A LOOK AT THIS CHAPTER A LOOK AHEAD

A LOOK BACK In Chapter 3, we explain how job-order Chapter 4 continues the discussion of
Chapter 2 described how job-order costing systems can be used to determine the allocation of manufacturing overhead
costing systems can be used to assign the value of ending inventories and cost of costs, showing how these costs can be
manufacturing costs to individual jobs and goods sold for external reporting purposes. more accurately assigned using activity-
to calculate unit product costs. based costing.

3
CHAPTER OUTLINE
Job-Order Costing—The Flow of Costs
Job-Order Costing:
Cost Flows and
External Reporting

• Disposition of Underapplied and Overapplied Overhead Balances

• The Purchase and Issue of Materials • Comparing the Two Methods for Disposing of Underapplied
or Overapplied Overhead
• Labor Cost
• A General Model of Product Cost Flows
• Manufacturing Overhead Costs
• Applying Manufacturing Overhead Appendix 3A: Job-Order Costing: A Microsoft Excel-Based
Approach
• Nonmanufacturing Costs
• Fundamental Accounting Equations
• Cost of Goods Manufactured
• Three Key Assumptions
• Cost of Goods Sold
• Sapphire Company–Setting the Stage
Schedules of Cost of Goods Manufactured and Cost of
• Sapphire Company–Transaction Analysis
Goods Sold
• Sapphire Company–Schedules of Cost of Goods Manufactured
Underapplied and Overapplied Overhead—A Closer Look and Cost of Goods Sold
• Computing Underapplied and Overapplied Overhead • Sapphire Company–Income Statement
 www.freebookslides.com

DECISION FEATURE LEARNING

OBJECTIVES

After studying Chapter 3, you

should be able to:

LO3–1 Understand the flow

of costs in a job-order costing
system and prepare appropri-
ate journal entries to record
costs.

LO3–2 Use T-accounts to

show the flow of costs in a
job-order costing system.

LO3–3 Prepare schedules

of cost of goods manufactured
and cost of goods sold and an
income statement.

LO3–4 Compute underap-

plied or overapplied overhead
cost and prepare the journal
entry to close the balance in
Manufacturing Overhead to
the appropriate accounts.
©Pixtal/AGE Fotostock

LO3–5 (Appendix 3A) Use

Inventory Accounting At Toll Brothers Microsoft Excel to summarize
the flow of costs in a job-order
Toll Brothers is one of America’s largest home builders with annual revenues in excess of $5.1 billion. The costing system.
company’s inventory consists of land acquisition costs, land development costs, home construction costs, and
overhead costs related to development and construction. In accordance with generally accepted accounting
principles (GAAP), Toll Brothers treats its inventory as a long-lived asset rather than a current asset because its
master planned communities can take up to 10 years to fully develop.
While Toll Brothers’ industry has some unique attributes relative to most manufacturers, it is an industry well-
suited for job-order costing. For example, each new home that the company builds can be accounted for as a job
that gets assigned direct material costs (such as lumber, shingles, and bricks), direct labor (such as subcontracted
electricians, plumbers, and roofers), and overhead costs (such as the costs of construction supervisors and the
equipment that they use to perform their jobs).
Source: 2016 Toll Brothers Annual Report

97
 www.freebookslides.com
98 Chapter 3

C
hapter 2 discussed how companies use job-order costing to assign manufactur-
ing costs to individual jobs. This chapter describes how companies use job-
order costing to prepare a balance sheet and an income statement for external
reporting purposes.
Exhibit 3–1 summarizes seven important vocabulary terms that were introduced in the
previous chapter. Please take a moment to review these terms, each of which is included
in the Glossary at the end of this chapter, because it will help you understand the forth-
coming learning objectives.

EXHIBIT 3– 1 Summary of lmportant Vocabulary Terms

Vocabulary Term Definition

Job-order costing A costing system used in situations where many different products, jobs, or services are
produced each period.
Absorption costing A costing method that includes all manufacturing costs—direct materials, direct labor,
and both variable and fixed manufacturing overhead—in the cost of a product.
Allocation base A measure of activity such as direct labor-hours or machine-hours that is used to assign
costs to cost objects.
Predetermined overhead rate A rate used to charge manufacturing overhead cost to jobs that is established in
advance for each period. It is computed using the following equation:
Estimated total manufacturing overhead cost
Predetermined overhead rate =
Estimated total amount of the allocation base
Overhead application The process of assigning overhead costs to specific jobs using the following formula:
Overhead applied to Predetermined Amount of the allocation base
= ×
a particular job overhead rate incurred by the job

Normal costing A costing system in which overhead costs are applied to a job by multiplying a predeter-
mined overhead rate by the actual amount of the allocation base incurred by the job.
Job cost sheet A form that records the direct materials, direct labor, and manufacturing overhead cost
charged to a job.

JOB-ORDER COSTING—THE FLOW OF COSTS

LEARNING OBJECTIVE 3–1
In Chapter 1, we used Exhibit 1–2 to illustrate the cost flows and classifications in a
manufacturing company. Now we are going to use a similar version of that exhibit, as
Understand the flow of costs in a shown in Exhibit 3–2, to introduce the cost flows and classifications in a manufacturing
job-order costing system and company that uses job-order costing.
prepare appropriate journal entries
Exhibit 3–2 shows that in job-order costing a company’s product costs flow through
to record costs.
three inventory accounts on the balance sheet and then on to cost of goods sold in the
income statement. More specifically, raw materials purchases are recorded in the Raw
Materials inventory account. Raw materials include any materials that go into the final
product. When raw materials are used in production as direct materials, their costs are
transferred to Work in Process inventory.1 Work in process consists of units of product
that are only partially complete and will require further work before they are ready for
sale to the customer. To transform direct materials into completed jobs, direct labor cost
is added to Work in Process and manufacturing overhead cost is applied to Work in Pro-
cess by multiplying the predetermined overhead rate by the actual quantity of the alloca-
tion base consumed by each job.2 When jobs are completed, their costs are transferred
from Work in Process to Finished Goods inventory. Finished goods consist of completed
units of product that have not yet been sold to customers.

1
Indirect materials are accounted for as part of manufacturing overhead.
2
For simplicity, Exhibit 3–2 assumes that Cost of Goods Sold does not need to be adjusted as discussed
later in the chapter.
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 99

EXHIBIT 3– 2 Cost Flows and Classifications in a Manufacturing Company That Uses Job-Order Costing

Costs
Balance Sheet
Raw materials Raw Materials inventory
purchases
Product costs

Direct materials
used in production
Direct labor
Work in Process inventory

Goods completed
Manufacturing (Cost of Goods
overhead Manufactured) Income Statement

Finished Goods inventory Cost of Goods Sold

Goods
sold
Selling and
Period
costs

Selling and Administrative

administrative Expenses

The amount transferred from Work in Process to Finished Goods is referred to as the
cost of goods manufactured. The cost of goods manufactured includes the manufacturing
costs associated with units of product that were finished during the period. As jobs are sold,
their costs are transferred from Finished Goods to Cost of Goods Sold. At this point, the
various costs attached to each job are finally recorded as an expense on the income state-
ment. Until that point, these costs are in inventory accounts on the balance sheet. Period
costs (or selling and administrative expenses) do not flow through inventories on the bal-
ance sheet. They are recorded as expenses on the income statement in the period incurred.
To illustrate the cost flows within a job-order costing system, we will record Ruger
Corporation’s transactions for the month of April. Ruger is a producer of gold and silver
commemorative medallions and it worked on only two jobs in April. Job A, a special
minting of 1,000 gold medallions commemorating the invention of motion pictures, was
started during March and completed in April. As of March 31st, Job A had been assigned
$30,000 in manufacturing costs, which corresponds with Ruger’s Work in Process balance
on April 1st of $30,000. Job B, an order for 10,000 silver medallions commemorating the
fall of the Berlin Wall, was started in April and was incomplete at the end of the month.

The Purchase and Issue of Materials

On April 1, Ruger Corporation had $7,000 in raw materials on hand. During the month,
the company purchased on account an additional $60,000 in raw materials. The purchase
is recorded in journal entry (1) below:
(1)
Raw Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . 60,000

Remember that Raw Materials is an asset account. Thus, when raw materials are pur-
chased, they are initially recorded as an asset—not as an expense.
Issue of Direct and Indirect Materials During April, materials requisition forms
were prepared to authorize withdrawing $52,000 in raw materials from the storeroom for
 www.freebookslides.com

100 Chapter 3

EXHIBIT 3– 3 Raw Materials Cost Flows

Raw Materials Work in Process Manufacturing Overhead

Bal. 7,000 (2) 52,000 Bal. 30,000 (2) 2,000

(1) 60,000 (2) 50,000

Job Cost Sheet Job Cost Sheet

Bal Job A Job B

Dir ance. . . . . . . . . . $30,000 Balance. . . . . . . . . . $0
ect materials. . . $28,000 Direct materials. . . $22,000

Indirect
materials
Direct
Materials Requisition Forms materials
$52,000

use in production. These raw materials included $50,000 of direct and $2,000 of indirect
materials. Entry (2) records issuing the materials to the production departments.
(2)
Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Manufacturing Overhead . . . . . . . . . . . . . . . . . . . . . 2,000
Raw Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000

The materials charged to Work in Process represent direct materials for specific jobs.
These costs are also recorded on the appropriate job cost sheets. This point is illustrated
in Exhibit 3–3, where $28,000 of the $50,000 in direct materials is charged to Job A’s
cost sheet and the remaining $22,000 is charged to Job B’s cost sheet. (In this example, all
data are presented in summary form and the job cost sheet is abbreviated.)
The $2,000 charged to Manufacturing Overhead in entry (2) represents indirect mate-
rials. The debit side of the Manufacturing Overhead account is always used to record the
actual manufacturing overhead costs, such as indirect materials, that are incurred during
the period. The credit side of this account, as you will see in transaction (7), is always
used to record the manufacturing overhead applied to work in process.
Before leaving Exhibit 3–3, we need to provide one additional comment. Notice from
the exhibit that the job cost sheet for Job A contains a beginning balance of $30,000. We
stated earlier that this balance represents the cost of work done during March that has
been carried forward to April. Also note that the Work in Process account contains the
same $30,000 balance. Thus, the Work in Process account summarizes all of the costs
appearing on the job cost sheets of the jobs that are in process. Job A was the only job
in process at the beginning of April, so the beginning balance in the Work in Process
account equals Job A’s beginning balance of $30,000.

Labor Cost
In April, the employee time tickets (which provide hourly summaries of each employee’s
activities throughout the day) included $60,000 recorded for direct labor and $15,000 for
indirect labor. The following entry summarizes these costs:
(3)
Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Manufacturing Overhead . . . . . . . . . . . . . . . . . . . . . 15,000
Salaries and Wages Payable . . . . . . . . . . . . . . . . 75,000
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 101

EXHIBIT 3– 4 Labor Cost Flows

Salaries and Wages Payable Work in Process Manufacturing Overhead

(3) , Bal. , (2) ,

(2) , (3) ,
(3) ,

Job Cost Sheet Job Cost Sheet

Job A Job B
Balance. . . . . . . . . . $ , Balance. . . . . . . . . . $
Direct materials. . . $ , Direct materials. . . $ ,
Direct labor. . . . . . . $ , Direct labor. . . . . . . $ ,

Indirect
labor
Direct
Various Time Tickets labor
$ ,

Only the direct labor cost of $60,000 is added to the Work in Process account. At the
same time that direct labor costs are added to Work in Process, they are also added to the
individual job cost sheets, as shown in Exhibit 3–4. During April, $40,000 of direct labor
cost was charged to Job A and the remaining $20,000 was charged to Job B.
The $15,000 charged to Manufacturing Overhead represents the indirect labor costs of
the period, such as supervision, janitorial work, and maintenance.

A Look at Bangladesh’S $20 Billion Garment Industry IN BUSINESS

In Bangladesh, the minimum wage is $38 per month. A highly-skilled sewing machine operator
may earn as much as $100 per month before considering overtime. Companies such as Fakir
Apparels, a T-shirt manufacturer in Bangladesh, can readily attract customers such as Walmart,
Gap, and Primark, due to these low labor costs. However, in addition to serving mass market
retailers, Fakir Apparels also makes T-shirts for premium brands such as Tommy Hilfiger, Giorgio
Armani, Hugo Boss, and G-Star Raw. While the manufacturing cost for one of Fakir Apparels
T-shirts ranges from $1.60 to $6.00, the retail selling prices for these T-shirts can vary from ©Joerg Boethling/Alamy Stock Photo
$6.00 (at Walmart) to as much as $91.00 (at G-Star Raw).
Source: Passariello, Christina et al., “Bangladesh’s Tale of the T-Shirts,” The Wall Street Journal, July 1,
2013, pp. B1 and B8.

Manufacturing Overhead Costs

Recall that all manufacturing costs other than direct materials and direct labor are clas-
sified as manufacturing overhead costs. These costs are entered directly into the Man-
ufacturing Overhead account as they are incurred. To illustrate, assume that Ruger
Corporation incurred the following general factory costs during April:

Utilities (heat, water, and power) . . . . . . . . . . . . . . . . . . . $21,000

Rent on factory equipment . . . . . . . . . . . . . . . . . . . . . . . . 16,000
Miscellaneous factory overhead costs . . . . . . . . . . . . . . 3,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,000
 www.freebookslides.com

102 Chapter 3

The following entry records these costs:

(4)
Manufacturing Overhead . . . . . . . . . . . . . . . . . . . . . . 40,000
Accounts Payable* . . . . . . . . . . . . . . . . . . . . . . . . 40,000

*Accounts such as Cash may also be credited

In addition, assume that during April, Ruger Corporation recognized $13,000 in

accrued property taxes and that $7,000 in prepaid insurance expired on factory buildings
and equipment. The following entry records these items:
(5)
Manufacturing Overhead . . . . . . . . . . . . . . . . . . . . . . 20,000
Property Taxes Payable . . . . . . . . . . . . . . . . . . . . . 13,000
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 7,000

Finally, assume that the company recognized $18,000 in depreciation on factory equip-
ment during April. The following entry records the accrual of this depreciation:
(6)
Manufacturing Overhead . . . . . . . . . . . . . . . . . . . . . . 18,000
Accumulated Depreciation . . . . . . . . . . . . . . . . . . 18,000
In short, all actual manufacturing overhead costs are debited to the Manufacturing
Overhead account as they are incurred.

