REVIEW PROBLEM: JOB-ORDER COSTING

Hogle Corporation is a manufacturer that uses job-order costing. On January 1, the beginning of its fiscal year, the
company's inventory balances were as follows:

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 requisitioned for use 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 were $17,000.
e. Utility costs in the factory were $43,000.
f. Advertising costs were $180,000.
g. Depreciation was recorded for the year, $350,000 (80% relates to factory operations, and 20% relates to
selling and administrative activities).
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. Goods costing $900,000 to manufacture according to their job cost sheets were completed during the year.
k. Goods were sold on account to customers during the year for a total of $1,500,000. The goods 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.
4. Prepare an income statement for the year.
Solution to Review Problem I
1.

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:

2.
3. Manufacturing overhead is overapplied for the year. The entry to close it out to Cost of Goods Sold is as follows:

4.
THE FOUNDATIONAL 15
Sweeten Company had no jobs in progress at the beginning of March and no beginning inventories. It started only
two jobs during March—Job P and Job Q. Job P was completed and sold by the end of the March and Job Q was
incomplete at the end of the March. The company uses a plantwide predetermined overhead rate based on direct
labor-hours. The following additional information is available for the company as a whole and for Jobs P and Q (all
data and questions relate to the month of March):

Required:

1. What is the company's predetermined overhead rate? Y = $10,000 + ($1.00 per DLH)(2,000 DLHs)

Estimated fixed manufacturing overhead .................................................. $10,000

Estimated variable manufacturing overhead:
$1.00 per DLH × 2,000 DLHs................................................................ 2,000
Estimated total manufacturing overhead cost ............................................ $12,000

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead (a) ........................... $12,000

Estimated total direct labor hours (DLHs) (b) ............................. 2,000 DLHs
Predetermined overhead rate (a) ÷ (b) .................................. $6.00 per DLH

2. How much manufacturing overhead was applied to Job P and Job Q?

Job P takes 1400 DLH * POHR $6 = $8400
Job Q takes 500 DLH * POHR $6 = $3000
3. What is the direct labor hourly wage rate? Direct labor hourly wage = Direct labor cost / Direct labor-hours
worked $21000/1400 = $15 for Job P and for job Q 7500/500 = $15
4. If Job P included 20 units, what is its unit product cost? What is the total amount of manufacturing cost
assigned to Job Q as of the end of March (including applied overhead)?

Total manufacturing cost assigned to Job P:

Direct materials ...................................................... $13,000
Direct labor ............................................................ 21,000
Manufacturing overhead applied
($6 per DLH × 1,400 DLHs) ................................. 8,400
Total manufacturing cost ......................................... $42,400
Unit product cost for Job P:
Total manufacturing cost (a) ................................... $42,400
Number of units in the job (b) ................................ 20
 Unit product cost (a) ÷ (b) ..................................... $2,120
Total manufacturing cost assigned to Job Q:
Direct materials ...................................................... $ 8,000
Direct labor ............................................................ 7,500
Manufacturing overhead applied
($6 per DLH × 500 DLHs).................................... 3,000
Total manufacturing cost ......................................... $18,500

5. Assume the ending raw materials inventory is $1,000 and the company does not use any indirect materials.
Prepare the journal entries to record raw materials purchases and the issuance of direct materials for use in
production.

Raw Materials ........................... 22,000

Accounts Payable ............ 22,000

Work in Process ........................ 21,000

Raw Materials ................. 21,000

Raw material
13000 +
21000 Direct Mat used 8000
Raw materials
purchased 22,000
Ending Inv. 1000
Or Beginning Inventory + Purchases – Ending Raw Materials Inventory = Direct material used
0 + X - 1000 = 21000
X = 21000 + 1000

6. Assume that the company does not use any indirect labor. Prepare the journal entry to record the direct
labor costs added to production.

Work in Process ........................ 28,500 (21000+7500)

Wages Payable ............... 28,500
7. Prepare the journal entry to apply manufacturing overhead to production.

