Chapter 3

Job-Order Costing: Cost Flows and External

Reporting

Questions

3-1 The link that connects these two sched- 3-5 Underapplied overhead implies that not
ules is the cost of goods manufactured. It is cal- enough overhead was assigned to jobs during the
culated within a schedule of cost of goods manu- period. Thus, cost of goods sold is understated so
factured and then it plugs into the schedule of we add underapplied overhead to cost of goods
cost of goods sold to enable calculating the cost sold. On the other hand, overapplied overhead is
of goods available for sale. deducted from cost of goods sold.

3-2 The Manufacturing Overhead clearing ac- 3-6 The raw materials used in production is
count is credited when overhead cost is applied to calculated by taking the beginning raw materials
Work in Process. The applied overhead cost for inventory plus raw material purchases to derive
the period will probably not equal the actual over- the raw materials available. From this amount,
head cost because overhead application relies on subtract the ending raw materials inventory to
a predetermined overhead rate that is based on derive the raw materials used in production.
estimates made at the beginning of the period.
3-7 The total manufacturing costs added to
3-3 Underapplied overhead occurs when the production include the direct materials used in
actual overhead cost exceeds the amount of over- production, the direct labor cost, and the manu-
head cost applied to Work in Process inventory facturing overhead applied to work in process.
during the period. Overapplied overhead occurs
when the actual overhead cost is less than the 3-8 The beginning work in process inventory
amount of overhead cost applied to Work in Pro- plus the total manufacturing costs (which includes
cess inventory during the period. Underapplied or the direct materials used production, the direct la-
overapplied overhead is disposed of by either bor cost, and the manufacturing overhead applied
closing out the amount to Cost of Goods Sold or to work in process) minus the ending work in pro-
by allocating the amount among Cost of Goods cess inventory equals the cost of goods manufac-
Sold and ending Work in Process and Finished tured.
Goods inventories in proportion to the applied
overhead in each account. The adjustment for un- 3-9 Beginning finished goods inventory plus
derapplied overhead increases Cost of Goods Sold the cost of goods manufactured equals the cost
(and the two inventories) whereas the adjustment of goods available for sale. From this amount,
for overapplied overhead decreases Cost of Goods subtract the ending finished goods inventory to
Sold (and the two inventories). derive the unadjusted cost of goods sold.

3-4 Manufacturing overhead may be underap- 3-10 Direct labor costs are added to Work in
plied for several reasons. Control over overhead Process as goods are being manufactured. Once
spending may be poor. Or, some of the overhead goods are completed, their manufacturing costs
may be fixed and the actual amount of the alloca- (including direct labor) are transferred to Finished
tion base may be less than estimated at the be- Goods. Once goods are sold to customers their
ginning of the period. In this situation, the manufacturing costs (including direct labor) are
amount of overhead applied to inventory will be transferred to Cost of Goods Sold.
less than the actual overhead cost incurred.
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Solutions Manual, Chapter 3 1
 Chapter 3: Applying Excel
The completed worksheet is shown below.

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written consent of McGraw-Hill Education.
2 Managerial Accounting, 17th Edition
 Chapter 3: Applying Excel (continued)
The completed worksheet, with formulas displayed, is shown below.

[Note: To display formulas in cells instead of their calculated amounts, con-

sult Excel Help.]

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Solutions Manual, Chapter 3 3
 Chapter 3: Applying Excel (continued)
1. When the estimated total amount of the allocation base is changed to
60,000 machine-hours, the worksheet changes as show below:

The predetermined overhead rate has increased from $4.00 per ma-
chine-hour to $5.00 per machine-hour because the estimated total
amount of the allocation base has decreased from 75,000 machine-
hours to 60,000 machine-hours. The same amount of estimated over-
head cost is spread across fewer machine-hours.

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4 Managerial Accounting, 17th Edition
 Chapter 3: Applying Excel (continued)
2. With all of the changes in the data, the worksheet should look like the
following:

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Solutions Manual, Chapter 3 5
 Chapter 3: Applying Excel (continued)
3. When the estimated total amount of the allocation base is changed to
40,000 machine-hours, the worksheet looks like the following:

The manufacturing overhead is now overapplied by $10,000 rather than

underapplied by $10,000 as it was when the estimated total amount of
the allocation base was 10,000 machine-hours higher. This occurred be-
cause the predetermined overhead rate was $2.00 per machine-hour
when the estimated total amount of the allocation base was 50,000 ma-
chine-hours and is now $2.50 per machine-hour as a consequence of
the reduction in the estimated total amount of the allocation base to
40,000 machine-hours. Because the predetermined overhead rate is
now larger and everything else is the same, more overhead was applied.
In this case, the result is a switch from underapplied to overapplied
overhead.

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6 Managerial Accounting, 17th Edition
 Chapter 3: Applying Excel (continued)
4. When the estimated total amount of the allocation base is changed back
to 50,000 machine-hours and the actual manufacturing overhead cost is
changed to $100,000, the worksheet looks like the following:

In part 2 above, manufacturing overhead was underapplied by $10,000.

Manufacturing overhead is now underapplied by $20,000. This occurred
because the actual manufacturing overhead cost increased by $10,000—
from $90,000 to $100,000. Thus, the amount of the underapplied over-
head also increased by $10,000.