Applying Manufacturing Overhead

Because actual manufacturing overhead costs are charged to the Manufacturing Overhead
account rather than to Work in Process, it begs the question how are manufacturing over-
head costs assigned to Work in Process? The answer is, they are assigned by using the
predetermined overhead rate—which is calculated by dividing the estimated total manu-
facturing overhead cost for the period by the estimated total amount of the allocation
base. For example, if we assume that machine-hours is the allocation base, then overhead
cost would be applied to jobs by multiplying the predetermined overhead rate by the
number of machine-hours charged to each job.
To illustrate, assume that Ruger Corporation’s predetermined overhead rate is $6 per
machine-hour. Also assume that during April, 10,000 machine-hours were worked on
Job A and 5,000 machine-hours were worked on Job B (a total of 15,000 machine-
hours). Thus, $90,000 in overhead cost ($6 per machine-hour × 15,000 machine-hours =
$90,000) would be applied to Work in Process. The following entry records the applica-
tion of Manufacturing Overhead to Work in Process:
(7)
Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000
Manufacturing Overhead . . . . . . . . . . . . . . . . . . . 90,000

The flow of costs through the Manufacturing Overhead account is shown in Exhibit 3–5.
The actual overhead costs on the debit side in the Manufacturing Overhead account in
Exhibit 3–5 are the costs that were added to the account in entries (2)–(6). Observe that
recording these actual overhead costs [entries (2)–(6)] and the application of overhead to
Work in Process [entry (7)] represent two separate and entirely distinct processes.

The Concept of a Clearing Account The Manufacturing Overhead account

operates as a clearing account. As we have noted, actual manufacturing overhead costs
are debited to the account as they are incurred throughout the year. When jobs are com-
pleted (or at the end of an accounting period), overhead cost is applied to the jobs using
the predetermined overhead rate—Work in Process is debited and Manufacturing Over-
head is credited. This sequence of events is illustrated below:
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 103

Work in Process Manufacturing Overhead The Flow of Costs in Overhead

Bal. , (2) , (7) , Application

Applied

(2) , Actual (3) , overhead

(3) , overhead (4) , costs
(7) , costs (5) ,
(6) ,
, ,
Balance ,

Job Cost Sheet Job Cost Sheet

Job A Job B
Balance. . . . . . . . . . . . . . . . . . $ , Balance. . . . . . . . . . . . . . . . . . . $
Direct materials. . . . . . . . . . . $ , Direct materials. . . . . . . . . . . . $ ,
Direct labor. . . . . . . . . . . . . . . $ , Direct labor. . . . . . . . . . . . . . . . $ ,
Manufacturing overhead. . . $ , Manufacturing overhead. . . $ ,
Total. . . . . . . . . . . . . . . . . . . . . $ , Total. . . . . . . . . . . . . . . . . . . . . . $ ,

Overhead Applied to Work in P ro cess

$ per machine-hour × , machine- h ours = $ ,

Manufacturing Overhead
(a clearing account)
Actual overhead costs are charged Overhead is applied to Work in Process
to this account as they are incurred using the predetermined overhead rate.
throughout the period.

As we emphasized earlier, the predetermined overhead rate is based entirely on estimates

of what the level of activity and overhead costs are expected to be, and it is established before
the year begins. As a result, the overhead cost applied during a year will almost certainly
turn out to be more or less than the actual overhead cost incurred. For example, notice from
Exhibit 3–5 that Ruger Corporation’s actual overhead costs for the period are $5,000 greater
than the overhead cost that has been applied to Work in Process, resulting in a $5,000 debit
balance in the Manufacturing Overhead account. We will reserve discussion of what to do
with this $5,000 balance until later in the chapter.
For the moment, we can conclude from Exhibit 3–5 that the cost of a completed job con-
sists of the actual direct materials cost of the job, the actual direct labor cost of the job, and
the manufacturing overhead cost applied to the job. Pay particular attention to the following
subtle but important point: Actual overhead costs are not charged to jobs; actual overhead
costs do not appear on the job cost sheet nor do they appear in the Work in Process account.
Only the applied overhead cost, based on the predetermined overhead rate, appears on the
job cost sheet and in the Work in Process account.

HELPFUL HINT
Actual manufacturing overhead costs are recorded as debits to the Manufacturing Overhead
account. The amount of manufacturing overhead applied to all jobs using the predetermined
overhead rate is recorded on the credit side of the Manufacturing Overhead account. The man-
ufacturing overhead cost added to all jobs during a period will equal the amount of the credits
recorded in the Manufacturing Overhead account during that period.
 www.freebookslides.com

104 Chapter 3

IN BUSINESS Using Technology to Improve Manufacturing Efficiency

Roland DG, a Japanese manufacturer that employs 966 people, has developed an advanced
production system that it refers to as D-shop. This technology-intensive system enables a single
worker to assemble products from start to finish. Each worker refers to a computer screen that
provides step-by-step instructions accompanied by 3-D drawings to properly assemble prod-
ucts. A computerized rotating parts rack automatically rotates to the appropriate component
part for each step in the assembly process. Digital screwdrivers monitor how many times and
how tightly screws are turned. The computer screen does not advance to the next step until the
©igor terekhov/Alamy Stock Photo RF
correct screws are turned the pre-specified number of times.
Thus far, the D-shop has increased the company’s productivity by 60% with a long-term
goal of doubling productivity. In essence, Roland has developed an innovative production
method that invests in automated manufacturing overhead costs to reduce the direct labor cost
per unit produced.
Source: Negishi, Mayumi, “No More Assembly Line,” The Wall Street Journal, June 2, 2014, p. R3.

Nonmanufacturing Costs
In addition to manufacturing costs, companies also incur selling and administrative costs.
These costs should be treated as period expenses and charged directly to the income
statement. Nonmanufacturing costs should not go into the Manufacturing Overhead
account. To illustrate the correct treatment of nonmanufacturing costs, assume that Ruger
Corporation incurred $30,000 in selling and administrative salary costs during April. The
following entry summarizes the accrual of those salaries:
(8)
Salaries Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Salaries and Wages Payable . . . . . . . . . . . . . . . . 30,000

Assume that depreciation on office equipment during April was $7,000. The entry is
as follows:
(9)
Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . 7,000
Accumulated Depreciation . . . . . . . . . . . . . . . . . . 7,000

Pay particular attention to the difference between this entry and entry (6) where
we recorded depreciation on factory equipment. In journal entry (6), depreciation on
factory equipment was debited to Manufacturing Overhead and is therefore a product
cost. In journal entry (9) above, depreciation on office equipment is debited to Depre-
ciation Expense. Depreciation on office equipment is a period expense rather than a
product cost.
Finally, assume that advertising was $42,000 and that other selling and administrative
expenses in April totaled $8,000. The following entry records these items:
(10)
Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000
Other Selling and Administrative Expense . . . . . . . 8,000
Accounts Payable* . . . . . . . . . . . . . . . . . . . . . . . . . 50,000

*Other accounts such as Cash may also be credited

The amounts in entries (8) through (10) are recorded directly into expense accounts—
they have no effect on product costs. The same will be true of any other selling and
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 105

administrative expenses incurred during April, including sales commissions, depreci-

ation on sales equipment, rent on office facilities, insurance on office facilities, and
related costs.

Cost of Goods Manufactured

When a job has been completed, the finished output is transferred from the production
departments to the finished goods warehouse. By this time, the accounting department
will have charged the job with direct materials and direct labor cost, and manufacturing
overhead will have been applied using the predetermined overhead rate. A transfer of
costs is made within the costing system that parallels the physical transfer of goods to
the finished goods warehouse. The costs of the completed job are transferred out of the
Work in Process account and into the Finished Goods account. The sum of all amounts
transferred between these two accounts represents the cost of goods manufactured for
the period.
In the case of Ruger Corporation, remember that Job A was completed during April
and Job B was incomplete at the end of the month. Thus, the following entry transfers the
cost of Job A from Work in Process to Finished Goods:

(11)
Finished Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,000
Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,000

The $158,000 represents the completed cost of Job A, as shown on the job cost sheet in
Exhibit 3–5. Because Job A was the only job completed during April, the $158,000 also
represents the cost of goods manufactured for the month.
Because Job B was not completed by the end of the month, its assigned costs will
remain in Work in Process and carry over to the next month. If a balance sheet were pre-
pared at the end of April, the cost accumulated thus far on Job B ($72,000) would appear
in the asset account Work in Process.

Cost of Goods Sold

As completed jobs are shipped to customers, their accumulated costs are transferred
from Finished Goods to Cost of Goods Sold. If an entire job is shipped at one time,
then the entire cost appearing on the job cost sheet is transferred to Cost of Goods Sold.
However, sometimes only a portion of the units involved in a particular job will be
immediately sold. In these situations, the unit product cost must be used to determine
how much product cost should be removed from Finished Goods and charged to Cost
of Goods Sold.
For Ruger Corporation, we will assume 750 of the 1,000 gold medallions in Job A
were shipped to customers by the end of the month for total sales revenue of $225,000.
Because 1,000 units were produced and the total cost of the job from the job cost sheet
was $158,000, the unit product cost was $158. The following journal entries would record
the sale (all sales were on account):

(12)
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . 225,000
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000
(13)
Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,500
Finished Goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,500
(750 units × $158 per unit = $118,500)
 www.freebookslides.com

106 Chapter 3

LEARNING OBJECTIVE 3–2

Entry (13) completes the flow of costs through the job-order costing system. To pull
the entire Ruger Corporation example together, journal entries (1) through (13) are sum-
Use T-accounts to show the flow of marized in Exhibit 3–6. In addition, Exhibit 3–7 presents the flow of costs through the
costs in a job-order costing system. accounts in T-account form.
EXHIBIT 3–6
(1)
Entries—Ruger Corporation Raw Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000

(2)
Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Manufacturing Overhead . . . . . . . . . . . . . . . . . . . . . . . 2,000
Raw Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000
(3)
Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Manufacturing Overhead . . . . . . . . . . . . . . . . . . . . . . 15,000
Salaries and Wages Payable . . . . . . . . . . . . . . . . . 75,000
(4)
Manufacturing Overhead . . . . . . . . . . . . . . . . . . . . . . 40,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
(5)
Manufacturing Overhead . . . . . . . . . . . . . . . . . . . . . . 20,000
Property Taxes Payable . . . . . . . . . . . . . . . . . . . . . 13,000
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000

(6)
Manufacturing Overhead . . . . . . . . . . . . . . . . . . . . . . 18,000
Accumulated Depreciation . . . . . . . . . . . . . . . . . . 18,000
(7)
Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000
Manufacturing Overhead . . . . . . . . . . . . . . . . . . . . 90,000
(8)
Salaries Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Salaries and Wages Payable . . . . . . . . . . . . . . . . . 30,000
(9)
Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . 7,000
Accumulated Depreciation . . . . . . . . . . . . . . . . . . 7,000
(10)
Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000
Other Selling and Administrative Expense . . . . . 8,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000

(11)
Finished Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,000
Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,000
(12)
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000
(13)
Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,500
Finished Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,500
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 107

EXHIBIT 3– 7 Summary of Cost Flows—Ruger Corporation

Accounts Receivable Accounts Payable Sales

Bal. XX Bal. XX (12) 225,000

(12) 225,000 (1) 60,000
(4) 40,000 Cost of Goods S old
Prepaid Insurance (10) 50,000 (13) 118,500

Bal. XX
(5) 7,000 Salaries and Wages Payable Salaries Expense
Bal. XX (8) 30,000
Raw Materials (3) 75,000
Bal. 7,000 (2) 52,000 (8) 30,000 Depreciation Expense
(1) 60,000
Property Taxes Payable (9) 7,000
Bal. 15,000
Bal. XX Advertising Expense
Work in Process (5) 13,000
(10) 42,000
Bal. 30,000 (11) 158,000
(2) 50,000
Other Selling and
(3) 60,000
Administrative Expense
(7) 90,000
Bal. 72,000 (10) 8,000

Finished Goods
Bal. 0 (13) 118,500
(11) 158,000
Bal. 39,500

Accumulated Depreciation
Bal. XX
(6) 18,000
(9) 7,000

Manufacturing Overhead
(2) 2,000 (7) 90,000
(3) 15,000
(4) 40,000
(5) 20,000
(6) 18,000
95,000 90,000
Bal. 5,000

Explanation of entries: (8) Administrative salaries expense incurred.

(1) Raw materials purchased. (9) Depreciation recorded on office equipment.
(2) Direct and indirect materials issued into production. (10) Advertising and other selling and administrative expense
(3) Direct and indirect factory labor cost incurred. incurred.
(4) Utilities and other factory costs incurred. (11) Cost of goods manufactured transferred to finished
(5) Property taxes and insurance incurred on the factory. goods.
(6) Depreciation recorded on factory assets. (12) Sale of Job A recorded.
(7) Overhead cost applied to Work in Process. (13) Cost of goods sold recorded for Job A.
 www.freebookslides.com

108 Chapter 3

✓
1. Which of the following statements is true? (You may select more than one answer.)
CONCEPT a. Direct labor costs are debited to Work in Process and indirect labor costs are deb-
CHECK ited to Manufacturing Overhead.
b. Raw material purchases are immediately debited to the Raw Materials account
and recorded as an expense on the income statement.
c. Administrative expenses are debited to the Manufacturing Overhead clearing
account.
d. Assume a company sells finished goods to a customer for $200 on credit. To
record this transaction, the company would debit Accounts Receivable for $200
and credit Finished Goods Inventory for $200.
2. Which of the following statements is true with respect to the Manufacturing Over-
head clearing account? (You may select more than one answer.)
a. Actual manufacturing overhead costs are debited to Manufacturing Overhead.
b. Applied manufacturing overhead costs are credited to Manufacturing Overhead.
c. If the Manufacturing Overhead account has a debit balance at the end of an
accounting period, it means that the actual overhead costs incurred through-
out the period were less than the overhead applied to Work in Process during
the period.
d. The overhead cost applied to Work in Process during a period will usually equal
the actual overhead cost incurred during the period.

DECISION POINT Would You Debit the Manufacturing Overhead Account?

Assume you are serving as an intern at a company that uses job-order costing. The company’s
chief financial officer (CFO) has asked you to review the costs that are shown below to determine
which of them should be recorded as debits to the Manufacturing Overhead account. She has
also asked you to provide explanations for your choices. What would you say?

Debit Manufacturing Overhead:

Type of cost: Yes or No?
Sales commissions ?
Utility expense, factory ?
Direct materials ?
Depreciation, office equipment ?
Indirect labor ?
Administrative salaries ?
Direct labor ?

