CHAPTER 3

Product Costing and Cost Accumulation in

a Batch Production Environment
3-2

In a job-order costing system, costs are assigned to batches or job orders

of production. Job-order costing systems are used by firms that produce
relatively small numbers of dissimilar products. In a process-costing
system, production costs are averaged over a large number of product
units. Process-costing systems are used by firms that produce large
numbers of nearly identical products.

3-4

a. Material requisition form: A document upon which the production

department supervisor requests the release of raw materials for
production.
b. Labor time record: A document upon which employees record the time
they spend working on each production job or batch.
c. Job-cost record: A document on which the costs of direct material,
direct labor, and manufacturing overhead are recorded for a particular
production job or batch. The job-cost sheet is a subsidiary ledger
account for the Work-in-Process Inventory account in the general
ledger.

3-9

The difference between actual and normal costing systems involves the
procedure for applying manufacturing overhead to Work-in-Process
Inventory. Under actual costing, applied overhead is the product of the
actual overhead rate (computed at the end of the period) and the actual
amount of the cost driver used. Under normal costing, applied overhead is
the product of the predetermined overhead rate (computed at the
beginning of the period) and the actual amount of the cost driver used.

3-16

When direct material, direct labor, and manufacturing-overhead costs are

incurred, they are applied to Work-in-Process Inventory by debiting the
account. When goods are finished, the costs are removed from that
account with a credit, and they are transferred to Finished-Goods
Inventory by debiting that account. Subsequently, when the goods are
sold, Finished-Goods Inventory is credited, and the costs are added to
Cost of Goods Sold with a debit.

EXERCISE 3-23 (10 MINUTES)

1.

Process

2.

Job-order

3.

Job-order (contracts or projects)

4.

Process

5.

Process

6.

Job-order

7.

Process

8.

Job-order (contracts or projects)

9.

Process

10.

Job-order

EXERCISE 3-25 (25 MINUTES)

JOB-COST RECORD
Job Number

TB78

Description

Date Started

8/11

Date Completed

teddy bears
8/20

Number of Units Completed

Direct Material
Requisition Number
Quantity
201
500
208
600

Date
8/11
8/12

Unit Price
$.90
.40

Cost
$450
240

Rate
$14

Cost
$7,700

Direct Labor
Hours
550

Date
8/15

Time Card Number

82

Date
8/15

Manufacturing Overhead
Activity Base
Quantity
direct-labor hours
550

1,000

Application Rate
$3

Cost
$1,650

Cost Summary
Cost Item
Total Direct Material
Total Direct Labor
Total Manufacturing Overhead
Total Cost
Unit Cost

Date

Amount
$ 690
7,700
1,650
$10,040
$ 10.04

Shipping Summary
Units Remaining
Units Shipped
In Inventory

Cost Balance

8/30

800

200

$2,008*

*200 units remaining in inventory$10.04 = $2,008

EXERCISE 3-26 (15 MINUTES)
1.

Applied manufacturing overhead

= total manufacturing costs 30%

= $1,250,000 30%
= $375,000

Applied manufacturing overhead

= direct-labor cost 80%

Direct-labor cost = applied manufacturing overhead 80%

= $375,000 .8
= $468,750
2.

Direct-material used = total manufacturing cost

direct labor cost
applied manufacturing overhead
= $1,250,000 $468,750 $375,000
= $406,250

3.

Let X denote work-in-process inventory on December 31.

Total
manufacturing
cost

$1,250,000

work-in-process
inventory,

Jan. 1
.75X

work-in-process
inventory,
Dec. 31
X

cost of
goods
manufactured

= $1,212,500
.25X = $1,250,000 $1,212,500
X = $150,000

Work-in-process inventory on December 31 amounted to $150,000.

EXERCISE 3-31 (20 MINUTES)
1.

Raw material:
Beginning inventory...................................................................................
Add: Purchases..........................................................................................
Deduct: Raw material used........................................................................
Ending inventory........................................................................................

$142,000
?
652,000
$162,000

Therefore, purchases for the year were....................................................

