ACC203: Managerial Accounting

Rits Limited manufactures wrist watches for various brands. The company designs and assembles products according to customers specifications, which may include alarms, straps or other electronic and aesthetic functions. Rits uses normal costing to cost its job orders and applies plant-wide manufacturing overhead (MOH) based on direct labour hours (DLH). Over or under-applied overhead is closed to Cost of Goods Sold (COGS) annually on 31st December. Rits sells its products on fixed price or cost plus basis.

The watches are designed in the Design Department with computer-aided design software using a state of the art machine. Once the design is approved, the material is sourced from contract manufacturers and the products are manually assembled in the Assembly Department. The assembly workers are paid an hourly rate of $8 per DLH and the designers are paid a lump sum fee based on the complexity of each job. The designer is also responsible to oversee the completion of the assigned job order. In consideration of the added responsibilities, they are entitled to an incentive payment equal to 15% of gross profit (computed based on normal product cost) for each job order completed within specified deadline. For product costing purposes, the company treats all bonuses and incentive payments as period expenses, and all spoilage as abnormal spoilage specific to each job. As such, the designer has incentive to complete the jobs in a cost effective and timely manner.

Ritss budgeted MOH, DLH and Machine Hours (MH) for the year 2018 are estimated as follows.

	MOH	DLH	MH
Design Department Variable	$2,400,000	10,000	12,000
Assembly Department Variable	$1,200,000	240,000	2,000
Assembly Department Fixed	$2,400,000

Appended below are relevant data for three job orders processed by Rits during December 2018.

Job Order	#220	#221	#223
Quantity in units	4,000	4,000	2,000
Contract Price	$360,000	$300,000	Cost plus**
Direct Materials	$225,000	$232,000	$126,000
Designer fee	$5,000	$8,000	$12,000
Assembly labour	$18,000	$9,000*	$7,200

* 40% assembled

** Normal Product Costs plus 30%

Jobs #220 and #223 were completed within their respective specified deadlines and Job #221 is still in progress. Job #220 was delivered and billed in the last week of December 2018. Accounting entries in the ledger account for Job #220 are as follows before MOH was posted in December 2018:

Work in Process	#220
Direct Materials	$225,000
Designer Fee	$5,000
Assembly Labour	$18,000

The balance, as at 30 November 2018, in the MOH account was $9,250 Dr. In December 2018, actual MOH incurred was $109,350 and applied MOH for the 3 jobs were yet to be recorded. Job #221 is an order for leather strap dress watches. The purchaser for raw material made an error on the leather straps ordered. The strap was 4 cm longer than required. When the error was discovered, production operators cut away the extra leather and discarded the extras as they could not be re-used. The additional leather costs 98 cents more per unit. The entire cost of leather straps was included in the material cost charged to the accounts.

Willen, a designer and account manager for Jobs #220 and #223 complained that the companys policy on overhead application cost him to earn less incentive payment for both jobs. He suggests that MOH should be applied using departmental rates based on appropriate cost drivers. With the help of other designers, he obtained the machine times used in the Design department for Jobs #220 and #223 were 40 hours and 50 hours respectively.

In January 2019, there was a phone call from the customer of Job #221 informing Rits that 50 units of watches were found to have broken glass faces. Rits has accepted responsibility for the return of the watches and the customer does not want replacements.

Required:

1. Compute and record the necessary journal entries to account for the production costs and sales of Job #220 completed in the last week of December 2018. (8 marks)
2. Based on information obtained in January 2019 from the customer of Job #220, prepare necessary journal entries to record the costs related to the return of the 50 damaged units. Explain the impact on profits of Job #220 if the damaged units were treated as normal spoilage instead (show workings where relevant). (4 marks)
3. Compute the total amount of additional product costs that Rits will incur if, during 2018, the customer for Job #221 requested to increase the order from 4,000 to 5,000 units. State your assumptions where applicable. (11 marks)

*This is all the information that the question was given, everything is word for word