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Solutions Manual, Chapter 3 7
 The Foundational 15
1. The journal entry to record raw materials used in production is:

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

Raw Materials ......... 480,000

2. The ending balance in Raw Materials is:

Raw Materials
Beg. Bal. 40,000
(a) 510,000 (b) 480,000
End. Bal. 70,000

3. The journal entry to record the labor costs is:

Work in Process .............................. 600,000

Manufacturing Overhead ................. 150,000
Selling and administrative salaries .... 240,000
Wages Payable ....................... 990,000

4. The total manufacturing overhead applied to production is computed as

follows:

Actual direct labor-hours (a) ............................ 41,000

Predetermined overhead rate (b) ..................... $16.25
Manufacturing overhead applied (a) × (b) ........ $666,250

5. The total manufacturing cost added to work in process is:

Direct materials used in production ................ $ 480,000

Direct labor................................................... 600,000
Manufacturing overhead applied .................... 666,250
Total manufacturing cost ............................... $1,746,250

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8 Managerial Accounting, 17th Edition
 The Foundational 15 (continued)

6. The journal entry is recorded as follows:

Finished Goods ................ 1,680,000
Work in Process ...... 1,680,000

7. The ending balance in Work in Process is computed as follows:

Work in Process
Beg. Bal. 18,000
(b) 480,000
(c) 600,000
(f) 666,250 (g) 1,680,000
End. Bal. 84,250

8. The total actual manufacturing overhead cost is as follows:

Indirect labor .............................................. $150,000

Depreciation, insurance, utilities, etc............. 500,000
Total actual manufacturing overhead cost ..... $650,000

9. The overapplied overhead is computed as follows:

Actual manufacturing overhead cost (a) ........... $650,000
Manufacturing overhead applied (b) ................ $666,250
Overapplied overhead (a) ‒ (b) ....................... $(16,250)

10. The cost of goods available for sale is computed as follows:

Beginning finished goods inventory ................ $ 35,000

Add: Cost of goods manufactured .................. 1,680,000
Cost of goods available for sale ...................... $1,715,000

11. The journal entry is recorded as follows:

Cost of Goods Sold .................. 1,690,000

Finished Goods ..................... 1,690,000

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Solutions Manual, Chapter 3 9
The Foundational 15 (continued)

12. The ending balance in Finished Goods is:

Finished Goods
Beg. Bal. 35,000
(g) 1,680,000 (h) 1,690,000
End. Bal. 25,000

13. The adjusted cost of goods sold is computed as follows:

Beginning finished goods inventory ................. $ 35,000

Cost of goods manufactured .......................... 1,680,000
Cost of goods available for sale ...................... 1,715,000
Ending finished goods inventory..................... 25,000
Unadjusted cost of goods sold ....................... 1,690,000
Overapplied overhead ................................... (16,250)
Adjusted cost of goods sold ........................... $1,673,750

14. and 15.

The gross margin and net operating income are computed as follows:

Sales ........................................................ $2,800,000

Cost of goods sold ..................................... 1,673,750
Gross margin ............................................ 1,126,250
Selling and administrative expenses
($240,000 + $367,000) ........................... 607,000
Net operating income ................................ $ 519,250

Note: The selling and administrative expenses ($607,000) include selling

and administrative salaries ($240,000) and various other selling and admin-
istrative expenses ($367,000).

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10 Managerial Accounting, 17th Edition
 Exercise 3-1 (10 minutes)

a. Raw Materials ......................... 80,000

Accounts Payable ............... 80,000

b. Work in Process ...................... 62,000

Manufacturing Overhead ......... 9,000
Raw Materials .................... 71,000

c. Work in Process ...................... 101,000

Manufacturing Overhead ......... 11,000
Cash ................................. 112,000

d. Manufacturing Overhead ......... 175,000

Accumulated Depreciation .. 175,000

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Solutions Manual, Chapter 3 11
 Exercise 3-2 (20 minutes)
Requirement 1

Cash Raw Materials

(a) 94,000 (a) 94,000 (b) 89,000
(c) 132,000 Bal. 5,000
(d) 143,000

Work in Process Finished Goods

(b) 78,000 (f) 342,000 (f) 342,000 (g) 342,000
(c) 112,000 Bal. 0
(e) 152,000
Bal. 0

Manufacturing Overhead Cost of Goods Sold

(b) 11,000 (e) 152,000 (g) 342,000
(c) 20,000 (h) 22,000 (h) 22,000
(d) 143,000 Bal. 364,000
Bal. 0

Requirement 2: The adjusted cost of goods sold is shown above as the

ending balance in the Cost of Goods Sold T-account ($364,000).

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12 Managerial Accounting, 17th Edition
 Exercise 3-3 (20 minutes)

1. Schedule of cost of goods manufactured

Beginning work in process inventory........................ $56,000

Direct materials:
Beginning raw materials inventory ...................... $12,00
0
Add: Purchases of raw materials ......................... 30,000
Total raw materials available .............................. 42,000
Deduct: Ending raw materials inventory .............. 18,000
Raw materials used in production ....................... 24,000
Deduct: indirect materials used in production ...... 5,000
Direct materials used in production ............... $19,00
0
Direct labor ............................................................ 58,000
Manufacturing overhead applied to work in process.. 87,000
Total manufacturing costs added to production ........ 164,000
Total manufacturing costs to account for ................. 220,000
Deduct: Ending work in process inventory ............... 65,000
Cost of goods manufactured ................................... $155,000

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tion.
Solutions Manual, Chapter 3 13
 Exercise 3-3 (20 minutes)
2. Schedule of Cost of Goods Sold:

Beginning finished goods inventory ................... $ 35,000

Add: Cost of goods manufactured ..................... 155,000
Cost of goods available for sale ........................ 190,000
Deduct: Ending finished goods inventory ........... 42,000
Unadjusted cost of goods sold .......................... 148,000
Add: Underapplied overhead ............................ 4,000
Adjusted cost of goods sold .............................. $152,000

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14 Managerial Accounting, 17th Edition
 Exercise 3-4 (10 minutes)

1. Manufacturing overhead incurred (a)....... $215,000

Actual direct labor-hours......................... 11,500
× Predetermined overhead rate .............. $18.20
= Manufacturing overhead applied (b) .... $209,300
Manufacturing overhead underapplied
(a) – (b) ............................................. $5,700

2. Because manufacturing overhead is underapplied, the journal entry

would increase cost of goods sold by $5,700 and the gross margin
would decrease by $5,700.

