Reference no: EM132486757

Topic - Job and Process Costing

Learning outcomes - After studying this presentation, you should be able to:

- Explain the flow of costs through the manufacturing process;

- Use a job costing system to calculate the inventoriable product cost of customised products;

- Calculate product costs using weighted average and FIFO methods;

- Critically analyse the uses and limitations of job costing and process costing for financial reporting.

Questions -

Q1. Will underapplied and overapplied overhead arise under both actual and normal costing? Explain your answer.

Q2. Part of a contract between a union and a company guarantees that all manufacturing employees earn five hours of overtime each week. In the company's job costing system, should overtime be treated as a direct or indirect cost?

Q3. Compare actual and normal cost systems. Discuss the ways in which they are similar and the ways they differ.

Q4. Describe the procedures used in job costing.

Q5. Explain the difference between the weighted average and FIFO methods for process costing. Explain why an entity might choose one method over the other.

Q6. Under what conditions will weighted average and FIFO process costing consistently produce similar equivalent unit costs?

Exercises -

1. Job costing, over- and underapplied overhead, journal entries

Shane's Shovels produces small, custom earth-moving equipment for landscaping companies. Manufacturing overhead is allocated to work in process using an estimated overhead rate. During April, transactions for Shane's Shovels included the following:

Beginning and ending work in process were both zero.

Required -

(a) What was the cost of jobs completed in April?

(b) Was manufacturing overhead underapplied or overapplied? By how much?

(c) Write out the journal entries for these transactions, including the adjustment.

2. Analysis of WIP T-account

Jasper Company uses a job costing system. Overhead is allocated based on 120 per cent of direct labour cost. Last month's transactions in the work in process account are shown here:

Only one job, number 850, was still in process at the end of the month. Job 850 was charged with $9000 in overhead for the month.

Required -

(a) What is the ending balance in the WIP account?

(b) How much direct labour cost was used for job 850?

(c) What is the amount of direct materials used for job 850?

3. Job costing journal entries

Vern's Van Service customises light trucks according to customers' orders. This month the entity worked on five jobs, numbered 207 to 211. Materials requisitions for the month were as follows:

An analysis of the payroll records revealed the following distribution for labour costs:

Other overhead costs (consisting of rent, depreciation, taxes, insurance, utilities, etc.) amounted to $3600. At the beginning of the period, management anticipated that overhead cost would be $6400 and total direct labour would amount to $5000. Overhead is allocated on the basis of direct labour dollars.

Jobs 207 to 210 were finished during the month; Job 211 is still in process. Jobs 207 to 209 were picked up and paid for by customers. Job 210 is still on the lot waiting to be picked up.

Required -

(a) Prepare the journal entries to reflect the incurrence of materials, labour, and overhead costs; the allocation of overhead; and the transfer of units to finished goods and cost of sales.

(b) Close overapplied or underapplied overhead to cost of sales.

4. Allocating overhead; over- and underapplied overhead; spoilage

The Futons for You Company sells batches of custom-made futons to customers and uses predetermined rates for fixed overhead, based on machine hours. The following data are available for last year:

Required -

(a) Calculate the estimated overhead allocation rate to be used for the year.

(b) Determine the overhead to be allocated to job 21.

(c) Determine total overapplied or underapplied overhead at the end of the year.

(d) Should cost of sales be increased or decreased at the end of the year? Why?

(e) If the amount of overapplied or underapplied overhead is material, how is it assigned?

(f) Suppose Job 21 required a special fabric cover for the futon pads. This type of fabric dulls the blades of the cutting machine, and a number of fabric covers were unusable. Should this spoilage be recorded for Job 21 or for all jobs processed this period? Explain your answer.

5. Equivalent unit cost under weighted average and FIFO

Fine Fans mass-produces small electric fans in Hawley Beach for home use. All direct materials are added at the beginning of production, and conversion costs are incurred evenly throughout production. The following production information is for the month of October:

Required -

(a) Calculate the equivalent cost per unit using the weighted average method.

(b) Calculate the equivalent cost per unit using the FIFO method.

6. Cost per equivalent unit under weighted average

Fox and Sons is a toy maker and produces Flying Flingbats, a soft foam rubber boomerang. All direct materials are added at the beginning of production, and conversion costs are incurred evenly throughout production. Conversion was 75 per cent complete for the 8000 units in WIP on December 1 and 50 per cent complete for the 6000 units in WIP on 31 December. During the month, 12 000 Flingbats were completed and transferred out as finished goods. Following is a summary of the costs for the period:

Required - Using the weighted average method, prepare a schedule calculating the equivalent unit cost for each cost pool for December.