SCHEDULES OF COST OF GOODS MANUFACTURED AND COST OF

GOODS SOLD
LEARNING OBJECTIVE 3–3 This section uses the Ruger Corporation example to explain how to prepare schedules of
cost of goods manufactured and cost of goods sold as well as an income statement. The
Prepare schedules of cost of goods
manufactured and cost of goods schedule of cost of goods manufactured contains three elements of product costs—direct
sold and an income statement. materials, direct labor, and manufacturing overhead—and it summarizes the portions of
those costs that remain in ending Work in Process inventory and that are transferred out
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 109

of Work in Process into Finished Goods. The schedule of cost of goods sold also con-
tains three elements of product costs—direct materials, direct labor, and manufacturing
overhead—and it summarizes the portions of those costs that remain in ending Finished
Goods inventory and that are transferred out of Finished Goods into Cost of Goods Sold.
Exhibit 3–8 presents Ruger Corporation’s schedules of cost of goods manufactured
and cost of goods sold. We want to draw your attention to three equations that are embed-
ded within the schedule of cost of goods manufactured. First, the raw materials used in
production are computed using the following equation:

Raw materials Beginning raw Purchases of Ending raw materials

= + −
used in production materials inventory raw materials inventory

For Ruger Corporation, the beginning raw materials inventory of $7,000 plus the pur-
chases of raw materials of $60,000 minus the ending raw materials inventory of $15,000
equals the raw materials used in production of $52,000. Second, the total manufacturing
costs are computed using the following equation:

Total Manufacturing
manufacturing = Direct materials + Direct labor + overhead applied to
costs work in process

For Ruger Corporation, the direct materials of $50,000 plus the direct labor of $60,000
plus the manufacturing overhead applied to work in process of $90,000 equals the
total manufacturing costs of $200,000. Notice, the direct materials used in production

Cost of Goods Manufactured

EXHIBIT 3–8
Direct materials:
Schedules of Cost of Goods
Beginning raw materials inventory . . . . . . . . . . . . . . . . . . . . . $ 7,000 Manufactured and Cost of Goods
Add: Purchases of raw materials . . . . . . . . . . . . . . . . . . . . . . . 60,000 Sold
Total raw materials available . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,000
Deduct: Ending raw materials inventory . . . . . . . . . . . . . . . . . 15,000
Raw materials used in production . . . . . . . . . . . . . . . . . . . . . . 52,000
Deduct: Indirect materials included in manufacturing
overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 $ 50,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Manufacturing overhead applied to work in process . . . . . . . . 90,000
Total manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Add: Beginning work in process inventory . . . . . . . . . . . . . . . . . 30,000
230,000
Deduct: Ending work in process inventory . . . . . . . . . . . . . . . . . 72,000
Cost of goods manufactured . . . . . . . . . . . . . . . . . . . . . . . . . . . . $158,000

Cost of Goods Sold

Beginning finished goods inventory . . . . . . . . . . . . . . . . . . . . . . $ 0
Add: Cost of goods manufactured . . . . . . . . . . . . . . . . . . . . . . . . 158,000
Cost of goods available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . 158,000
Deduct: Ending finished goods inventory . . . . . . . . . . . . . . . . . 39,500
Unadjusted cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . 118,500
Add: Underapplied overhead* . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Adjusted cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $123,500

*Note that the underapplied overhead is added to cost of goods sold. If overhead were
overapplied, it would be deducted from cost of goods sold.
 www.freebookslides.com

110 Chapter 3

($50,000) is included in total manufacturing costs instead of raw materials purchases

($60,000). The direct materials used in production will usually differ from the amount
of raw material purchases when the raw materials inventory balance changes or indirect
materials are withdrawn from raw materials inventory. You should also make a note that
this equation includes manufacturing overhead applied to work in process rather than
actual manufacturing overhead costs. For Ruger Corporation, its manufacturing over-
head applied to work in process of $90,000 is computed by multiplying the predeter-
mined overhead rate of $6 per machine-hour by the actual amount of the allocation base
recorded on all jobs, or 15,000 machine-hours. The actual manufacturing overhead costs
incurred during the period are not added to the Work in Process account.
The third equation included in the schedule of cost of goods manufactured relates to
computing the cost of goods manufactured:

Cost of goods Total Beginning work in Ending work in

= + −
manufactured manufacturing costs process inventory process inventory

For Ruger, the total manufacturing costs of $200,000 plus the beginning work in process
inventory of $30,000 minus the ending work in process inventory of $72,000 equals the
cost of goods manufactured of $158,000. The cost of goods manufactured represents the
cost of the goods completed during the period and transferred from Work in Process to
Finished Goods.
The schedule of cost of goods sold shown in Exhibit 3–8 relies on the following equa-
tion to compute the unadjusted cost of goods sold:

Unadjusted cost Beginning finished Cost of goods Ending finished

= + −
of goods sold goods inventory manufactured goods inventory

The beginning finished goods inventory ($0) plus the cost of goods manufactured ($158,000)
equals the cost of goods available for sale ($158,000). The cost of goods available for
sale ($158,000) minus the ending finished goods inventory ($39,500) equals the unad-
justed cost of goods sold ($118,500). Finally, the unadjusted cost of goods sold ($118,500)
plus the underapplied overhead ($5,000) equals adjusted cost of goods sold ($123,500).
The next section of the chapter takes a closer look at why cost of goods sold needs to be
adjusted for the amount of underapplied or overapplied overhead.
Exhibit 3–9 presents Ruger Corporation’s income statement for April. Notice that
the cost of goods sold on this statement is carried over from Exhibit 3–8. The selling
and administrative expenses (which total $87,000) did not flow through the schedules
of cost of goods manufactured and cost of goods sold. Journal entries 8–10 show that
these items were immediately debited to expense accounts rather than being debited to
inventory accounts.

EXHIBIT 3–9
Ruger Corporation
Income Statement
Income Statement
For the Month Ending April 30
$225,000
123,500
101,500

87,000
$ 14,500
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 111

✓
3. Which of the following statements is false with respect to the schedule of cost of
goods manufactured? (You may select more than one answer.) CONCEPT
a. The beginning raw materials inventory plus raw materials purchases minus ending CHECK
raw materials inventory equals the raw materials used in production.
b. Direct labor costs and actual manufacturing overhead costs are included in the
schedule of cost of goods manufactured.
c. The cost of goods manufactured represents the amount that will be debited to Cost
of Goods Sold during an accounting period.
d. If the finished goods inventory increases during an accounting period, it will
decrease the cost of goods manufactured.

HELPFUL HINT
The schedules of cost of goods manufactured and cost of goods sold use the same generic
equation (Transferred out = Beginning balance + Additions – Ending balance) three times to
track the flow of costs through raw materials, work in process, and finished goods inventories.
The application of this general equation to each of the three inventory accounts is as follows:
Raw materials:
Raw materials used in = Beginning raw + Purchases of raw − Ending raw
production materials materials materials
Work in process:
Cost of goods = Beginning work in + Total manufacturing − Ending work in
manufactured process costs process
Finished goods:
Cost of goods sold = Beginning Cost of goods − Ending finished
+ manufactured
finished goods goods

UNDERAPPLIED AND OVERAPPLIED OVERHEAD—A CLOSER LOOK

This section explains how to compute underapplied and overapplied overhead and how LEARNING OBJECTIVE 3–4
to dispose of any balance remaining in the Manufacturing Overhead account at the end
of a period. Compute underapplied or
overapplied overhead cost and
prepare the journal entry to close
Computing Underapplied and Overapplied Overhead the balance in Manufacturing
Overhead to the appropriate
Because the predetermined overhead rate is established before the period begins and is accounts.
based entirely on estimated data, the overhead cost applied to Work in Process will gen-
erally differ from the amount of overhead cost actually incurred. In the case of Ruger
Corporation, for example, the predetermined overhead rate of $6 per machine-hour was
used to apply $90,000 of overhead cost to Work in Process, whereas actual overhead costs
for April proved to be $95,000 (see Exhibit 3–5). The difference between the overhead
cost applied to Work in Process and the actual overhead costs of a period is called either
underapplied overhead or overapplied overhead. For Ruger Corporation, overhead
was underapplied by $5,000 because the applied cost ($90,000) was $5,000 less than the
actual cost ($95,000). If the situation had been reversed and the company had applied
$95,000 in overhead cost to Work in Process while incurring actual overhead cost of only
$90,000, then the overhead would have been overapplied.
 www.freebookslides.com
112 Chapter 3

What is the cause of underapplied or overapplied overhead? Basically, the method of

applying overhead to jobs using a predetermined overhead rate assumes that actual over-
head costs will be proportional to the actual amount of the allocation base incurred dur-
ing the period. If, for example, the predetermined overhead rate is $6 per machine-hour,
then it is assumed that actual overhead costs incurred will be $6 for every machine-hour
that is actually worked. There are at least two reasons why this may not be true. First,
much of the overhead often consists of fixed costs that do not change as the number of
machine-hours incurred goes up or down. Second, spending on overhead items may or
may not be under control. If individuals who are responsible for overhead costs do a good
job, those costs should be less than were expected at the beginning of the period. If they
do a poor job, those costs will be more than expected.
To illustrate these concepts, suppose that two companies—Turbo Crafters and Black
& Howell—have prepared the following estimated data for the coming year:

Turbo Crafters Black & Howell

Allocation base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machine-hours Direct materials cost
Estimated manufacturing overhead cost (a) . . . . . . . . . . . . . $300,000 $120,000
Estimated total amount of the allocation base (b) . . . . . . . . . 75,000 machine-hours $80,000 direct materials cost
Predetermined overhead rate (a) ÷ (b) . . . . . . . . . . . . . . . . . . . $4 per machine-hour 150% of direct materials cost

Note that when the allocation base is dollars (such as direct materials cost in the case
of Black & Howell) the predetermined overhead rate is expressed as a percentage of the
allocation base. When dollars are divided by dollars, the result is a percentage.
Now assume that because of unexpected changes in overhead spending and unit sales,
the actual overhead cost incurred and the actual amount of the allocation base used dur-
ing the year in each company are as follows:

Turbo Crafters Black & Howell

Actual manufacturing overhead cost . . . . . . . . . . . . . . . . . . . . . . $290,000 $130,000
Actual total amount of the allocation base . . . . . . . . . . . . . . . . . 68,000 machine-hours $90,000 direct materials cost

Given this actual data and each company’s predetermined overhead rate, the manu-
facturing overhead applied to Work in Process during the year would be computed as
follows:

Turbo Crafters Black & Howell

Predetermined overhead rate (a) . . . . . . . . . . . . . . . . . . . . . . $4 per machine-hour 150% of direct materials cost

Actual total amount of the allocation base (b) . . . . . . . . . . . .

68,000 machine-hours $90,000 direct materials cost
Manufacturing overhead applied (a) × (b) . . . . . . . . . . . . . . . $272,000 $135,000

This results in underapplied and overapplied overhead as shown below:

Turbo Crafters Black & Howell

Actual manufacturing overhead cost . . . . . . . . . . . . . . . . . . . . $290,000 $ 130,000
Manufacturing overhead applied . . . . . . . . . . . . . . . . . . . . . . . 272,000 135,000
Underapplied (overapplied) manufacturing overhead . . . . . $ 18,000 $ (5,000)
 www.freebookslides.com
Job-Order Costing: Cost Flows and External Reporting 113

EXHIBIT 3–10
At the beginning of the period: Summary of Overhead Concepts
Estimated total Estimated total
Predetermined
manufacturing ÷ amount of the = overhead rate
overhead cost allocation base

During the period:

Actual total amount of the Total
Predetermined × allocation base incurred = manufacturing
overhead rate during the period overhead applied

At the end of the period:

Actual total Total Underapplied
manufacturing - manufacturing = (overapplied)
overhead cost overhead applied overhead

For Turbo Crafters, the overhead cost applied to Work in Process of $272,000 is less
than the actual overhead cost for the year of $290,000; therefore, overhead is underap-
plied by $18,000.
For Black & Howell, the overhead cost applied to Work in Process of $135,000 is
greater than the actual overhead cost for the year of $130,000, so overhead is overapplied
by $(5,000).
A summary of these concepts is presented in Exhibit 3–10.

Disposition of Underapplied or Overapplied

Overhead Balances
The Turbo Crafters and Black & Howell examples demonstrate one way to calculate
underapplied or overapplied overhead. However, another equivalent method of determin-
ing the amount of underapplied or overapplied overhead is to properly analyze the Manu-
facturing Overhead T-account. Explaining this second method also enables us to discuss
the topic of preparing a journal entry to dispose of underapplied or overapplied overhead
for financial reporting purposes.
If we return to the Ruger Corporation example and look at the Manufacturing Over-
head T-account in Exhibit 3–7, you will see that there is a debit balance of $5,000.
Remember that debit entries to this account represent actual overhead costs, whereas
credit entries represent applied overhead costs. In this case, the applied overhead costs
(the credits) are less than the actual overhead costs (the debits) by $5,000—hence, the
debit balance indicates that manufacturing overhead is underapplied. In other words, if
there is a debit balance in the Manufacturing Overhead account of X dollars, then the
overhead is underapplied by X dollars. On the other hand, if there is a credit balance in
the Manufacturing Overhead account of Y dollars, then the overhead is overapplied by
Y dollars.
Once we have quantified the amount of underapplied or overapplied overhead, the
corresponding amount remaining in the Manufacturing Overhead account at the end of a
period must be disposed of in one of two ways:
1. It can be closed to Cost of Goods Sold.
2. It can be closed proportionally to Work in Process, Finished Goods, and Cost of
Goods Sold.
 www.freebookslides.com

114 Chapter 3

Closed to Cost of Goods Sold Closing the balance in Manufacturing Overhead to

Cost of Goods Sold is the simpler of the two methods. In the Ruger Corporation example,
the entry to close the $5,000 of underapplied overhead to Cost of Goods Sold is:

(14)
Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Manufacturing Overhead . . . . . . . . . . . . . . . . . . . 5,000

Note that because the Manufacturing Overhead account has a debit balance, Manufac-
turing Overhead must be credited to close out the account. This has the effect of increas-
ing April’s Cost of Goods Sold by $5,000 as shown below:

Unadjusted cost of goods sold [from entry (13)] . . . . . . . $118,500

Add underapplied overhead [from entry (14)] . . . . . . . . . 5,000
Adjusted cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . $123,500

Ruger Corporation’s adjusted cost of goods sold of $123,500 as shown here agrees
with the company’s income statement that was presented earlier in Exhibit 3–9.
Keep in mind that unadjusted cost of goods sold is based on the amount of manufac-
turing overhead cost applied to jobs, not the amount of actual manufacturing overhead
cost incurred. So, when overhead is underapplied it means two things—not enough over-
head cost was applied to jobs and the cost of goods sold is understated. Adding the under-
applied overhead to the cost of goods sold corrects this understatement.