Job P takes 1400 DLH * POHR $6 = $8400

Job Q takes 500 DLH * POHR $6 = $3000

Work in Process ..................................... 11,400

Manufacturing Overhead ..................... 11,400
8. Assume the ending raw materials inventory is $1,000 and the company does not use any indirect materials.
Prepare a schedule of cost of goods manufactured.
The Schedule of Cost of Goods Manufactured is as follows:

Direct materials:
Raw materials inventory, beginning ...................................... $ 0
Add: Purchases of raw materials .......................................... 22,000
Total raw materials available ............................................... 22,000
Deduct: Raw materials inventory, ending ............................. 1,000
Raw materials used in production ........................................ $21,000
Direct labor .............................................................................. 28,500
Manufacturing overhead applied to work in process inventory ..... 11,400
Total manufacturing costs ......................................................... 60,900
Add: Beginning work in process inventory .................................. 0
60,900
Deduct: Ending work in process inventory .................................. 18,500
Cost of goods manufactured ...................................................... $42,400

9. Prepare the journal entry to transfer costs from Work in Process to Finished Goods.

Finished Goods ...................................... 42,400

Work in Process .................................. 42,400

10. Prepare a completed Work in Process T-account including the beginning and ending balances and all debits
and credits posted to the account.

Work in Process
Beg. Bal. 0
(a) 21,000
(b) 28,500
(c) 11,400 (d) 42,400
End. Bal. 18,500
11. Prepare a schedule of cost of goods sold. (Stop after computing the unadjusted cost of goods sold.)

The Schedule of Cost of Goods Sold is as follows:

Finished goods inventory, beginning .......................................... $ 0

Add: Cost of goods manufactured .............................................. 42,400
Cost of goods available for sale.................................................. 42,400
Deduct: Finished goods inventory, ending .................................. 0
Unadjusted cost of goods sold ................................................... $42,400
12. Prepare the journal entry to transfer costs from Finished Goods to Cost of Goods Sold.

Cost of Goods Sold ................................. 42,400

Finished Goods ................................... 42,400

13. What is the amount of underapplied or overapplied overhead?

The amount of underapplied overhead is computed as follows:

Actual direct labor-hours (a) ....................................... 1,900

Predetermined overhead rate (b) ................................ $6.00
Manufacturing overhead applied (a) × (b) ................... $11,400

Actual manufacturing overhead ................................... $12,500

Deduct: Manufacturing overhead applied ..................... 11,400
Underapplied overhead .............................................. $ 1,100
14. Prepare the journal entry to close the amount of underapplied or overapplied overhead to Cost of Goods
Sold.

Cost of Goods Sold ................................. 1,100

Manufacturing Overhead ..................... 1,100

15. Assume that Job P includes 20 units that each sell for $3,000 and that the company's selling and
administrative expenses in March were $14,000. Prepare an absorption costing income statement for
March.

The income statement is as follows:

Sales ................................................................................ $60,000
Cost of goods sold ($42,400 + $1,100) ............................... 43,500
Gross margin ................................................................. 16,500
Selling and administrative expenses ................................. 14,000
Net operating income ........................................................ $ 2,500
EXERCISE 2–1 Compute the Predetermined Overhead Rate [LO1]
Logan Products computes its predetermined overhead rate annually on the basis of direct labor-hours. At the
beginning of the year, it estimated that 40,000 direct labor-hours would be required for the period's estimated level of
production. The company also estimated $466,000 of fixed manufacturing overhead expenses for the coming period
and variable manufacturing overhead of $3.00 per direct laborhour. Logan's actual manufacturing overhead for the
year was $713,400 and its actual total direct labor was 41,000 hours.
Required:
Compute the company's predetermined overhead rate for the year.

What are the facts?

Allocation base is Direct labour hours (DLH)
Estimate 40000 DLH
Estimate Fixed Manufacturing Overhead (FMOH) $466000
Estimate Variable Manufacturing Overhead (VMOH) $3 per DLH
Actual DLH 41000
Actual MFG $713400

Y = $466,000 + ($3.00 per DLH)(40,000 DLHs)

Estimated fixed manufacturing overhead ........................................ $466,000

Estimated variable manufacturing overhead:
$3.00 per DLH × 40,000 DLHs ................................................... 120,000
Estimated total manufacturing overhead cost ................................. $586,000

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead (a).................... $586,000

Estimated total direct labor hours (DLHs) (b) .................. 40,000 DLHs
Predetermined overhead rate (a) ÷ (b)........................... $14.65 per DLH
EXERCISE 2–2 Apply Overhead [LO2]
Westan Corporation uses a predetermined overhead rate of $23.10 per direct labor-hour. This predetermined rate
was based on a cost formula that estimated $277,200 of total manufacturing overhead for an estimated activity level
of 12,000 direct labor-hours.
The company incurred actual total manufacturing overhead costs of $266,000 and 12,600 total direct labor-hours
during the period.
Required:
Determine the amount of manufacturing overhead that would have been applied to all jobs during the period.
We have the POHR $23.10/DLH = 277200/12000
Applied MOH = POHR * Actual DLH $23.10*12600= $291060