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Solutions Manual, Chapter 3 15
 Exercise 3-5 (30 minutes)
1. a. Raw Materials .......................................... 210,000
Accounts Payable .................................. 210,000
b. Work in Process ....................................... 178,000
Manufacturing Overhead .......................... 12,000
Raw Materials ....................................... 190,000
c. Work in Process ....................................... 90,000
Manufacturing Overhead .......................... 110,000
Salaries and Wages Payable................... 200,000
d. Manufacturing Overhead .......................... 40,000
Accumulated Depreciation ..................... 40,000
e. Manufacturing Overhead .......................... 70,000
Accounts Payable .................................. 70,000
f. Work in Process ....................................... 240,000
Manufacturing Overhead ....................... 240,000
30,000 MH × $8 per MH = $240,000.
g. Finished Goods ........................................ 520,000
Work in Process .................................... 520,000
h. Cost of Goods Sold .................................. 480,000
Finished Goods ..................................... 480,000
Accounts Receivable ................................ 600,000
Sales .................................................... 600,000
$480,000 × 1.25 = $600,000.

2.
Manufacturing Overhead Work in Process
(b) 12,000 (f) 240,000 Bal. 42,000 (g) 520,000
(c) 110,000 (b) 178,000
(d) 40,000 (c) 90,000
(e) 70,000 (f) 240,000
8,000 Bal. 30,000
(Overapplied
overhead)

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16 Managerial Accounting, 17th Edition
 Exercise 3-6 (30 minutes)
1. Mason Company’s schedule of cost of goods manufactured is as follows:

Beginning work in process inventory........................ $10,000

Direct materials:
Beginning raw materials inventory ...................... $7,000
Add: Purchases of raw materials ......................... 118,000
Total raw materials available .............................. 125,000
Deduct: Ending raw materials inventory .............. 15,000
Direct materials used in production ......................... $110,000
Direct labor ............................................................ 70,000
Manufacturing overhead applied to work in process.. 90,000
Total manufacturing costs added to production ........ 270,000
Total manufacturing costs to account for ................. 280,000
Deduct: Ending work in process inventory ............... 5,000
Cost of goods manufactured ................................... $275,000

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tion.
Solutions Manual, Chapter 3 17
 Exercise 3-6 (continued)
2. Mason Company’s schedule of cost of goods sold is as follows:
Beginning finished goods inventory ............ $ 20,000
Add: Cost of goods manufactured .............. 275,000
Cost of goods available for sale .................. 295,000
Deduct: Ending finished goods inventory .... 35,000
Unadjusted cost of goods sold.................... 260,000
Deduct: Overapplied overhead* ................. 10,000
Adjusted cost of goods sold ....................... $250,000
* Actual manufacturing overhead cost of $80,000 ‒ Manufacturing over-
head applied of $90,000 = Overapplied overhead of $10,000.

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18 Managerial Accounting, 17th Edition
 Exercise 3-6 (continued)
3.
Mason Company
Income Statement

Sales .............................................................. $524,000

Cost of goods sold ($260,000 – $10,000).......... 250,000
Gross margin .................................................. 274,000
Selling and administrative expenses:
Selling expenses ......................................... $140,000
Administrative expense ............................... 63,000 203,000
Net operating income ...................................... $ 71,000

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Solutions Manual, Chapter 3 19
 Exercise 3-7 (15 minutes)

1. Actual manufacturing overhead costs (a) ... $473,000

Manufacturing overhead cost applied:
19,400 MH × $25 per MH (b) ................. 485,000
Overapplied overhead cost (a) ‒ (b) .......... $(12,000)

2. Schedule of Cost of Goods Manufactured:

Beginning work in process inventory.......... $40,00

0
Direct materials:
Beginning raw materials inventory ...................... $ 20,00
0
Add: Purchases of raw materials ......................... 400,00
0
Total raw materials available .............................. 420,00
0
Deduct: Ending raw materials inventory .............. 30,00
0
Raw materials used in production ....................... 390,00
0
Deduct: indirect materials used in production ...... 15,00
0
Direct materials used in production ........... $375,0
00
Direct labor ............................................................ 60,000
Manufacturing overhead applied to work in process.. 485,00
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tion.
20 Managerial Accounting, 17th Edition
 0
Total manufacturing costs added to production ........ 920,000
Total manufacturing costs to account for ................. 960,000
Deduct: Ending work in process inventory ............... 70,000
Cost of goods manufactured ................................... $890,000

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tion.
Solutions Manual, Chapter 3 21
 Exercise 3-8 (15 minutes)
1. Item (a): Actual manufacturing overhead costs incurred for the
year.
Item (b): Overhead cost applied to Work in Process for the year.
Item (c): Cost of goods manufactured for the year.
Item (d): Cost of goods sold for the year.

2. The journal entry to close the balance in the Manufacturing Overhead

account to Cost of Goods Sold is:

Cost of Goods Sold .......................................... 70,000

Manufacturing Overhead ............................ 70,000

3. The underapplied overhead is allocated to Work in Process, Finished

Goods, and Cost of Goods Sold based on the percentage of total over-
head applied during the year that resides in each account as of the end
of the year:
Work in Process ........... $ 19,500 5%
Finished Goods ............. 58,500 15
Cost of Goods Sold ....... 312,000 80
Total cost..................... $390,000 100 %
Using these percentages, the journal entry would be as follows:
Work in Process (5% × $70,000) ................. 3,500
Finished Goods (15% × $70,000) ................. 10,500
Cost of Goods Sold (80% × $70,000) ........... 56,000
Manufacturing Overhead ........................ 70,000

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22 Managerial Accounting, 17th Edition
 Exercise 3-9 (30 minutes)
1. The overhead applied to work in process is computed as follows:
Machine-hours worked (a) ............................... 75,000
Predetermined overhead rate (b) ..................... $2.40 per MH
Overhead applied to work in process (a) × (b) .. $180,000

