WEEK 4

JOB COSTING (MANAGEMENT AND COST ACCOUNTING 200)

PRACTICE QUESTIONS AND SOLUTIONS AND PREPARED QUESTIONS

PREPARED SOLUTIONS

PREPARED SOLUTIONS:
MHAM (UKZN Assessment) 45 MINS
KENT (PTY) LTD 45 MINS
KINGFURN (ABRIDGED) (UKZN Assessment) 40 MINS
QUESTION IM6.2 (PAGE 173)

MHAM (UKZN Assessment) (30 MARKS: 45 MINS)

SUGGESTED SOLUTION QUESTION 1 PART 1 (3 marks)

A job costing system is recommended where each unit or batch of output a company produces is unique .
Alternatively a process costing system is recommended where the company mass produces similar product or
services in a continuous process . In this instance a job costing system is more appropriate as nearly all the jobs
are significantly different and require different resources.

SUGGESTED SOLUTION QUESTION 1 PART 2 (maximum 6 marks)

Pre-determined vs Actual Overhead Rates

The calculation of overhead rates based on the actual overheads incurred during the accounting period causes a
number of problems. Firstly, the product cost calculations have to be delayed until the end of the accounting period,
since the overhead rate calculations cannot be obtained before this date. Information on product costs is required
quickly if it is to be used for monthly profit calculations and inventory valuations or as a basis for setting selling
prices. Secondly, one may argue that the timing problem can be resolved by calculating actual overhead rates at
more frequent intervals, say on a monthly basis. The objection to this proposal is that a large amount of overhead
expenditure is fixed in the short term whereas activity will vary from month to month, giving large fluctuations in the
overhead rates.

Such fluctuating overhead rates are not representative of typical, normal production conditions. Management has
committed itself to a specific level of fixed costs in the light of foreseeable needs for beyond one month. Thus, where
production fluctuates, monthly overhead rates may be volatile. Furthermore; some costs such as repairs,
maintenance and heating are not incurred evenly throughout the year. Therefore, if monthly overhead rates are

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 used, these costs will not be allocated fairly to output. Heating costs, for example, would be charged only to winter
production so that products produced in winter would be more expensive than those produced in summer.

SUGGESTED SOLUTION QUESTION 1 PART 3 (2 marks)

Pre-determined overhead rate applied = Overhead applied/ amount of actual activity

We use actual activity here, not normal activity, because we are effectively working backwards to recalculate pre-
determined overhead rate.
Pre-determined overhead rate = R2 800/ R14 000 material cost
Pre-determined overhead rate = R1 360/ R6 800 material cost
Pre-determined overhead rate = R4 160/ R20 800 material cost
Pre-determined overhead rate = 20% of material
Overheads applied to WIP = 20% x R100 000 = R20 000

SUGGESTED SOLUTION QUESTION 1 PART 4 (16 marks)

2
Working 1

Pre-determined overhead rate = Budgeted overhead/normal capacity

Pre-determined overhead rate = R123 200/ 5 600 direct labour hours

Pre-determined overhead rate = R22/ direct labour hours

Overheads applied to WIP = R22 x 790 direct labour hours = R17 380

Working 2

R
Indirect material 11 000
Indirect labour 4 400
Power and lights 1 200
Maintenance 300
Insurance 400
Miscellaneous 200
Depreciation 300
Actual manufacturing o/heads 17 800
Absorbed manufacturing o/heads 17 380
Under absorbed manufacturing o/heads 420

SUGGESTED SOLUTION QUESTION 1 PART 5 (3 marks)

Sales R330,000
- Cost of goods sold R140,260
Amount transferred from WIP R139,840
Under applied overheads R420
Gross profit R189,740

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KENT (PTY) LTD
1. budgeted manufacturing overhead
Predetermined overhead rate =
budgeted machine hours
15,202,000
=
69,100
= R 220 per machine hour
2.
(a) Raw material inventory 82,400
Accounts payable 82,400
(b) Work in process inventory 1,960
Raw material inventory 1,960
(c) Manufacturing overhead 320
Manufacturing supplies inventory 320
(d) Manufacturing overhead 9,000
Cash 9,000
(e) Work in process inventory 735,000
Wages payable 735,000
(f) Selling and administrative expense 21,000
Prepaid insurance 21,000
(g) Raw material inventory 28,000
Accounts payable 28,000
(h) Accounts payable 18,500
Cash 18,500
(i) Manufacturing overhead 190,000
Wages payable 190,000
(j) Manufacturing overhead 85,000
Accumulated depreciation: equipment 85,000
(k) Finished goods inventory 12,000
Work in process inventory 12,000
(l) Work in process inventory 1,430,000 *
Manufacturing overhead 1,430,000
*Applied manufacturing overhead = 6500 machine hours
xR220 per hour

