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Chapter 17: Q. 17-24RQ (page 938)
How is the predetermined overhead allocation rate used by service companies?
The service companies use the predetermined overhead allocation rate for allocating the indirect costs to individual jobs by applying it to the actual working hours.
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The manufacturing records for Sporty Kayaks at the end of the 2018 fiscal year show the following information about manufacturing overhead:
Overhead allocated to production | \(409,200 |
Actual manufacturing overhead cost | 432,000 |
Predetermined overhead allocation rate | \)44 per machine hours |
Requirements
2. Was manufacturing overhead overallocated or underallocated for the year, and by how much?
Superior Construction, Inc. is a home builder in Arizona. Superior uses a job order costing system in which each house is a job. Because it constructs houses, the company uses an account titled Construction Overhead. The company applies overhead based on estimated direct labor costs. For the year, it estimated construction overhead of \(1,150,000 and total direct labor costs of \)5,750,000. The following events occurred during August:
a. Purchased materials on account, \(400,000.
b. Requisitioned direct materials and used direct labor in construction. Recorded the materials requisitioned.
Direct material | Direct Labor | |
House 402 | \)58,000 | \(44,000 |
House 403 | 62,000 | 32,000 |
House 404 | 61,000 | 58,000 |
House 405 | 86,000 | 57,000 |
c. The company incurred total wages of \)300,000. Use the data from Item b to assign the wages. Wages are not yet paid.
d. Depreciation of construction equipment, \(6,700.
e. Other overhead costs incurred: Equipment rentals paid in cash, \)30,000; Worker liability insurance expired, \(7,000.
f. Allocated overhead to jobs.
g. Houses completed: 402, 404.
h. House sold on account: 404 for \)250,000.
Requirements
1. Calculate Superior’s predetermined overhead allocation rate for the year.
2. Prepare journal entries to record the events in the general journal.
3. Open T-accounts for Work-in-Process Inventory and Finished Goods Inventory.
Post the appropriate entries to these accounts, identifying each entry by letter.
Determine the ending account balances, assuming that the beginning balances
were zero.
4. Add the costs of the unfinished houses, and show that this total amount equals the ending balance in the Work-in-Process Inventory account.
5. Add the costs of the completed house that has not yet been sold, and show that this equals the ending balance in Finished Goods Inventory.
6. Compute gross profit on the house that was sold. What costs must gross profit
cover for Superior Construction?
Following is a list of cost system characteristics and sample companies. Match each to either job order costing or process costing.
h. A company that bottles milk into one-gallon containers.
June production generated the following activity in Bentley Chassis Company’s Work-in-Process Inventory account:
June 1 balance | \(36,000 |
Direct materials used | 32,000 |
Direct labor assigned to jobs | 40,000 |
Manufacturing overhead allocated to jobs | 28,000 |
Additionally, Bentley Chassis has completed Jobs 142 and 143, with total costs of
\)37,000 and $48,000, respectively.
Requirements
4. What is the gross profit on Job 143?
Why would the manager of a service company need to use job order costing?
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