This amount is shown in entry (a) below:

Manufacturing Overhead
(Maintenance) 21,000 (a) 180,000
(Indirect materials) 8,000
(Indirect labor) 60,000
(Utilities) 32,000
(Insurance) 7,000
(Depreciation) 56,000
Balance 4,000

Work in Process
(Direct materials) 710,000
(Direct labor) 90,000
(Overhead) (a) 180,000

2. Overhead is underapplied by $4,000 for the year, as shown in the Manu-

facturing Overhead account above. The entry to close out this balance
to Cost of Goods Sold would be:
Cost of Goods Sold ...................................... 4,000
Manufacturing Overhead......................... 4,000

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Solutions Manual, Chapter 3 23
 Exercise 3-9 (continued)
3. When overhead is applied using a predetermined rate based on ma-
chine-hours, it is assumed that overhead cost is proportional to ma-
chine-hours. When the actual machine-hours turn out to be 75,000, the
costing system assumes that the overhead will be 75,000 machine-hours
× $2.40 per machine-hour, or $180,000. This is a drop of $12,000 from
the initial estimated manufacturing overhead cost of $192,000. How-
ever, the actual manufacturing overhead cost did not drop by this much.
The actual manufacturing overhead cost was $184,000—a drop of
$8,000 from the estimate. The manufacturing overhead did not decline
by the full $12,000 because of the existence of fixed costs and/or be-
cause overhead spending was not under control. These issues will be
covered in more detail in later chapters.

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24 Managerial Accounting, 17th Edition
 Exercise 3-10 (30 minutes)

1. a. Raw Materials ......................................... 325,000

Accounts Payable .............................. 325,000
b. Work in Process ...................................... 232,000
Manufacturing Overhead ......................... 58,000
Raw Materials.................................... 290,000
c. Work in Process ...................................... 60,000
Manufacturing Overhead ......................... 120,000
Wages and Salaries Payable ............... 180,000
d. Manufacturing Overhead ......................... 75,000
Accumulated Depreciation .................. 75,000
e. Manufacturing Overhead ......................... 62,000
Accounts Payable .............................. 62,000
f. Work in Process ...................................... 300,000
Manufacturing Overhead .................... 300,000
Predetermined = Estimated total manufacturing overhead cost
overhead rate Estimated total amount of the allocation base
$4,800,000
= = $20 per MH
240,000 MHs
15,000 MH × $20 per MH = $300,000

2. Manufacturing Overhead Work in Process

(b) 58,000 (f) 300,000 (b) 232,000
(c) 120,000 (c) 60,000
(d) 75,000 (f) 300,000
(e) 62,000

3. The cost of the completed job is $592,000 as shown in the Work in Pro-
cess T-account in requirement 2. The journal entry is:
Finished Goods................................. 592,000
Work in Process .......................... 592,000

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Solutions Manual, Chapter 3 25
 Exercise 3-10 (continued)
4. The unit product cost for this job would be:

$592,000 ÷ 16,000 units = $37 per unit

So, the portion of this job’s costs that would be included in February’s
cost of goods sold is:

10,000 units × $37 per unit = $370,000

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26 Managerial Accounting, 17th Edition
 Problem 3-11 (45 minutes)
1. The cost of raw materials used in production was:
Beginning raw materials inventory ......... $ 15,000
Add: Purchases of materials (debits) ..... 120,000
Total raw materials available ................. 135,000
Deduct: Ending raw materials inventory. 25,000
Raw materials used in production .......... $110,000

2. Of the $110,000 in materials requisitioned for production, $90,000 was

debited to Work in Process as direct materials. Therefore, the difference
of $20,000 was debited to Manufacturing Overhead as indirect materi-
als.

3. Total factory wages accrued during the year (credits to

the Factory Wages Payable account) ............................ $180,000
Less direct labor cost (from Work in Process) ................... 150,000
Indirect labor cost .......................................................... $ 30,000

4. The cost of goods manufactured was $470,000—the credits to the Work

in Process account.

5. The Cost of Goods Sold for the year was:

Beginning finished goods inventory ................................... $ 40,000
Add: Cost of goods manufactured (from Work in Process) .. 470,000
Cost of goods available for sale ......................................... 510,000
Deduct: Ending finished goods inventory ........................... 60,000
Cost of goods sold ............................................................ $450,000

6. The predetermined overhead rate was:

Predetermined = Estimated total manufacturing overhead cost
overhead rate Estimated total amount of the allocation base
$240,000
= = 160% of direct
$150,000 direct labor cost labor cost

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Solutions Manual, Chapter 3 27
 Problem 3-11 (continued)
7. Manufacturing overhead was overapplied by $10,000, computed as fol-
lows:
Actual manufacturing overhead cost for the year (debits
to Manufacturing Overhead) ......................................... $230,000
Manufacturing overhead applied (debits to Work in Pro-
cess) ........................................................................... 240,000
Overapplied overhead ..................................................... $(10,000)

8. The ending balance in Work in Process is $30,000. Direct materials

make up $9,200 of this balance, and applied overhead makes up
$12,800. The computations are:
Balance, Work in Process, 12/31 (a) ................... $30,000
Less: Direct labor cost (given) ............................ 8,000
Applied overhead cost ($8,000 × 160%) .... 12,800
Total conversion cost (b) ........................... 20,800
Direct materials cost (a) – (b) ............................ $ 9,200

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28 Managerial Accounting, 17th Edition
 Problem 3-12 (30 minutes)
1. The predetermined overhead rate is computed as follows:
Estimated total manufacturing overhead (a) .. $900,000
Estimated total computer hours (b) ............... 75,000 hours
Predetermined overhead rate (a) ÷ (b) ......... $12.00 per hour