2.

$672,000

Direct labor:
Total manufacturing cost...........................................................................
Deduct: Direct material..............................................................................
Direct labor and manufacturing overhead................................................

3.

4.

$1,372,000
652,000
$ 720,000

Direct labor + manufacturing overhead

Direct labor + (60%) (direct labor)
(160%) (direct labor)

=
=
=

$720,000
$720,000
$720,000

Direct labor

$720,000
1.6

Direct labor

$450,000

Cost of goods manufactured:

Work in process, beginning inventory..................................................
Add: Total manufacturing costs............................................................
Deduct: Cost of goods manufactured...................................................
Work in process, ending inventory.......................................................

$ 160,000
1,372,000
?
$ 60,000

Therefore, cost of goods manufactured was.......................................

$1,472,000

Cost of goods sold:

Finished goods, beginning inventory.......................................................
Add: Cost of goods manufactured............................................................
Deduct: Cost of goods sold.......................................................................
Finished goods, ending inventory............................................................

$ 180,000
1,472,000
?
$ 220,000

Therefore, cost of goods sold was...........................................................

$1,432,000

EXERCISE 3-33 (20 MINUTES)

NOTE: Budgeted sales revenue, although given in the exercise, is irrelevant to the
solution.

1.

Predetermined overhead rate

(a)

$650,000
20,000 machine hours

(b)

$650,000
25,000 direct - labor hours

(c)

$650,000
$325,000 *

budgeted manufacturing overhead

budgeted level of cost driver

= $32.50 per machine hour

= $26.00 per direct-labor hour
=

$2.00 per direct-labor dollar or 200%

of direct-labor cost

*Budgeted direct-labor cost = 25,000$13

2.

Actual
manufacturing
overhead

applied
manufacturing
overhead

overapplied or
underapplied
overhead

(a)

$690,000 (22,000)($32.50)

$25,000 overapplied overhead

(b)

$690,000 (26,000)($26.00)

$14,000 underapplied overhead

(c)

$690,000 ($364,000)(200%)

$38,000 overapplied overhead

Actual direct-labor cost = 26,000$14

EXERCISE 3-34 (5 MINUTES)

1.
2.

Work-in-Process Inventory.......................................................
Manufacturing Overhead................................................

690,000

Work-in-Process Inventory.......................................................
Manufacturing Overhead................................................

715,000*

690,000
715,000

*Applied manufacturing overhead = $715,000

= 22,000 hours x $32.50 per machine hour
EXERCISE 3-35 (15 MINUTES)
1.

Predetermined overhead rate = $1,040,000 / 80,000 hours = $13.00 per hour

2.

To compute actual manufacturing overhead:

Depreciation................................................................................................
Property taxes............................................................................................
Indirect labor...............................................................................................
Supervisory salaries..................................................................................
Utilities........................................................................................................
Insurance....................................................................................................
Rental of space...........................................................................................
Indirect material:
Beginning inventory, January 1.........................................................
$ 48,000
Add: Purchases...................................................................................
102,000
Indirect material available for use......................................................
$150,000
Deduct: Ending inventory, December 31...........................................
70,000
Indirect material used.........................................................................
Actual manufacturing overhead................................................................
Overapplied

actual
manufacturing

applied
manufacturing

$250,000
21,000
82,000
220,000
61,000
34,000
310,000

80,000
$1,058,000

overhead

overhead
=

overhead

$1,058,000 ($13.0083,000*) = $21,000

*Actual direct-labor hours.

3.

Manufacturing Overhead............................................................
Cost of Goods Sold..........................................................
4.

21,000
21,000

In the electronic version of the solutions manual, press the CTRL key and click
on the following link: 10E - BUILD A SPREADSHEET 03-35.XLS

NOTE: Budgeted selling and administrative expense, although given in the exercise, is
irrelevant to the solution.

PROBLEM 3-43 (35 MINUTES)

1.
Predetermined overhead rate = budgeted overhead budgeted directlabor cost
= $2,730,000 $2,100,000 = 130% of direct labor cost
2.

