Exercises

1.

The Franklin Manufacturing Company uses a job costing system with machine hours as the
allocation base for overhead. The company uses normal costing to develop the overhead
allocation rate. The following data are available for the latest accounting period:
Estimated fixed factory overhead cost
$160,000
Estimated machine-hours
100,000
Actual fixed factory overhead cost incurred
$170,000
Actual machine-hours used
110,000
Jobs worked on:
Job No.
1020
1030
1040
1050
a.
b.
c.
d.
e.

2.

Machine Hours Used

12,000
18,000
15,000
10,000

Compute the overhead allocation rate.

Determine the overhead allocated to job 1040.
Determine total over or underapplied overhead at the end of the year
Should cost of goods sold be increased or decreased at the end of the year? Explain.
When Franklin incurs an amount of overapplied or underapplied overhead that is quite large
(i.e., above 10% of the total allocated cost), how is it assigned?

Fabulous Surf Boards makes custom boards for professional surfers. The boards vary according
to the types of materials requested by customers and the amount of direct labor required for the
finishing process.
The following costs are estimated for 20x5:
Number of surf boards
3,000
Direct labor hours
45,000
Direct material cost
$175,000
Direct labor cost
$900,000
Overhead cost
$675,000
During 20x5 actual costs were:
Number of surfboards
Direct labor hours
Direct materials
Direct labor
Overhead

3,300
46,300
$185,000
$850,000
$664,000

a. Explain why job costing, and not process costing, should be used for this organization.
b. Fabulous uses a normal costing system. Overheard is allocated on the basis of direct labor
hours. Calculate the manufacturing cost of a surfboard that takes $150 of direct materials and
36 hours of direct labor.
c. At the end of 20x5, how much overhead had been allocated to production?
d. Is the overhead over or underapplied, and by how much?
e. Assume that any over or underapplied overhead is closed to cost of goods sold. Prepare the
journal entry for the adjustment.

3.

During a recent month, Pisces, Inc. reported the following activity:

Jobs
1
2
3
4
Beginning balance $1,500 $2,000 $1,000 $ 400
Direct materials
0
100
1,200
3,000
Direct labor
495
405
300
450
Direct labor hours
33
27
20
30
Overhead is allocated at $7.50 per direct labor hour. Jobs 1, 2, and 4 were completed, and Job 2
was delivered to the customer.
Determine the following amounts:
a. Ending WIP inventory
b. Cost of the jobs that were completed
c. Costs of goods sold
d. Ending finished goods inventory

4.

PNG Corporation designs and builds roller coasters for amusement parks. At the end of 20x1,
managers estimated overhead costs for 20x2 of $150,000 based on expected production of 5 roller
coasters using 5,000 labor hours each. Actual overhead costs for 20x2 were $170,000. PNG
actually designed and built 6 roller coasters with the following direct labor usage and overhead
costs:
Overhead Cost
Labor Hours
The Big Dipper
$28,000
3,500
The Ultimate Scream
35,000
4,000
Loop Me
27,000
5,000
The Screaming Chicken
40,000
2,500
You Dont Know Coasters
25,000
6,000
Old Faithful
15,000
4,500
Assume PNG uses a normal costing system with the number of jobs as the overhead allocation
base.
a. How much overhead would be allocated to each job?
b. Calculate the total over- or underapplied overhead (specify which) for each job.

5.

PNG Corporation designs and builds roller coasters for amusement parks. At the end of 20x1,
managers estimated overhead costs for 20x2 of $150,000 based on expected production of 5 roller
coasters using 5,000 labor hours each. Actual overhead costs for 20x2 were $170,000. PNG
actually designed and built 6 roller coasters with the following direct labor usage and overhead
costs:
Overhead Cost
Labor Hours
The Big Dipper
$28,000
3,500
The Ultimate Scream
35,000
4,000
Loop Me
27,000
5,000
The Screaming Chicken
40,000
2,500
You Dont Know Coasters
25,000
6,000
Old Faithful
15,000
4,500

Assume PNG uses a normal costing system with the number of labor hours as the overhead
allocation base.
a. Calculate the allocation rate for 20x2.
b. Calculate the total corporate over- or underapplied overhead (specify which) for 20x2.
6.