EXERCISE 2–3 Computing Job Costs [LO3]

Weaver Company's predetermined overhead rate is $18.00 per direct labor-hour and its direct labor wage rate is
$12.00 per hour. The following information pertains to Job A-200:

Required:
1. What is the total manufacturing cost assigned to Job A-200?
Job A-200 DM + DL + MOH
$200 + 120 + (18 * 120/12) = $500
2. If Job A-200 consists of 50 units, what is the average cost assigned to each unit included in the job?
$500/50= $10 per unit

EXERCISE 2–4 Prepare Journal Entries [LO4]

Kirkaid Company had the following transactions for the just completed month.
a. $86,000 in raw materials were purchased on account.
b. $84,000 in raw materials were requisitioned for use in production. Of this amount, $72,000 was for direct
materials and the remainder was for indirect materials.
c. Total labor wages of $108,000 were incurred. Of this amount, $105,000 was for direct labor and the
remainder was for indirect labor.
d. Additional manufacturing overhead costs of $197,000 were incurred.
Required:
Record the above transactions in journal entries.
a. Raw Materials ......................................... 86,000
Accounts Payable ........................ 86,000

b. Work in Process ...................................... 72,000

Manufacturing Overhead ......................... 12,000
Raw Materials ............................. 84,000

c. Work in Process ...................................... 105,000

Manufacturing Overhead ......................... 3,000
Wages Payable ........................... 108,000

d. Manufacturing Overhead ......................... 197,000

Various Accounts ........................ 197,000
EXERCISE 2–5 Prepare T-Accounts [LO5, LO7]
Granger Products had the following transactions for the just completed month. The company had no beginning
inventories.
a. $75,000 in raw materials were purchased for cash.
b. $73,000 in raw materials were requisitioned for use in production. Of this amount, $67,000 was for direct
materials and the remainder was for indirect materials.
c. Total labor wages of $152,000 were incurred and paid. Of this amount, $134,000 was for direct labor and
the remainder was for indirect labor.
d. Additional manufacturing overhead costs of $126,000 were incurred and paid.
e. Manufacturing overhead costs of $178,000 were applied to jobs using the company's predetermined
overhead rate.
f. All of the jobs in progress at the end of the month were completed and shipped to customers.
g. Any underapplied or overapplied overhead for the period was closed out to Cost of Goods Sold.
Required:
1. Post the above transactions to T-accounts.
2. Determine the cost of goods sold for the period.
Parts 1 and 2.

Cash Raw Materials

(a) 75,000 (a) 75,000 (b) 73,000
(c) 152,000 Bal. 2,000
(d) 126,000

Work in Process Finished Goods

(b) 67,000 (f) 379,000 (f) 379,000
(c) 134,000 Bal. 0
(e) 178,000 (f) 379,000
Bal. 0

Manufacturing Overhead Cost of Goods Sold

(b) 6,000 (e) 178,000 (f) 379,000 (g) 28,000
(c) 18,000 Bal. 351,000
(d) 126,000
(g) 28,000
Bal. 0
EXERCISE 2–6 Schedules of Cost of Goods Manufactured and Cost of Goods Sold [LO6]
Parmitan Corporation has provided the following data concerning last month's manufacturing operations.

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.

1. Cost of Goods Manufactured

Direct materials:
Raw materials inventory, beginning .................................... $24,000
Add: Purchases of raw materials ........................................ 53,000
Total raw materials available ............................................. 77,000
Deduct: Raw materials inventory, ending ............................ 6,000
Raw materials used in production ....................................... 71,000
Deduct: Indirect materials included in manufacturing
overhead....................................................................... 8,000 $ 63,000
Direct labor ........................................................................... 62,000
Manufacturing overhead applied to work in process inventory .... 41,000
Total manufacturing costs ....................................................... 166,000
Add: Beginning work in process inventory ................................ 41,000
207,000
Deduct: Ending work in process inventory ................................ 38,000
Cost of goods manufactured.................................................... $169,000

2. Cost of Goods Sold

Finished goods inventory, beginning ........................................ $ 86,000
Add: Cost of goods manufactured ............................................ 169,000
Cost of goods available for sale ............................................... 255,000
Deduct: Finished goods inventory, ending ................................ 93,000
Unadjusted cost of goods sold ................................................. 162,000
Add: Underapplied overhead ................................................... 8,000
Adjusted cost of goods sold..................................................... $170,000
EXERCISE 2–7 Underapplied and Overapplied Overhead [LO7]
Cretin Enterprises uses a predetermined overhead rate of $21.40 per direct labor-hour. This predetermined rate was
based on a cost formula that estimated $171,200 of total manufacturing overhead for an estimated activity level of
8,000 direct labor-hours.
The company incurred actual total manufacturing overhead costs of $172,500 and 8,250 total direct labor-hours
during the period.
Required:
1. Determine the amount of underapplied or overapplied manufacturing overhead for the period.
2. Assuming that the entire amount of the underapplied or overapplied overhead is closed out to Cost of Goods Sold,
what would be the effect of the underapplied or overapplied overhead on the company's gross margin for the period?

