing as the allocation base). The budget for 2006 for the [
the plant is the following:
Department Department
machining finished

Indirect manufacturing costs $10,000,000 $8,000,000

Direct manufacturing labor costs $ 900,000 $4,000,000
Direct manufacturing labor hours 30,000 160,000
Machine hours 200,000 33,000

1. Prepare un diagrama general del sistema de costeo por órdenes de trabajo

of Solomon.
2. What is the budgeted indirect cost rate in the department?
of machining and in finishing?
3. During the month of January, the record of a work order for the Work
431 shows the following:
Department Department
of of
machining machining
Direct materials used $14,000 $3,000
Direct manufacturing labor costs $ 600 $1,250
Direct manufacturing labor hours 30 50
Machine hours 130 10

Calculate the total manufacturing overhead costs assigned to Job 431.

4. Assuming that Job 431 consisted of 200 units of product,
What is the cost per unit?
5. The amounts at the end of 2006 are as follows:
Department Department
of machining of machining
Indirect manufacturing costs incurred $11,200,000 $7,900,000
Direct manufacturing labor costs $ 950,000 $4,100,000
Machine hours 220,000 32,000

Calculate the underapplied or overapplied manufacturing overhead costs.

for each department and for the Dover plant as a whole.

6. Why could Solomon use two different groups of indirect costs?

of manufacturing in its job order costing system?

4-31 Service industry, job order costing, dispatch of

Keating & Associates is a law firm that is
specializes in labor relations and advisory for workers. Employs 25
professionals (5 partners and 20 associates) who work directly with their
clients. The average total compensation budgeted per professional for the
2005 is $104,000. It has been budgeted that each professional bills 1,600.
hours to the clients in 2005.

All professionals work for clients to a maximum of 1,600 hours of

available billing. All costs of professional labor are
they are included in a single category of direct costs and work is tracked on
a base per hour.

All costs of Keating & Associates that are not labor-related

professionals are included in a single group of indirect costs (legal support) and are
They are assigned to jobs that use hours of professional labor as the basis.
allocation. The budgeted level of indirect costs for 2005 is $
2,200,000.

1. Prepare a general diagram of the job order costing system.

from Keating.
2. Calculate the budgeted rate of direct costs per hour of labor
professional work of the year 2005.
3. Calculate the budgeted indirect cost rate per hour of labor
professional work of the year 2005.
4. Keating & Associates is considering participating in the bidding for two
trabajos:
a. Litigation for Richardson, Inc., which requires 100 budgeted hours
of professional labor.
b. Contract work for Punch, Inc., requiring 150 hours
budgeted professional labor.

Prepare a cost estimate for each job.

4-32 Service industry, job order costing and two categories

of indirect costs, law firm (continuation of the problem
Keating has just finished reviewing his job order costing system
work. This review included a detailed analysis of the way in which the
Previous works used the resources of the office and interviews with the
Personnel on what factors generate the level of indirect costs. The
management concluded that a system with two categories of direct costs
professional labor of the partners and professional labor of the
associates) and two categories of indirect costs (general support and support
secretarial) would generate more accurate labor costs. The information
budgeted for 2005 related to the two categories of costs
the direct ones are the following:

Labor Labor
professional of professional of
partners associates
Number of professionals 5 20
Hours of time to bill by professionals 1,600 per year 1,600 per year
Total remuneration (average by profession; $200,000 $80,000

The budgeted information for 2005 related to the two categories

Indirect costs are:
General support Secretarial support
Total costs $1,800,000 $400,000

Cost allocation base Professional labor hours Hours of

labor of partners

1. Calculate the budgeted direct cost rates for the year 2005 for
(a) professional partners, and (b) professional associates.
2. Calculate the budgeted indirect cost rates for the year 2005 by
(a) apoyo general, y (b) apoyo secretarial.
3. Calculate the budgeted costs for the jobs of Richardson and Punch,
given the following information:

Richardson, Inc. Punch, Inc.

60 hours 30 hours
Professional partners
40 hours 120 hours
Professional associates

4. Comment on the results obtained in requirement 3. Why are the costs

Are the jobs different from those calculated in problem 4-31?
4-33 Allocation of indirect costs. (Adapted from Z. Iqbal) Zaf Radiator
The company uses a normal costing system with a single cost group.
indirect manufacturing costs and machine hours as a basis for cost allocation.
The following data is for 2007:

Budgeted manufacturing indirect costs $4,800,000

Cost allocation base Machine hours
Budgeted machine hours 80,000
Indirect manufacturing costs incurred $4,900,000
Actual machine hours 75,000

The machine-hours information and the final balances (before the apportioning of
Indirect costs that are under-allocated or over-allocated are as follows:
Hours-maximum Balance at the end

quinoa of the exercise

real 2007
Cost of goods sold 60,000 $8,000,000
Finished products control 11,000 1,250,000
Control of products in process 4,000 750,000

1. Calculate the budgeted manufacturing overhead rate for the

year 2007.
2. Calculate the underassigned or overassigned indirect manufacturing costs.
from Zaf Radiator in 2007. Remove this amount by:
a. The cancellation against the Cost of Goods Sold.
b. Proration based on the final balances (before proration) of the
Control accounts for products in process, Control of products
finished goods, and Cost of Goods Sold.
c. Proration based on the amount of allocated indirect expenses
(before the apportionment) and in the final balances of the Control accounts
of products in process, Control of finished products, and Cost
of the merchandise sold.
3. What method do you prefer to use in requirement 2? Explain your answer.

