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Chapter 4: Problem 31

Job costing, journal entries. Donald Transport assembles prestige manufactured homes. Its jobcosting system has two direct-cost categories (direct materials and direct manufacturing labor) and one indirect-cost pool (manufacturing overhead allocated at a budgeted \(\$ 31\) per machine-hour in 2017 ). The following data (in millions) show operation costs for 2017 : 1\. Prepare an overview diagram of Donald Transport's job-costing system. 2\. Prepare journal entries. Number your entries. Explanations for each entry may be omitted. Post to T-accounts. What is the ending balance of Work-in- Process Control? 3\. Show the journal entry for disposing of under- or overallocated manufacturing overhead directly as a year-end writeoff to cost of Goods Sold. Post the entry to T-accounts. 4\. How did Donald Transport perform in \(2017 ?\)

Short Answer

Expert verified
In summary, we analyzed Donald Transport's job-costing system by preparing an overview diagram depicting the flow of direct materials, direct manufacturing labor, and manufacturing overhead costs through the various accounts. We then recorded the journal entries and determined the ending balance of Work-in-Process Control. Additionally, we disposed of the under- or overallocated manufacturing overhead and compared the actual costs of goods sold with the budgeted costs to analyze the company's performance in 2017.

Step by step solution

01

Prepare an overview diagram of Donald Transport's job-costing system

In the overview diagram, we need to show direct materials, direct manufacturing labor, and manufacturing overhead being allocated to the Work-in-Process Control account, which will then be transferred to the Finished Goods Control account and, ultimately, to Cost of Goods Sold. The diagram will look like this: Direct Materials + Direct Manufacturing Labor + Manufacturing Overhead (Allocated at \(\$31\)/machine-hour) -> Work-in-Process Control -> Finished Goods Control -> Cost of Goods Sold
02

Prepare journal entries and T-accounts for 2017

Now, we will prepare the journal entries (without explanations) for Donald Transport's job-costing system and post them to the corresponding T-accounts. -JE1: Direct Materials Control Direct Manufacturing Labor Control Manufacturing Overhead Allocated (at \(\$31\)/machine-hour) Work-in-Process Control -T-Account: Work-in-Process Control Debit: Direct Materials Control, Direct Manufacturing Labor Control, Manufacturing Overhead Allocated Credit: -JE2: Work-in-Process Control Finished Goods Control -T-Account: Finished Goods Control Debit: Work-in-Process Control Credit: -JE3: Finished Goods Control Cost of Goods Sold -T-Account: Cost of Goods Sold Debit: Finished Goods Control Credit: As per the T-accounts above, the ending balance of Work-in-Process Control is the sum of the debit entries (Direct Materials Control, Direct Manufacturing Labor Control, and Manufacturing Overhead Allocated) minus any credits made.
03

Journal entry for disposing of under- or overallocated manufacturing overhead

To dispose of under- or overallocated manufacturing overhead, we will credit or debit the manufacturing overhead allocated and directly write off the difference to Cost of Goods Sold. -JE4: Manufacturing Overhead Allocated (at \(\$31\)/machine-hour) Cost of Goods Sold (for the difference in under- or overallocation) -T-Account: Manufacturing Overhead Allocated Debit: Credit: Cost of Goods Sold (for the difference in under- or overallocation)
04

Analyzing Donald Transport's performance in 2017

To analyze the performance of Donald Transport in 2017, we will compare the actual costs of goods sold with the budgeted costs. We can calculate the total costs by adding the direct materials, direct manufacturing labor, and manufacturing overhead allocated, and compare these with the budgeted costs for the year. A difference between the actual and budgeted costs will indicate whether the company performed better or worse than expected. Note: The analysis largely depends on the actual values given in the data, which are not provided in the exercise. This step requires interpreting the data and drawing a conclusion based on the values provided.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Journal Entries
Journal entries are crucial for accurately recording transactions in accounting, especially for a job-costing system. In this system, we track costs related to a specific job largely through the use of journal entries. Each entry reflects an event that affects the financial statements.

In the context of Donald Transport, entries are made to record costs for direct materials, direct manufacturing labor, and manufacturing overhead. These entries are then posted to the Work-in-Process (WIP) account.
  • The first type of journal entry involves debiting the WIP Control account while also debiting direct materials, labor, and overhead accounts.
  • Another entry includes transferring costs from WIP Control to Finished Goods Control, signifying that the product is ready for sale.
  • Finally, a journal entry will transfer costs from Finished Goods Control to Cost of Goods Sold, reflecting the sale of the manufactured homes.
These structured entries allow companies to tally their direct and indirect costs effectively, ensuring accurate financial statements and cost management.
Manufacturing Overhead
Manufacturing overhead refers to all indirect costs associated with production that are not directly traceable to a specific product. This might include costs like electricity, depreciation, and salaries of production supervisors.

In Donald Transport's job-costing system, manufacturing overhead is allocated to different jobs at a predetermined rate per machine-hour, in this case, $31 per machine-hour. Allocating overhead is essential for a realistic estimate of production costs.
  • The overhead allocation allows companies to apportion these indirect costs uniformly across different jobs.
  • By creating an overhead pool, businesses can ensure they assign costs even if direct tracing is not feasible.
  • Overallocated or underallocated overhead at the end of the year is adjusted by writing off the balance to Cost of Goods Sold. This step ensures that financial statements reflect true cost absorption.
Effectively managing and allocating overhead costs contribute to a firm's understanding of its overall cost structure and profitability.
T-Accounts
T-accounts are visual representations used in accounting to record and examine the debit and credit sides of business transactions, enhancing comprehension and accuracy of cost allocations.