Closed Proportionally to Work in Process, Finished Goods, and Cost of

Goods Sold Closing underapplied or overapplied overhead proportionally to Work in
Process, Finished Goods, and Cost of Goods Sold is more accurate than closing the entire
balance into Cost of Goods Sold; however, it is also more complex. We’ll explain the pro-
portional allocation of underapplied or overapplied overhead using a three-step process.
The first step is to take the total overhead cost applied to production during the
period and break it into three pieces—the portion included in Work in Process at the
end of the period, the portion included in Finished Goods at the end of the period, and
the portion applied to Cost of Goods Sold during the period. The second step is to state
each of these three amounts as a percent of the total overhead cost applied to production
during the period. The third step is to derive the amounts needed for the journal entry
by multiplying the percentages from step two by the amount of underapplied or overap-
plied overhead.
Exhibit 3–11 illustrates this three-step process for Ruger Corporation. As you may
remember, Ruger worked on only two jobs in April—Job A and Job B. Job A consisted of
1,000 gold medallions, 750 of which were sold to customers and 250 of which remained
in Finished Goods at the end of the month. Job B consisted of 10,000 silver medallions
and it was incomplete at the end of April.
In step 1 of Exhibit 3–11, Ruger takes its total manufacturing overhead applied to
production from Exhibit 3–5 ($90,000) and splits it between Job A ($60,000) and Job B
($30,000). Because Job B was incomplete at the end of April, all of its applied overhead
cost ($30,000) resides in Work in Process at the end of the month, whereas the $60,000 of
overhead cost applied to Job A needs to be split into two accounts. A total of 25% of Job
A’s gold medallions (= 250 ÷ 1,000) were in Finished Goods at the end of April; there-
fore, 25% of Job A’s applied overhead cost, or $15,000 (= $60,000 × 25%), also remains
in Finished Goods. Similarly, 75% of Job A’s gold medallions (= 750 ÷ 1,000) were sold
during April; thus, 75% of Job A’s applied overhead cost, or $45,000 (= $60,000 × 75%),
is included in Cost of Goods Sold.
In step 2 of Exhibit 3–11, the amounts of applied overhead cost in Work in Process
($30,000), Finished Goods ($15,000), and Cost of Goods Sold ($45,000) are each stated
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 115

EXHIBIT 3–11
Ruger Corporation: Closing
Manufacturing Overhead Underapplied Overhead
Applied to Production
Proportionally to Work in
Process, Finished Goods, and
$90,000
Cost of Goods Sold

Manufacturing Overhead Manufacturing Overhead

Step 1 Applied to Job A Applied to Job B

$60,000 $30,000

Finished Cost of Work in

Goods Goods Sold Process

$15,000 $45,000 $30,000

÷ $90,000 ÷ $90,000 ÷ $90,000

Step 2

16.67% 50.00% 33.33%

× $5,000 × $5,000 × $5,000

Step 3

$833.50 $2,500.00 $1,666.50

as a percent of the total manufacturing overhead cost applied to production during the
period ($90,000). In other words, 33.33% of the period’s total applied overhead cost
resides in Work in Process at the end of April. Similarly, 16.67% of the total remains in
Finished Goods and 50% is included in Cost of Goods Sold.
Step 3 from Exhibit 3–11 uses the percentages from step 2 to proportionally allocate
the $5,000 of underapplied overhead to Work in Process, Finished Goods, and Cost of
Goods Sold. Work in Process is allocated $1,666.50 of underapplied overhead, whereas
Finished Goods and Cost of Goods Sold are allocated $833.50 and $2,500, respectively.
Using these dollar amounts, the journal entry would be recorded as follows:
Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,666.50
Finished Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 833.50
Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500.00
Manufacturing Overhead . . . . . . . . . . . . . . . . . . . 5,000.00
 www.freebookslides.com

116 Chapter 3

Note that the $5,000 credit to Manufacturing Overhead ensures that this account con-
cludes the month with a zero balance. Furthermore, it bears emphasizing that if Ruger’s
overhead had been overapplied rather than underapplied, the entry above would have
been just the reverse. The Manufacturing Overhead account would have had a credit bal-
ance, thus necessitating a reversal of the debits and credits shown above.

Comparing the Two Methods for Disposing of

Underapplied or Overapplied Overhead
Closing the underapplied or overapplied overhead to Work in Process, Finished Goods,
and Cost of Goods Sold is more accurate than the simpler approach of closing it out to
Cost of Goods Sold. For example, the simpler approach overstates Ruger Corporation’s
Cost of Goods Sold by $2,500 (= $5,000 – $2,500) and understates its net operating
income by the same amount.

4. The estimated total manufacturing overhead cost is $200,000. The estimated

CONCEPT
CHECK ✓ total amount of the allocation base is 40,000 direct labor-hours. The actual total
manufacturing overhead cost for the period is $220,000 and the actual direct labor-
hours worked on all jobs during the period is 41,000 hours. The total underapplied
(overapplied) overhead for the period is:
a. $20,000 underapplied
b. $20,000 overapplied
c. $15,000 underapplied
d. $15,000 overapplied
5. The predetermined overhead rate is $50 per machine-hour, underapplied overhead
is $5,000, and the actual amount of machine-hours is 2,000. What is the actual
amount of total manufacturing overhead incurred during the period?
a. $105,000
b. $95,000
c. $150,000
d. $110,000

HELPFUL HINT
Students struggle to understand two key points with respect to underapplied or overap-
plied overhead. First, underapplied or overapplied overhead is not computed for each job. It is
computed for the company as a whole (if a plantwide overhead rate is used) or for each depart-
ment (if departmental overhead rates are used). Second, students often fail to grasp the chro-
nology of events in a normal costing system. Predetermined overhead rates are computed at
the beginning of the period. Overhead is applied to jobs throughout the period. Underapplied
or overapplied overhead is computed at the end of the period.

A General Model of Product Cost Flows

Exhibit 3–12 presents a T-account model of the flow of manufacturing costs in a job-
order costing system. This model can be very helpful in understanding how manufactur-
ing costs flow through a normal costing system and finally end up as Cost of Goods Sold
on the income statement.
 www.freebookslides.com
Job-Order Costing: Cost Flows and External Reporting 117

EXHIBIT 3–1 2 A General Model of Cost Flows (Using Normal Costing)

Raw Materials
Debited for the Credited for direct
cost of materials materials added to
purchased Work in Process

Credited for indirect

materials added to Work in Process

Manufacturing Debited for the Credited for the

Overhead cost of direct cost of goods
materials, direct manufactured
labor, and
Salaries and Wages Payable manufacturing
overhead applied
Credited for direct
labor added to
Work in Process

Finished Goods
Credited for in-

direct labor added Debited for the Credited for the

to Manufacturing cost of goods cost of goods
Overhead manufactured sold

Manufacturing Overhead Cost of Goods Sold

Debited for actual Credited for over- Debited for
overhead costs head cost applied the cost of
incurred to Work in Process goods sold
Underapplied Overapplied
overhead cost overhead cost

SUMMARY
LO3–1 Understand the flow of costs in a job-order costing system and prepare appro-
priate journal entries to record costs.
Direct materials costs are debited to Work in Process when they are released for use in pro-
duction. Direct labor costs are debited to Work in Process as incurred. Actual manufacturing
overhead costs are debited to the Manufacturing Overhead account as incurred. Manufacturing
overhead costs are applied to Work in Process using the predetermined overhead rate. The
journal entry that accomplishes this is a debit to Work in Process and a credit to Manufacturing
Overhead.
LO3–2 Use T-accounts to show the flow of costs in a job-order costing system.
See Exhibits 3–7 and 3–12 for summaries of the cost flows through the T-accounts.
LO3–3 Prepare schedules of cost of goods manufactured and cost of goods sold and
an income statement.
The schedule of cost of goods manufactured calculates the cost of inventories that were
completed and transferred from Work in Process to Finished Goods. The schedule of cost of
goods sold calculates the cost of inventories that were transferred from Finished Goods to Cost
of Goods Sold. See Exhibits 3–8 and 3–9 for an example of these schedules and an income
statement.
 www.freebookslides.com
118 Chapter 3

LO3–4 Compute underapplied or overapplied overhead cost and prepare the journal
entry to close the balance in Manufacturing Overhead to the appropriate account.
The difference between the actual overhead cost incurred during a period and the amount of
overhead cost applied to production is referred to as underapplied or overapplied overhead.
Underapplied or overapplied overhead is closed out to Cost of Goods Sold. When overhead
is underapplied, the balance in the Manufacturing Overhead account is debited to Cost of
Goods Sold. This has the effect of increasing the Cost of Goods Sold and occurs because costs
assigned to products have been understated. When overhead is overapplied, the balance in
the Manufacturing Overhead account is credited to Cost of Goods Sold. This has the effect
of decreasing the Cost of Goods Sold and occurs because costs assigned to products have
been overstated.

GUIDANCE ANSWERS TO DECISION POINT

Would You Debit the Manufacturing Overhead Account?
The only costs that would be recorded as debits to the Manufacturing Overhead account are utility expense,
factory and indirect labor. Both of these costs are indirect manufacturing costs that are properly classified
as manufacturing overhead costs. Direct materials and direct labor are direct manufacturing costs rather
than indirect manufacturing costs, so they would be debited to Work in Process rather than Manufacturing
Overhead. Sales commissions, depreciation, office equipment, and administrative salaries are period costs
rather than product costs, so they would be debited to expense accounts (rather than the Manufacturing
Overhead account) that would flow through to the income statement in the period incurred.

✓ GUIDANCE ANSWERS TO CONCEPT CHECKS

1. Choice a. Raw materials are not expensed when purchased. Administrative expenses are
period costs; therefore, they are never recorded in the Manufacturing Overhead account.
The debit to Accounts Receivable for $200 would be accompanied by a credit to Sales
for $200.
2. Choices a and b. If the Manufacturing Overhead account has a debit balance at the end
of an accounting period, it means that the actual overhead costs incurred throughout the
period were greater than (not less than) the overhead applied to Work in Process dur-
ing the period. Also, the overhead cost applied to Work in Process during a period will
usually differ from (rather than be equal to) the actual overhead cost incurred during
the period.
3. Choices b, c, and d. Applied manufacturing overhead costs are included in the schedule of
cost of goods manufactured. The cost of goods manufactured represents the amount that will
be debited to Finished Goods during an accounting period. A change in the Finished Goods
inventory balance has no impact on the cost of goods manufactured.
4. Choice c. Actual overhead of $220,000 minus applied overhead of $205,000 ($200,000 ÷
40,000 direct labor-hours × 41,000 actual hours worked) equals $15,000 underapplied.
5. Choice a. The amount of overhead applied to production is 2,000 hours multiplied by the
$50 predetermined overhead rate, or $100,000. If overhead is underapplied by $5,000, the
actual amount of overhead is $100,000 + $5,000 = $105,000.

REVIEW PROBLEM: THE FLOW OF COSTS IN A JOB-ORDER COSTING SYSTEM

Hogle Corporation is a manufacturer that uses job-order costing. On January 1, the company’s inventory
balances were as follows:
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,000
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,000
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 119

The company applies overhead cost to jobs on the basis of machine-hours worked. For the current
year, the company’s predetermined overhead rate was based on a cost formula that estimated $450,000
of total manufacturing overhead for an estimated activity level of 75,000 machine-hours. The following
transactions were recorded for the year:

a. Raw materials were purchased on account, $410,000.

b. Raw materials were used in production, $380,000 ($360,000 direct materials and $20,000 indirect
materials).
c. The following costs were accrued for employee services: direct labor, $75,000; indirect labor,
$110,000; sales commissions, $90,000; and administrative salaries, $200,000.
d. Sales travel costs (on account) were $17,000.
e. Utility costs (on account) in the factory were $43,000.
f. Advertising costs (on account) were $180,000.
g. Depreciation was recorded for the year, $350,000 (80% relates to factory assets, and 20% relates to
selling and administrative assets).
h. Insurance expired during the year, $10,000 (70% relates to factory operations, and the remaining 30%
relates to selling and administrative activities).
i. Manufacturing overhead was applied to production. Due to greater than expected demand for its
products, the company worked 80,000 machine-hours on all jobs during the year.
j. Jobs costing $900,000 to manufacture according to their job cost sheets were completed during
the year.
k. Jobs were sold on account to customers during the year for a total of $1,500,000. The jobs cost
$870,000 to manufacture according to their job cost sheets.

Required:
1. Prepare journal entries to record the preceding transactions.
2. Post the entries in (1) above to T-accounts (don’t forget to enter the beginning balances in the inventory
accounts).
3. Is Manufacturing Overhead underapplied or overapplied for the year? Prepare a journal entry to
close any balance in the Manufacturing Overhead account to Cost of Goods Sold. Do not allocate the
balance between Work in Process, Finished Goods, and Cost of Goods Sold.
4. Prepare an income statement for the year.

Solution to Review Problem

1.
a. Raw Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . 410,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . 410,000
b. Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . 360,000
Manufacturing Overhead . . . . . . . . . . . . . . . . . 20,000
Raw Materials . . . . . . . . . . . . . . . . . . . . . . . . . 380,000
c. Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Manufacturing Overhead . . . . . . . . . . . . . . . . . 110,000
Sales Commissions Expense . . . . . . . . . . . . . . 90,000
Administrative Salaries Expense . . . . . . . . . . . 200,000
Salaries and Wages Payable . . . . . . . . . . . . 475,000
d. Sales Travel Expense . . . . . . . . . . . . . . . . . . . . . 17,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . 17,000
e. Manufacturing Overhead . . . . . . . . . . . . . . . . . 43,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . 43,000
f. Advertising Expense . . . . . . . . . . . . . . . . . . . . . 180,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . 180,000
g. Manufacturing Overhead . . . . . . . . . . . . . . . . . 280,000
Depreciation Expense . . . . . . . . . . . . . . . . . . . . 70,000
Accumulated Depreciation . . . . . . . . . . . . . . 350,000

Continued
 www.freebookslides.com

120 Chapter 3

Continued
h. Manufacturing Overhead . . . . . . . . . . . . . . . . . 7,000
Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . 3,000
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . 10,000
i. The predetermined overhead rate for the year is computed as follows:

Estimated total manufacturing overhead cost

Predetermined overhead rate =
Estimated total amount of the allocation base
= $450,000
75,000 machine-hours
= $6 per machine-hour
Based on the 80,000 machine-hours actually worked during the year, the company applied $480,000
in overhead cost to production: $6 per machine-hour × 80,000 machine-hours = $480,000.
The following entry records this application of overhead cost:

Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . 480,000

Manufacturing Overhead . . . . . . . . . . . . . . . 480,000
j. Finished Goods . . . . . . . . . . . . . . . . . . . . . . . . . . 900,000
Work in Process . . . . . . . . . . . . . . . . . . . . . . . 900,000
k. Accounts Receivable . . . . . . . . . . . . . . . . . . . . . 1,500,000
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000
Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . 870,000
Finished Goods . . . . . . . . . . . . . . . . . . . . . . . 870,000

2.
Accounts Receivable Manufacturing Overhead Sales

(k) 1,500,000 (k) 1,500,000

(b) 20,000 (i) 480,000
(c) 110,000
Prepaid Insurance (e) 43,000 Cost of Goods Sold
(g) 280,000
(h) 10,000 (h) 7,000 (k) 870,000
460,000 480,000
Bal. 20,000
Raw Materials Sales Commissions Expense

Bal. 20,000 (b) 380,000 (c) 90,000

(a) 410,000 Accumulated Depreciation

Bal. 50,000 Administrative Salaries Expense

(g) 350,000
(c) 200,000
Work in Process Accounts Payable
Bal. 15,000 ( j) 900,000 Sales Travel Expense
(a) 410,000
(b) 360,000 (d) 17,000 (d) 17,000
(c) 75,000 (e) 43,000
(i) 480,000 (f) 180,000 Advertising Expense
Bal. 30,000
Salaries and Wages Payable (f) 180,000
Finished Goods
(c) 475,000 Depreciation Expense
Bal. 30,000 (k) 870,000
( j) 900,000 (g) 70,000
Bal. 60,000
Insurance Expense

