Problem 4-47 Application of Overhead; Service Industry

Meyers CPA Firm

Annual Budget
Overhead
Indirect materials
Indirect labor
Depreciation-Building
Depreciation-Furniture
Utilities
Insurance
Property taxes
Other expenses
TOTAL

NOTE: The firm uses direct labor cost as the cost driver to apply overhead to clie
Also, the firm estimates total direct labor cost for professional hours in the year to

During January, the firm worked for many clients; data for two of them
Gargus Account
Direct labor $3,800

1.) Compute the firm's overhead rate

Budgeted overhead rate 160%

$2,720,000 ÷ 1,700,000 = 160%

This is used to allocate the budgeted overhead for the period to each
specific account based on the direct professional labor that has occurre
for each account.

2.) Compute the amount of overhead to be charged to the Gargus and Feller accounts usin
rate calculated in requirement 1.
 Gargus Account $6,080
Feller Account $15,680

2. Amount of overhead charged to:

Gargus Account: 160% x $2,500 = $4,000
Feller Account: 160% x $8,500 = $13,600

3.) Compute a separate job cost for the Gargus and the Feller accounts.

Gargus Account $9,880

Feller Account $25,480

Gargus Account Feller Account

Direct labor $3,800 $9,800
Overhead $6,080 $15,680
TOTAL $9,880 $25,480
 $430,000
$1,795,000
$319,000
$51,000
$350,000
$47,000
$61,000
$161,000
$3,214,000

apply overhead to clients.

nal hours in the year to be $ 2,008,750

s; data for two of them follow:

Feller Account
$9,800

the period to each

bor that has occurred

nd Feller accounts using the predetermined overhead

Account
Problem 4-45 Application of Overhead

The following information is for Punta Company for July 2013:

Facts and Figures about Punta Company

Predetermined Labor Hour Rate:

Job S 42.50
Job T 42.50

Factory labor incurred for the two jobs and indirect labor is as follows:

Job S $ 55,500
Job T 45,000
Indirect Labor 133,000
TOTAL: $ 233,500

The company closed the overapplied or underapplied overhead to the Cost of Goods Sold a

Required
1. Calculate the total manufacturing cost for Job S and Job T for July.
2. Calculate the amount of overapplied and underapplied overhead and state whether
account will be increased or decreased by the adjustment.
 1.   Total manufacturing cost: Job S - $358,437.50; Job T $332,937.50
2.   Overapplied overhead: $22,875
See calculations below:

Solution
1. Total Manufacturing Costs for each job

Job S
Total Direct Materials Cost $ 40,500.00
Total Direct Labor Cost
55,500.00
Applied Overhead
Labor Hours 6,175
x Application rate $ 42.50
Total Applied Overhead Cost 262,437.50
Total Manufacturing Costs $ 358,437.50

2. Calculate Factory Overhead Under or Overapplied

Actual Factory OH:
Indirect Materials $ 211,000
Indirect Labor 133,000
Utilities 14,250
Depreciation 45,000
Insurance 18,000
Total Actual Factory OH $ 421,250
Applied Factory OH 444,125 (10,450 labor hours x $42.50/hour)
$ (22,875) OVERAPPLIED

Adjust Difference to COGS $ (22,875) Decrease Cost of Goods Sold by this A

2013:

igures about Punta Company March Jobs:

Labor Hours: Status: Ship Date: Gross Margin:

6,175 Completed July 24%
4,275 In Process NA NA

Direct materials and indirect materials used are as follows:

Job S Job T TOTAL
Material A $ 28,500 $ 71,250 $ 99,750
Material B 12,000 35,000 47,000
Subtotal: $ 40,500 $ 106,250 146,750
Indirect Materials 211,000
TOTAL: $ 357,750

Factory utilities, factory depreciation, and factory insurance incurred is summarized

by these factory vouchers, invoices, and cost memos:

Utilities $ 14,250
Depreciation 45,000
Insurance 18,000
TOTAL: $ 77,250

d to the Cost of Goods Sold account at the end of July.

ob T for July.
d overhead and state whether the cost of goods sold
ent.
ob T $332,937.50