Actual manufacturing overhead cost ....................... $850,000

Manufacturing overhead applied to Work in Pro-
cess during the year: 60,000 actual MHs × $12
per MH .............................................................. 720,000
Underapplied overhead cost................................... $130,000

2. Cost of Goods Sold ................................... 130,000

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

3. The underapplied overhead would be allocated using the following per-

centages:
Overhead applied during the year in:
Work in process ................................. $ 36,000 5 %
Finished goods .................................. 180,000 25 %
Cost of goods sold ............................. 504,000 70 %
Total ................................................... $720,000 100 %
The entry to record the allocation of the underapplied overhead would
be:
Work in Process (5% × $130,000) ........... 6,500
Finished Goods (25% × $130,000) ........... 32,500
Cost of Goods Sold (70% × $130,000) ..... 91,000
Manufacturing Overhead ................. 130,000

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Solutions Manual, Chapter 3 29
 Problem 3-12 (continued)

4. Comparing the two methods:

Cost of goods sold if the underapplied overhead is

closed to cost of goods sold ($1,400,000 +
$130,000) .......................................................... $1,530,000
Cost of goods sold if the underapplied overhead is
closed to Work in Process, Finished Goods, and
Cost of Goods Sold ($1,400,000 + $91,000)......... 1,491,000
Difference in cost of goods sold ............................. $ 39,000
Thus, net operating income will be $39,000 greater if the underapplied
overhead is closed to Work in Process, Finished Goods, and Cost of Goods
Sold rather than being closed to Cost of Goods Sold.

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30 Managerial Accounting, 17th Edition
 Problem 3-13 (30 minutes)
Schedule of cost of goods manufactured:
Beginning work in process inventory........................ $ 4
2,0
00
Direct materials:
Beginning raw materials inventory .... $ 40,00
0
Add: Purchases of raw materials ...... 290,000
Total raw materials available ............ 330,000
Deduct: Ending 10,000
raw materials
inventory .......
Direct materials used in production ....... 32
0,0
00
Direct labor ............................................................ 78,
00
0
Manufacturing overhead applied to work in process.. 28
5,0
00
Total manufacturing costs added to production ........ 683
,00
0
Total manufacturing costs to account for ................. 725
,00
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tion.
Solutions Manual, Chapter 3 31
 0
Deduct: Ending work in process inven- 35
tory .................................................. ,00
0
Cost of goods manufactured................. $69
0,0
00

Schedule of cost of goods sold:

Beginning finished goods inventory* ............. $ 50,000
Add: Cost of goods manufactured ................. 690,000
Cost of goods available for sale* ................... 740,000
Deduct: Ending finished goods inventory ....... 80,000
Unadjusted cost of goods sold*..................... 660,000
Deduct: Overapplied overhead ($270,000 ‒
$285,000) ................................................. 15,000
Adjusted cost of goods sold .......................... $645,000

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tion.
32 Managerial Accounting, 17th Edition
 Problem 3-13 (continued)
Income statement:
Sales .......................................................... $915,000
Cost of goods sold ($660,000 – $15,000)...... 645,000
Gross margin .............................................. 270,000
Selling and administrative expenses:
Selling expenses* ..................................... $140,000
Administrative expense* ........................... 100,000 240,000
Net operating income* ................................ $ 30,000
* Given in the problem

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Solutions Manual, Chapter 3 33
 Problem 3-14 (60 minutes)

1. The predetermined overhead rate is computed as follows:

Predetermined = Estimated total manufacturing overhead cost

overhead rate Estimated total amount of the allocation base

$800,000
= =160%
$500,000 direct materials cost

2. Before the underapplied or overapplied overhead can be computed,

we must determine the amount of direct materials used in production
for the year.
Beginning raw materials inventory ....................... $ 20,000
Add, Purchases of raw materials.......................... 510,000
Total raw materials available ............................... 530,000
Deduct: Ending raw materials inventory ............... 80,000
Raw materials used in production ........................ $450,000

Actual 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
Total actual costs ............................................... 760,000
Manufacturing overhead applied to work in pro-
cess ($450,000 × 160%) ................................. 720,000
Underapplied overhead ....................................... $ 40,000

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34 Managerial Accounting, 17th Edition
 Problem 3-14 (continued)

3. Schedule of Cost of Goods Manufactured:

Beginning work in process inventory........................ $150,0

Direct materials:
Beginning raw materials inventory ...................... $ 20,000
Add: Purchases of raw materials ......................... 510,000
Total raw materials available .............................. 530,000
Deduct: Ending raw materials inventory .............. 80,000
Direct materials used in production ......................... 450,000
Direct labor ............................................................ 90,000
Manufacturing overhead applied to work in process.. 720,000
Total manufacturing costs added to production ........ 1,260,0
Total manufacturing costs to account for ................. 1,410,0
Deduct: Ending work in process inventory ............... 70,0
Cost of goods manufactured ................................... $1,340,0

4. Unadjusted cost of goods sold:

Beginning finished goods inventory.................... $ 260,000
Add: Cost of goods manufactured...................... 1,340,000
Cost of goods available for sale ......................... 1,600,000
Deduct: Ending finished goods inventory ........... 400,000
Unadjusted cost of goods sold ........................... $1,200,000
The underapplied overhead can either be closed out to Cost of Goods
Sold or allocated between Work in Process, Finished Goods, and Cost of
Goods Sold based on the overhead applied during the year in the ending
balance in each of these accounts.

