CHAPTER 5
JOB-ORDER COSTING
DISCUSSION QUESTIONS
1. Job-order costing accumulates costs by
jobs, and process costing accumulates costs
by processes. Job-order costing is suitable
for operations that produce custom-made
products that receive different doses of
manufacturing costs. Process costing, on
the other hand, is suitable for operations that
produce homogeneous products that receive
equal amounts of manufacturing costs in
each process.
2. Job-order costing is appropriate for many
service firms. The key factor is that differing
amounts of resources must be used for
different jobs. Examples of service firms that
use job-order costing are law firms,
accounting firms, dental offices, automobile
repair, and architectural firms. The key point
is that the costs of each job are unique to
the job and must be tracked by job.
3. Normal costing defines product cost as the
sum of actual direct materials, actual direct
labour, and applied overhead. The
difference between actual costing and
normal costing lies in the treatment of
overhead. Actual costing uses actual
overhead; normal costing uses applied
overhead.
4. Actual overhead rates are rarely used
because managers cannot wait until the end
of the year to obtain product costs.
Information on product costs is needed as
the year unfolds for planning, control, and
decision making.
5. Overhead is assigned to production using
the predetermined rate. The predetermined
overhead rate is equal to estimated
overhead divided by estimated activity level.
The predetermined overhead rate is
multiplied by the actual activity level or the
cost driver on which the rate is based.
6. Underapplied overhead means that the
applied overhead is less than the actual
overhead. As a result, the unadjusted cost of
goods is too small (because too little
overhead has been applied). So, Cost of
Copyright 2015 by Nelson Education Ltd.
Goods Sold will increase by the amount of
under-applied overhead.
7. Overapplied overhead means that the
applied overhead is more than the actual
overhead. As a result, the unadjusted cost of
goods is too large (because too much
overhead has been applied). So, Cost of
Goods Sold will decrease by the amount of
over-applied overhead.
8. Unless all your jobs (lawns) are the same
size and require the same services, you will
need to use a job-order costing system. At a
minimum, you will need job-order cost
sheets for each customer. You will need
labour time tickets to record the amount of
time spent on each job, both to cost the job
and to pay the individual doing the work. A
materials requisition form may be needed if
fertilizer or weed control products are used
(alternatively, it may be possible to just list
the amount of product used directly on the
job-order cost sheet). The more complicated
your business becomes (e.g., mowing,
fertilizing, trimming shrubbery, planting
shrubs and trees), the more source
documents will be needed to keep track of
time, materials, and use of capital
equipment (e.g., trimmers, brush hogs).
Basically, as the business grows, the need
for more formal accounting and source
documentation grows.
9. Multiple overhead rates often produce a
more accurate assignment of overhead
costs to jobs. This can be true if the
departments through which products pass
have different amounts of overhead and if
the various products spend differing
amounts of time in the departments. For
example, a company may have two
departments, but some products only go
through one department. It would be more
accurate to assign less overhead cost to the
products using only one department. This
can be easily accomplished using
departmental overhead rates.
10. Materials requisition forms serve as the
source document for posting materials
5-1
 usage and costs to individual jobs. Time
tickets serve a similar function for labour.
Predetermined overhead rates are used to
assign overhead costs to individual jobs.
11. Because the overhead rate is based on
direct labour cost, the amount of overhead
applied will increase. As a result, the total
cost of each job will go up.
12. The overhead variance is the difference
between applied overhead and actual
overhead. Typically, that variance is
relatively small, and it is closed to Cost of
Goods Sold. If overhead is underapplied, the
variance is added to Cost of Goods Sold. If
overhead is overapplied, the variance is
subtracted from Cost of Goods Sold.
13. The cost of a job is often strongly related to
the price charged. Logically enough, the
higher the cost of the job, the higher the
price charged to the customer. This
relationship makes sense not only to the
business, but also to the customer. By
comparing the cost of the individual job with
the price charged, the firm can determine
the profit attributable to each job. Then, the
firm can decide whether the profit is
sufficient to continue offering the product or
service under the current terms.
14. Because advertising expense is a period
expense, it has no effect on overhead
either applied or actual. Therefore, changes
in advertising expense cannot affect
manufacturing cost or cost of goods sold.
15. A departmental overhead rate application
can be easily converted to a plantwide rate.
First, the estimated overhead for all
departments is totalled, and a single
plantwide driver is chosen. The plantwide
overhead rate is simply the estimated
plantwide overhead divided by the plantwide
driver. When overhead is applied, the
predetermined plantwide rate is multiplied by
the actual amount of driver used in the
factory.
16. Producing departments work directly on the
products and services being made, whereas
5-2
support departments provide indirect
support to the producing departments.
17. Without any allocation of support
department costs, users may view services
as a free good and consume more of the
service than is optimal. Allocating support
department costs would encourage
managers to use the service until such time
as the marginal cost of the service is equal
to the marginal benefit.
18. The identification and use of causal factors
ensures that support department costs are
accurately assigned to users. This increases
the legitimacy of the control function and
enhances product-costing accuracy.
19. a. Number of employees
b. Square metres
c. Kilograms of laundry
d. Orders processed
e. Maintenance hours worked
f. Number of employees
g. Number of transactions processed
20. The direct method allocates the direct costs
of each support department directly to the
producing departments. No consideration is
given to the fact that other support
departments may use services. The
sequential method allocates support
department costs sequentially. First, the
costs of the centre providing the greatest
service to all user departments, including
other support departments, are allocated.
Next, the costs of the second greatest
provider of services are allocated to all user
departments, excluding any department(s)
whose costs have already been allocated.
This continues until all support department
costs have been allocated. The principal
difference in the two methods is the fact that
the sequential method considers some
interactions among support departments
and the direct method ignores interactions.
Copyright 2015 by Nelson Education Ltd.
 CORNERSTONE EXERCISES

Cornerstone Exercise 51

Estimated overhead
1. Predetermined overhead rate = Estimated direct labour cost

$900,000
= $1,200,000
= 0.75, or 75% of direct labour cost

2. Overhead applied to December production = 0.75 $77,800 = $58,350

Cornerstone Exercise 52

1. Applied overhead = Overhead rate Actual direct labour cost

= 0.75 $1,214,400 = $910,800
Actual overhead $913,000
Applied overhead 910,800
Overhead variance $ 2,200 underapplied

2. Unadjusted COGS $1,780,000

Add: Underapplied overhead 2,200
Adjusted COGS $1,782,200

Cornerstone Exercise 5-3

$828,000
1. Predetermined plantwide overhead rate = 331,200
= $2.50 per direct labour hour