Additions (debits) total $7,802,500 [$2,800,000 + $2,175,000 + ($2,175,000 x

130%)].

3.

The finished-goods inventory consisted of job no. 3154, which cost

$175,750 [$78,000 + $42,500 + ($42,500 x 130%)].

4.

Since there is no work in process at year-end, all amounts in the Work-inProcess account must be transferred to Finished-Goods Inventory. Thus:
Finished-Goods Inventory.......................................7,880,900*
Work-in-Process Inventory..........................
....................................................................................7,880,900
*Beginning balance in Work-in-Process Inventory + additions to the
account:
$78,400 + $7,802,500 = $7,880,900

5.

BBBCs applied overhead totals 130% of direct-labor cost, or $2,827,500

($2,175,000 x 130%). Actual overhead was $2,777,000, itemized as follows,
resulting in overapplied overhead of $50,500.
Indirect materials used........................................... $ 32,500
Indirect labor........................................................... 1,430,000
Factory depreciation...............................................
870,000
Factory insurance...................................................
29,500
Factory utilities.......................................................
415,000
Total
$2,777,000
..................................................................................
Manufacturing Overhead......................................................
Cost of Goods Sold..................................................

50,500
50,500

6.

The companys cost of goods sold totals $7,654,650:

Finished-goods inventory, Jan. 1.
Add: Cost of goods manufactured..
Cost of goods available for sale...
Less: Finished-goods inventory, Dec. 31..
Unadjusted cost of goods sold.
Less: Overapplied overhead.
Cost of goods sold...

7.

0
7,880,900
$ 7,880,900
175,750
$ 7,705,150
50,500
$ 7,654,650

No, selling and administrative expenses are operating expenses of the

firm and are treated as period costs rather than product costs. Such costs
are unrelated to manufacturing overhead and cost of goods sold.

PROBLEM 3-46 (35 MINUTES)

1.

Predetermined overhead rate = budgeted overhead budgeted machine

hours
= $1,925,000 35,000 = $55.00 per
machine hour

2.

(a)

Work-in-Process Inventory. ..................................... 170,000*

Raw-Material Inventory.....................
170,000
Work-in-Process Inventory. ..................................... 288,200**
Wages Payable..............................................
288,200
* $45,000 + $90,000 + $33,000 = $170,000
** $80,000 + $49,000 + $140,000 + $19,200 = $288,200

(b)

Manufacturing Overhead...................................................... 520,000

Accumulated Depreciation.......................................
72,000
Wages Payable.......................................................... 140,000
Manufacturing Supplies Inventory. ......................... 15,000
Miscellaneous Accounts..........................................
293,000

(c)

Work-in-Process Inventory. ................................................. 605,000*

Manufacturing Overhead..........................................
605,000
* (2,500 + 1,500 + 5,000 + 2,000) x $55.00 = $605,000

(d)

Finished-Goods Inventory. . ..................................... 692,000*

Work-in-Process Inventory. .....................................
692,000

* Job 101: $182,000 + $45,000 + $80,000 + (2,500 x $55.00) =

$444,500
Job 102: $116,000 + $49,000 + (1,500 x $55.00) = $247,500
$692,000 = $444,500 + $247,500
(e)

Accounts Receivable................................................ 319,800*

Sales Revenue..............................................
319,800
* $247,500 + $72,300 = $319,800
Cost of Goods Sold. ................................................. 247,500

Finished-Goods Inventory. . .........................

247,500

3.

Job no. 103 and no. 104 are in production as of March 31:
Job 103: $92,000 + $140,000 + (5,000 x $55.00)..................$507,000
Job 104: $33,000 + $19,200 + (2,000 x $55.00).................... 162,200
Total...........................................................................$669,200

4.

Finished-goods inventory increased by $444,500 ($692,000 - $247,500).

5.

The companys actual overhead amounted to $520,000, whereas applied

overhead totaled $605,000. Thus, overhead was overapplied by $85,000.