(m) Accounts receivable 1,810,000

Sales revenue 1,810,000
Cost of goods sold 1,425,000
Finished goods inventory 1,425,000

Note: Narrations should be included for all journal entries.

Journal (l) continued for the under/over-recovery:
Dr Manufacturing overhead 1 145 680
Cr Cost of sales (over-recovery) 1 145 680

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KINGFURN (ABRIDGED)(UKZN Assessment)

SUGGESTED SOLUTION

Required 1

Fixed costs are cost that does not increase in total as output increases and decrease in total as
output decreases over a relevant range. For example, production manager’s salary is fixed for the
year until the next annual increase.

Variable costs are costs that increase in total as output increases and decreases in total as output
decreases. For example direct material costs (fabric, or mahogany or oak wood), increases in
proportion to the number of units of products produced.

Mixed costs are costs that have both a fixed and a variable component. For example telephone
costs include the fixed rental for the telephone line plus the amount based on the number of calls
made.

Required 2

Total budgeted manufacturing overheads/ Budgeted machine hours

Budgeted manufacturing overheads

Depreciation on the plant 5 000

Production manager’s salary 25 000

Electricity for the plant 15 000

Supervisor’s salary 20 000

Total overheads 65 000

Level of Activity R65 000/6 400

OAR = R10.16 per machine hour

Depreciation of an office printer is not a manufacturing overhead therefore excluded

Telephone costs for marketing - not a manufacturing overhead therefore excluded

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Required 3

Direct material inventory

Bank R50,000 WIP R15,000
Balance c/d R35,000
R50,000 R50,000
Balance b/d R35,000

Direct wages payable

Bank R31,000 WIP R31,000
R31,000 R31,000

Manufacturing overheads
Account payable R17,000 WIP R16,256
COS R744
R17,000 R17,000

WIP
Direct materials R15,000 Finished goods R62,256
Direct wages R31,000
Manufacturing o/heads R16,256
R62,256 R62,256

Finished goods
WIP R62,256 COS R62,256
R62,256 R62,256

Cost of goods sold

Finished goods R62,256 Profit and loss R63,000
Manufacturing overheads R744
R63,000 R63,000

Workings

2. Direct labour costs (R20*1 550) = R31 000

3. Applied overheads(1 600*R10.16)= R16 256

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Required 4

In this case electricity costs will be classified as mixed costs, because as illustrated below it consists
of both a variable and fixed element.

High-low method will be used to split between variable and fixed costs

R20 000 – R15 000

6 jobs – 4 jobs

Variable costs =R2500 per job

y = mx + c

R20 000= R2500* 6 + fixed costs

Fixed costs = R5 000

Solution IM 6.2

Workings
Gross wages paid
(R)
Direct (25,520 hours × R57.60) 1,469,952
(2,120 overtime hours × R17.28) 36,634
1,506,586
Indirect (4,430 hours × R46.80) 207,324
Indirect (380 hours × R14.04) 5,335
212,659
Tax and employees’ national insurance
(R)
Direct (R1,506,586 – R1,175,460) 331,126
Indirect (R212,659 – R155,308 R166 308) 57,351 46351

Productive hours (7,200 + 11,600 + 4,400) 23,200 hours

Direct labour unproductive labour hours (25,520 – 23,200) 2,320 hours
Productive hours charged to WIP (23,200 × R57.60) R1,336,320
Charge to production overhead
(R) (R)
Gross wages of indirect workers 212,659
Overtime premium (direct workers) 36,634
Unproductive time of direct workers (2,320 × R57.60) 133,632 382,925
Wages control account
(R) (R)
Cash/bank (net wages): WIP 1,336,320
Direct 1,175,460 Production overhead 393,925 382925
Indirect 166,308
Tax and national
Insurance 388,477 377477
1,730,245 1719245 1,730,245 1719245