Job T Total
$ 106,250.00 $ 146,750.00

45,000.00 100,500.00

4,275
$ 42.50
181,687.50 444,125.00
$ 332,937.50 $ 691,375.00

r hours x $42.50/hour)

ost of Goods Sold by this Amount

:

summarized
Problem 4-43 Cost Flows, Application of Overhead
Dream Makers is a small manufacturer of gold and platinum. It uses a job co
overhead on the basis of direct labor-hours. Budgeted factory overhead for the
management budgeted 33,500 direct labor-hours. The company had no mate
finished goods inventory at the beginning of April. These transactions were record
a. April insurance cost for the manufacturing property and equipment was $1,80
paid in January.
b. Recorded $1,025 depreciation on an administrative asset.
c. Purchased 21 pounds of high-grade polishing materials at $15 per pound (indire
d. Paid factory utility bill, $6,510 in cash.
e. Incurred and paid 4,000 hours payroll costs of $160,000. Of this amount, 1,00
indirect labor costs.
f. Incurred and paid other factory overhead costs, $6,270.
g. Purchased $24,500 of unpolished semi-precious stones and gold.
h. Requisitioned $18,500 of direct materials and $1,600 of indirect materials from
i. Incurred miscellaneous selling and administrative expenses, $5,660.
j. Incurred $3,505 depreciation on manufacturing equipment for April.
k. Paid advertising expenses in cash, $2,650.
l. Applied factory overhead to production on the basis of direct labor hours.
m. Completed goods costing $64,000 manufactured during the month.
n. Made sales on account in August, $56,410. The cost of goods sold was $47,860

Required
1. Compute the firm’s predetermined factory overhead rate for the year.
2. Prepare journal entries to record the April events.
3. Calculate the amount of overapplied or underapplied overhead to be closed to
account on April 30.
4. Prepare a schedule of cost of goods manufactured and sold.
5. Prepare the income statement for April

1 Predetermined Overhead Rate

= $455,600 ÷ 33,500 = $13.60 per direct labor hour

2 a. Factory Overhead 1,800

Prepaid Insurance

b. Selling & Administrative Expense 1,025

Accumulated Depreciation

c. Materials Inventory 336

 Accounts Payable
$16 x21 = $336

d. Factory Overhead 6,510

Cash

e. Work-in-Process Inventory 140,000

Factory Overhead 20,000
Cash

f. Factory Overhead 6,270

Cash

g. Materials Inventory 24,500

Accounts Payable

h. Work-in-Process Inventory 18,500

Factory Overhead 1,600
Materials Inventory

i. Selling & Administrative Expense 5,660

Cash

j. Factory Overhead 3,505

Accumulated Depreciation

k. Advertising Expense 2,650

Cash

l. Applied Overhead = $13.60 x 3,000 direct labor hours = $40,800

Work-in-Process Inventory 40,800
Factory Overhead

m. Finished Goods Inventory 64,000

Work-in-Process Inventory

n. Accounts Receivable 56,410

Sales Revenue
 Cost of Goods Sold 47,860
Finished Goods Inventory

3. Actual Overhead = $1,800 + $6,510 + $20,000 + $6,270 + $1,600

+ $3,505 = $39,685

Overapplied Overhead = $40,800 - $39,685 = $1,115

Decrease Cost of Goods Sold

Dream Makers
April 30

Data
Cost of Goods Manufactured $ 64,000
Cost of Goods Sold 47,860
Estimated depreciation 455,600
Estimated direct labor hours 33,500
Direct labor hours in April 3,000
Depreciation Expense--Plant $ 3,505
Direct Materials Used 18,500
Indirect Materials Used 1,600
Direct Labor 140,000
Indirect Labor 20,000
Finished Goods Inventory, Beginning -
Finished Goods Inventory, Ending 16,140
Factory utilities 6,510
Factory insurance 1,800
Selling and Administrative 6,685
Work-in-Process Inventory, Beginning -
Work-in-Process Inventory, Ending 135,500
Advertising Expense 2,650
Sales Revenue 56,410
Other factory overhead 6,270

Dream Makers
Statement of Cost of Goods Manufactured
For the Month Ended April 30
Direct Materials Used
Direct Labor
Factory Overhead Applied
Total Manufacturing Costs Incurred during year
Work-in-Process Inventory, Beginning
Total Manufacturing Costs to Account for
Work-in-Process Inventory, Ending
Cost of Goods Manufactured

Actual Overhead
Indirect Materials Used
Factory utilities
Factory insurance
Depreciation Expense--Plant
Other factory overhead
Indirect Labor
Total Factory Overhead
Total Applied Overhead
Overapplied Overhead

Dream Makers
Income Statement
For the Month Ended April 30
Sales Revenue
Cost of Goods Sold
Finished Goods Inventory, Beginning
Cost of Goods Manufactured
Total Goods Available for Sale
Finished Goods Inventory, Ending
Cost of Goods Sold
Overapplied Overhead -
Adjusted Cost of Goods Sold =
Gross Margin
Advertising Expense
Selling and Administrative
Total Selling & Administrative Expenses
Operating Income
d platinum. It uses a job costing system that applies
ted factory overhead for the year was $455,600, and
The company had no materials, work-in-process or
hese transactions were recorded during April:
rty and equipment was $1,800. The premium had been

e asset.
erials at $15 per pound (indirect material).