1. Actual direct labor-hours (a) .......................................................... 8,250

Predetermined overhead rate (b) ................................................... $21.40
Manufacturing overhead applied (a) × (b) ...................................... $176,550

Actual manufacturing overhead cost ............................................... $172,500

Deduct: Manufacturing overhead applied ........................................ 176,550
Manufacturing overhead overapplied .............................................. $ (4,050)

2. Because manufacturing overhead is overapplied, the cost of goods sold would decrease by $4,050
and the gross margin would increase by $4,050.

EXERCISE 2–8 Schedules of Cost of Goods Manufactured and Cost of Goods Sold; Income Statement [LO6]
The following data from the just completed year are taken from the accounting records of Eccles Company:

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.
3. Prepare an income statement.
 1. Cost of Goods Manufactured
Direct materials:
Raw materials inventory, beginning ................................. $ 8,000
Add: Purchases of raw materials ..................................... 132,000
Total raw materials available .......................................... 140,000
Deduct: Raw materials inventory, ending ......................... 10,000
Raw materials used in production.................................... 130,000
Direct labor ........................................................................ 90,000
Manufacturing overhead applied to work in process inventory . 210,000
Total manufacturing costs .................................................... 430,000
Add: Beginning work in process inventory ............................. 5,000
435,000
Deduct: Ending work in process inventory ............................. 20,000
Cost of goods manufactured ................................................ $415,000

2. Cost of Goods Sold

Finished goods inventory, beginning ..................................... $ 70,000
Add: Cost of goods manufactured......................................... 415,000
Cost of goods available for sale ............................................ 485,000
Deduct: Finished goods inventory, ending ............................. 25,000
Unadjusted cost of goods sold.............................................. 460,000
Add: Underapplied overhead ................................................ 10,000
Adjusted cost of goods sold ................................................. $470,000

3.
Eccles Company
Income Statement

Sales ................................................................................ $643,000

Cost of goods sold ($460,000 + $10,000)............................ 470,000
Gross margin ................................................................. 173,000
Selling and administrative expenses:
Selling expenses ......................................................... $100,000
Administrative expense ................................................ 43,000 143,000
Net operating income ........................................................ $ 30,000
EXERCISE 2–9 Apply Overhead to a Job [ LO2]
Winston Company applies overhead cost to jobs on the basis of direct labor cost. Job X, which was started and
completed during the current period, shows charges of $18,000 for direct materials, $10,000 for direct labor, and
$15,000 for overhead on its job cost sheet. Job Q, which is still in process at year-end, shows charges of $20,000 for
direct materials, and $8,000 for direct labor.
Required:
Should any overhead cost be added to Job Q at year-end? If so, how much? Explain.

Yes, overhead should be applied to value the Work in Process inventory at year-end.
Because $15,000 of overhead was applied to Job X on the basis of $10,000 of direct labor cost,
the company’s predetermined overhead rate must be 150% of direct labor cost.

Job Q direct labor cost (a) ....................................................................... $8,000

Predetermined overhead rate (b) ............................................................. 150%
Manufacturing overhead applied to Job Q (a) × (b) ................................... $12,000

EXERCISE 2–10 Applying Overhead; Computing Unit Product Cost [LO2, LO3]
A company assigns overhead cost to completed jobs on the basis of 120% of direct labor cost. The job cost sheet for
Job 413 shows that $12,000 in direct materials has been used on the job and that $8,000 in direct labor cost has
been incurred. A total of 200 units were produced in Job 413.
Required:
What is the total manufacturing cost assigned to Job 413? What is the unit product cost for Job 413?