2. Overhead applied in June = $2.50 27,800 = $69,500

3. Overhead variance = Applied overhead Actual overhead

= $69,500 $68,362
= $1,138 overapplied

Copyright 2015 by Nelson Education Ltd. 5-3

Cornerstone Exercise 54

$378,000
1. Cutting department overhead rate = 210,000 = $1.80 per machine hour

$450,000
Sewing department overhead rate = 200,000
= $2.25 per direct labour hour

2. Overhead applied to cutting in June = $1.80 17,840 = $32,112

Overhead applied to sewing in June = $2.25 16,000 = $36,000

3. Cutting Department Sewing Department

Actual overhead $32,612 $35,750
Less: Applied overhead 32,112 36,000
Overhead variance $ 500 underapplied $ 250 overapplied

Cornerstone Exercise 55

1. Since the predetermined overhead rate is not given, it must be calculated from
BWIP amounts using either Job 44 or Job 45. Using Job 44,
Applied overhead
Predetermined overhead rate = Direct labour cost
$2,250
= $3,600
= 0.625, or 62.5%
(The predetermined overhead rate using Job 45 is identical.)

2.
Job 44 Job 45 Job 46 Job 47
Beginning balance, June 1 $19,650$ 8,400$ 0 $
0
Direct materials 4,500 18,300 2,400
2,100
Direct labour 3,000 7,200 6,000
1,800
 Applied overhead 1,875 4,500
3,750 1,125
Total, June 30 $29,025 $38,400 $12,150
$5,025

Copyright 2015 by Nelson Education Ltd. 5-5

Cornerstone Exercise 55 (Concluded)

3. By the end of June, Jobs 44, 45, and 47 have been transferred out of Work in
Process. Thus, the ending balance in Work in Process consists of Job 46.
Work in process, June 30 $12,150
While three jobs (44, 45, and 47) were transferred out of Work in Process and into
Finished Goods during June, only two jobs remain (Jobs 44 and 47).
Finished goods, June 1 $ 0
Job 44 29,025
Job 47 5,025
Finished goods, June 30 $34,050

4. One job, Job 45, was sold during June.

Cost of goods sold $38,400
 Cornerstone Exercise 56

Direct Allocation Method

Maintenanc
Cafeteria e Pencils Pens Total

$1,050,00 $1,800,00 $2,225,00

Overhead Costs 0 $875,000 0 0 $5,950,000

Employees 15 25 60 100 200

Allocation
Ratio 0.375 0.625 1.000

Square Metres
Coverage 15,000 5,000 100,000 125,000 245,000
Allocation
Ratio 0.444 0.556 1.000

Direct Labour
Hours 0 0 108,000 135,000 243,000
Allocation
Ratio 0.444 0.556 1.000

Direct Allocation Method

$1,050,00 $1,800,00 $2,225,00

Department Costs 0 $875,000 0 0 $5,950,000

Allocations
-
$1,050,00
Cafeteria Costs 0 $393,750 $656,250 $0

Maintenance -
Costs $875,000 $388,889 $486,111 $0

Total Overhead $2,582,63 $3,367,36

Costs $0 $0 9 1 $5,950,000

Copyright 2015 by Nelson Education Ltd. 5-7

Cornerstone Exercise 57

Sequential Allocation Method (Smallest First)

Maintenanc
Cafeteria e Pencils Pens Total

$1,050,00 $1,800,00 $2,225,00

Overhead Costs 0 $875,000 0 0 $5,950,000

Employees 15 25 60 100 200

Allocation Ratio 0.375 0.625 1.000

Square Metres
Coverage 15,000 5,000 100,000 125,000 245,000
Allocation Ratio 0.063 0.417 0.520 1.000

Direct Labour Hours 0 0 108,000 135,000 243,000

Allocation Ratio 0.444 0.556 1.000

$1,050,00 $1,800,00 $2,225,00

Department Costs 0 $875,000 0 0 $5,950,000

Allocations
Maintenance
Costs $55,125 -$875,000 $364,875 $455,000 $0

-
$1,105,12
Cafeteria Costs 5 $414,422 $690,703 $0

Total $2,579,29 $3,370,70

Overhead Costs $0 $0 7 3 $5,950,000
 Cornerstone Exercise 58

Reciprocal Allocation Method

Cafeteria Maintenance Pencils Pens Total

Overhead Costs $1,050,000 $875,000 $1,800,000 $2,225,000 $5,950,000

Employees 15 25 60 100 200

Allocation Ratio - 0.1351 0.3243 0.5405 1.0000

Square Metres
Coverage 15,000 5,000 100,000 125,000 245,000
Allocation Ratio 0.0625 - 0.4167 0.5208 1.0000

Direct Labour
Hours 0 0 108,000 135,000 243,000
Allocation Ratio - - 0.444 0.556 1.000

Copyright 2015 by Nelson Education Ltd. 5-9

 Cornerstone Exercise 58 (Concluded)

Simultaneous
Equations

Cafeteria Costs
(A) $1,050,000 + (0.0625 * Maintenance)

Maintenance
Costs (B) $875,000 + (0.1351 * Cafeteria)

Therefore
A = $1,050,000 + 0.0625B

B = $875,000 + 0.1351A

Solving for A A = $1,050,000 + .0625(875,000 + 0.1351A)

A = $1,050,000 + 54,688 + 0.0084A
A -0.0084A = 1,104,688
A=
1,114,046

Solving for B B = $875,000 + 0.1351A

B = $875,000 + (0.1351 * $1,114,046)
B = $875,000 + 150,508
B=
$1,025,508

Department Costs $1,050,000 $875,000 $1,800,000 $2,225,000 $5,950,000

Allocations
Cafeteria Costs -$1,114,046 $150,547 $361,312 $602,187 $0

Maintenance
Costs $64,094 -$1,025,508 $427,295 $534,119 $0

Total
Overhead Costs* $48 $39 $2,588,607 $3,361,306 $5,950,000

*Note: Differences are due to rounding errors.

 EXERCISES

Exercise 59

a. Paint manufacturingprocess
b. Auto manufacturingprocess
c. Toy manufacturingprocess
d. Custom cabinet makingjob order
e. Airplane manufacturing (e.g., 767s)job order
f. Personal computer assemblyprocess
g. Furniture makingprocess
h. Custom furniture makingjob order
i. Dental servicesjob order
j. Hospital servicesjob order
k. Paper manufacturingprocess
l. Auto repairjob order
m. Architectural servicesjob order
n. Landscape design servicesjob order
o. Light bulb manufacturingprocess

Exercise 510

1. a. Auto manufacturinga shop that builds autos from scratch (the way Rolls Royce
used to build cars, or a car that can be built from kits) would use job-order
costing. Large automobile manufacturers use process costing. (While the
customer may think the car is being built to order when selected among options,
actually, the manufacturer waits until enough of the same orders are received to
build a run of virtually identical cars.)

b. Dental servicesbasic dental services use job-order costing, but denturists (who
make only dentures) can use process costing. (It is important to recognize that
while the dentures themselves are uniquely shaped to fit each patient, the costs
involved do not differ from patient to patient.)

c. Auto repaira general automobile repair shop uses job-order costing. However, a
shop devoted to only one type of service or repair (e.g., oil change) can use
process costing yet price the cost of the number of litres of oil used for each
customer.