60,000. Of this amount, 1,000 hours and $20,000 were

,270.
ones and gold.
600 of indirect materials from materials inventory.
expenses, $5,660.
uipment for April.

is of direct labor hours.

uring the month.
st of goods sold was $47,860.

ate for the year.

ed overhead to be closed to the Cost of Goods Sold

d sold.

1,800

1,025
 336

6,510

160,000

6,270

24,500

20,100

5,660

3,505

2,650

urs = $40,800 4,000 total hours - 1,000 indirect hours = 3,000 direct hours

40,800

64,000

56,410
 47,860

0 + $1,600

=64,000-47,860

=1,025+5,660

=140,000+18,500+42,000-65,000

ds Manufactured
d April 30
$ 18,500
140,000
40,800
199,300
+ -
 199,300
- 135,300 =199,300-64,000
$ 64,000

$ 1,600
6,510
1,800
3,505
6,270
20,000
$ 39,685
40,800
$ 1,115

ded April 30
$56,410

$0
64,000
64,000
16,140
47,860
1,115
46,745
$9,665
$2,650
6,685
9,335
$330
Exercise 4-37 Overhead Application

Progressive Painting Company (PPC) is a successful company in commercial and residentia

variety of jobs: new construction, repair and repainting existing structures, and restoration o
homes. The company is known for the quality and reliability of its work, and customers exp
for those benefits. One of the company’s core values is sustainability, and it insists on using
friendly paints and materials in its work; it has refused jobs where the client required a more
paint than PPC thought was appropriate for the application. This value has lost PPC some jo
loyal and growing customer base.

The company uses job costing and applies overhead on the basis of direct labor hours. Over
consists of painting equipment, trucks, supervisory labor, supplies and administrative operat
budgeted costs for the year are shown below.
 
 
 

Budgeted Cost
Direct Materials $2,900,000
Direct Labor hours 33,500
Direct Labor dollars $750,000
Gallons of Paint 20,000
Total Overhead $360,125

PPC has just completed two jobs

Direct Gallons of Direct Labor
Job Materials Paint Hours
Prevette $3,800 24 42
Harmon 4,600 38 66

Required:
1. Determine the total cost of each job.
2. The Prevette job required oil-based paint and the clean-up after the job required the use of ch
after use, had to be disposed of in an environmentally appropriate way. In contrast, the Harmo
water-based paint and the job clean-up was very quick and simple and involved no harmful che
the job costing in part 1 above capture the difference between the two jobs in the types of paint
think the costing system should capture this difference, if any, and if so how do you think the c
be changed?
 think the costing system should capture this difference, if any, and if so how do you think the c
be changed?

1 Budgeted total overhead $360,125

Budgeted direct labor hours 33,500
Overhead rate $10.75 = $360,125 ÷ 33,500

Direct Gallons of Direct Labor

Job
Materials Paint Hours

Prevette $3,800 24 42
Harmon 4,600 38 66

2. The oil-based paint, because it required more clean-up time and materials (harmful
increased direct labor hours and increased materials costs (due to the purchase of th
chemicals), both of which are included in job cost. The disposal of the clean-up waste
included in overhead and therefore not charged to the Prevette job; it is also quite p
clean-up chemicals were not included in direct materials but also charged to overhead
these costs depends on company practices.
From a sustainability point of view, the cost of the clean-up of oil-based paints should
calculated, so the company can track the “full” cost of using oil-based paints. The com
disposing of the waste clean-up materials in an environmentally appropriate manner is
ommercial and residential painting. PPC has a
ructures, and restoration of very old buildings and
work, and customers expect to pay a little more
ty, and it insists on using the most environmentally
he client required a more environmentally harmful
lue has lost PPC some jobs, but has attracted a

direct labor hours. Overhead for the company

and administrative operation costs. The total

Direct Labor
Cost
$855
1,366

job required the use of chemicals that,

y. In contrast, the Harmon job required
involved no harmful chemicals. Does
jobs in the types of paint used? Do you
o how do you think the cost system should
o how do you think the cost system should

