Question

Cost Estimation, Estimating Overhead Rates, Job Costing, and Decision Making

O’Leary Corporation manufactures special-purpose portable structures (huts, mobile offices, and so on) for use at construction sites. It only builds to order (each unit is built to customer specifications). O’Leary uses a normal job costing system. Direct labor at O’Leary is paid $17 per hour, but the employees are not paid if they are not working on jobs. Manufacturing overhead is assigned to jobs by a predetermined rate on the basis of direct labor-hours. The company incurred manufacturing overhead costs during two recent years (adjusted for price-level changes using current prices and wage rates) as follows.

At the beginning of year 3, O’Leary has two jobs, which have not yet been delivered to customers. Job MC-270 was completed on December 27, year 2. It is scheduled to ship on January 7, year 3. Job MC-275 is still in progress. For the purpose of computing the predetermined overhead rate, O’Leary uses the previous year’s actual overhead rate. Data on direct material costs and direct labor-hours for these jobs in year 2 follow.

During year 3, O’Leary incurred the following direct material costs and direct labor-hours for all jobs worked in year 3, including the completion of Job MC-275.

At the end of year 3, there were four jobs that had not yet shipped. Data on these jobs follow.

Required

a. What was the amount in the beginning Finished Goods and beginning Work-in-Process accounts for year 3?

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b. O’Leary incurred direct materials costs of $57,000 and used an additional 300 hours in year 3 to complete job MC-275. What was the final (total) cost charged to job MC-275?

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c. What was over- or underapplied overhead for year 3?

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d. O’Leary prorates any over- or underapplied overhead to Cost of Goods Sold, Finished Goods Inventory, and Work-in-Process Inventory. Prepare the journal entry to prorate the over- or underapplied overhead computed in requirement (c).

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e. A customer has asked O’Leary to bid on a job to be completed in year 4. O’Leary estimates that the job will require about $92,500 in direct materials and 5,000 direct labor-hours. Because of the economy, O’Leary expects demand for its services to be low in year 4, and the CEO wants to bid aggressively but does not want to lose any money on the project. O’Leary estimates that there would be virtually no sales or administrative costs associated with this job. What is the minimum amount O’Leary can bid on the job and still not incur a loss?

Answer 1

Job Costing

A job is carried out by a firm only against an order placed by a buyer. It is not a pre manufactured one and can be product or service.

Each job is ensured the profitability before undertaken. What makes job accounting special is the the level at which aggregate of costs related with a job combined together and allotted to individual units of jobs. Before starting the work the customer want to know the expected expenditure. And in large private companies and governmental organizations , work is allotted on the basis of bidding. So estimating the costs and profitability is a must before undertaking the job.

Job costing system

Job work process includes the design ,drawing and identification of materials required for producing the required finished product by the fabrication and assembly department.

The resources for finishing in the form of material , labour and over head is procured by the job firm. As soon as the firm receives job order , it is entered in record known as job work sheet and a serial number allotted for identification purpose .

Books of accounts

The firms which under take job works will have such accounting records as job cost sheet, subsidiary ledger account and control accout. The records of a job shop consist of Inventory accounts, and procurement , utilization and transactions for each of the three resources can be obtained from these records from inventory books

Overhead rate

For overhead recording, predetermined rate is calculated as used for estimation purpose as explained below as and when requirement of a job cost estimation reqiurement occurs.

Using this rate the firm is able to calculate how much a particular job costs.

The difference of thease two accounts shows under applied over head (if actual overhead costs incurred in manufacturing overhead control account is in excess of applied overhead account) or over applied overhead (in case of oppsit situation)

Predetermined overhead rates under Job costing

Over head rates are prefixed for each job calculated using the formula

Service firms and job costing

In service firms , the cost object is the customer and and before bidding the profitability of the job has to be undertaken by legal, consulting, architectural aor accounting firm. The only difference is ther will be no direct material cost and the rest are same procedures.

A ratio is arrived based on actual overhead and under or overapplied overhead .The ratio shows how much percentage was the underor overhead applied overhead when compared to actual overhear incurred.

a)

b)