Direct material ................................................ $12,000

Direct labor .................................................... 8,000
Manufacturing overhead applied:
$8,000 × 120% .......................................... 9,600
Total manufacturing cost ................................ $29,600
Unit product cost:
$29,600 ÷ 200 units.................................... $148

EXERCISE 2–11 Journal Entries and T-Accounts [LO2, LO4, LO5]

Foley Company uses a job-order costing system. The following data relate to the month of October, the first month of
the company's fiscal year:
 a. Raw materials purchased on account, $210,000.
 b. Raw materials issued to production, $190,000 (80% direct and 20% indirect).
 c. Direct labor cost incurred, $49,000; and indirect labor cost incurred, $21,000.
 d. Depreciation recorded on factory equipment, $105,000.
 e. Other manufacturing overhead costs incurred during October, $130,000 (credit Accounts Payable).
 f. The company applies manufacturing overhead cost to production on the basis of $4 per machine-hour. A
total of 75,000 machine-hours were recorded for October.
 g. Production orders costing $510,000 according to their job cost sheets were completed during October and
transferred to Finished Goods.
 h. Production orders that had cost $450,000 to complete according to their job cost sheets were shipped to
customers during the month. These goods were sold on account at 50% above cost.
Required:
1. Prepare journal entries to record the information given above.
2. Prepare T-accounts for Manufacturing Overhead and Work in Process. Post the relevant information above to each
account. Compute the ending balance in each account, assuming that Work in Process has a beginning balance of
$35,000.

1. a. Raw Materials Inventory .................................................. 210,000

Accounts Payable ......................................................... 210,000

b. Work in Process ............................................................... 152,000

Manufacturing Overhead .................................................. 38,000
Raw Materials Inventory ............................................... 190,000

c. Work in Process ............................................................... 49,000

Manufacturing Overhead .................................................. 21,000
Salaries and Wages Payable ......................................... 70,000

d. Manufacturing Overhead .................................................. 105,000

Accumulated Depreciation ............................................ 105,000

e. Manufacturing Overhead .................................................. 130,000

Accounts Payable ......................................................... 130,000

f. Work in Process ............................................................... 300,000

Manufacturing Overhead .............................................. 300,000
75,000 machine-hours  $4 per machine-hour = $300,000.

g. Finished Goods ................................................................ 510,000

Work in Process ........................................................... 510,000

h. Cost of Goods Sold .......................................................... 450,000

Finished Goods ............................................................ 450,000
Accounts Receivable ........................................................ 675,000
Sales ........................................................................... 675,000
$450,000 × 1.5 = $675,000.

2. Manufacturing Overhead Work in Process

(b) 38,000 (f) 300,000 Bal. 35,000 (g) 510,000
(c) 21,000 (b) 152,000
(d) 105,000 (c) 49,000
(e) 130,000 (f) 300,000
6,000 Bal. 26,000
(Overapplied
overhead)
EXERCISE 2–12 Computing Predetermined Overhead Rates and Job Costs [LO1 , LO2, LO3, LO7]
Kody Corporation uses a job-order costing system with a plantwide overhead rate based on machinehours. At the
beginning of the year, the company made the following estimates:

Required:
1. Compute the predetermined overhead rate.
2. During the year Job 500 was started and completed. The following information was available with respect to this
job:

Compute the total manufacturing cost assigned to Job 500.

3. During the year the company worked a total of 147,000 machine-hours on all jobs and incurred actual
manufacturing overhead costs of $1,325,000. What is the amount of underapplied or overapplied overhead
for the year? If this amount were closed out entirely to Cost of Goods Sold, would the journal entry increase
or decrease net operating income?

1. The estimated total manufacturing overhead cost is computed as follows:

Y = $750,000 + $4.00 per MH × 150,000 MHs

Estimated fixed manufacturing overhead..................................... $ 750,000

Estimated variable manufacturing overhead
$4.00 per MH × 150,000 MHs ................................................. 600,000
Estimated total manufacturing overhead cost .............................. $1,350,000

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead (a) ................. $1,350,000
Estimated total machine-hours (MHs) (b) ..................... 150,000 MHs
Predetermined overhead rate (a) ÷ (b) ........................ $9.00 per MH

2. Total manufacturing cost assigned to Job 500:

4.

Direct materials ............................................. $350

Direct labor ................................................... 230
Manufacturing overhead applied
$9.00 per MH × 30 MHs .............................. 270
Total manufacturing cost ................................ $850
3. Computing underapplied/overapplied overhead:
Actual machine-hours (a) ....................................... 147,000
Predetermined overhead rate (b) ............................ $9.00
Manufacturing overhead applied (a) ×(b) ................ $1,323,000
Actual manufacturing overhead............................... $1,325,000
Deduct: Manufacturing overhead applied ................. 1,323,000
Underapplied overhead .......................................... $ 2,000

The closing entry would increase cost of goods sold by $2,000 and decrease net
operating income by $2,000.