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Solutions Manual, Chapter 3 35
 Problem 3-14 (continued)
5. The amount of overhead cost in Work in Process was:
$24,000 direct materials cost × 160% = $38,400
The amount of direct labor cost in Work in Process is:
Total ending work in process .............. $70,000
Deduct: Direct materials .................... $24,000
Manufacturing overhead........ 38,400 62,400
Direct labor cost ................................. $ 7,600
The completed schedule of costs in Work in Process was:
Direct materials .................................. $24,000
Direct labor ........................................ 7,600
Manufacturing overhead ..................... 38,400
Work in process inventory................... $70,000

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36 Managerial Accounting, 17th Edition
 Problem 3-15 (120 minutes)

1. a. Raw Materials.................................... 200,000

Accounts Payable ......................... 200,000
b. Work in Process................................. 185,000
Raw Materials .............................. 185,000
c. Manufacturing Overhead .................... 63,000
Utilities Expense ................................ 7,000
Accounts Payable ......................... 70,000
d. Work in Process................................. 230,000
Manufacturing Overhead .................... 90,000
Salaries Expense ............................... 110,000
Salaries and Wages Payable .......... 430,000
e. Manufacturing Overhead .................... 54,000
Accounts Payable ......................... 54,000
f. Advertising Expense .......................... 136,000
Accounts Payable ......................... 136,000
g. Manufacturing Overhead .................... 76,000
Depreciation Expense ........................ 19,000
Accumulated Depreciation............. 95,000
h. Manufacturing Overhead .................... 102,000
Rent Expense .................................... 18,000
Accounts Payable ......................... 120,000
i. Work in Process................................. 390,000
Manufacturing Overhead............... 390,000
Predetermined = Estimated total manufacturing overhead cost
overhead rate Estimated total amount of the allocation base
$360,000
= = $400 per DLH
900 DLHs
975 actual DLH × $400 per DLH = $390,000

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Solutions Manual, Chapter 3 37
 Problem 3-15 (continued)

j. Finished Goods .................................. 770,000

Work in Process ............................ 770,000
k. Accounts Receivable........................... 1,200,000
Sales ............................................ 1,200,000
Cost of Goods Sold ............................. 800,000
Finished Goods ............................. 800,000

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38 Managerial Accounting, 17th Edition
 Problem 3-15 (continued)
2.
Accounts Receivable Sales
(k) 1,200,000 (k) 1,200,000

Raw Materials Cost of Goods Sold

Bal. 30,000 185,000 (k) 800,000
(a) 200,000 (b)
Bal. 45,000

Work in Process Manufacturing Overhead

Bal. 21,000 (j) 770,000 (c) 63,000 (i) 390,000
(b) 185,000 (d) 90,000
(d) 230,000 (e) 54,000
(i) 390,000 (g) 76,000
Bal. 56,000 (h) 102,000
Bal. 5,000

Finished Goods Advertising Expense

Bal. 60,000 (k) 800,000 (f) 136,000
(j) 770,000
Bal. 30,000

Accumulated Depreciation Utilities Expense

(g) 95,000 (c) 7,000

Accounts Payable Salaries Expense

(a) 200,000 (d) 110,000
(c) 70,000
(e) 54,000 Depreciation Expense
(f) 136,000 (g) 19,000
(h) 120,000

Salaries & Wages Payable Rent Expense

(d) 430,000 (h) 18,000

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Solutions Manual, Chapter 3 39
 Problem 3-15 (continued)
3. Schedule of Cost of Goods Manufactured

Beginning work in process inventory........................ $21,00

Direct materials:
Beginning raw materials inventory ...................... $ 30,000
Add: Purchases of raw materials ......................... 200,000
Total raw materials available .............................. 230,000
Deduct: Ending raw materials inventory .............. 45,000
Direct materials used in production ......................... 185,000
Direct labor ............................................................ 230,000
Manufacturing overhead applied to work in process.. 390,000
Total manufacturing costs added to production ........ 805,00
Total manufacturing costs to account for ................. 826,00
Deduct: Ending work in process inventory ............... 56,00
Cost of goods manufactured ................................... $770,00

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40 Managerial Accounting, 17th Edition
 Problem 3-15 (continued)
4. Manufacturing Overhead ........................... 5,000
Cost of Goods Sold .............................. 5,000

Schedule of cost of goods sold:

Beginning finished goods inventory ......... $ 60,000
Add: Cost of goods manufactured ........... 770,000
Cost of goods available for sale .............. 830,000
Deduct: Ending finished goods inventory . 30,000
Unadjusted cost of goods sold ................ 800,000
Deduct: Overapplied overhead................ 5,000
Adjusted cost of goods sold .................... $795,000

5. Froya Fabrikker A/S

Income Statement
Sales ..................................................... $1,200,000
Cost of goods sold.................................. 795,000
Gross margin ......................................... 405,000
Selling and administrative expenses:
Advertising expense ............................. $136,000
Utilities expense .................................. 7,000
Salaries expense .................................. 110,000
Depreciation expense........................... 19,000
Rent expense ...................................... 18,000 290,000
Net operating income ............................. $ 115,000

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Solutions Manual, Chapter 3 41
 Problem 3-16 (60 minutes)

1. a. Raw Materials ......................................... 275,000

Accounts Payable .............................. 275,000
b. Work in Process ...................................... 220,000
Manufacturing Overhead ......................... 60,000
Raw Materials.................................... 280,000
c. Work in Process ...................................... 180,000
Manufacturing Overhead ......................... 72,000
Sales Commissions Expense .................... 63,000
Administrative Salaries Expense ............... 90,000
Salaries and Wages Payable ............... 405,000
d. Manufacturing Overhead ......................... 13,000
Rent Expense ......................................... 5,000
Accounts Payable .............................. 18,000
e. Manufacturing Overhead ......................... 57,000
Accounts Payable .............................. 57,000
f. Advertising Expense ................................ 140,000
Accounts Payable .............................. 140,000
g. Manufacturing Overhead ......................... 88,000
Depreciation Expense.............................. 12,000
Accumulated Depreciation .................. 100,000
h. Work in Process ...................................... 297,000
Manufacturing Overhead .................... 297,000
Predetermined = Estimated total manufacturing overhead cost
overhead rate Estimated total amount of the allocation base
$330,000 165% of
= =
$200,000 direct labor cost direct labor cost
$180,000 actual direct labor cost × 165% = $297,000