HLY Corporations accounting information system showed the following balances at the end of
this period:
Work in process
$20,000
Finished goods
30,000
Cost of goods sold
50,000
Overapplied overhead this period totaled $60,000; HLY maintains a single overhead account in its
general ledger.
Does HLY use an actual or a normal costing system? Explain your answer.

7.

HLY Corporations accounting information system showed the following balances at the end of
this period:
Work in process
$20,000
Finished goods
30,000
Cost of goods sold
50,000
Overapplied overhead this period totaled $60,000; HLY maintains a single overhead account in its
general ledger.
If the overapplied overhead is considered material, prepare the journal entry to record its
disposition. If no journal entry is required, explain why.

8.

HLY Corporations accounting information system showed the following balances at the end of
this period:
Work in process
$20,000
Finished goods
30,000
Cost of goods sold
50,000
Overapplied overhead for this period totaled $60,000; HLY maintains a single overhead account
in its general ledger.
If the overapplied overhead is not considered material, prepare the journal entry to record its
disposition. If no journal entry is required, explain why.

9.

Following is information about Allens Accounting Services.

Professional
Labor Cost
Direct Costs
Client 57
$2,000
$800
Client 58
$1,000
$200
Client 59
$5,000
$600

Professional
Labor Hours
20
10
50

Allens Accounting Services uses job costing and applies overhead using a normal costing
system using professional labor cost as the allocation base. This periods estimated overhead
cost is $400,000, estimated professional labor cost is $800,000 and estimated direct labor hours
are 8,000. This period actual overhead cost was $426,400, actual direct labor cost was $820,000,
and actual direct labor hours were 8,200.

a. What is the overhead allocation rate?

b. What is the total cost for Client 57?

More Difficult Exercises

Although the cost of goods sold schedule is not formally developed in Chapter 5 of the textbook, some
instructors may introduce it. Therefore, we have included several exercises covering it.
10.

Given the following data from the Fun Toys and Games Company for Year X2:
1/1/X2
12/31/X2
Direct materials inventory
$40,000
$ 20,000
WIP inventory
25,000
15,000
Finished goods inventory
20,000
25,000
Sales
390,000
Gross margin
115,000
Direct material purchases
80,000
Prime costs (direct material + direct labor)
210,000
Prepare a schedule of cost of goods manufactured.

11.

The following information for August, 20X3 comes from the Jones Co. books.
The balance in Materials Inventory on 8/1 was $35,000
Purchases of direct materials during August were $60,000
Work in Process on 8/1 was $10,000
Finished Goods had a balance on 8/1 of $15,000
Payroll Payable had a balance on 8/1 of $5,000
August payroll totaling $80,000 was credited to Payroll Payable
2,500 indirect hours were worked during the month
All workers make $6.40/hour
Overhead is allocated at $5.00/direct labor hour
Materials used during the month were $70,000
Cost of goods sold for the month was $105,000
Finished goods at 8/30 was $64,000
Prepare a schedule of cost of goods manufactured and sold.

Solutions
1.

a.
b.
c.
d.
e.

2.

a.
b.
c.
d.
e.

3.

a.
b.
c.
d.

Allocation rate = $160,000/100,000 = $1.60 per machine hour

For job 1040 allocated overhead = $24,000 (15,000 hours x $1.60)
Allocated = 110,000 x $1.60 = $176,000 and actual = $170,000, so overhead was overapplied by
$6,000.
Cost of goods sold should be decreased by $6,000
If the amount is material, it is pro-rated among WIP, finished goods, and COGS.
Each surfboard is built to a customers specifications and the direct materials and direct labor can be
traced to the board. For these types of products, job costing is appropriate. Process costing is more
appropriate for mass-produced products.
Total cost = $1,410 ($150 + 36 x $20 + 36 x $15)
$15 x 46,300 = $694,500
It is overapplied by $30,500
Overhead cost control
$30,500
Cost of goods sold
$30,500
$2,650.00 (= Cost of Job 3); See table below
$9,025.00 (= Cost of Job 1 + Job 2 + Job 4)
$2,707.50 (= Cost of Job 2)
$6,317.50 (= Cost of Job 1 + Job 4)