In the job-costing system used by Donald Transport, T-accounts assist in visually tracking the flow of costs through different stages:
  • Direct materials and labor, along with allocated overhead, are debited to the Work-in-Process (WIP) T-account.
  • Once these materials and efforts are used, and the jobs are completed, the costs get credited out of WIP and debited to Finished Goods.
  • Finally, when the goods are sold, the costs are credited from Finished Goods to Cost of Goods Sold, completing the cycle.
T-accounts simplify the process of tracking where each cost component is at any point in production, ensuring accurate and efficient record-keeping.
Work-in-Process Control
The Work-in-Process (WIP) Control account plays a pivotal role in job costing. It serves as a running tally for costs associated with unfinished products. This account ensures visibility and accountability of job costs until completion.

For Donald Transport, when direct materials, direct labor, and manufacturing overhead costs are recorded, they are first debited to the WIP Control account.
  • These costs accumulate in the WIP until the manufacturing process is complete and the finished product moves to the Finished Goods Control account.
  • The accuracy of this account is vital as it influences the valuation of inventory on the balance sheet.
  • By breaking down the WIP balance, a company can assess its current production stage and maintain operational efficiency.
Timely posting and adjustments in the WIP Control account ensure the company can adequately track project progress while aligning with financial reporting requirements.

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Most popular questions from this chapter

Job costing, unit cost, ending work in process. Rowan Company produces pipes for concertquality organs. Each job is unique. In April 2016 , it completed all outstanding orders, and then, in May 2016 , it worked on only two jobs, M1 and M2: $$\begin{array}{|c|l|c|c|} \hline & \multicolumn{1}{|c|} {\mathrm{A}} & \multicolumn{1}{|c|} {\mathrm{B}} & \multicolumn{1}{|c|} {\mathrm{C}} \\ \hline 1 & \text { Rowan Company, May 2016 } & \text { Job M1 } & \text { Job M2 } \\ \hline 2 & \text { Direct materials } & \$ 75,000 & \$ 56,000 \\ \hline 3 & \text { Direct manufacturing labor } & 275,000 & 209,000 \\ \hline \end{array}$$ Direct manufacturing labor is paid at the rate of \(\$ 25\) per hour. Manufacturing overhead costs are allocated at a budgeted rate of \(\$ 22\) per direct manufacturing labor-hour. Only Job M1 was completed in May. 1\. Calculate the total cost for Job M1. 2\. 1,600 pipes were produced for Job M1. Calculate the cost per pipe. 3\. Prepare the journal entry transferring Job M1 to finished goods. 4\. What is the ending balance in the Work-in-Process Control account?

Time period used to compute indirect cost rates. Capitola Manufacturing produces surfboards. The company uses a normal-costing system and allocates manufacturing overhead on the basis of direct manufacturing labor-hours. Most of the company's production and sales occur in the first and second quarters of the year. The company is in danger of losing one of its larger customers, Pacific Wholesale, due to large fluctuations in price. The owner of Capitola has requested an analysis of the manufacturing cost per unit in the second and third quarters. You have been provided the following budgeted information for the coming year: $$\begin{array}{ccccc} & \multicolumn{4}{c} {\text { Quarter }} \\ \\)\cline { 2 - 5 } & 1 & 2 & 3 & 4 \\ \hline\\( \text { Surfboards manufactured and sold } & 500 & 400 & 100 & 250 \end{array}$$ It takes 2 direct manufacturing labor-hours to make each board. The actual direct material cost is \(\$ 65.00\) per board. The actual direct manufacturing labor rate is \(\$ 20\) per hour. The budgeted variable manufacturing overhead rate is \(\$ 16\) per direct manufacturing labor-hour. Budgeted fixed manufacturing overhead costs are \(\$ 20,000\) each quarter. 1\. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company allocates manufacturing overhead costs based on the budgeted manufacturing overhead rate determined for each quarter. 2\. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company allocates manufacturing overhead costs based on an annual budgeted manufacturing overhead rate. 3\. Capitola Manufacturing prices its surfboards at manufacturing cost plus \(20 \%\). Why might Pacific Wholesale be seeing large fluctuations in the prices of boards? Which of the methods described in requirements 1 and 2 would you recommend Capitola use? Explain.

Service industry, job costing, law firm. Kidman \(\&\) Associates is a law firm specializing in labor relations and employee-related work. It employs 30 professionals \((5 \text { partners and } 25\) associates) who work directly with its clients. The average budgeted total compensation per professional for 2017 is \(\$ 97,500\). Each professional is budgeted to have 1,500 billable hours to clients in 2017 . All professionals work for clients to their maximum 1,500 billable hours available. All professional labor costs are included in a single direct-cost category and are traced to jobs on a per-hour basis. All costs of Kidman \& Associates other than professional labor costs are included in a single indirect-cost pool (legal support) and are allocated to jobs using professional labor-hours as the allocation base. The budgeted level of indirect costs in 2017 is \(\$ 2,475,000\). 1\. Prepare an overview diagram of Kidman's job-costing system. 2\. Compute the 2017 budgeted direct-cost rate per hour of professional labor. 3\. Compute the 2017 budgeted indirect-cost rate per hour of professional labor. 4\. Kidman \& Associates is considering bidding on two jobs: a. Litigation work for Richardson, Inc., which requires 120 budgeted hours of professional labor b. Labor contract work for Punch, Inc., which requires 160 budgeted hours of professional labor. Prepare a cost estimate for each job.

Distinguish between actual costing and normal costing.

Describe briefly why Electronic Data Interchange (EDI) is helpful to managers.
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