(h) 3,000
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 121

3. Manufacturing overhead is overapplied for the year. The entry to close it out to Cost of Goods Sold is
as follows:

Manufacturing Overhead . . . . . . . . . . . . . . . . . . . 20,000

Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . 20,000

4.
Hogle Corporation
Income Statement
For the Year Ended December 31

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,500,000
Cost of goods sold ($870,000 – $20,000) . . . . . . . . 850,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650,000
Selling and administrative expenses:
Sales commissions expense . . . . . . . . . . . . . . . . . . . . $ 90,000
Administrative salaries expense . . . . . . . . . . . . . . . . 200,000
Sales travel expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,000
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 560,000
Net operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,000

GLOSSARY
Absorption costing A costing method that includes all manufacturing costs—direct materials, direct
labor, and both variable and fixed manufacturing overhead—in unit product costs. (p. 98)
Allocation base A measure of activity such as direct labor-hours or machine-hours that is used to assign
costs to cost objects. (p. 98)
Cost of goods manufactured The manufacturing costs associated with units of product that were
finished during the period. (p. 99)
Finished goods Units of product that have been completed but not yet sold to customers. (p. 98)
Job cost sheet A form that records the direct materials, direct labor, and manufacturing overhead cost
charged to a job. (p. 98)
Job-order costing A costing system used in situations where many different products, jobs, or services
are produced each period. (p. 98)
Normal costing A costing system in which overhead costs are applied to a job by multiplying a
predetermined overhead rate by the actual amount of the allocation base incurred by the job. (p. 98)
Overapplied overhead A credit balance in the Manufacturing Overhead account that occurs when the
amount of overhead cost applied to Work in Process exceeds the amount of overhead cost actually
incurred during a period. (p. 111)
Overhead application The process of assigning overhead cost to specific jobs. (p. 98)
Predetermined overhead rate A rate used to charge manufacturing overhead cost to jobs that is
established in advance for each period. It is computed by dividing the estimated total manufacturing
overhead cost for the period by the estimated total amount of the allocation base for the period. (p. 98)
Raw materials Any materials that go into the final product. (p. 98)
Schedule of cost of goods manufactured A schedule that contains three elements of product costs—
direct materials, direct labor, and manufacturing overhead—and that summarizes the portions of those
costs that remain in ending Work in Process inventory and that are transferred out of Work in Process
into Finished Goods. (p. 108)
Schedule of cost of goods sold A schedule that contains three elements of product costs—direct
materials, direct labor, and manufacturing overhead—and that summarizes the portions of those costs
that remain in ending Finished Goods inventory and that are transferred out of Finished Goods into
Cost of Goods Sold. (p. 109)
 www.freebookslides.com

122 Chapter 3

Underapplied overhead A debit balance in the Manufacturing Overhead account that occurs when the
amount of overhead cost actually incurred exceeds the amount of overhead cost applied to Work in
Process during a period. (p. 111)
Work in process Units of product that are only partially complete and will require further work before
they are ready for sale to the customer. (p. 98)

QUESTIONS
3–1 What is the link that connects the schedule of cost of goods manufactured to the schedule of cost
of goods sold?
3–2 What account is credited when overhead cost is applied to Work in Process? Would you expect
the amount of overhead applied for a period to equal the actual overhead costs of the period?
Why or why not?
3–3 What is underapplied overhead? Overapplied overhead? What disposition is made of these
amounts at the end of the period?
3–4 Provide two reasons why overhead might be underapplied in a given year.
3–5 What adjustment is made for underapplied overhead on the schedule of cost of goods sold? What
adjustment is made for overapplied overhead?
3–6 How do you compute the raw materials used in production?
3–7 How do you compute the total manufacturing costs within a schedule of cost of goods
manufactured?
3–8 How do you compute the cost of goods manufactured?
3–9 How do you compute the unadjusted cost of goods sold?
3–10 How do direct labor costs flow through a job-order costing system?

APPLYING EXCEL
The Excel worksheet form that appears below is to be used to recreate part of the example relating to Turbo
LO3–1, LO3–4
Crafters that appears earlier in the chapter. Download the workbook containing this form from Connect,
where you will also receive instructions about how to use this worksheet form.

You should proceed to the requirements below only after completing your worksheet.
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 123

Required:
1. Check your worksheet by changing the estimated total amount of the allocation base in the Data area
to 60,000 machine-hours, keeping all of the other data the same as in the original example. If your
worksheet is operating properly, the predetermined overhead rate should now be $5.00 per machine-
hour. If you do not get this answer, find the errors in your worksheet and correct them.
How much is the underapplied (overapplied) manufacturing overhead? Did it change? Why or
why not?
2. Determine the underapplied (overapplied) manufacturing overhead for a different company with the
following data:

Allocation base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machine-hours

Estimated manufacturing overhead cost . . . . . . . . . . . . . $100,000
Estimated total amount of the allocation base . . . . . . . . . 50,000 machine-hours
Actual manufacturing overhead cost . . . . . . . . . . . . . . . . . $90,000
Actual total amount of the allocation base . . . . . . . . . . . . 40,000 machine-hours

3. What happens to the underapplied (overapplied) manufacturing overhead from part (2) if the estimated
total amount of the allocation base is changed to 40,000 machine-hours and everything else remains
the same? Why is the amount of underapplied (overapplied) manufacturing overhead different from
part (2)?
4. Change the estimated total amount of the allocation base back to 50,000 machine-hours so that the
data look exactly like they did in part (2). Now change the actual manufacturing overhead cost to
$100,000. What is the underapplied (overapplied) manufacturing overhead now? Why is the amount
of underapplied (overapplied) manufacturing overhead different from part (2)?

TE FOUNDATIONAL 15
H
LO3–1, LO3–2, LO3–3,
LO3–4
 www.freebookslides.com

124 Chapter 3

4. What is the total amount of manufacturing overhead applied to production during the year?
5. What is the total manufacturing cost added to Work in Process during the year?
6. What is the journal entry to record the transfer of completed jobs that is referred to in item g above?
7. What is the ending balance in Work in Process?
8. What is the total amount of actual manufacturing overhead cost incurred during the year?
9. Is manufacturing overhead underapplied or overapplied for the year? By how much?
10. What is the cost of goods available for sale during the year?
11. What is the journal entry to record the cost of goods sold referred to in item h above?
12. What is the ending balance in Finished Goods?
13. Assuming that the company closes its underapplied or overapplied overhead to Cost of Goods Sold,
what is the adjusted cost of goods sold for the year?
14. What is the gross margin for the year?
15. What is the net operating income for the year?

EXERCISES
EXERCISE 3–1 Prepare Journal Entries LO3–1
Larned Corporation recorded the following transactions for the just completed month.
a. $80,000 in raw materials were purchased on account.
b. $71,000 in raw materials were used in production. Of this amount, $62,000 was for direct materials
and the remainder was for indirect materials.
c. Total labor wages of $112,000 were paid in cash. Of this amount, $101,000 was for direct labor and
the remainder was for indirect labor.
d. Depreciation of $175,000 was incurred on factory equipment.

Required:
Record the above transactions in journal entries.
EXERCISE 3–2 Prepare T-Accounts LO3–2, LO3–4
Jurvin Enterprises recorded the following transactions for the just completed month. The company had no
beginning inventories.
a. $94,000 in raw materials were purchased for cash.
b. $89,000 in raw materials were used in production. Of this amount, $78,000 was for direct materials
and the remainder was for indirect materials.
c. Total labor wages of $132,000 were incurred and paid. Of this amount, $112,000 was for direct labor
and the remainder was for indirect labor.
d. Additional manufacturing overhead costs of $143,000 were incurred and paid.
e. Manufacturing overhead of $152,000 was applied to production using the company’s predetermined
overhead rate.
f. All of the jobs in process at the end of the month were completed.
g. All of the completed jobs were shipped to customers.
h. Any underapplied or overapplied overhead for the period was closed to Cost of Goods Sold.

Required:
1. Post the above transactions to T-accounts.
2. Determine the adjusted cost of goods sold for the period.

EXERCISE 3–3 Schedules of Cost of Goods Manufactured and Cost of Goods Sold LO3–3
Primare Corporation has provided the following data concerning last month’s manufacturing
operations.

Purchases of raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,000

Indirect materials included in manufacturing overhead . . . . . . . . . . . . . . . . . . $5,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,000
Manufacturing overhead applied to work in process . . . . . . . . . . . . . . . . . . . . $87,000
Underapplied overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,000
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 125

Inventories Beginning Ending

Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . $12,000 $18,000
Work in process . . . . . . . . . . . . . . . . . . . . . . $56,000 $65,000
Finished goods . . . . . . . . . . . . . . . . . . . . . . . $35,000 $42,000

Required:
1. Prepare a schedule of cost of goods manufactured for the month.
2. Prepare a schedule of cost of goods sold for the month. Assume the underapplied or overapplied
overhead is closed to Cost of Goods Sold.

EXERCISE 3–4 Underapplied and Overapplied Overhead LO3–4

Osborn Manufacturing uses a predetermined overhead rate of $18.20 per direct labor-hour. This predeter-
mined rate was based on a cost formula that estimates $218,400 of total manufacturing overhead for an
estimated activity level of 12,000 direct labor-hours.
The company actually incurred $215,000 of manufacturing overhead and 11,500 direct labor-hours
during the period.

Required:
1. Determine the amount of underapplied or overapplied manufacturing overhead for the period.
2. Assume that the company’s underapplied or overapplied overhead is closed to Cost of Goods Sold.
Would the journal entry to dispose of the underapplied or overapplied overhead increase or decrease
the company’s gross margin? By how much?

EXERCISE 3–5 Journal Entries and T-accounts LO3–1, LO3–2

The Polaris Company uses a job-order costing system. The following transactions occurred in October:
a. Raw materials purchased on account, $210,000.
b. Raw materials used in production, $190,000 ($178,000 direct materials and $12,000 indirect
materials).
c. Accrued direct labor cost of $90,000 and indirect labor cost of $110,000.
d. Depreciation recorded on factory equipment, $40,000.
e. Other manufacturing overhead costs accrued during October, $70,000.
f. The company applies manufacturing overhead cost to production using a predetermined rate of
$8 per machine-hour. A total of 30,000 machine-hours were used in October.
g. Jobs costing $520,000 according to their job cost sheets were completed during October and
transferred to Finished Goods.
h. Jobs that had cost $480,000 to complete according to their job cost sheets were shipped to customers
during the month. These jobs were sold on account at 25% above cost.

Required:
1. Prepare journal entries to record the transactions given above.
2. Prepare T-accounts for Manufacturing Overhead and Work in Process. Post the relevant transactions
from above to each account. Compute the ending balance in each account, assuming that Work in
Process has a beginning balance of $42,000.

EXERCISE 3–6 Schedules of Cost of Goods Manufactured and Cost of Goods Sold; Income
Statement LO3–3
The following data from the just completed year are taken from the accounting records of Mason
Company:

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $524,000
Direct labor cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,000
Raw material purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $118,000
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,000
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $63,000
Manufacturing overhead applied to work in process . . . . . . . . . $90,000
Actual manufacturing overhead costs . . . . . . . . . . . . . . . . . . . . . $80,000
 www.freebookslides.com

126 Chapter 3

Inventories Beginning Ending

Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . $7,000 $15,000
Work in process . . . . . . . . . . . . . . . . . . . . . . $10,000 $5,000
Finished goods . . . . . . . . . . . . . . . . . . . . . . . $20,000 $35,000

Required:
1. Prepare a schedule of cost of goods manufactured. Assume all raw materials used in production were
direct materials.
2. Prepare a schedule of cost of goods sold. Assume that the company’s underapplied or overapplied
overhead is closed to Cost of Goods Sold.
3. Prepare an income statement.
EXERCISE 3–7 Applying Overhead; Cost of Goods Manufactured LO3–3, LO3–4
The following cost data relate to the manufacturing activities of Chang Company during the just completed year:

Manufacturing overhead costs incurred:

Indirect materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000
Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,000
Property taxes, factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Utilities, factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
Depreciation, factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000
Insurance, factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Total actual manufacturing overhead costs incurred . . . . . . . . . . . . . $473,000

Other costs incurred:

Purchases of raw materials (both direct and indirect) . . . . . . . . . . . . $400,000
Direct labor cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,000
Inventories:
Raw materials, beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,000
Raw materials, ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,000
Work in process, beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,000
Work in process, ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,000

The company uses a predetermined overhead rate of $25 per machine-hour to apply overhead cost to jobs.
A total of 19,400 machine-hours were used during the year.
Required:
1. Compute the amount of underapplied or overapplied overhead cost for the year.
2. Prepare a schedule of cost of goods manufactured for the year.
EXERCISE 3–8 Applying Overhead; Journal Entries; Disposing of Underapplied or Overapplied
Overhead LO3–1, LO3–2, LO3–4
The following information is taken from the accounts of Latta Company. The entries in the T-accounts are
summaries of the transactions that affected those accounts during the year.

Manufacturing Overhead Work in Process

(a) 460,000 (b) 390,000 Bal. 15,000 (c) 710,000

Bal. 70,000 260,000
85,000
(b) 390,000
Bal. 40,000

Finished Goods Cost of Goods Sold

Bal. 50,000 (d) 640,000 (d) 640,000

(c) 710,000
Bal. 120,000
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 127

The overhead that had been applied to production during the year is distributed among Work in Pro-
cess, Finished Goods, and Cost of Goods Sold as of the end of the year as follows:

Work in Process, ending . . . . . . . . . $ 19,500

Finished Goods, ending . . . . . . . . . 58,500
Cost of Goods Sold . . . . . . . . . . . . . 312,000
Overhead applied . . . . . . . . . . . . . . $390,000

For example, of the $40,000 ending balance in Work in Process, $19,500 was overhead that had been
applied during the year.

Required:
1. Identify reasons for entries (a) through (d).
2. Assume that the underapplied or overapplied overhead is closed to Cost of Goods Sold. Prepare the
necessary journal entry.
3. Assume that the underapplied or overapplied overhead is closed proportionally to Work in Process,
Finished Goods, and Cost of Goods Sold. Prepare the necessary journal entry. Provide supporting
computations.
EXERCISE 3–9 Applying Overhead; T-accounts; Journal Entries LO3–1, LO3–2, LO3–4
Harwood Company uses a job-order costing system that applies overhead cost to jobs on the basis of
machine-hours. The company’s predetermined overhead rate of $2.40 per machine-hour was based on a
cost formula that estimates $192,000 of total manufacturing overhead for an estimated activity level of
80,000 machine-hours.