4-34 Normal costing, allocation of indirect expenses, work in

retrospective. (Adapted from M. Rajan) Gibson Manufacturing uses costing
normal for your job order costing system, which has two
categories and direct costs (direct materials and direct labor of
manufacturing) and a category of indirect costs (indirect expenses of
manufacturing). The following information was obtained in the year 2007:
Budgeted manufacturing overhead costs $4,800,000
Cost allocation base Machine hours
Budgeted machine hours 80,000
Indirect manufacturing costs incurred $4,900,000
Real machine hours 75,000

1. Use the information from the first two panels to calculate (a) the costs
direct manufacturing labor in 2007, and (b) the cost of
direct materials used in 2007.
2. Calculate the final inventory of work in progress as of December 31
2007.

4-35 Allocation of indirect costs, two groups of indirect costs.

Glavine Corporation uses two groups of manufacturing indirect costs: one
for the indirect expenses incurred in the machining department 1
and another for the indirect expenses incurred by the assembly department.
Glavine uses a normal costing system. It assigns indirect expenses to the
machining department jobs me-idiante a budgeted rate of
the indirect costs per machine hour, and for the jobs of the department of
assembly applies a budgeted direct labor rate per hour of
fabrication.

The following data is for 2006:

 Department of Department of
machining assembly

Budgeted rate of expenses $60 per machine hour $40 per labor hour
manufacturing overhead expenses of direct work of
$6,200,000
actual manufacturing overhead manufacturing
$4,700,000

The data on machine hours and direct labor hours for manufacturing,
the final balances are as follows:

Machine hours Hand hours Balance before the

royal coins direct work of proration 31 of
real manufacturing December of
2006

Cost of goods sold 67,500 90,000 $16,000,000

Finished products control 4,500 4,800 750,000

In-process product control 18,000 25,200 3,250,000

1. Calculate the undersupplied or oversupplied indirect expenses in each

department in the year 2006. Remove the assigned amount or
overassigned based department using:
a. Cancellation against the Cost of Goods Sold
b. Proration based on the final balances (before proration) in the accounts
of Cost of goods sold. Control of finished products, and
Control of products in process.
c. Proration based on the amount of allocated indirect costs (before the
proration) in the final balances of the Cost of Goods accounts
sold, Finished products control, and Control of products in
process.

2. Explain which allocation method you prefer in the requirement.

4-36 Relationships of the general ledger, suballocation, and overallocation.

Needham Company uses a normal costing in its
job order costing system. The partially completed T accounts
finished and the additional information for Needham in 2006 is as follows:
Material control Product control in Product control
direct process finished
1-1-2006 30,000 380,000 1-1-2006 20,000 1-1-2006 10,000 900,000
400,000 Direct labor 940,000
of manufacturing
360,000

Control of indirect expenses Indirect expenses of Cost of the merchandise

of manufacturing assigned manufacturing sold

540,000

Additional information:
a. The direct labor wage rate for manufacturing was $15 per
hour.
b. Indirect manufacturing costs were allocated at $20 per labor hour.
direct manufacturing work.
c. During the exercise, sales revenue was $1,090,000, and the
marketing and distribution costs amounted to $140,000.

1. What was the amount of direct materials that were delivered to

production during 2006?
2. What was the amount of the manufacturing overhead costs allocated to the
jobs during 2006?
3. What was the total cost of the completed works during 2006?
4. What was the balance of the work-in-progress inventory as of December 31?
from 2006?
5. What was the cost of goods sold before the allocation of expenses?
overallocated or underallocated indirects?
6. What were the allocated indirect manufacturing costs or
overassigned in 2006?
7. Eliminate the underallocated or overallocated manufacturing overhead expenses
using:
 a. The cancellation against the Cost of Goods Sold.
b. The allocation based on the final balances (before the allocation) in the
Control accounts of products in process, Control of products
completed, and Cost of goods sold.
8. With the use of each of the approaches applied in requirement 7,
Calculate the operating profit of Needham for 2006.
9. Which approach to requirement 7 does Needham recommend using?
Briefly explain your answer.

