Question

Exercise 15-12

Don Lieberman and Associates, a CPA firm, uses job order costing to capture the costs of its audit jobs. There were no audit jobs in process at the beginning of November. Listed below are data concerning the three audit jobs conducted during November.

		Lynn		Brian		Mike
Direct materials		$630		$440		$210
Auditor labor costs		$5,700		$7,260		$4,260
Auditor hours		77		89		51

Overhead costs are applied to jobs on the basis of auditor hours, and the predetermined overhead rate is $54 per auditor hour. The Lynn job is the only incomplete job at the end of November. Actual overhead for the month was $13,610.

(a) Determine the cost of each job.

		Cost
Lynn		$
Brian		$
Mike		$

(b) Indicate the balance of the Service Contracts in Process account at the end of November.

Balance in service contracts in process account

$

(c) Calculate the ending balance of the Operating Overhead account for November.

Balance in operating overhead account

$

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Answer 1

Concepts and reason

Costing: It can be referred as estimation of cost of a product or service. It is a comprehensive term which includes controlling of costs other than only calculating the costs.

Methods of Costing: Ascertainment of cost differs in various industries. It depends on the type of industry that which method must be followed or what technique of costing is most suitable. Most common methods used by manufacturing industries are:

• Job Costing

• Contract Costing

• Batch Costing

• Process Costing

• Activity based costing

Job Costing: It is a type of costing in which costs are classified according to various jobs. The revenues and expenses of each job are accounted separately and job profitability is analyzed for further improvements. Generally, batches of products are considered as a single job and accounted for in the books in a single job sheet.

Fundamentals

Job Costing- Nature and Usage: This method of costing is used when the products manufactured by the entity are different from each other. Instead of a comprehensive costing, a costing divided in to fractions is used which is termed as Job Costing.

The Process: To calculate the cost attributable to each job, firstly, the materials, labor and thereafter overheads are added. Materials relating to any job are taken from material requisitions, labor charges from the tickets issued in the payroll department and overheads are allocated based on the consumption in each department.

(a)

Prepare the statement as shown below to find total cost under each job:

(b)

The balance of service contracts in process at the end of November is $10,488.

(c)

The actual overheads for the month of November are $13,610 whereas the applied overheads are calculated based on the rates given in the problem. Prepare the statement as shown below to calculate the applied overheads:

The difference between the actual and applied overheads is the balance that remains in the overheads account at the end of the year. The ending balance of the account is $1,892 ($13,610 - $11,718).

Ans: Part a

The total costs of audit jobs performed by Lynn, Brian and Mike are $10,488, $12,506 and $7,224.

Part b

The balance of service contracts in process at the end of November is $10,488.

Part c

The ending balance in the overheads account is $1,892.