Required:
1. Assume that during the year the company works only 75,000 machine-hours and incurs the following
costs in the Manufacturing Overhead and Work in Process accounts:

Manufacturing Work in
Overhead Process

(Maintenance) 21,000 ? (Direct materials) 710,000

(Indirect materials) 8,000 (Direct labor) 90,000
(Indirect labor) 60,000 (Overhead) ?
(Utilities) 32,000
(Insurance) 7,000
(Depreciation) 56,000

Copy the data in the T-accounts above onto your answer sheet. Compute the amount of overhead cost
that would be applied to Work in Process for the year and make the entry in your T-accounts.
2. Compute the amount of underapplied or overapplied overhead for the year and show the balance in
your Manufacturing Overhead T-account. Prepare a journal entry to close the company’s underapplied
or overapplied overhead to Cost of Goods Sold.
3. Explain why the manufacturing overhead was underapplied or overapplied for the year.
EXERCISE 3–10 Applying Overhead; Journal Entries; T-accounts LO3–1, LO3–2
Dillon Products manufactures various machined parts to customer specifications. The company uses a
job-order costing system and applies overhead cost to jobs on the basis of machine-hours. At the beginning
of the year, the company used a cost formula to estimate that it would incur $4,800,000 in manufacturing
overhead cost at an activity level of 240,000 machine-hours.
The company spent the entire month of January working on a large order for 16,000 custom-made
machined parts. The company had no work in process at the beginning of January. Cost data relating to
January follow:
a. Raw materials purchased on account, $325,000.
b. Raw materials used in production, $290,000 (80% direct materials and 20% indirect materials).
c. Labor cost accrued in the factory, $180,000 (one-third direct labor and two-thirds indirect labor).
 www.freebookslides.com
128 Chapter 3

d. Depreciation recorded on factory equipment, $75,000.

e. Other manufacturing overhead costs incurred on account, $62,000.
f. Manufacturing overhead cost was applied to production on the basis of 15,000 machine-hours
actually worked during the month.
g. The completed job for 16,000 custom-made machined parts was moved into the finished goods
warehouse on January 31 to await delivery to the customer. (In computing the dollar amount for
this entry, remember that the cost of a completed job consists of direct materials, direct labor, and
applied overhead.)

Required:
1. Prepare journal entries to record items (a) through (f) above [ignore item (g) for the moment].
2. Prepare T-accounts for Manufacturing Overhead and Work in Process. Post the relevant items from
your journal entries to these T-accounts.
3. Prepare a journal entry for item (g) above.
4. If 10,000 of the custom-made machined parts are shipped to the customer in February, how much
of this job’s cost will be included in cost of goods sold for February?

PROBLEMS
PROBLEM 3–11 T-Account Analysis of Cost Flows LO3–2, LO3–3, LO3–4
Selected T-accounts of Moore Company are given below for the just completed year:
Raw Materials Manufacturing Overhead

Bal. 1/1 15,000 Credits ? Debits 230,000 Credits ?

Debits 120,000
Bal. 12/31 25,000

Work in Process Factory Wages Payable

Bal. 1/1 20,000 Credits 470,000 Debits 185,000 Bal. 1/1 9,000
Direct materials 90,000 Credits 180,000

Direct labor 150,000 Bal. 12/31 4,000

Overhead 240,000
Bal. 12/31 ?

Finished Goods Cost of Goods Sold

Bal. 1/1 40,000 Credits ? Debits ?

Debits ?
Bal. 12/31 60,000

Required:
1. What was the cost of raw materials used in production during the year?
2. How much of the materials in (1) above consisted of indirect materials?
3. How much of the factory labor cost for the year consisted of indirect labor?
4. What was the cost of goods manufactured for the year?
5. What was the unadjusted cost of goods sold for the year? Do not include any underapplied or
overapplied overhead in your answer.
6. If overhead is applied to production on the basis of direct labor cost, what predetermined overhead
rate was in effect during the year?
7. Was manufacturing overhead underapplied or overapplied? By how much?
8. Compute the ending balance in Work in Process. Assume that this balance consists entirely of goods
started during the year. If $8,000 of this balance is direct labor cost, how much of it is direct materials
cost? Applied overhead cost?
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 129

PROBLEM 3–12 Predetermined Overhead Rate; Disposing of Underapplied or Overapplied

Overhead LO3–4
Luzadis Company makes furniture using the latest automated technology. The company uses a job-order
costing system and applies manufacturing overhead cost to products on the basis of machine-hours. The
predetermined overhead rate was based on a cost formula that estimates $900,000 of total manufacturing
overhead for an estimated activity level of 75,000 machine-hours.
During the year, a large quantity of furniture on the market resulted in cutting back production and
a buildup of furniture in the company’s warehouse. The company’s cost records revealed the following
actual cost and operating data for the year:

Machine-hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Manufacturing overhead cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $850,000
Inventories at year-end:
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,000
Work in process (includes overhead applied of $36,000) . . . . . . . $100,000
Finished goods (includes overhead applied of $180,000) . . . . . . . $500,000
Cost of goods sold (includes overhead applied of $504,000) . . . . . . $1,400,000

Required:
1. Compute the underapplied or overapplied overhead.
2. Assume that the company closes any underapplied or overapplied overhead to Cost of Goods Sold.
Prepare the appropriate journal entry.
3. Assume that the company allocates any underapplied or overapplied overhead proportionally to Work
in Process, Finished Goods, and Cost of Goods Sold. Prepare the appropriate journal entry.
4. How much higher or lower will net operating income be if the underapplied or overapplied overhead
is allocated to Work in Process, Finished Goods, and Cost of Goods Sold rather than being closed to
Cost of Goods Sold?
PROBLEM 3–13 Schedules of Cost of Goods Manufactured and Cost of Goods Sold; Income
Statement LO3–3
Superior Company provided the following data for the year ended December 31 (all raw materials are used
in production as direct materials):

Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,000

Purchases of raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $290,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000
Manufacturing overhead applied to work in process . . . . . . . . . . . . . . $285,000
Actual manufacturing overhead cost . . . . . . . . . . . . . . . . . . . . . . . . . . . $270,000

Inventory balances at the beginning and end of the year were as follows:

Beginning Ending
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,000 $10,000
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . ? $35,000
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . $50,000 ?

The total manufacturing costs for the year were $683,000; the cost of goods available for sale totaled
$740,000; the unadjusted cost of goods sold totaled $660,000; and the net operating income was $30,000.
The company’s underapplied or overapplied overhead is closed to Cost of Goods Sold.

Required:
Prepare schedules of cost of goods manufactured and cost of goods sold and an income statement. (Hint:
Prepare the income statement and schedule of cost of goods sold first followed by the schedule of cost of
goods manufactured.)
 www.freebookslides.com

130 Chapter 3

PROBLEM 3–14 Schedule of Cost of Goods Manufactured; Overhead Analysis LO3–3, LO3–4
Gitano Products operates a job-order costing system and applies overhead cost to jobs on the basis of direct
materials used in production (not on the basis of raw materials purchased). Its predetermined overhead rate
was based on a cost formula that estimated $800,000 of manufacturing overhead for an estimated alloca-
tion base of $500,000 direct material dollars to be used in production. The company has provided the fol-
lowing data for the just completed year:

Purchase of raw materials . . . . . . . . . . . . . . . . . . . $510,000

Direct labor cost . . . . . . . . . . . . . . . . . . . . . . . . . . . $90,000
Manufacturing overhead costs:
Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . $170,000
Property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $48,000
Depreciation of equipment . . . . . . . . . . . . . . . . $260,000
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . $95,000
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,000
Rent, building . . . . . . . . . . . . . . . . . . . . . . . . . . . $180,000

Beginning Ending
Raw Materials . . . . . . . . . . . . . . $20,000 $80,000
Work in Process . . . . . . . . . . . . $150,000 $70,000
Finished Goods . . . . . . . . . . . . . $260,000 $400,000

Required:
1. Compute the predetermined overhead rate for the year.
2. Compute the amount of underapplied or overapplied overhead for the year.
3. Prepare a schedule of cost of goods manufactured for the year. Assume all raw materials are used in
production as direct materials.
4. Compute the unadjusted cost of goods sold for the year. Do not include any underapplied or overapplied
overhead in your answer. What options are available for disposing of underapplied or overapplied
overhead?
5. Assume that the $70,000 ending balance in Work in Process includes $24,000 of direct materials.
Given this assumption, supply the information missing below:

Direct materials . . . . . . . . . . . . . . . . . . . . . . $24,000

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . ?
Manufacturing overhead . . . . . . . . . . . . . . ?
Work in process inventory . . . . . . . . . . . . . $70,000

PROBLEM 3–15 Journal Entries; T-Accounts; Financial Statements LO3–1, LO3–2, LO3–3, LO3–4
Froya Fabrikker A/S of Bergen, Norway, is a small company that manufactures specialty heavy equipment
for use in North Sea oil fields. The company uses a job-order costing system that applies manufacturing
overhead cost to jobs on the basis of direct labor-hours. Its predetermined overhead rate was based on a
cost formula that estimated $360,000 of manufacturing overhead for an estimated allocation base of 900
direct labor-hours. The following transactions took place during the year:
a. Raw materials purchased on account, $200,000.
b. Raw materials used in production (all direct materials), $185,000.
c. Utility bills incurred on account, $70,000 (90% related to factory operations, and the remainder related
to selling and administrative activities).
d. Accrued salary and wage costs:

Direct labor (975 hours) . . . . . . . . . . . . . . $230,000

Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . $90,000
Selling and administrative salaries . . . . . . $110,000
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 131

e. Maintenance costs incurred on account in the factory, $54,000.

f. Advertising costs incurred on account, $136,000.
g. Depreciation was recorded for the year, $95,000 (80% related to factory equipment, and the remainder
related to selling and administrative equipment).
h. Rental cost incurred on account, $120,000 (85% related to factory facilities, and the remainder related
to selling and administrative facilities).
i. Manufacturing overhead cost was applied to jobs, $ ? .
j. Cost of goods manufactured for the year, $770,000.
k. Sales for the year (all on account) totaled $1,200,000. These goods cost $800,000 according to their
job cost sheets.
The balances in the inventory accounts at the beginning of the year were:

Raw Materials . . . . . . . . . . . . . . . . . . . . . . . $30,000

Work in Process . . . . . . . . . . . . . . . . . . . . . $21,000
Finished Goods . . . . . . . . . . . . . . . . . . . . . . $60,000

Required:
1. Prepare journal entries to record the preceding transactions.
2. Post your entries to T-accounts. (Don’t forget to enter the beginning inventory balances above.)
Determine the ending balances in the inventory accounts and in the Manufacturing Overhead account.
3. Prepare a schedule of cost of goods manufactured.
4. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods
Sold. Prepare a schedule of cost of goods sold.
5. Prepare an income statement for the year.
PROBLEM 3–16 Comprehensive Problem LO3–1, LO3–2, LO3–4
Gold Nest Company of Guandong, China, is a family-owned enterprise that makes birdcages for the South
China market. The company sells its birdcages through an extensive network of street vendors who receive
commissions on their sales.
The company uses a job-order costing system in which overhead is applied to jobs on the basis of
direct labor cost. Its predetermined overhead rate is based on a cost formula that estimated $330,000 of
manufacturing overhead for an estimated activity level of $200,000 direct labor dollars. At the beginning
of the year, the inventory balances were as follows:

Raw materials . . . . . . . . . . . . . . . . . . . . . . . $25,000

Work in process . . . . . . . . . . . . . . . . . . . . . $10,000
Finished goods . . . . . . . . . . . . . . . . . . . . . . $40,000

During the year, the following transactions were completed:

a. Raw materials purchased for cash, $275,000.
b. Raw materials used in production, $280,000 (materials costing $220,000 were charged directly to
jobs; the remaining materials were indirect).
c. Cash paid to employees as follows:

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . $180,000

Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . $72,000
Sales commissions . . . . . . . . . . . . . . . . . . . $63,000
Administrative salaries . . . . . . . . . . . . . . . $90,000

d. Cash paid for rent during the year was $18,000 ($13,000 of this amount related to factory operations,
and the remainder related to selling and administrative activities).
e. Cash paid for utility costs in the factory, $57,000.
f. Cash paid for advertising, $140,000.
g. Depreciation recorded on equipment, $100,000. ($88,000 of this amount related to equipment used
in factory operations; the remaining $12,000 related to equipment used in selling and administrative
activities.)
h. Manufacturing overhead cost was applied to jobs, $ ? .
i. Goods that had cost $675,000 to manufacture according to their job cost sheets were completed.
j. Sales for the year (all paid in cash) totaled $1,250,000. The total cost to manufacture these goods
according to their job cost sheets was $700,000.
 www.freebookslides.com

132 Chapter 3

Required:
1. Prepare journal entries to record the transactions for the year.
2. Prepare T-accounts for each inventory account, Manufacturing Overhead, and Cost of Goods Sold.
Post relevant data from your journal entries to these T-accounts (don’t forget to enter the beginning
balances in your inventory accounts). Compute an ending balance in each account.
3. Is Manufacturing Overhead underapplied or overapplied for the year? Prepare a journal entry to close
any balance in the Manufacturing Overhead account to Cost of Goods Sold.
4. Prepare an income statement for the year. (Do not prepare a schedule of cost of goods manufactured;
all of the information needed for the income statement is available in the journal entries and T-accounts
you have prepared.)
PROBLEM 3–17 Cost Flows; T-Accounts; Income Statement LO3–2, LO3–3, LO3–4
Supreme Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance
sheet accounts as of January 1, are given below.

Supreme Videos, Inc.

Balance Sheet
January 1
Assets
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,000
Inventories:
Raw materials (film, costumes) . . . . . . . . . . . . . . . . . $ 30,000
Videos in process . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Finished videos awaiting sale . . . . . . . . . . . . . . . . . 81,000 156,000
Prepaid insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330,000
Studio and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 730,000
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . 210,000 520,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $850,000

Liabilities and Stockholders’ Equity

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 160,000
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $420,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,000 690,000
Total liabilities and stockholders’ equity . . . . . . . . . . . . . $850,000

Because the videos differ in length and in complexity of production, the company uses a job-order
costing system to determine the cost of each video produced. Studio (manufacturing) overhead is charged
to videos on the basis of camera-hours of activity. The company’s predetermined overhead rate for the year
is based on a cost formula that estimated $280,000 in manufacturing overhead for an estimated allocation
base of 7,000 camera-hours. The following transactions occurred during the year:
a. Film, costumes, and similar raw materials purchased on account, $185,000.
b. Film, costumes, and other raw materials used in production, $200,000 (85% of this material was
considered direct to the videos in production, and the other 15% was considered indirect).
c. Utility costs incurred in the production studio, $72,000.
d. Depreciation recorded on the studio, cameras, and other equipment, $84,000. Three-fourths of this
depreciation related to production of the videos, and the remainder related to equipment used in
marketing and administration.
e. Advertising expense incurred, $130,000.
f. Costs for salaries and wages were incurred as follows:

Direct labor (actors and directors) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $82,000

Indirect labor (carpenters to build sets, costume designers, and so forth) . . . . . . . . $110,000
Administrative salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $95,000
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 133

g. Prepaid insurance expired during the year, $7,000 (80% related to production of videos, and 20%
related to marketing and administrative activities).
h. Miscellaneous marketing and administrative expenses incurred, $8,600.
i. Studio (manufacturing) overhead was applied to videos in production. The company used 7,250
camera-hours during the year.
j. Videos that cost $550,000 to produce according to their job cost sheets were transferred to the finished
videos warehouse to await sale and shipment.
k. Sales for the year totaled $925,000 and were all on account. The total cost to produce these videos
according to their job cost sheets was $600,000.
l. Collections from customers during the year totaled $850,000.
m. Payments to suppliers on account during the year, $500,000; payments to employees for salaries and
wages, $285,000.