4-37 General overview of the relationships of the ledger. Blakely Company

it is a small machine shop that uses normal costing in its systems.
costing by work orders. The total debits and the total debits in certain
Accounts one day before the end of the exercise are as follows:

30 de diciembre de 2005
■ Total of Total of
debts credits
Material Control $100,000 $ 70,000
Control of products in process 320,000 305,000
Control of indirect expenses of the manufacturing department 85,000
Control of finished products 325,000 300,000
Cost of goods sold 300,000
Allocated manufacturing indirect costs 90,000

All purchased materials are direct materials. Note that the 'total of
"debts" in the inventory accounts would include the balances of the initial inventory as of
January 1, 2005, if any. The total debits and the total credits in the table
previously include the following:
a. The manufacturing labor costs per business day of the 31st
December: direct manufacturing labor for $5,000, and labor
indirect manufacturing cost of $1,000.
b. Various indirect manufacturing expenses incurred on December 31:
1,000 dollars.

Additional information:
a. Manufacturing indirect costs have been allocated as a percentage of
 the direct labor manufacturing costs until December 30.
b. The direct materials purchased during 2005 totaled $85,000.
c. There was no return of direct materials to the suppliers.
The direct manufacturing labor costs amounted to $150,000.
excluding the business day of December 31 mentioned earlier.

1. Use T-accounts to calculate the initial balances as of January 1, 2005

for the accounts of Material Control, Work in Progress Control,
and Control of finished products.
2. Prepare all the adjusting and closing journal entries for the accounts
previous. Suppose that all indirect manufacturing costs
sub-allocated or over-allocated are directly closed against the
cost of goods sold account.
3. Calculate the final inventory balances as of December 31, 2005, after
the adjustments and closures for the Material Control accounts, Control
products in process, and control of finished products.

4-38 Relationships of the ledger, suballocation and overallocation,

service industry. Brody and with a consulting company in
engineering uses a variation of normal costing in its costing system by
work orders. Load the fees paid to experts into the jobs
externals and the preparation of plans at real costs, the labor costs of
direct professional work at a budgeted direct labor rate, and the
indirect engineering support costs at a budgeted expense rate
indirect

Brody maintains a "Work in Progress Control" account in his book.

greater than accumulates all the costs of the ongoing work. When it is finished
a job, Brody invoices the client immediately and transfers the cost of the work
terminated to an account of "Cost of billed jobs".

The following data belongs to 2007:

1. Direct costs of fees and plans (all in cash) $ 150,000
2. Costos reales de mano de obra directa profesional (todo en efectivo) $1,500,000
3. Costs of professional direct labor charged to the jobs to a
budgeted direct labor rate of $50 per hour of labor
of direct professional work $1,450,000
4- Actual indirect engineering support costs (all in cash) $1,140,000
5. Indirect engineering support expenses allocated at 80% of the costs
direct professional labor charged to the jobs
(80% of $1,450,000) $1,160,000
6. Cost of billed work $2,500,000
7- Income from billed work $3,500,000

1- Prepare a summary of the journal entries for the transactions

previous ones using these accounts: Work in process control, Cost of
invoiced work, Control of direct professional labor, Cost
direct professional labor charged to the jobs, Expense control
indirect engineering support costs, indirect engineering support expenses
assigned, and Cash Control.
2- As a final entry, directly cancel the assigned balances or
overassigned at the end of the exercise against the account called Cost of
the billed jobs.
3- Calculate Brody's gross profit margin in 2007.

4-39 Assignment and allocation of direct labor costs of

manufacturing. (Largely adapted from SMA) Nicole Limited is a company
that produces machinery made to order. Its costing system by orders of
work (with normal costing) has two categories of direct costs
(direct materials and direct labor for manufacturing) and a group of costs
indirect costs (indirect manufacturing expenses, assigned using a rate)
budgeted based on the direct labor costs of manufacturing.
The budget for 2007 was:

Direct labor for manufacturing $420,000

Indirect manufacturing costs $252,000

At the end of 2007, two jobs were not completed: Number 1768B (the costs
Total direct manufacturing labor costs were $11,000 and the number
1819C (the total direct labor manufacturing costs were
$39,000). The machine time totaled 287 hours for job 1768B and
647 hours for the 1819C. The direct materials delivered for the work.
1768B rose to $22,000, and for number 1819C they were $42,000.

The total charges to the indirect manufacturing expense control account for
the exercise amounted to $186,840. The direct labor costs of
The manufacturing of all the jobs totaled $400,000, which represents 20,00!
direct manufacturing labor hours.

There were no initial inventories. In addition to the Product Control account in

proceso, la cuenta de Control de productos terminados mostró un saldo de
$156,000 (including direct labor manufacturing costs of
$40,000). The revenues for 2007 totaled $2,700,680, the cost of the
The merchandise sold amounted to $1,600,000, and the marketing costs totaled
$857,870. Nicole sets prices based on cost-benefit.
current affairs uses a cost-plus margin directive of 40% of the cost.