Copyright 2015 by Nelson Education Ltd. 5-11

Exercise 510 (Concluded)

d. Costume makinga small tailor shop would use job-order costing. However, a
large costume manufacturer that sews a certain number of costume designs
would use process costing.
2. CONCEPTUAL CONNECTION: The nature of the process differentiates job-order
costing from process costing. In a job-order costing environment each job differs
from every other one. In process costing, each product is the same and the
process of manufacturing is consistent.

Exercise 511

$1,140,000
1. Predetermined overhead rate = 95,000 = $12 per direct labour hour

2. Applied overhead = $12 7,400 = $88,800

Exercise 512
$864,000
1. Predetermined overhead rate = 320,000 = $2.70 per direct labour hour

2. Applied overhead = $2.70 7,950 = $21,465

3. Applied overhead = $2.70 330,400

= $892,080
Actual overhead $904,000
Applied overhead 892,080
Underapplied overhead $ 11,920

4. Adjusted Cost of Goods Sold = $942,680 + $11,920 = $954,600

5. Overhead variance means the difference between applied overhead and actual
overhead incurred. It is calculated by taking the difference between applied
overhead and actual overhead. At the end of the accounting period this amount is
added to cost of goods sold or deducted from cost of goods sold, depending on
whether it is underapplied or overapplied.
Exercise 513

$620,000
1. Assembly department overhead rate = 155,000
= $4 per direct labour hour

$180,000
Testing department overhead rate = 120,000
= $1.50 per machine hour

2. Assembly department applied overhead = $4 13,000 = $52,000

Testing department applied overhead = $1.50 13,050 = $19,575

3. Assembly Department Testing Department

Actual overhead.................... $53,000 $15,500
Applied overhead.................. 52,000 19,575
Overhead variance........... $ 1,000 $ (4,075)
Assembly department has underapplied overhead of $1,000.
Testing department has overapplied overhead of $4,075.

4. We cannot leave the overhead variance in the overhead control account because
this would render the numbers for cost of goods sold for the accounting period
inaccurate. Financial accounting requires that we report accurate numbers in the
financial statements.

Exercise 514

1. Job 24:
Beginning balance $ 330
Direct materials 475
Direct labour 280
Applied overhead 210
Total cost $1,295

$1,295
2. Unit cost = 5 = $259

Copyright 2015 by Nelson Education Ltd. 5-13

 Exercise 515

1. Materials requisition form

2. Time ticket
3. Travel log
4. Job-order cost sheet

Exercise 516

$1,800
1. Job 730 direct labour hours = $10 = 180
$4,000
Job 731 direct labour hours = $10 = 400
$200
Job 732 direct labour hours = $10 = 20
$800
Job 733 direct labour hours = $10 = 80

2. August applied overhead for:

Job 730 = 180 $11 = $1,980
Job 731 = 400 $11 = $4,400
Job 732 = 20 $11 = $220
Job 733 = 80 $11 = $880

3. Job 730 Job 731 Job 732 Job 733

Beginning balance $10,400 $ 8,600 $0 $0
Direct materials 1,200 8,000 2,100 3,000
Direct labour 1,800 4,000 200 800
Applied overhead 1,980 4,400 220 880
Total $15,380 $25,000 $2,520 $4,680

4. Work in Process, August 31, consists of unfinished jobs:

Job 731 $25,000

Job 732 2,520
Job 733 4,680
Total $32,200

5. Price of Job 730 = $15,380 + 0.40($15,380) = $21,532

Exercise 517

1. Job 877 Job 878 Job 879 Job 880

Beginning balance $20,520 $0 $0 $0
Direct materials 13,960 7,000 350 4,800
Direct labour 13,800 10,000 1,500 4,000

2. Applied overhead in October for:

Job 877 = $13,800 0.85 = $11,730
Job 878 = $10,000 0.85 = $8,500
Job 879 = $1,500 0.85 = $1,275
Job 880 = $4,000 0.85 = $3,400

3. Work in Process, October 31:

Job 877 $60,010
Job 879 3,125
Job 880 12,200
Total $75,335

4. Cost of Job 878 = $7,000 + $10,000 + $8,500 = $25,500

Price of Job 878 = $25,500 + 0.5($25,500) = $38,250

Exercise 518

1. Balance in Work in Process (all incomplete jobs):

Job 303 $ 460

Job 306 230
Job 308 650
Job 309 1,035
Job 310 217
Total $2,592

2. Balance in Finished Goods (all jobs completed but not sold):

Beginning balance $ 0
Job 301 610
Job 304 2,670
Job 305 3,800
Total $7,080

3. Cost of Goods Sold = Job 302 + Job 307

= $1,300 + $300 = $1,600

Copyright 2015 by Nelson Education Ltd. 5-15

Exercise 519

1. Job 73 Job 74 Job 75

Balance, July 1 $ 8,450 $0 $0
Direct materials 7,450 12,30016,150
Direct labour 12,000 10,500 23,000
Applied overhead 8,000 7,000 20,000
Total $35,900 $29,800 $59,150

2. Work in Process, July 31 = Job 74 = $29,800

3. Finished Goods:
Beginning balance $ 49,000
Job 75 (transferred in) 59,150
Job 70 (sold) (19,000)
Ending balance, July 31 $ 89,150

4. Cost of Goods Sold = Job 70 + Job 73

= $19,000 + $35,900
= $54,900
5. Sales [$54,900 + (0.30 $54,900)]........................ $71,370
Cost of goods sold ............................................... 54,900
Gross margin.................................................... 16,470
Less:
Variable marketing (0.1 $71,370).................. $7,137
Fixed marketing................................................ 2,000
Administrative expenses................................. 4,800 13,937
Operating income.................................................. $ 2,533

Exercise 520

Job 213:
Total manufacturing cost
1. Number of units = Unit cost
$855
= $8.55
= 100
Exercise 520 (Continued)

2. Total sales revenue = Price per unit Number of units

= $12 100
= $1,200

Overhead applied, Department 1

3. Direct labour hours, Department 1 = $6
$90
= $6
= 15
Direct labour cost, Department 1 = 15 direct labour hours $10 = $150