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42 Managerial Accounting, 17th Edition
 Problem 3-16 (continued)

i. Finished Goods ....................................... 675,000

Work in Process ................................. 675,000
j. Cash ...................................................... 1,250,000
Sales ................................................. 1,250,000
Cost of Goods Sold .................................. 700,000
Finished Goods .................................. 700,000

2.
Raw Materials Work in Process
Bal. 25,000 (b) 280,000 Bal. 10,000 (i) 675,000
(a) 275,000 (b) 220,000
Bal. 20,000 (c) 180,000
(h) 297,000
Bal. 32,000

Finished Goods Manufacturing Overhead

Bal. 40,000 (j) 700,000 (b) 60,000 (h) 297,000
(i) 675,000 (c) 72,000
Bal. 15,000 (d) 13,000
(e) 57,000
(g) 88,000
Bal. 7,000

Cost of Goods Sold

(j) 700,000

3. Manufacturing overhead is overapplied by $7,000 for the year. The en-

try to close this balance to Cost of Goods Sold would be:
Manufacturing Overhead..................................... 7,000
Cost of Goods Sold ........................................ 7,000

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Solutions Manual, Chapter 3 43
 Problem 3-16 (continued)
4.
Gold Nest Company
Income Statement
Sales ..................................................... $1,250,000
Cost of goods sold
($700,000 - $7,000) ............................. 693,000
Gross margin ......................................... 557,000
Selling and administrative expenses:
Sales commissions ............................... $63,000
Administrative salaries expense ............ 90,000
Rent expense ...................................... 5,000
Advertising expense ............................. 140,000
Depreciation expense ........................... 12,000 310,000
Net operating income ............................. $ 247,000

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44 Managerial Accounting, 17th Edition
 Problem 3-17 (60 minutes)
1. and 2.

Cash Accounts Receivable

Bal. 63,000 (m) 785,000 Bal. 102,000 (l) 850,000
(l) 850,000 (k) 925,000
Bal. 128,000 Bal. 177,000

Raw Materials Prepaid Insurance

Bal. 30,000 (b) 200,000 Bal. 9,000 (g) 7,000
(a) 185,000 Bal. 2,000
Bal. 15,000

Videos in Process Finished Goods

Bal. 45,000 (j) 550,000 Bal. 81,000 (k) 600,000
(b) 170,000 (j) 550,000
(f) 82,000 Bal. 31,000
(i) 290,000
Bal. 37,000

Studio and Equipment Accumulated Depreciation

Bal. 730,000 Bal. 210,000
(d) 84,000
Bal. 294,000

Studio Overhead Depreciation Expense

(b) 30,000 * (i) 290,000 (d) 21,000
(c) 72,000
(d) 63,000
(f) 110,000
(g) 5,600 Insurance Expense
Bal. 9,400 (g) 1,400
(n) 9,400

* $280,000 ÷ 7,000 hours = $40 per hour;

7,250 hours × $40 per hour = $290,000

Advertising Expense Miscellaneous Expense

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Solutions Manual, Chapter 3 45
 (e) 130,000 (h) 8,600

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46 Managerial Accounting, 17th Edition
 Problem 3-17 (continued)
Administrative Salaries Expense Sales
(f) 95,000 (k) 925,000

Cost of Goods Sold Accounts Payable

(k) 600,000 (n) 9,400 (m) 500,000 Bal. 160,000
(a) 185,000
Bal. 590,600 (c) 72,000
(e) 130,000
(h) 8,600
Bal. 55,600

Salaries & Wages Payable

(m) 285,000 (f) 287,000
Bal. 2,000

Capital Stock Retained Earnings

Bal. 420,000 Bal. 270,000

3. Overhead is overapplied for the year by $9,400. Entry (n) above records
the closing of this overapplied overhead balance to Cost of Goods Sold.

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Solutions Manual, Chapter 3 47
 Problem 3-17 (continued)

4. Schedule of Cost of Goods Manufactured

Beginning videos in process inventory ..................... $ 45,000

Direct materials:
Beginning raw materials inventory ...................... $ 30,000
Add: Purchases of raw materials ......................... 185,000
Total raw materials available .............................. 215,000
Deduct: Ending raw materials inventory .............. 15,000
Raw materials used in production ....................... 200,000
Deduct: indirect materials used in production ...... 30,000
Direct materials used in production ......................... 170,000
Direct labor ............................................................ 82,000
Manufacturing overhead applied to work in process.. 290,000
Total manufacturing costs added to production ........ 542,000
Total manufacturing costs to account for ................. 587,000
Deduct: Ending videos in process inventory ............. 37,000
Cost of goods manufactured ................................... $550,000

The cost of goods manufactured from this schedule ($550,000) agrees with transaction “j.”

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tion.
48 Managerial Accounting, 17th Edition
Problem 3-17 (continued)

5.
Supreme Videos, Inc.
Schedule of Cost of Goods Sold
Beginning finished goods inventory......... $ 81,000
Add: Cost of goods manufactured........... 550,000
Cost of goods available for sale .............. 631,000
Deduct: Ending finished goods inventory 31,000
Unadjusted cost of goods sold ................ 600,000
Deduct: Overapplied overhead ............... 9,400
Adjusted cost of goods sold.................... $590,600

The unadjusted cost of goods sold ($600,000) agrees with transaction “k.”

