CHAPTER 5
DISCUSSION QUESTIONS
Q5-1. The cost attached to a product is an amount The unit costs by cost category as well as
assigned by the costing methods used—an total unit cost for each process (department)
amount controlled by the circumstances, are necessary for product costing purposes.
assumptions, and limitations of the method Q5-4. A job order cost sheet is used:
under which it was compiled. Product costs (a) to keep track of the direct materials and
are composites of historical outlay that have, direct labor used on a job plus an appro-
perhaps, been modified by estimates or stan- priate share of factory overhead;
dards, by processes assigning or prorating (b) to compare actual costs to estimated
expenditures to periods, or by tracing the costs;
direct costs and allocating the indirect costs (c) as a subsidiary ledger for the work in
to particular products so that the total period process account.
outlay is spread over the aggregate output. Q5-5. The work in process account is a control
Despite these shortcomings, product costs account in the general ledger, reflecting total
are useful in costing inventories, comparing costs assigned or applied to jobs. The individ-
prices and total unit cost, measuring current ual job cost sheets form the work in process
profit or loss, and indicating the minimum cost account’s subsidiary ledger, indicating the
below which a sales price cannot go in the direct materials, direct labor, and factory over-
long run. Some confusion will result at times head charged to each job.
in using cost information in making manage- Q5-6. Job order cost sheets serve a control func-
ment decisions unless information relevant tion. Comparisons are made between esti-
only to the decision is used. mates of job costs and costs actually
Q5-2. The primary objective in job order costing is to accumulated for the job. In addition, cost con-
determine the cost of materials, labor, and trol is enhanced by accumulating direct mate-
factory overhead used to produce a specific rials and labor as well as factory overhead
order or contract. Cost estimates are made costs by cost centers or departments, and by
when the order is taken, and the job order comparing the actual costs to cost center
procedures are designed to reveal costs as budgets.
the order goes through production, thereby Q5-7. Actual factory overhead consists of the day-
giving an opportunity to control costs. by-day costs that are actually experienced
Q5-3. The type of cost accumulation method used and incurred by the company. Applied factory
by a company will be determined by the type overhead is the overhead charged to jobs
of manufacturing operations performed. A based on the predetermined factory overhead
manufacturing company should use process rate. This rate is created by dividing total esti-
cost accumulation for product costing pur- mated overhead by total estimated number of
poses when like units are continuously mass units (or any other appropriate base). The dif-
produced; when custom-made or unique ference between actual and applied factory
goods are produced, job order costing would overhead is the over- or underapplied factory
be more appropriate. Process costing is often overhead.
used in industries such as chemicals, food Q5-8. The characteristic of a service business that
processing, oil, mining, rubber, and electrical makes likely the use of job order costing is
appliances. With a continuous mass produc- that all jobs are not alike and cost information
tion of like units, the center of attention is the for each job is desired.
individual process (usually a department).
5-1
,5-2 Chapter 5
EXERCISES
E5-1 Job 5575
Direct material............................................................... $24,070
Direct labor.................................................................... 22,832
Applied overhead ......................................................... 10,024
Total job cost ....................................................... $56,926
E5-2 Job 5576
Direct material............................................................... $ 4,420
Direct labor.................................................................... 2,600
Applied overhead ......................................................... 2,000
Cost to date.......................................................... $ 9,020
E5-3
(1) The amount of direct labor in finished goods:
Finished goods ............................................................. $37,500
Materials included in finished goods ($15,500 – $3,200) 12,300
Direct labor and factory overhead in finished goods $25,200
Factory overhead charged to work in process $11, 800
= = .8
ork in process
Direct labor charged to wo $14, 750
Let X = direct labor in finished goods
1.8X = $25,200 direct labor and factory overhead in finished goods
X = $14,000 direct labor in finished goods
(2) The amount of factory overhead in finished goods:
X = $14,000
.8X = .8($14,000)
.8X = $11,200 factory overhead in finished goods
E5-4
(1) December materials used:
Materials inventory, December 1............... $ 8,000
Materials purchased ................................... $87,000
Freight-in .................................................... 1,500 88,500
Materials available ...................................... $96,500
Materials inventory, December 31............. 6,500
$90,000
, Chapter 5 5-3
E5-4 (Concluded)
(2) Work in process, December 31:
Per
Unit
Direct materials......................... $2.40
Direct labor................................ .80
$3.20 × 2,000 units = $6,400
Factory overhead .....................32 machine hrs. @ $100 = 3,200
$9,600
(3) December cost of goods manufactured:
Materials used (direct) (requirement (1)) ........................................... $ 90,000
Direct labor ........................................................................................... 30,000
Factory overhead (600 machine hours @$100) ................................ 60,000
Total manufacturing cost .................................................................... $180,000
Add work in process, December 1:
Direct Material, $2.40 × 3,000 = $7,200
Direct Labor, $.80 × 3,000 = 2,400
Overhead, $100 × 48 machine hours = 4,800 14,400
$194,400
Less work in process, December 31 (requirement (2)) .................... 9,600
$184,800
(4) Finished goods, December 31:
Direct materials .................................................................................. $ 5,000
Direct labor ......................................................................................... 3,000
Factory overhead (60 machine hours @$100) ................................ 6,000
14,000
(5) December cost of goods sold:
Cost of goods manufactured (requirement (3)) .............................. $184,800
Add finished goods, December 1 ..................................................... 12,000
Cost of goods available for sale....................................................... $196,800
Less finished goods, December 31 (requirement (4)) .................... 14,000
$182,800
CGA-Canada (adapted). Reprint with permission.