Required:
1. Prepare a T-account for each account on the company’s balance sheet and enter the beginning
balances.
2. Record the transactions directly into the T-accounts. Prepare new T-accounts as needed. Key your
entries to the letters (a) through (m) above. Compute the ending balance in each account.
3. Is the Studio (manufacturing) Overhead account underapplied or overapplied for the year? Make
an entry in the T-accounts to close any balance in the Studio Overhead account to Cost of Goods
Sold.
4. Prepare a schedule of cost of goods manufactured. If done correctly, the cost of goods manufactured
from your schedule should agree with which of the above transactions?
5. Prepare a schedule of cost of goods sold. If done correctly, the unadjusted cost of goods sold from
your schedule should agree with which of the above transactions?
6. Prepare an income statement for the year.

BI DING YOUR SKILLS

ETHICS CHALLENGE LO3-4
Terri Ronsin had recently been transferred to the Home Security Systems Division of National Home
Products. Shortly after taking over her new position as divisional controller, she was asked to develop
the division’s predetermined overhead rate for the upcoming year. The accuracy of the rate is important
because it is used throughout the year and any underapplied or overapplied overhead is closed out to Cost
of Goods Sold at the end of the year. National Home Products uses direct labor-hours in all of its divisions
as the allocation base for manufacturing overhead.
To compute the predetermined overhead rate, Terri divided her estimate of the total manufacturing
overhead for the coming year by the production manager’s estimate of the total direct labor-hours for the
coming year. She took her computations to the division’s general manager for approval but was quite sur-
prised when he suggested a modification in the allocation base. Her conversation with the general manager
of the Home Security Systems Division, Harry Irving, went like this:
Ronsin: Here are my calculations for next year’s predetermined overhead rate. If you approve, we can
enter the rate into the computer on January 1 and be up and running in the job-order costing system
right away this year.
Irving: Thanks for coming up with the calculations so quickly, and they look just fine. There is, however,
one slight modification I would like to see. Your estimate of the total direct labor-hours for the year is
440,000 hours. How about cutting that to about 420,000 hours?
Ronsin: I don’t know if I can do that. The production manager says she will need about 440,000 direct
labor-hours to meet the sales projections for the year. Besides, there are going to be over 430,000
direct labor-hours during the current year and sales are projected to be higher next year.
Irving: Teri, I know all of that. I would still like to reduce the direct labor-hours in the allocation base to
something like 420,000 hours. You probably don’t know that I had an agreement with your predecessor
as divisional controller to shave 5% or so off the estimated direct labor-hours every year. That way,
we kept a reserve that usually resulted in a big boost to net operating income at the end of the year in
December. We called it our Christmas bonus. Corporate headquarters always seemed to be pleased
that we could pull off such a miracle at the end of the year. This system has worked well for many
years, and I don’t want to change it now.
 www.freebookslides.com

134 Chapter 3

Required:
1. Explain how shaving 5% off the estimated direct labor-hours in the allocation base for the
predetermined overhead rate usually results in a big boost in net operating income at the end of the
year.
2. Should Terri Ronsin go along with the general manager’s request to reduce the direct labor-hours in
the predetermined overhead rate computation to 420,000 direct labor-hours?
TEAMWORK IN ACTION LO3–1, LO3–2, LO3–4
After a dispute concerning wages, Orville Arson tossed an incendiary device into the Sparkle Company’s
record vault. Within moments, only a few charred fragments were readable from the company’s factory
ledger, as shown below:

Raw Materials Manufacturing Overhead

Balance 4/1 12,000 Actual costs

for April 14,800

Work in Process Accounts Payable

Balance 4/1 4,500

Balance 4/30 8,000
Finished Goods
Cost of Goods Sold

Balance 4/30 16,000

Sifting through ashes and interviewing selected employees has turned up the following additional
information:
a. The controller remembers clearly that the predetermined overhead rate was based on an estimated
60,000 direct labor-hours to be worked over the year and an estimated $180,000 in manufacturing
overhead costs.
b. The production superintendent’s cost sheets showed only one job in process on April 30. Materials of
$2,600 had been added to the job, and 300 direct labor-hours had been expended at $6 per hour.
c. The accounts payable are for raw material purchases only, according to the accounts payable clerk.
He clearly remembers that the balance in the account was $6,000 on April 1. An analysis of canceled
checks (kept in the treasurer’s office) shows that payments of $40,000 were made to suppliers during
April. (All materials used during April were direct materials.)
d. A charred piece of the payroll ledger shows that 5,200 direct labor-hours were recorded for the month.
The personnel department has verified that there were no variations in pay rates among employees.
e. Records maintained in the finished goods warehouse indicate that the finished goods inventory totaled
$11,000 on April 1.
f. From another charred piece in the vault, you are able to discern that the cost of goods manufactured
for April was $89,000.

Required:
1. Assign one of the following sets of accounts to each member of the team:
a. Raw Materials and Accounts Payable.
b. Work in Process and Manufacturing Overhead.
c. Finished Goods and Cost of Goods Sold.
Determine the types of transactions that would be posted to each account and present a summary to
the other team members. When agreement is reached, the team should work together to complete
steps 2 through 4.
2. Determine the company’s predetermined overhead rate and the total manufacturing overhead applied
for the month.
3. Determine the April 30 balance in the company’s Work in Process account.
4. Prepare the company’s T-accounts for the month. (It is easiest to complete the T-accounts in the
following order: Accounts Payable, Work in Process, Raw Materials, Manufacturing Overhead,
Finished Goods, Cost of Goods Sold.)
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 135

APPENDIX 3A: JOB-ORDER COSTING: A MICROSOFT EXCEL-BASED APPROACH

In this appendix, we use Microsoft Excel to depict how the transactions in a job- LEARNING OBJECTIVE 3—5
order costing system impact a company’s balance sheet. While the main body of the
chapter focused on using journal entries to record transactions, the approach demon- Use Microsoft Excel to summarize
strated in this appendix will help you develop a new and valuable managerial skill— the flow of costs in a job-order
costing system.
analyzing how transactions affect the balance sheet without having to prepare formal
journal entries.
To set the stage for the forthcoming example, we need to review your understand-
ing of two fundamental accounting equations and we need to specify three important
assumptions.

Fundamental Accounting Equations A company’s balance sheet is based on

the following accounting equation that is the bedrock of double-entry bookkeeping:

Assets = Liabilities + Stockholders’ Equity

In the Excel spreadsheets that we’ll be using in this appendix, one column will always
be populated with an “=” sign. The accounts on the left-hand side of the “=” sign will be
asset accounts and the accounts on the right-hand side will be liability and stockholders’
equity accounts. After we record every transaction, the amounts on the left-hand side of
the “=” sign must equal the amounts on the right-hand side.
The second foundational equation relates to the Retained Earnings account on a com-
pany’s balance sheet. The ending balance in retained earnings is computed using the fol-
lowing equation:

Net
Ending balance in Beginning balance in
= + operating − Dividends
retained earnings retained earnings
income

This equation highlights the connection between the balance sheet and the income
statement. It recognizes the fact that net operating income from the income statement is
embedded within retained earnings on the balance sheet. Thus, in our Microsoft Excel-
based approach, any transactions involving sales or expenses will be recorded in the
Retained Earnings column of the balance sheet.

Three Key Assumptions The first assumption in the appendix is that we will
always use only one predetermined overhead rate. In other words, we are going to use
the same approach that was demonstrated in the main body of this chapter. This requires
using an account titled Manufacturing Overhead within our Microsoft Excel spreadsheets
that will serve the same purpose as the Manufacturing Overhead clearing account dis-
cussed earlier in the chapter.
The second assumption is that any underapplied or overapplied manufacturing
overhead will always be closed to Cost of Goods Sold as reported in the income state-
ment. Because the income statement is embedded in the Retained Earnings account
on the balance sheet, we will always close underapplied or overapplied overhead to
Retained Earnings.
Our third assumption is that we’ll record transactions within Microsoft Excel by
using positive numbers to increase balance sheet accounts and negative numbers (shown
in parentheses) to decrease balance sheet accounts. This is a slightly different approach
than we used in the main body of the chapter where all transactions were depicted using
the language of debits and credits—in journal entry form and in T-account form. This
appendix replaces the language of debits and credits with an equivalent alternative.
Instead, it identifies the balance sheet accounts affected by each transaction and it deter-
mines if those account balances should increase or decrease.
 www.freebookslides.com

136 Chapter 3

Sapphire Company−Setting the Stage Sapphire Company uses a job-order cost-

ing system to assign manufacturing costs to jobs. Its balance sheet on January 1 is as follows:

Sapphire Company
Balance Sheet
January 1
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,000
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000 26,000
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Property, plant, and equipment (net) . . . . . . . . . 240,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $284,000

Liabilities and Stockholders’ Equity

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 280,000
Total liabilities and stockholders’ equity . . . . . . $284,000

Note: To reduce the number of columns contained in the Excel spreadsheets

used throughout this appendix, we have excluded a Common Stock account
from the balance sheets within this appendix.

Exhibit 3A–1 contains a Microsoft Excel spreadsheet that includes the beginning
balances shown in the balance sheet above. Notice that column “J” of the spreadsheet
contains “=” signs (see cells J5 and J6). This means that after we record each of the forth-
coming transactions, the amounts on the left-hand side of column “J” will always need to
equal the amounts on the right-hand side of column “J.”
Also, notice that the spreadsheet contains all of the accounts shown in the January 1
balance sheet plus an account called Manufacturing Overhead. As discussed earlier in the
chapter, Manufacturing Overhead is a clearing account that always has a beginning and
ending balance of zero. This account is used to record two things—all actual overhead
costs and the amount of manufacturing overhead applied to production using the prede-
termined overhead rate. The difference between the actual overhead cost and the amount
of overhead applied to production is the underapplied or overapplied overhead.
Finally, to conserve space, the Excel spreadsheet abbreviates Property, Plant, and
Equipment (net) as PP&E (net). The term net implies that the acquisition cost of property,
plant, and equipment is being reported net of accumulated depreciation.
Sapphire Company−Transaction Analysis The remainder of the appendix
proceeds in three steps. First, it lists Sapphire Company’s transactions for the month of
January. Second, it explains how each of these transactions is recorded in the Microsoft
Excel spreadsheet. Finally, it explains how to use the information depicted in the spread-
sheet to prepare a schedule of cost of goods manufactured, a schedule of cost of goods
sold, and an income statement for the month of January.
EXHIBIT 3A–1 Sapphire Company: Transaction Analysis
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 137

To begin our illustration, let’s assume that Sapphire Company has a predetermined
overhead rate of $25 per direct labor-hour that was based on a cost formula that estimated
$100,000 in manufacturing overhead cost for an estimated allocation base of 4,000 direct
labor-hours. During January, the company completed the following transactions:
a. Purchased raw materials on account, $80,000.
b. Raw materials used in production, $78,000 ($70,000 was direct materials and $8,000
was indirect materials).
c. Paid $135,000 of salaries and wages in cash ($68,000 was direct labor, $45,000 was
indirect labor, and $22,000 was related to employees responsible for selling and
administration).
d. Utility costs incurred (on account) to support production, $15,000.
e. Depreciation recorded on property, plant, and equipment, $40,000 (70% related to man-
ufacturing equipment and 30% related to assets that support selling and administration).
f. Advertising expenses paid in cash, $18,000.
g. Prepaid insurance expired during the month, $1,000 (80% related to production, and
20% related to selling and administration).
h. Manufacturing overhead applied to production, $102,500. This amount was com-
puted by multiplying 4,100 direct labor-hours worked in January by the predeter-
mined overhead rate of $25 per direct labor-hour.
i. Cost of goods manufactured, $235,000.
j. Cash sales, $320,000.
k. Cost of goods sold, $245,000.
l. Cash payments to creditors, $92,000.
m. Close overapplied overhead of $5,700 to cost of goods sold.
Exhibit 3A–2 summarizes how each of the transactions just described would be
recorded in the Microsoft Excel spreadsheet. The underlying explanations for each trans-
action are as follows (each transaction includes a parenthetical reference to its row within
the Microsoft Excel spreadsheet):
a. (row 7) Purchasing raw materials on account for $80,000 will increase Raw Materi-
als and Accounts Payable by $80,000.
b. (row 8) When raw materials are used in production, it decreases Raw Materials by
$78,000. The direct materials of $70,000 are added to Work in Process, whereas the

EXHIBIT 3A–2 Sapphire Company: Completed Transaction Analysis

 www.freebookslides.com

138 Chapter 3

indirect materials of $8,000 are added to Manufacturing Overhead. Notice that actual
manufacturing overhead costs, such as the $8,000 of indirect materials, are not added
to Work in Process. As you will see in a later transaction, manufacturing overhead is
applied to Work in Process using the predetermined overhead rate.
c. (row 9) The salaries and wages decrease Cash by $135,000. The direct labor cost
of $68,000 increases Work in Process, whereas the indirect labor cost of $45,000
increases Manufacturing Overhead. The $22,000 paid to employees working in sell-
ing and administrative roles is a period cost that should be recorded on January’s
income statement. Because the income statement is embedded in Retained Earnings,
we decrease Retained Earnings by $22,000.
d. (row 10) The utility costs support production, so they are treated as a product cost
rather than a period cost. Thus, Manufacturing Overhead increases by $15,000 and
Accounts Payable increases by the same amount.
e. (row 11) The depreciation reduces Property, Plant, and Equipment (net) by $40,000.
This is equivalent to recording accumulated depreciation of $40,000. The deprecia-
tion on manufacturing equipment of $28,000 (a product cost) increases Manufac-
turing Overhead, whereas the depreciation on selling and administrative assets of
$12,000 (a period cost) decreases Retained Earnings.
f. (row 12) Advertising is a period cost so Cash and Retained Earnings decrease by
$18,000.
g. (row 13) The expired insurance coverage decreases Prepaid Expenses by $1,000. The
insurance related to production (a product cost) increases Manufacturing Overhead
by $800. The insurance related to selling and administration of $200 (a period cost)
decreases Retained Earnings by $200.
h. (row 14) The manufacturing overhead applied increases Work in Process and
decreases Manufacturing Overhead by $102,500. Notice that manufacturing over-
head is applied to Work in Process using the predetermined overhead rate. Actual
manufacturing overhead costs are not recorded in Work in Process. In a later transac-
tion, the actual overhead costs will be compared to the applied overhead to determine
the amount of underapplied or overapplied overhead for the month.
i. (row 15) The cost of goods manufactured refers to the cost of the goods that were
transferred from work in process to finished goods during the period. This transac-
tion decreases Work in Process by $235,000 and increases Finished Goods by the
same amount.
j. (row 16) The sales will increase Cash by $320,000, and given that sales appear on the
income statement, Retained Earnings will increase by the same amount.
k. (row 17) The cost of goods sold must be removed from finished goods; therefore,
Finished Goods decreases by $245,000. Because cost of goods sold appears on the
income statement, Retained Earnings decreases by the same amount.
l. (row 18) The cash payments to creditors decrease Cash and Accounts Payable by
$92,000.
m. (row 19) The manufacturing overhead applied of $102,500 is $5,700 greater than the
actual overhead costs incurred during the month of $96,800 (= $8,000 + $45,000 +
$15,000 + $28,000 + $800). Therefore, manufacturing overhead is overapplied by
$5,700. We record this transaction by increasing Manufacturing Overhead by $5,700
and increasing Retained Earnings by the same amount. The increase in Retained
Earnings reflects the fact that we are decreasing Cost of Goods Sold (which increases
net operating income).
Once we have recorded all transactions, the company’s balance sheet at January 31
can be derived by summing each column in the spreadsheet (see row 20 for the ending
balances that would be reported on Sapphire Company’s balance sheet at January 31).