4. Overhead applied, Department 2 = 25 machine hours $8

= $200
Job 214:
Total sales revenue
1. Price per unit = Number of units
$4,375
= 350
= $12.50

Direct labour cost, Department 1

2. Direct labour hours, Department 1 = $10
$700
= $10
= 70

Overhead applied, Department 1 = Direct labour hours, Department 1 $6

= 70 $6
= $420

Copyright 2015 by Nelson Education Ltd. 5-17

Exercise 520 (Continued)

3. Materials used in production = Total manufacturing cost Direct labour

cost, Department 1 Direct labour cost,
Department 2 Overhead applied,
Department 1 Overhead applied,
Department 2
= $3,073 $700 $100 $420 $400
= $1,453

Total manufacturing cost

4. Unit cost = Number of units
$3,073
= 350
= $8.78
Job 217:
Overhead applied, Department 2
1. Machine hours, Department 2 = Overhead rate
$160
= $8
= 20

2. Total manufacturing cost = Unit cost Number of units

= $9.87 400
= $3,948

3. Direct labour cost, Department 2 = Total manufacturing cost Materials

used in production Direct labour cost,
Department 1 Overhead applied,
Department 1 Overhead applied,
Department 2

= $3,948 $488 $2,000 $1,200 $160

= $100
Exercise 520 (Concluded)

Job 225:
Total sales revenue
1. Number of units = Price per unit

$1,150
= $5 = 230

Total manufacturing cost

2. Unit cost = Number of units
$575
= 230
= $2.50

Overhead applied, Department 2

3. Machine hours, Department 2 = $8
$0
= $8
=0
Exercise 521

1. Direct materials...................................................... $ 18,000

Direct labour:
Department A.................................................... $36,000
Department B.................................................... 6,000 42,000
Overhead ($12 7,000 DLH)................................. 84,000
Total manufacturing costs............................... $144,000

$144,000
2. Unit cost = 10,000 = $14.40

3. Direct materials...................................................... $18,000

Direct labour:
Department A.................................................... $36,000
Department B.................................................... 6,000 42,000
Overhead:
Department A ($3 6,000)................................ 18,000
Department B ($7 1,200)............................... 8,400
Total manufacturing costs.................................... $86,400

Copyright 2015 by Nelson Education Ltd. 5-19

Exercise 521 (Concluded)

$86,400
4. Unit cost = 10,000 = $8.64

Exercise 522

1. Job 68 Job 69 Job 70 Job 71 Job 72

Balance, April 1 $ 540 $1,230 $ 990 $0 $0
Direct materials 700 560 75 3,500 2,750
Direct labour 500 600 90 2,500 2,000
Applied overhead 600 720 108 3,000 2,400
Total cost $2,340 $3,110 $1,263 $9,000 $7,150

2. Ending balance in Work in Process = Job 68 + Job 71

= $2,340 + $9,000
= $11,340
Cost of Goods Sold for April = Job 69 + Job 70 + Job 72
= $3,110 + $1,263 + $7,150
= $11,523

3.
Greenthumb Landscape Design
Income Statement
For the Month Ended April 30
Sales [$11,523 + 0.40($11,523)]............................................. $16,132
Cost of goods sold................................................................. 11,523
..........................................................................Gross margin
4,609
Less: Operating expenses.................................................... 3,670
...................................................................Operating income $
939

Exercise 523

1. a..................................................Raw Materials 27,800

............................................................................Accounts Payable
27,800
b.............................................Work in Process 21,000
............................................................................ Raw Materials
21,000
 c.............................................Work in Process 27,000
............................................................................Wages Payable
27,000
d...........................................Overhead Control 15,500
............................................................................Various Payables
15,500

Copyright 2015 by Nelson Education Ltd. 5-21

Exercise 523 (Continued)

e.............................................Work in Process 13,500

............................................................................Overhead Control
13,500
$27,000
. Total direct labour hours = $15 = 1,800
..Applied overhead = 1,800 $7.50 = $13,500
f...............................................Finished Goods 47,700
............................................................................Work in Process
47,700
g........................................Cost of Goods Sold 58,700
............................................................................Finished Goods
58,700
.......................................Accounts Receivable 82,180
............................................................................Sales Revenue
82,180

2. Job 58 Job 59 Job 60

Direct materials $ 9,300 $ 6,900 $ 4,800
Direct labour 12,000 9,000 6,000
Applied overhead 6,000 4,500 3,000
Total cost $27,300 $20,400 $13,800

3. Raw Materials:
Beginning balance $ 5,170
Purchases 27,800
Direct materials (21,000)
Ending balance $ 11,970

4. Work in Process:
Beginning balance................................................. $ 0
Direct materials...................................................... 21,000
Direct labour........................................................... 27,000
Applied overhead................................................... 13,500
Jobs completed:
Job 58................................................................ $27,300
Job 59................................................................ 20,400 (47,700)
Ending balance...................................................... $ 13,800
Exercise 523 (Concluded)

5. Finished Goods:
Beginning balance................................................. $ 31,400
Jobs transferred in:
Job 58................................................................ $27,300
Job 59................................................................ 20,400 47,700
Jobs sold:
Job 57................................................................ 31,400
Job 58................................................................ 27,300 (58,700)
Ending balance...................................................... $ 20,400

Exercise 524

1. Allocation ratios for Power based on number of machine hours:

5,000
Battery = (5,000 + 3,000) = 0.625
3,000
Small Motors = (5,000 + 3,000) = 0.375
Allocation ratios for Human Resources based on number of employees:
20
Battery = (20 + 60) = 0.25
60
Small Motors = (20 + 60) = 0.75

2. Support Departments
Producing Departments
Human
Small
Power Resources Battery
Motors
Direct costs $ 100,000 $ 205,000
$180,000$ 93,500
Allocate:
Power(100,000)
62,500 37,500
Human Resources (205,000)
51,250 153,750
Total $ 0 $ 0 $293,750
$284,750

Copyright 2015 by Nelson Education Ltd. 5-23

 $293,750
3. Battery overhead rate = 15,000 = $19.58

$284,750
Small Motors overhead rate = 80,000 = $3.56
Exercise 525

1. Allocation ratios for Human Resources based on number of employees:

20
Power = (20 + 20 + 60) = 0.20
20
Battery = (20 + 20 + 60) = 0.20
60
Small Motors = (20 + 20 + 60) = 0.60
Allocation ratios for Power based on number of machine hours:
5,000
Battery = (5,000 + 3,000) = 0.625
3,000
Small Motors = (5,000 + 3,000) = 0.375