DISCUSSION QUESTIONS
Q5-1. The cost attached to a product is an amount The unit costs by cost category as well as
assigned by the costing methods used—an total unit cost for each process (department)
amount controlled by the circumstances, are necessary for product costing purposes.
assumptions, and limitations of the method Q5-4. A job order cost sheet is used:
under which it was compiled. Product costs (a) to keep track of the direct materials and
are composites of historical outlay that have, direct labor used on a job plus an appro-
perhaps, been modified by estimates or stan- priate share of factory overhead;
dards, by processes assigning or prorating (b) to compare actual costs to estimated
expenditures to periods, or by tracing the costs;
direct costs and allocating the indirect costs (c) as a subsidiary ledger for the work in
to particular products so that the total period process account.
outlay is spread over the aggregate output. Q5-5. The work in process account is a control
Despite these shortcomings, product costs account in the general ledger, reflecting total
are useful in costing inventories, comparing costs assigned or applied to jobs. The individ-
prices and total unit cost, measuring current ual job cost sheets form the work in process
profit or loss, and indicating the minimum cost account’s subsidiary ledger, indicating the
below which a sales price cannot go in the direct materials, direct labor, and factory over-
long run. Some confusion will result at times head charged to each job.
in using cost information in making manage- Q5-6. Job order cost sheets serve a control func-
ment decisions unless information relevant tion. Comparisons are made between esti-
only to the decision is used. mates of job costs and costs actually
Q5-2. The primary objective in job order costing is to accumulated for the job. In addition, cost con-
determine the cost of materials, labor, and trol is enhanced by accumulating direct mate-
factory overhead used to produce a specific rials and labor as well as factory overhead
order or contract. Cost estimates are made costs by cost centers or departments, and by
when the order is taken, and the job order comparing the actual costs to cost center
procedures are designed to reveal costs as budgets.
the order goes through production, thereby Q5-7. Actual factory overhead consists of the day-
giving an opportunity to control costs. by-day costs that are actually experienced
Q5-3. The type of cost accumulation method used and incurred by the company. Applied factory
by a company will be determined by the type overhead is the overhead charged to jobs
of manufacturing operations performed. A based on the predetermined factory overhead
manufacturing company should use process rate. This rate is created by dividing total esti-
cost accumulation for product costing pur- mated overhead by total estimated number of
poses when like units are continuously mass units (or any other appropriate base). The dif-
produced; when custom-made or unique ference between actual and applied factory
goods are produced, job order costing would overhead is the over- or underapplied factory
be more appropriate. Process costing is often overhead.
used in industries such as chemicals, food Q5-8. The characteristic of a service business that
processing, oil, mining, rubber, and electrical makes likely the use of job order costing is
appliances. With a continuous mass produc- that all jobs are not alike and cost information
tion of like units, the center of attention is the for each job is desired.
individual process (usually a department).
5-1
,5-2 Chapter 5
EXERCISES
E5-1 Job 5575
Direct material............................................................... $24,070
Direct labor.................................................................... 22,832
Applied overhead ......................................................... 10,024
Total job cost ....................................................... $56,926
E5-2 Job 5576
Direct material............................................................... $ 4,420
Direct labor.................................................................... 2,600
Applied overhead ......................................................... 2,000
Cost to date.......................................................... $ 9,020
E5-3
(1) The amount of direct labor in finished goods:
Finished goods ............................................................. $37,500
Materials included in finished goods ($15,500 – $3,200) 12,300
Direct labor and factory overhead in finished goods $25,200
Factory overhead charged to work in process $11, 800
= = .8
ork in process
Direct labor charged to wo $14, 750
Let X = direct labor in finished goods
1.8X = $25,200 direct labor and factory overhead in finished goods
X = $14,000 direct labor in finished goods
(2) The amount of factory overhead in finished goods:
X = $14,000
.8X = .8($14,000)
.8X = $11,200 factory overhead in finished goods
E5-4
(1) December materials used:
Materials inventory, December 1............... $ 8,000
Materials purchased ................................... $87,000
Freight-in .................................................... 1,500 88,500
Materials available ...................................... $96,500
Materials inventory, December 31............. 6,500
$90,000
, Chapter 5 5-3
E5-4 (Concluded)
(2) Work in process, December 31:
Per
Unit
Direct materials......................... $2.40
Direct labor................................ .80
$3.20 × 2,000 units = $6,400
Factory overhead .....................32 machine hrs. @ $100 = 3,200
$9,600
(3) December cost of goods manufactured:
Materials used (direct) (requirement (1)) ........................................... $ 90,000
Direct labor ........................................................................................... 30,000
Factory overhead (600 machine hours @$100) ................................ 60,000
Total manufacturing cost .................................................................... $180,000
Add work in process, December 1:
Direct Material, $2.40 × 3,000 = $7,200
Direct Labor, $.80 × 3,000 = 2,400
Overhead, $100 × 48 machine hours = 4,800 14,400
$194,400
Less work in process, December 31 (requirement (2)) .................... 9,600
$184,800
(4) Finished goods, December 31:
Direct materials .................................................................................. $ 5,000
Direct labor ......................................................................................... 3,000
Factory overhead (60 machine hours @$100) ................................ 6,000
14,000
(5) December cost of goods sold:
Cost of goods manufactured (requirement (3)) .............................. $184,800
Add finished goods, December 1 ..................................................... 12,000
Cost of goods available for sale....................................................... $196,800
Less finished goods, December 31 (requirement (4)) .................... 14,000
$182,800
CGA-Canada (adapted). Reprint with permission.