Sapphire Company−Schedules of Cost of Goods Manufactured and

Cost of Goods Sold The transactions recorded in Exhibit 3A–2 can be used to cre-
ate schedules of cost of goods manufactured and cost of goods sold. Exhibit 3A–3 shows
 www.freebookslides.com
Job-Order Costing: Cost Flows and External Reporting 139

EXHIBIT 3A–3 Sapphire Company: Schedule of Cost of Goods Manufactured

Sapphire Company’s schedule of cost of goods manufactured. Each row heading in this
exhibit contains a cell reference that indicates where the number appears in Exhibit 3A–2.
Notice that the cost of goods manufactured of $235,000 as shown in Exhibit 3A–3
equals the cost of goods manufactured mentioned in transaction “i” and recorded in row 15
of Exhibit 3A–2.
Exhibit 3A–4 shows Sapphire Company’s schedule of cost of goods sold. Each row
heading in this exhibit contains a cell reference that indicates where the number appears
in Exhibit 3A–2.

EXHIBIT 3A–4 Sapphire Company: Schedule of Cost of Goods Sold

 www.freebookslides.com

140 Chapter 3

EXHIBIT 3A–5 Sapphire Company: Income Statement

In the schedule of cost of goods sold, we subtract overapplied overhead of $5,700

from unadjusted cost of goods sold because overapplied overhead means that too much
overhead was added to production during the period, and hence, the cost of goods sold
was overstated. In Exhibit 3A–2, we add overapplied overhead to retained earnings (see
row 19) because lowering cost of goods sold increases net operating income, which in
turn increases retained earnings.

Sapphire Company−Income Statement Exhibit 3A–5 shows Sapphire Com-

pany’s income statement for the month of January. The sales and selling and administra-
tive expenses come from the transaction analysis in Exhibit 3A–2 and they each contain
a corresponding parenthetical cell reference. The cost of goods sold ($239,300) is carried
over from the schedule of cost of goods sold in Exhibit 3A–4.

APPENDIX 3A: EXERCISES AND PROBLEMS

EXERCISE 3A–1 Transaction Analysis LO3–5

Carmen Company is a manufacturer that completed numerous transactions during the month,
some of which are shown below:
a. Raw materials used in production as direct materials, $56,000.
b. Paid direct laborers $40,000 in cash for their work on various jobs during the month.
c. Applied $35,000 of manufacturing overhead to production during the month.
d. Various jobs costing a total of $110,000 were completed during the month and transferred to
Finished Goods.
e. Various completed jobs costing a total of $90,000 were sold to customers.
f. Cash sales for the month totaled $160,000.
g. Selling and administrative expenses paid in cash, $18,000.

Required:
The table shown below includes a subset of Carmen Company’s balance sheet accounts. Record
each of the above transactions using the accounts that are given. If a transaction increases an
account balance, then record the amount as a positive number. If it decreases an account balance,
then record the amount in parentheses.
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 141

Raw Work in Finished Manufacturing Retained

Transaction Cash Materials Process Goods Overhead Earnings
a. =
b. =
c. =
d. =
e. =
f. =
g. =

EXERCISE 3A–2 Transaction Analysis LO3–5

Adams Company is a manufacturer that completed numerous transactions during the month, some of
which are shown below:
a. Manufacturing overhead costs incurred on account, $80,000.
b. Depreciation was recorded for the month, $35,000 (80% related to factory equipment, and the
remainder related to selling and administrative equipment).
c. Prepaid insurance expired during the month, $2,500 (75% related to production, and 25% related to
selling and administration).
d. Applied $115,000 of manufacturing overhead to production during the month.
e. Closed $5,125 of overapplied overhead to cost of goods sold.

Required:
The table shown below includes a subset of Adams Company’s balance sheet accounts. Record each of
the above transactions using the accounts that are given. If a transaction increases an account balance,
then record the amount as a positive number. If it decreases an account balance, then record the amount in
parentheses.

Work in Manufacturing Prepaid PP&E Accounts Retained

Transaction Process Overhead Expenses (net) Payable Earnings

a. =
b. =
c. =
d. =
e. =

EXERCISE 3A–3 Transaction Analysis LO3–5

Dixon Company is a manufacturer that completed numerous transactions during the month, some of which
are shown below:
a. Raw materials purchased on account, $100,000.
b. Raw materials used in production, $78,000 direct materials, and $16,000 indirect materials.
c. Sales commissions paid in cash, $45,000.
d. Depreciation was recorded for the month, $60,000 (65% related to factory equipment, and the
remainder related to selling and administrative equipment).
e. Sales for the month, $450,000 (70% cash sales and the remainder were sales on account).
f. Factory utilities paid in cash, $12,000.
g. Applied $138,000 of manufacturing overhead to production during the month.
h. Various jobs costing a total of $190,000 were completed during the month and transferred to Finished
Goods.
i. Cash receipts from customers who had previously purchased on credit, $115,000.
j. Various completed jobs costing a total of $220,000 were sold to customers.
k. Cash paid to raw material suppliers, $90,000.

Required:
The table shown below includes only one account from Dixon Company’s balance sheet—Retained Earn-
ings. For each of the above transactions, select “No” if it would not affect Retained Earnings. Conversely
if the transaction would affect Retained Earnings, then record the amount of the increase or (decrease) to
this account under the “Yes” column.
 www.freebookslides.com

142 Chapter 3

Retained Earnings
Transaction Yes No
a. . . . . . . . . . . . . . . . . .
b. . . . . . . . . . . . . . . . . .
c. . . . . . . . . . . . . . . . . .
d. . . . . . . . . . . . . . . . . .
e. . . . . . . . . . . . . . . . . .
f.. . . . . . . . . . . . . . . . . .
g. . . . . . . . . . . . . . . . . .
h. . . . . . . . . . . . . . . . . .
i.. . . . . . . . . . . . . . . . . .
j.. . . . . . . . . . . . . . . . . .
k. . . . . . . . . . . . . . . . . .

PROBLEM 3A–4 Transaction Analysis LO3–5

Morrison Company uses a job-order costing system to assign manufacturing costs to jobs. Its balance sheet
on January 1 is as follows:

Morrison Company
Balance Sheet
January 1
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,000
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,000 30,000
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Property, plant, and equipment (net) . . . . . . . . . . . . . 190,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $254,000

Liabilities and Stockholders’ Equity

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247,000
Total liabilities and stockholders’ equity . . . . . . . . . . $254,000

During January the company completed the following transactions:

a. Purchased raw materials on account, $74,000.
b. Raw materials used in production, $77,000 ($67,000 was direct materials and $10,000 was indirect
materials).
c. Paid $167,000 of salaries and wages in cash ($95,000 was direct labor, $35,000 was indirect labor,
and $37,000 was related to employees responsible for selling and administration).
d. Various manufacturing overhead costs incurred (on account) to support production, $33,000.
e. Depreciation recorded on property, plant, and equipment, $90,000 (70% related to manufacturing
equipment and 30% related to assets that support selling and administration).
f. Various selling expenses paid in cash, $27,000.
g. Prepaid insurance expired during the month, $1,200 (80% related to production, and 20% related to
selling and administration).
h. Manufacturing overhead applied to production, $132,000.
i. Cost of goods manufactured, $288,000.
j. Cash sales to customers, $395,000.
k. Cost of goods sold (unadjusted), $285,000.
l. Cash payments to creditors, $62,000.
m. Underapplied or overapplied overhead $? .
 www.freebookslides.com

Job-Order Costing: Cost Flows and External Reporting 143

Required:
1. Calculate the ending balances that would be reported on the company’s balance sheet on January 31.
You can derive your answers using Microsoft Excel and Exhibit 3A–2 as your guide, or you can use
paper, pencil, and a calculator. (Hint: Be sure to calculate the underapplied or overapplied overhead
and then account for its effect on the balance sheet.)
2. What is Morrison Company’s net operating income for the month of January?
PROBLEM 3A–5 Transaction Analysis LO3–5
Star Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet
accounts as of January 1 are given below.

Star Videos, Inc.

Balance Sheet
January 1

Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 73,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,000
Inventories:
Raw materials (film, costumes) . . . . . . . . . . . . . . . . . . . . . $33,000
Videos in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,000
Finished videos awaiting sale . . . . . . . . . . . . . . . . . . . . . 78,000 158,000
Prepaid insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Studio and equipment (net) . . . . . . . . . . . . . . . . . . . . . . . . . 530,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $865,000

Liabilities and Stockholders’ Equity

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 715,000
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . $865,000

Because the videos differ in length and in complexity of production, the company uses a job-order
costing system to determine the cost of each video produced. Studio (manufacturing) overhead is charged
to videos on the basis of camera-hours of activity. The company’s predetermined overhead rate for the year
($40 per camera-hour) is based on a cost formula that estimated $280,000 in manufacturing overhead for
an estimated allocation base of 7,000 camera-hours. Any underapplied or overapplied overhead is closed to
cost of goods sold. The following transactions were recorded for the year:
a. Film, costumes, and similar raw materials purchased on account, $183,000.
b. Film, costumes, and other raw materials issued to production, $210,000 (85% of this material was
considered direct to the videos in production, and the other 15% was considered indirect).
c. Utility costs incurred (on account) in the production studio, $78,000.
d. Depreciation recorded on the studio, cameras, and other equipment, $82,000. Three-fourths of this
depreciation related to actual production of the videos, and the remainder related to equipment used in
marketing and administration.
e. Advertising expense incurred (on account), $131,000.
f. Salaries and wages paid in cash as follows:

Direct labor (actors and directors) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $84,000

Indirect labor (carpenters to build sets, costume
designers, and so forth) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105,000
Administrative salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $95,000

g. Prepaid insurance expired during the year, $7,000 (70% related to production of videos, and 30%
related to marketing and administrative activities).
h. Miscellaneous marketing and administrative expenses incurred (on account), $9,600.
 www.freebookslides.com
144 Chapter 3

i. Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250
camera-hours of activity during the year.
j. Videos that cost $565,000 to produce according to their job cost sheets were transferred to the finished
videos warehouse to await sale and shipment.
k. Sales for the year totaled $930,000 and were all on account.
l. The total cost to produce the videos that were sold according to their job cost sheets was $610,000.
m. Collections from customers during the year totaled $880,000.
n. Payments to suppliers on account during the year, $515,000.
o. Underapplied or overapplied overhead $ ? .

Required:
1. Using Exhibit 3A–2 as your guide, prepare a transaction analysis that records all of the above
transactions. Calculate the ending balances at December 31 for all balance sheet accounts.
2. Using Exhibit 3A–3 as your guide, prepare a schedule of cost of goods manufactured for the year.
If done correctly, your cost of goods manufactured should equal what amount mentioned in the
transactions above?
3. Using Exhibit 3A–4 as your guide, prepare a schedule of cost of goods sold for the year. If done
correctly, your unadjusted cost of goods sold should equal what amount mentioned in the transactions
above?
4. Using Exhibit 3A–5 as your guide, prepare an income statement for the year.
PROBLEM 3A–6 Transaction Analysis LO3–5
Brooks Corporation uses a job-order costing system to apply manufacturing costs to jobs. The company
closes its underapplied or overapplied overhead to cost of goods sold. Its balance sheet on March 1 is
as follows:

Brooks Corporation
Balance Sheet
March 1
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83,000
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,000
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,000 54,000
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800
Property, plant, and equipment (net) . . . . . . . . . . . . . . . . . 175,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $313,800

Liabilities and Stockholders’ Equity

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301,800
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . $313,800

During March the company completed the following transactions:

a. Purchased raw materials for cash, $69,000.
b. Raw materials used in production, $77,000 ($67,000 was direct materials and $10,000 was indirect
materials).
c. Paid $178,000 of salaries and wages in cash ($102,000 was direct labor, $23,000 was indirect labor,
and $53,000 was related to employees responsible for selling and administration).
d. Various manufacturing overhead costs paid in cash to support production, $41,000.
e. Depreciation recorded on property, plant, and equipment, $35,000 (85% related to manufacturing
equipment and 15% related to assets that support selling and administration).
f. Various selling expenses incurred on account, $27,000.
g. Prepaid insurance expired during the month, $450 (60% related to production, and 40% related to
selling and administration).
h. Manufacturing overhead applied to production, $101,000.
 www.freebookslides.com
Job-Order Costing: Cost Flows and External Reporting 145
 i. Cost of goods manufactured, $ ? . (Hint: The Work in Process balance on March 31 is $5,000.)
j. Cash sales to customers, $429,000.
k. Cost of goods sold (unadjusted), $ ? . (Hint: The Finished Goods balance at March 31 is
$
6
,
0
0
0
.
)
l. Cash payments to creditors, $35,000.
m. Underapplied or overapplied overhead $ ? .

Required:
1. Calculate the ending balances that would be reported on the company’s balance sheet at March 31.
You can derive your answers using Microsoft Excel and Exhibit 3A–2 as your guide,
or you can use paper, pencil, and a calculator. (Hint: Be sure to calculate the
underapplied or overapplied overhead and then account for its effect on the balance
sheet.)
2. Prepare Brooks Corporation’s schedule of cost of goods manufactured for the month ended March 31.
You can derive your answers using Microsoft Excel and Exhibit 3A–3 as your guide,
or you can use paper, pencil, and a calculator.
3. Prepare Brooks Corporation’s schedule of cost of goods sold for the month ended
March 31. You can derive your answers using Microsoft Excel and Exhibit 3A–4
as your guide, or you can use paper, pencil, and a calculator.
4. Prepare Brooks Corporation’s income statement for the month ended March 31. You can derive your answers
using Microsoft Excel and Exhibit 3A–5 as your guide, or you can use paper, pencil, and a calculator.