2. Support Departments
Producing Departments
Human
Small
Power Resources Battery
Motors
Direct costs $ 100,000 $ 205,000
$180,000$ 93,500
Allocate:
Human Resources 41,000 (205,000)
41,000 123,000
Power (141,000) 88,125
52,875
Total $ 0 $ 0 $309,125
$269,375

$309,125
3. Battery overhead rate = 15,000 = $20.61

$269,375
Small Motors overhead rate = 80,000 = $3.37

Copyright 2015 by Nelson Education Ltd. 5-25

Exercise 525 (Concluded)

4. The difference between the direct method and the sequential method lies in the
manner in which support department costs are applied. In the direct method, the
costs of the support departments are applied to the producing departments with
no regard to allocating costs to other support departments. In other words, the
support department costs are applied directly to the producing departments.
The sequential method applies costs of the support departments to other support
departments and to the producing departments. However, once a support
department has applied its costs, it is no longer considered for the application of
new costs. The decision is in which sequence will the support department costs
be applied. Often the support department with the highest cost will have its cost
applied first and the other support departments will be allocated in sequence,
based on their total costs.
 PROBLEMS

Problem 526

$665,000
1. Overhead rate = 100,000 = $6.65per DLH

2. Job 210 Job 211 Job 212 Job 213 Job 214
Balance, July 1 $ 32,780 $ 51,770 $ 29,600 $ 0 $ 0
Direct materials 25,500 39,800 24,450 13,600 18,420
Direct labour 60,000 28,500 41,500 23,000 21,300
Applied overhead 26,600 12,635 17,955 9,975 9,310
Total cost $144,880 $132,705 $113,505 $46,575 $49,030

3. Ending balance in Work in Process = Job 211 + Job 213 + Job 214
= $132,705 + $46,575 + $49,030
= $228,310

4. Cost of Goods Sold = Job 210 + Job 212

= $144,880 + $113,505 = $258,385

Problem 527

1. Cost of Alban job:

Professional time (85 hours @ $120) $10,200
Transportation (510 km @ $0.50) 255
Photographs 120
Total $10,575

2. Overhead is included in the rate for professional time. This is easier for
professionals than to calculate a separate overhead rate and charge it to clients.
In effect, Marlowe charges a conversion cost rate, not a labour rate, to its clients.

Copyright 2015 by Nelson Education Ltd. 5-27

Problem 527 (Concluded)

3. Answers may vary. The following is one example.

Inspector Briant Travel Log

BeginningEnding Total
Date Client km km Destination km
7/8 Alban 56,780 56,815 Ofc. to claimant #1, 35
to Dr. Phony, to
claimant #2, to ofc.
7/9 Alban 56,815 56,903 Ofc. to claimant #3, 88
to claimant #4, to ofc.
7/10 Alban 56,903 57,078 Ofc. to witness #3, 175
to client, to ofc.
7/11 Alban 57,078 57,290 Ofc. to claimant #2, 212
to claimant #4, to ofc.
Note: Separate travel logs are kept by Inspectors Briant and Ackerman. Then,
relevant amounts are transferred to cost sheets (or folders) for each client.

Problem 528

$1,120

1. Overhead rate = $1,400 = 0.80 times direct labour dollars

(This rate was calculated using information from the Asher job; however, the
Bryson and Cooper jobs would give the same answer.)

2. Asher Bryson Cooper Davison Egberts

Beginning WIP $2,920 $6,400 $10,680 $ 0 $ 0
Direct materials 2,400 2,200 3,440 5,240 1,040
Direct labour 1,200 800 1,000 6,600 720
Applied overhead 960 640 800 5,280 576
Total $7,480 $10,040 $15,920 $17,120 $2,336

Note: This is just one way of setting up the job-order cost sheets. You might
prefer to retain the details of the materials, labour, and overhead that are in
beginning inventory costs.
Problem 528 (Concluded)

3. Since the Cooper and Davison jobs were completed, the others must still be in
process. Therefore, the ending balance in Work in Process is the sum of the costs
of the Asher, Bryson, and Egberts jobs.

Asher $ 7,480
Bryson 10,040
Egberts 2,336
Ending WIP $19,856
Cost of Goods Sold = Cooper job + Davison job = $15,920 + $17,120 = $33,040

4. Kenno Prosthetics Company

Income Statement
For the Month Ended January 31
Sales (1.2 $33,040).............................................................. $39,648
Cost of goods sold................................................................. 33,040
..........................................................................Gross margin 6,608
Marketing and administrative expenses.............................. 3,400
...................................................................Operating income $
3,208

Problem 529

$432,000
1. OH rate = 216,000 = $2 per machine hour

$300,000
2. Department A: 120,000 = $2.50 per machine hour

$132,000
Department B: 96,000 = $1.375 per machine hour

Copyright 2015 by Nelson Education Ltd. 5-29

Problem 529 (Concluded)

3. Job 73 Job 74
Plantwide:
70 $2 = $140 70 $2 = $140
Departmental:
20 $2.50 $ 50.00 50 $2.50 $125.00
50 $1.375 68.75 20 $1.375 27.50
$118.75 $152.50
Department A appears to be more overhead intensive, so jobs spending more
time in Department A ought to receive more overhead. Thus, departmental rates
provide more accuracy.

$540,000
4. Plantwide rate: 216,000 = $2.50 per machine hour

$240,000
Department B: 96,000 = $2.50 per machine hour

Job 73 Job 74
Plantwide:
70 $2.50 = $175 70 $2.50 = $175
Departmental:
20 $2.50 $ 50 50 $2.50 $125
50 $2.50 125 20 $2.50 50
$175 $175

Assuming that machine hours is a good cost driver, the departmental rates reveal
that overhead consumption is the same in each department. In this case, there is
no need for departmental rates, and a plantwide rate is sufficient.