,125 ÷ 33,500

Total Job Cost

Applied
= Direct
Direct Overhead
Materials
Labor Cost at $10.75
+Direct Labor
per hour
+Overhead
$855 $451.50 $5,106.50
$ 1,366 $709.50 $6,675.50

and materials (harmful chemicals),

e to the purchase of the clean-up
al of the clean-up waste is likely to be
e job; it is also quite possible that the
so charged to overhead; the handling of

il-based paints should be separately

based paints. The company’s practice of
y appropriate manner is commendable.
Exercise 4-34 Application of Overhead

Whitley Construction Company is in the home remodeling business. Whitley has three teams of
whom has multiple skills of carpentry, painting, and other home remodeling activities. Each tea
employee who coordinates the work done on each job. As the needs of different jobs change, so
other teams for short periods of time. Whitley uses a job costing system to determine job costs a
and pricing the jobs. Direct materials and direct labor are easily traced to each job, using Whitle
Overhead consists of the purchase and maintenance of construction equipment, some supervisory
customers, and administrative costs. Whitley uses and annual overhead rate based on direct lab
Whitley’s has recently completed work for three clients: Harrison, Barnes, and Tyler.
The cost data for each of the three jobs is summarized below.
 

Direct Labor
Job Direct Materials Direct Labor Cost
Hours
Harrison $6,753 45 $15,367
Barnes 13,229 88 22,184
Tyler 42,338 133 49,654

Budgeted direct materials cost and direct labor cost for the year are estimated at $450,000 and
labor hours are budgeted at 22,500 hours, and total overhead is budgeted at $495,000.
 
Required:
1.Calculate the total cost of each of the three jobs.
2.Suppose that for the entire year, Whitley used 23,800 labor hours and total actual overhead
amount of underapplied or overapplied overhead?
Whitley’s business is very seasonal, with summer the period of high activity and winter the lo
potentially affect the job costing at the company?
4. What are some of the potential sustainability issues for Whitley?
5. Whitley has chosen direct labor hours as the cost driver-base for applying overhead. What
and how would you choose among them?
 
Budgeted total overhead $ 495,000
Budgeted direct labor hour 22,500
Overhead rate $ 22.00
Actual direct labor hours 23,800

Direct Direct Labor Direct Labor Applied Overhead

Job
Materials Hours Cost at $22 per hour

Harrison $6,753 45 $15,367 $ 990

Barnes 13,229 88 22,184 $ 1,936
Tyler 42,338 133 49,654 $ 2,926

Total Applied Overhead $ 523,600 = $22 x 23,800

Total Actual Overhead 525,000
Underapplied overhead $ 1,400

3. The seasonality should not affect Whitley’s job costs because Whitley is using an
annual overhead rate; the $22 rate would be used for each job throughout the year Th
effect would be for higher revenues and profits in the summer and lower revenues and
profits in the winter.
4. As a construction company, Whitley has a lot of waste to dispose of, most of which wi
end up in the local landfill. Whitley can reduce the environmental effects of waste
disposal by careful use of materials so as to minimize the waste that occurs in the jobs.
Environmentally harmful materials should be handled properly. Where possible, water-
based paints should be used rather than oil-based paints since the water-based paints
are less harmful.
5. The possible cost drivers in this case include direct labor hours (used by Whitley),
direct labor cost, and materials cost. There is not likely to be much difference between
the rates based on direct labor hours and dollars, but there could be a significant
difference if there were a change to materials cost as the cost driver. Materials cost
might make more sense if the jobs tended to be materials-intensive, or if the use of
overhead (the equipment and related supplies) were more associated with materials
usage than labor usage.
 Whitley has three teams of highly-skilled employees, each of
odeling activities. Each team is led by an experienced
of different jobs change, some team members may be shifted to
tem to determine job costs and to serve as a basis for bidding
ed to each job, using Whitley’s cost tracking software.
quipment, some supervisory labor, the cost of bidding for new
head rate based on direct labor hours.
Barnes, and Tyler.

e estimated at $450,000 and $600,000, respectively. Direct

dgeted at $495,000.

s and total actual overhead was $525,000. What 3. is the

gh activity and winter the low period. How would seasonality

?
r applying overhead. What are some alternative cost drivers,
 Total Job Cost =
Direct Materials
+Direct Labor
+Overhead

$23,110
$37,349
$94,918

e Whitley is using an
b throughout the year The
and lower revenues and

pose of, most of which will

ntal effects of waste
e that occurs in the jobs.
Where possible, water-
e the water-based paints

urs (used by Whitley),

much difference between
uld be a significant
driver. Materials cost
nsive, or if the use of
ociated with materials