1. Prepare a detailed table showing the final balances in the accounts of

the inventories and the Cost of Goods Sold account (before
consider any underspent or overspent indirect expense.|. Also
show the allocated indirect manufacturing costs included in these
final balances.
2. Calculate the underapplied or overapplied manufacturing overhead costs
for the year 2007.
3. Prorate the amount calculated in requirement 2 based on:
a. The final balances (before the proration) of the Control accounts
products in process, Control of finished products and Cost of the
merchandise sold.
b. The amount of indirect expenses allocated (before apportionment) in the
final balances of the Control accounts for work in process.
Finished goods control and Cost of goods sold.
4. Suppose that Nicole decides to charge against the Cost account of the
merchandise sold any indirect manufacturing expense subassigned or
overassigned. Will the operating profit then be greater or less than the
What would have been the result of the prorating applied to requirements 3a and 3b?
5. Calculate the cost of Work No. 1819Cs if Nicole Limited had used the
 adjusted allocation rate approach to eliminate indirect costs
of subcontracted or oversubscribed manufacturing in 2007.

4-40 Costing by work orders, hiring, ethics. Jack Halpern is

owner and CEO of Aerospace Comfort, a company
specialized in the manufacturing of aircraft seats. It has just received a
copy of a letter addressed to the General Audit Section of the Navy
The United States believes that it comes from a former Aerospace employee.

Dear Sir:

Aerospace Comfort manufactured 100 X7 seats for the Navy in 2007. Perhaps
I would be interested to know the following:

1. The costs of direct materials billed for the 100 seats X7 were
$25,000.
2. The direct labor costs of manufacturing billed by the 100
Seats X7 were $6,000. These costs include 16 hours of labor.
machine preparation work at $25 per hour, amount that was included
also in the group of indirect manufacturing costs. The $6,000 also
includes 12 hours of design time at $50 per hour. The design time is
explicitly identified as a cost that the Navy will not reimburse
3. The indirect manufacturing costs charged for the 100 X7 seats
were $9,000 (150% of direct manufacturing labor costs).
This amount includes the 16 hours of preparation labor.
machines at $25 per hour, incorrectly included as part
of the direct labor manufacturing costs.

You might also be interested to know that about 40% of the direct materials
se compran a Frontier Technology, compañía cuyo 51% es propiedad del
Brother of Jack Halpern. For obvious reasons, this letter is not signed.

cc: to: The Wall Street Journal

Jack Halpern, executive director of Aerospace Comfort

The Aerospace Comfort contract states that the Navy reimburses

Aerospace 130% of the total costs 4 manufacturing. Assume that the facts
The descriptions in the letter are correct when I answer the following questions.

1. What is the amount of the cost per seat X7 that Aerospace Comfort billed?
to the Marina? Suppose that the actual costs of direct materials were
$25,000.
2. What is the amount per seat X7 that Aerospace should have invoiced to the
Marina? Suppose that the actual costs of direct materials were
$25,000.
3. What should the Navy do to restrict its procedures?
supply in order to reduce the likelihood of such situations occurring
Will they become recurrent in the future?

Collaborative learning problem

4-41 Service industry, job order costing, accounting

of indirect costs, budgeted rates. Jefferson Company, contractor of
paint for buildings and factories, uses the standard costing system for costing
each job. Its job order costing system has two categories
of direct costs of direct materials and direct labor) and a group of
indirect costs known as indirect expenses. For each job, Jefferson assigns
indirect costs at a budgeted rate of 80% of labor costs
direct work.

Jefferson provides the following additional information for February 2007:

As of February 1, 2007, Job A21 was the only one that was located in
process, and for this, direct material costs had been incurred for
$30,000 and in direct labor costs of $50,000.
The works A22, A23, and A24 began in February.
The direct materials used during February cost $150,000.
4. The direct labor costs for February were $120,000.
The actual indirect costs for February were $102,000.
On February 28, 2007, only Work A24 was still in progress, having
incurred in the following costs: direct materials $20,000 and costs of
direct labor 40,000.
Jefferson maintains a Work in Progress Control account in his book.
mayor. As it is finished or its cost is transferred to the Cost account
of billed work. Every month, Jefferson closes any indirect expense
assigned against the Cost account of billed jobs.

1. Proporcione un ejemplo de un costo directo y otro ejemplo de un gasto

indirect for a job done by Jefferson Company.
2. Calculate the indirect costs assigned to Job A21 as of February 1.
2007.
3 Calculate the indirect expenses allocated to Job A24 as of February 28.
2007.
4. Calculate the underallocated or overallocated indirect expenses for February.
2007.
Calculate the cost of the billed works for February 2007.