5. In most instances, a departmental rate is preferable to a plantwide rate because

different products use the resources in different departments in a nonconsistent
way and departmental overhead rates adjust for this fact.
Problem 530

$472,000
1. Overhead rate = 8,000 = $59 per machine hour
Job 1 Job 2
Direct materials........................................................... $ 4,500 $ 8,600
Direct labour................................................................ 1,000 2,000
Overhead ($59 200 machine hours)....................... 11,800 11,800
Total manufacturing cost...................................... 17,300 22,400
Plus 30% markup......................................................... 5,190 6,720
Bid price.................................................................. $22,490 $29,120

$200,000
2. Welding overhead rate = 5,000 = $40 per machine hour

$22,000
Assembly overhead rate = 10,000 = $2.20 per DLH

$250,000
Finishing overhead rate = 2,000 = $125 per machine hour

Job 1 Job 2
Direct materials........................................................... $ 4,500 $ 8,600
Direct labour................................................................ 1,000 2,000
Overhead:
Welding ($40 50); ($40 30)............................... 2,000 1,200
Assembly ($2.20 60); ($2.20 20)..................... 132 44
Finishing ($125 110); ($125 165)..................... 13,750 20,625
Total manufacturing cost............................................ 21,382 32,469
Plus 30% markup......................................................... 6,415 9,741
Bid price.................................................................. $27,797 $42,210

Copyright 2015 by Nelson Education Ltd. 5-31

Problem 531

Firm wide overhead= $360,000 + $180,000 + $120,000 + $206,250 = $866,250

Total billable hours = 1,750 x 3 = 5,250 hours
Overhead rate = $866,250 / 5,250 = $165.00
Applied overhead to each lawyer = $165 x 1,750 = $288,750
Since each lawyer would be responsible for his own specific costs, each one would
have to determine the amount he must bill to cover all his own expenses.
Morris
Costs for Morris = $250,000 + $75,000 + $45,000 + $15,000 + $288,750 = $673,750
Per hour charge for Morris = $673,750 / 1,750 = $385 per hour
Leibowitz
Costs for Liebowitz = $250,000 + $90,000 + $40,000 + $26,000 + $288,750 = $694,750
Per hour charge for Liebowitz = $694,750 / 1,750 = $397 per hour
Guliani
Costs for Guliani = $250,000 + $80,000 + $60,000 + $21,250 + $288,750 = $700,000
Per hour charge for Guliani = $700,000 / 1,750 = $400 per hour

Problem 532
1. Job 64:
Direct materials $ 1,240
Direct labour 6,150
Overhead ($12 410) 4,920
Total cost $12,310
$12,310
Unit cost = 50 = $246.20

2. Ending Work in Process = Cost of Job 65

= $985 + $8,745 + ($12 583) = $16,726

3. Finished Goods................................................ 12,310

...............................................Work in Process
12,310
Cost of Goods Sold.......................................... 12,310
................................................Finished Goods
12,310
Accounts Receivable....................................... 19,696
 ..................................................Sales Revenue
19,696
(160% $12,310 = $19,696)

Copyright 2015 by Nelson Education Ltd. 5-33

Problem 533

1. a..................................................Raw Materials 3,000

............................................................................Accounts Payable
3,000
b.............................................Work in Process 1,700
............................................................................ Raw Materials
1,700
c.................Work in Process [$8 (50 + 100)] 1,200
............................................................................Wages Payable
1,200
d......................Work in Process ($7.50 150) 1,125
............................................................................Overhead Control
1,125
e...........................................Overhead Control 1,230
............................................................................ Cash
1,230

2. Job 443 Job 444

Direct materials $ 500 Direct materials $1,200
Direct labour 400 Direct labour 800
Applied overhead 375 Applied overhead 750
Total $1,275 Total $2,750
f...............................................Finished Goods 1,275
............................................................................Work in Process
1,275
g........................................Cost of Goods Sold 2,000
............................................................................Finished Goods
2,000
.......................................Accounts Receivable 2,500
............................................................................ Sales
2,500

3. Olakala Company
Schedule of Cost of Goods Manufactured
For the Month Ended April 30
Direct materials:
Beginning raw materials inventory................ $1,400
Purchases of raw materials............................. 3,000
Total raw materials available..................... 4,400
Ending raw materials....................................... 2,700
Raw materials used.......................................... $1,700
Direct labour........................................................... 1,200
 Overhead................................................................. 1,230
Less: Underapplied overhead.............................. 105
Overhead applied................................................... 1,125
Current manufacturing costs.......................... 4,025
Add: Beginning work in process.......................... 0
Total manufacturing costs............................... 4,025
Less: Ending work in process.............................. 2,750
Cost of goods manufactured.......................... $1,275

Copyright 2015 by Nelson Education Ltd. 5-35

Problem 534

1. Applied overhead = Direct labour cost Overhead rate

$140,000 = $80,000 Overhead rate
Overhead rate = 1.75, or 175% of direct labour cost

2. Applied overhead $140,000

Actual overhead 138,500
Overapplied overhead $ 1,500

3. Direct
materials $
40,000
Direct labour

80,000
Overhead
applied
140,000
260,000
Add:
Beginning WIP
17,000
Less: Ending
WIP
(32,000)
Cost of goods manufactured $245,000

4. Overhead Control............................................. 1,500

..........................................Cost of Goods Sold
1,500
Adjusted Cost of Goods Sold:
$210,000
(1,500)
$208,500

5. Direct materials ($32,000 $10,000 $17,500)................... $ 4,500

Direct labour (1,000 $10)..................................................... 10,000
Overhead applied (175% $10,000)..................................... 17,500
.........................................................Ending work in process $32,000

Problem 535
 $180,000
1. Overhead rate = 15,000 = $12 per direct labour hour

2. Direct materials...................................................................... $ 2,340

Direct labour........................................................................... 3,600
Applied overhead................................................................... 4,320*
.................................................................................Total cost $10,260
$3,600
*$4,320 = $12 $10

Copyright 2015 by Nelson Education Ltd. 5-37

Problem 535 (Concluded)

3. Overhead Control............................................. 185,000

...................................................Lease Payable
5,000
..............................Accumulated Depreciation
20,000
..................................................Wages Payable
100,000
................................................Utilities Payable
15,000
.................................................Other Payables
45,000
Work in Process ($12 15,400)....................... 184,800
.............................................Overhead Control
184,800

4. Actual overhead..................................................................... $185,000

Applied overhead................................................................... 184,800
.........................................................Underapplied overhead $
200

5. Normal cost of goods sold.................................................... $700,000

Add: Underapplied overhead................................................ 200
.................................................Adjusted cost of goods sold $700,200

Problem 536

1. a..................................................Raw Materials 42,630

............................................................................Accounts Payable
42,630
b.............................................Work in Process 27,000
............................................................................ Raw Materials
27,000
c.............................................Work in Process 26,320
............................................................................Wages Payable
26,320
d...........................................Overhead Control 19,950
............................................................................ Cash
19,950
e.............................................Work in Process 18,800
............................................................................Overhead Control
18,800
Copyright 2015 by Nelson Education Ltd. 5-39
Problem 536 (Concluded)
2. Job 703:
Beginning balance, WIP $10,000
Direct materials 12,500
Direct labour 10,920
Overhead applied 7,800
Total $41,220
Job 704:
Direct materials $14,500
Direct labour 15,400
Overhead applied 11,000
Total $40,900

3. f...............................................Finished Goods 41,220

............................................................................Work in Process
41,220
h........................................Cost of Goods Sold 6,240
............................................................................Finished Goods
6,240
.......................................Accounts Receivable 8,112
............................................................................ Sales
8,112