6.
Supreme Videos, Inc.
Income Statement
For the Year Ended December 31
Sales .......................................................... $925,000
Cost of goods sold ($600,000 – $9,400) ....... 590,600
Gross margin .............................................. 334,400
Selling and administrative expenses:
Depreciation expense ................................ $ 21,000
Advertising expense .................................. 130,000
Administrative salaries .............................. 95,000
Insurance expense.................................... 1,400
Miscellaneous expense .............................. 8,600 256,000
Net operating income .................................. $ 78,400
Case 3-18 (45 minutes)
1. Shaving 5% off the estimated direct labor-hours in the predetermined
overhead rate will result in an artificially high overhead rate. The artifi-
cially high predetermined overhead rate is likely to result in overapplied
overhead for the year. The cumulative effect of overapplying the over-
head throughout the year is all recognized in December when the bal-
ance in the Manufacturing Overhead account is closed out to Cost of
Goods Sold. If the balance were closed out every month or every quar-
ter, this effect would be dissipated over the course of the year.

2. This question may generate lively debate. Where should Terri Ronsin’s
loyalties lie? Is she working for the general manager of the division or
for the corporate controller? Is there anything wrong with the “Christ-
mas bonus”? How far should Terri go in bucking her boss on a new job?
While individuals can certainly disagree about what Terri should do,
some of the facts are indisputable. First, understating direct labor-hours
artificially inflates the overhead rate. This has the effect of inflating the
Cost of Goods Sold in all months prior to December and overstating the
costs of inventories. In December, the huge adjustment for overapplied
overhead provides a big boost to net operating income. Therefore, the
practice results in distortions in the pattern of net operating income over
the year. In addition, because all of the adjustment is taken to Cost of
Goods Sold, inventories are still overstated at year-end. This means, of
course, that the net operating income for the entire year is also over-
stated.
While Terri is in an extremely difficult position, her responsibilities under
the IMA’s Statement of Ethical Professional Practice seem to be clear.
The Credibility Standard states that management accountants have a re-
sponsibility to “disclose all relevant information that could reasonably be
expected to influence an intended user’s understanding of the reports,
analyses or recommendations.” In our opinion, Terri should discuss this
situation with her immediate supervisor in the controller’s office at cor-
porate headquarters. This step may bring her into direct conflict with
the general manager of the division, so it would be a very difficult deci-
sion for her to make.
Case 3-18 (continued)
In the actual situation that this case is based on, the corporate control-
ler’s staff were aware of the general manager’s accounting tricks, but
top management of the company supported the general manager be-
cause “he comes through with the results” and could be relied on to hit
the annual profit targets for his division. Personally, we would be very
uncomfortable supporting a manager who will resort to deliberate dis-
tortions to achieve “results.” If the manager will pull tricks in this area,
what else might he be doing that is questionable or even perhaps ille-
gal?
Appendix 3A
Job-Order Costing: A Microsoft Excel-Based Approach

Exercise 3A-1 (20 minutes)

The transactions are recorded as follows:

Work
Raw in Finished Manufacturing Retained
Transaction Cash Materials Process Goods Overhead Earnings
a. $(56,000) $56,000 =
b. $(40,000) $40,000 =
c. $35,000 $(35,000) =
d. $(110,000) $110,000 =
e. $(90,000) = $(90,000)
f. $160,000 = $160,000
g. $(18,000) = $(18,000)
Exercise 3A-2 (20 minutes)
The transactions are recorded as follows:

Work
in Manufacturing Prepaid PP&E Accounts Retained
Transaction Process Overhead Expenses (net) Payable Earnings
a. $80,000 = $80,000
b. $28,000 $(35,000) = $(7,000)
c. $1,875 $(2,500) = $(625)
d. $115,000 $(115,000) =
e. $5,125 = $5,125
Exercise 3A-3 (20 minutes)
The transactions are recorded as follows:

Retained Earnings
Transaction Yes No
a. √
b. √
c. $(45,000)
d. $(21,000)
e. $450,000
f. √
g. √
h. √
i. √
j. $(220,000)
k. √
Problem 3A-4 (45 minutes)

The transactions are recorded as shown below. The ending balance sheet balances are calculated in row
20 of the spreadsheet.

2. Since Morrison Company does not pay any dividends, its net operating income for the month of Janu-
ary equals the change in the balance of its Retained Earnings account ($255,800 ‒ $247,000 =
$8,800).
Problem 3A-5 (60 minutes)

1. The transactions are recorded as shown below. The ending balance sheet balances are calculated
in row 22 of the spreadsheet.
Problem 3A-5 (continued)

2. The schedule of cost of goods manufactured is prepared as shown be-

low.

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Solutions Manual, Chapter 3 57
Problem 3A-5 (continued)

3. The schedule of cost of goods sold is prepared as shown below:

4. The income statement is prepared as shown below:

Problem 3A-6 (60 minutes)

1. The transactions are recorded as shown below. The ending balance sheet balances are calculated
in row 20 of the spreadsheet.

© The McGraw-Hill Companies, Inc., 2015. All rights reserved.

Solutions Manual, Appendix 3A 59
Problem 3A-6 (continued)

The formula for computing the cost of goods manufactured that is included
in the spreadsheet for requirement 1 is as follows:

Beginning work in process ...................... $ 14,000

Total manufacturing costs: .....................
Direct materials .................................... $67,000
Direct labor .......................................... 102,000
Manufacturing overhead applied ........... 101,000 270,000
Total costs to account for ....................... 284,000
Deduct: Ending work in process .............. 5,000
Cost of goods manufactured ................... $279,000

The formula for computing the unadjusted cost of goods sold that is in-
cluded in the spreadsheet for requirement 1 is as follows:

Beginning finished goods ........................ $ 22,000

Cost of goods manufactured ................... 279,000
Cost of goods available for sale ............... 301,000
Deduct: Ending finished goods ................ 6,000
Unadjusted cost of goods sold ................ $295,000

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60 Managerial Accounting, 17th Edition
Problem 3A-6 (continued)

2. The schedule of the cost of goods manufactured is as follows:

© The McGraw-Hill Companies, Inc., 2021. All rights reserved.

Solutions Manual, Chapter 3 61
Problem 3A-6 (continued)

3. The schedule of cost of goods sold is as follows:

4. The income statement is as follows:

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62 Managerial Accounting, 17th Edition