Begi nni ng bal ance

Di rect materi al
Di rect labor
Appl ied ov erhead

Totals

Job 1
1,500.00
495.00
247.50
2,242.50

Job 2
2,000.00
100.00
405.00
202.50
2,707.50

Job 3
1, 000. 00
1, 200. 00
3 00.00
1 50.00
2, 650. 00

Job 4
400 .00
3,000.00
450 .00
225 .00
4,075.00

4.

a.
b.

$30,000 (=$150,000 / 5)
See table below

The Big Dipper

The Ultimate Scream
Loop Me
The Screaming Chicken
You Don't Know Coasters
Old Faithful

Applied OH
$
30,000
30,000
30,000
30,000
30,000
30,000

Actual OH
$
28,000
35,000
27,000
40,000
25,000
15,000

Over- or (under)-applied
$
2,000
(5,000)
3,000
(10,000)
5,000
15,000

5.

6.

HLY is using a normal costing system, as evidenced by the presence of overapplied overhead.

7.

Overhead Control
Work in process
Finished goods
Cost of goods sold

$60,000

Overhead Control
Cost of goods sold

$60,000

8.
9.

a.
b.

$12,000
$18,000
$30,000
$60,000

$400,000/$800,000 = 50%
Client 57 cost = $2,000 + $800 + ($800 x 50%) = $3,200

10.
Fun Toys and Games Company
Scheduleof Cost of Goods Manufactured
For 20x2
Direct materials
Beginning inventory
$
Plus: purchases
Less: ending inventory
Direct materials used
Direct labor (see Schedule A)
Overhead (see Schedule B)
Total manufacturing cost
Plus: beginning WIP
Less: ending WIP
Cost of goods manufactured

Schedule A
Total prime cost (given)
$
Less: direct materials used
Direct labor incurred $

40,000
80,000

$
$
$
$

210,000
(100,000)
110,000

Schedule B
cost of goods sold = sales - gross margin
cost of goods sold = $390,000 - $115,000
cost of goods sold = $275,000
beginning FG + CGM - COGS = ending FG
$20,000 + CGM - $275,000 = $25,000
CGM = $280,000
beginning WIP + total mfg cost - CGM = ending WIP
$25,000 + TMC - $280,000 = $15,000
TMC = $270,000
TMC = material + labor + overhead
$270,000 = $100,000 + $110,000 + OH

120,000
(20,000)
100,000
110,000
60,000
270,000
25,000
(15,000)
280,000

11.
Jones Co.
Schedule of Cost of Goods Manufactured and Sold
For the month of August 20x3
Direct materials:
Beginning inventory
Plus: purchases
Less: ending inventory
Direct materials used
Direct labor incurred (Schedule A)
Overhead applied (Schedule B)
Total manufacturing cost
Plus: beginning WIP
Less: ending WIP (Schedule C)
Cost of goods manufactured
Plus: beginning finished goods
Less: ending finished goods
Cost of goods sold

35,000
60,000
(25,000)
70,000
64,000
50,000
184,000
10,000
(40,000)
154,000
15,000
(64,000)
105,000

Schedule A
direct labor incurred = $80,000 - (2,500 * $6.40)
Schedule B
total labor hours worked = $80,000 / $6.40 = 12,500
direct labor hours worked = 12,500 - 2,500 = 10,000
applied OH = 10,000 * $5
Schedule C
beginning FG + cost of goods manufactured - cost of goods sold = ending FG
$15,000 + CGM - $105,000 = $64,000
CGM = $154,000
beginning WIP + total manufacturing cost - cost of goods manufactured = ending WIP
$10,000 + $184,000 - $154,000 = ending WIP
ending WIP = $40,000