4. a. Raw Materials:
Beginning balance $ 6,070
Add: Purchases 42,630
Less: Materials requisitioned (27,000)
Ending balance $ 21,700
b. Work in Process:
Beginning balance $ 10,000
Add: Materials requisitioned 27,000
Direct labour 26,320
Overhead applied 18,800
Less: Jobs completed (41,220)
Ending balance $ 40,900
c. Finished Goods:
Beginning balance $ 6,240
Add: Jobs completed 41,220
Less: Jobs sold (6,240)
Ending balance $ 41,220
Problem 537

1. Direct method:
Proportion of: Laboratory Tissue Pathology
Number of samples 0.60 0.40
Transactions processed 0.65 0.35
Direct costs $862,500 $1,140,000
Delivery:
(0.60 $600,000) 360,000
(0.40 $600,000) 240,000
Accounting:
(0.65 $675,000) 438,750
(0.35 $675,000) 236,250
Total $1,661,250 $1,616,250

2. Sequential method:
Tissue
Delivery Accounting Laboratory Pathology
Transactions 0.0500 0.6175 0.3325
Number of samples 0.6000 0.4000
Direct costs $ 600,000 $ 675,000 $862,500 $1,140,000
Accounting:
(0.0500 $675,000) 33,750 (33,750)
(0.6175 $675,000) (416,813) 416,813
(0.3325 $675,000) (224,437) 224,437
Delivery:
(0.6000 $633,750) (380,250) 380,250
(0.4000 $633,750) (253,500) 253,500
Total $ 0 $ 0 $1,659,563 $1,617,937

Copyright 2015 by Nelson Education Ltd. 5-41

Problem 538

1. a. Direct method:
Drilling Assembly
Machine hours 0.80 0.20
Kilowatt-hours 0.10 0.90
Maintenance:
(0.80 $320,000) $256,000
(0.20 $320,000) $ 64,000
Power:
(0.10 $400,000) 40,000
(0.90 $400,000) 360,000
Direct costs 163,000 90,000
Total $459,000 $514,000
$459,000
Drilling: 30,000 = $15.30/machine hour

$514,000
Assembly: 40,000 = $12.85/direct labour hour
Prime costs $1,817.00
Drilling ($15.30 2) 30.60
Assembly ($12.85 50) 642.50
Total cost 2,490.10
Markup (15%) 373.52
Bid price $2,863.62
Problem 538 (Concluded)

b. Sequential method: Allocate Power first, then Maintenance

Maintenance Power Drilling Assembly
Machine hours 0.80 0.20
Kilowatt-hours 0.10 0.09 0.81
Direct costs $ 320,000 $ 400,000 $163,000 $ 90,000
Power:
(0.10 $400,000) 40,000 (40,000)
(0.09 $400,000) (36,000) 36,000
(0.81 $400,000) (324,000) 324,000
Maintenance:
(0.80 $360,000) (288,000) 288,000
(0.20 $360,000) (72,000) 72,000
Total $ 0 $ 0 $487,000 $486,000
$487,000
Drilling: 30,000 = $16.23/machine hour

$486,000
Assembly: 40,000 = $12.15/direct labour hour

Prime costs $1,817.00

Drilling ($16.23 2) 32.46
Assembly ($12.15 50) 607.50
Total cost 2,456.96
Markup (15%) 368.54
Bid price $2,825.50

2. The sequential method is the more accurate because it considers some of the
support department interactions.

Copyright 2015 by Nelson Education Ltd. 5-43

 PROFESSIONAL EXAMINATION PROBLEMS1

Professional Examination Problem 539 JOB-ORDER COSTINGSCALEDOWN INC.

1. A job-order cost system is appropriate for manufacturing,

merchandising, and service companies that provide individual
products or services or products or services in unique batches. The
process characteristic that makes a job-order costing desirable is the
ability to trace materials and labour directly to the unit or batch.

2. Predetermined overhead rate = $4,500,000/ 600,000 direct labour hours

= $7.50 per DLH

The only job in process at May 31, 2015 is Job DRS114:

Costs in opening WIP $250,000

Direct materials added in May 124,000
Purchased parts added in May 87,000
Direct labour added in May 200,500
Manufacturing overhead applied: 19,500 hours $7.50 146,250
$807,750

3. Cost
/Unit Units Total
Beginning inventory, finished goods $35 19,400 $679,000

Playpens manufactured in May

WIP opening 420,000
Direct materials added in May 3,000
Purchased parts added in May 10,800
Direct labour added in May 43,200
Manufacturing overhead applied:
4,400 hours $7.50 33,000
34 15,000 510,000

Less: sales
Beginning inventory 35 19,400 (679,000)
Manufactured in May 34 1,600 (54,400)

Ending inventory, finished goods $34 13,400 $455,600

1 2010 CMA Ontario. Reproduced with Permission.

 Professional Examination Problem 539 (Concluded)

4. If the overhead balance at the end of the year is significant, it should

be prorated over COGS and the balances in WIP, FG, and COGS. If it is
insignificant, the ending balance can be closed to COGS.

Professional Examination Problem 540 (APPENDIX 5B) DEPARTMENTAL

COSTING AND COST ALLOCATIONCORINTH LTD.

a) Use the appropriate cost drivers as follows on which to base the cost allocation:

Department Cost Driver

Personnel # of employees
Purchasing Purchase requisitions
Machining Machine hours
Painting Direct labour costs

Personnel department cost is allocated first because it has the highest cost
among the service departments.
Personnel Purchasin Machining Paintin
g g
Overhead $40,000 $35,000 $128,00 $48,000
0
Personnel (number of (40,000) 3,371 1 5,618 2 31,011 3
employees)
0 38,371
Purchasing (number of (38,371) 32,801 4 5,570 5
requisitions)
0
Total overhead cost $166,41 $84,581
9
1
(15/178) $40,000
2
(25/178) $40,000
3
(138/178) $40,000
4
(2,650/3,100) $38,371
5
(450/3,100) $38,371

Overhead rates:
Machining = $166,419 23,500 machine hours = $7.0817 per machine hour
Painting = $84,581 $147,000 direct labour dollars = $0.5754 per direct labour
dollar

Copyright 2015 by Nelson Education Ltd. 5-45

 Professional Examination Problem 540 (Concluded)
b)
Actual overhead ($173,000 + $78,540) $251,540
Applied overhead:
Machining (24,150 hrs $7.0817) $171,023
Painting ($139,750 direct labour $0.5754) 80,412 251,435
Underapplied overhead $ 105

Journal Entry
Applied overhead account (s) 251,435
Cost of Goods Sold 105
Actual overhead control account 251,540

c) Reasons for allocating service department costs include:

1) Economic to provide information for economic decisions (e.g., how to
allocate available capacity among products)
2) Motivation to motivate managers and employees (e.g., to discourage using
shared services unwisely)
3) Income and asset measurement for external parties to cost products for
financial reporting purposes
4) Cost justification to establish a fair price
 CASES

Case 541
1. Mrs. Lucky wont like being charged more for two of the jobs when the same
number and type of announcements were produced in each job.
$20,000
2. May: Actual rate = 500 = $40 per hour
Overhead assigned: $40 5 = $200
$20,000
June and July: Actual rate = 250 = $80 per hour
Overhead assigned: $80 5 = $400
$240,000
3. Predetermined rate = (500 12) = $40 per hour
Cost and price of each job:
Direct materials $250.00
Direct labour 25.00
Overhead (5 $40) 200.00
Total cost 475.00
Plus 25% markup 118.75
Price $593.75
Using a predetermined rate will avoid the nonuniform production problem
revealed in the first two requirements and result in a more accurate application of
overhead and fairer costing of the summer jobs.
Case 542
1. The solution Franz proposes is not ethical. Although maintaining the current
plantwide rate is probably not illegal, its continuation has one purpose: to extract
extra profits from government business. Franz knows the plantwide rate is not
accurately assigning overhead costs to the various jobs and is willing to alter the
assignments on an unofficial basis for purposes of bidding on private-sector
jobs. Fundamentally, ethical behaviour is concerned with choosing right over
wrong. To knowingly overcharge government for future business certainly seems
wrong. To continue overpricing knowing the new overhead rates would more than
make up for any lost profits from the government sector (through more competitive
bidding in the private sector) is a clear indication of greed. While managers have
an obligation to maximize profits, this obligation must be within ethical boundaries.
2. Miroslav should first determine whether or not Matthaus has a corporate code of
conduct. He can pursue the avenues suggested by the code. For example, if
Miroslav cannot persuade Franz to refrain from implementing the scheme, he
could present his objections to Franzs immediate supervisor. If a resolution
cannot be realized at this level, then Miroslav should go to the next higher
management level. If no resolution is possible after appealing to all higher levels,
then Miroslavs resignation may be the only remaining option.

Copyright 2015 by Nelson Education Ltd. 5-47

Case 543
Student answers will vary.
The problem is that the overhead application rate has been set too low on a
consistent basis. The low rate can be due to an over estimation of the activity rate
for the overhead application base driver or an underestimation of the costs to be
incurred for overhead items. In either case, the rate will be set at a rate that will
not result in all overheads being absorbed into production.
A study should be made of the activity levels over the past five years and compare
this to the estimates that were used in determining the expected activity levels for
the year. If we determine that the estimates have been severely off, resulting in
the underapplied overhead at year end, then we should revise our rate
accordingly.
If it turns out that the level of expected activity was accurate, we should study the
costs over the same period and compare the expected costs to the actual costs.
We should determine why the costs have been inaccurately measured and take
steps to improve our budgeting process to catch seriously underestimated costs.
In the meantime, we should take steps to ensure that we do not incur such a serious
adjustment at the end of the year. We can review the overhead control account on
a monthly basis and if the unapplied overhead is greater than a certain
percentage (say 5%), then we should adjust cost of goods sold at month end
rather than at year end. Otherwise, if spo the magnitude of the adjustment will be
relatively small and will not cause a major concern by taking it then the
adjustment can be taken all at once at year end.

Case 544
Student responses will vary.
We have been gathering information on departmental operations to develop
overhead allocation rates by department. The reason for doing this is that the
various departments that we have are very different in how they operate and the
costs associated with each department. As an example, the Stamping department
has three very expensive machines that do most of the work in that department.
These machines each cost $5 million and are operated by fairly low level, semi-
skilled employees. The machines are the critical ingredient in how the products
are produced in this department.
The Grinding department, on the other hand, has a number of less expensive
machines, with an average cost of about $100,000 each, but they are operated by
highly skilled employees. These employees are relatively well paid and are the
difference between a good job and a bad job. These employees are the critical
difference in how the products are produced in this department.
Case 544 (Concluded)
In the Finishing department, the highly skilled labourers are the key ingredient to
maintaining a high quality finished product. They are the key to production in this
department.
In allocating costs, we must be certain that the costs are allocated properly because
many of the strategic decisions made by this company are based on the cost of
individual products. Allocating overhead by the key component in the
manufacturing cycle, be it the operation of the machine or the work of the
labourers, is crucial to maintaining the most appropriate strategy. Pricing is
impacted by the final cost assigned to our products and we must ensure that
these costs are appropriate.
Using machine hours to allocate overhead in the Stamping department and direct
labour in the other two departments will give us the most accurate costs of our
products and ensure that we make the best decisions possible from this
information.

Copyright 2015 by Nelson Education Ltd. 5-49

 Case 545
(All dollar values in 000s, except for rate per patient day)
Pharmacy Cafeteria Admin Maint. Surgery Oncology Internal Total
Medicine

Beds 150 200 650 1,000

Patient Days 48,600 64,800 210,600 324,000

Occupancy 1.00% 4.00% 3.00% 10.00% 18.00% 10.00% 46.00%

Beds Space 8.10% 10.80% 35.10% 54.00%

Nurses 1,200 1,000 1,950 4,150

Nurses Costs (000s) 99,000 82,500 160,875 342,375

 Case 545 (Concluded)
Department
Costs (000s)
Internal
Pharmacy Cafeteria Admin Maint. Surgery Oncology Medicine Total
Direct Costs 12,500 60,000 62,500 22,500 23,500 26,500 53,500 261,000

Nursing
Costs 99,000 82,500 160,875 342,375

Maintenance 225 900 675 -(22,500) 4,073 6,480 10,147 0

Depreciation 275 1,100 825 0 4,978 7,920 12,402 27,500

Sub total 13,000 62,000 64,000 0 131,551 123,400 236,924 630,875

Allocate
Pharmacy (13,000) 1,950 2,600 8,450 0

Allocate
Cafeteria (62,000) 17,928 14,940 29,132 0

Allocate Admin -(64,000) 9,600 12,800 41,600 0

Total Patient Care Costs 161,028 153,740 316,107 630,875

Patient Days 48,600 64,800 210,600 324,000

Rate Per Patient Day 3,313 2,373 1,501

Allocation of
Costs

Maintenance 225 900 675 0 4,073 6,480 10,147 22,500

Depreciation* 275 1,100 825 0 4,978 7,920 12,402 27,500*

*Based on $825 million over 30 years

Copyright 2015 by Nelson Education Ltd. 5-51