Acct 552

Case Study 2

Job-Order Costing

The McMahon Construction Company builds bridges. In September and October 20XX, the company worked on a bridge covering the Kleinfeld River in Northern Montana. The McMahon Company has two departments, the Precast Department and the Construction Department. The Precast Department is responsible for building structural elements of bridges in temporary locations (plants) located near the construction sites. The Construction Department operates at the bridge site and they are responsible for assembling the precast structural elements. The estimated costs for Kleinfeld River Bridge for the Precast Department were $ 1,750,000 for direct materials, $ 240,000 for direct labor, and $300,000 for overhead. The estimated costs for the Construction Department regarding the Kleinfeld River Bridge were $ 400,000 for direct materials, $ 180,000 for direct labor, and $ 260,000 for overhead. Overhead is applied on the last day of the month. The Overhead application rate for the Precast Department is $ 30 per direct labor hour. The Overhead application for the Construction Department is 150 percent of direct labor cost.

Transactions for September

Sept 1- Purchased $ 1,170,000 of material on account for the Precast Department to start the building of structural elements. All of the material was issued to production, of the issuance amount, $ 720,000 is considered direct material.

Sept 4- Installed utilities at bridge site at a total cost of $30,000. The amount will be paid later in the month. (Transaction applies to Construction Department)

Sept 6-Paid rent for the temporary construction site housing the Precast Department, $ 7,200.

Sept 15- Completed the bridge support pillars by the Precast Department and transfer everything to the construction site.

Sept 19- Paid machine rental expense of $ 65,000 incurred by the Construction Department for clearing the bridge site and digging the foundations for bridge supports.

Sept 23- Purchased additional materials costing $1,510,000 on account.

Sept 30-The company paid the bills for the Precast Department: utilities, $ 7,200; direct labor, $50,000; insurance, $ 6,700, indirect labor, $ 8,200. Departmental depreciation was recorded, $21,500.

Sept 30-The company paid the bills for the Construction Department: utilities, $ 2,600; direct labor, $19,500; indirect labor, $6,100; and insurance, $ 2,500. Department depreciation was recorded on equipment, $ 9,450.

Sept 30- Issued a check to pay for the material purchased on Sept 1 and Sept 23.

Sept 30-Applied overhead to production in each department; 6,400 machine hours were worked in the Precast Department for September. Note: Direct Labor Costs for the Construction Department were $19,500.

Transactions for October

Oct 1- Transferred additional structural elements from the Precast Department to the construction site. The construction department incurred an expense of $ 7,000 to rent a crane.

Oct 4- Issued $1,010,000 of material to the Precast Department. Of this amount, $860,000 was considered direct.

Oct 7- Paid rent of cash of $ 7,500 in cash for the temporary site that is occupied by the Precast Department.

Oct 12-Issued $ 390,000 of material to the Construction Department. Of this amount, $ 220,000 was considered direct.

Oct 15-Transferred additional structural elements from the Precast Department to the construction site.

Oct 25-Transferred the final batch of structural elements from the Precast Department to the construction site.

Oct 29-Completed the bridge.

Oct 31-Paid the final bills for the month in the Precast Department: utilities, $ 14,000; direct labor, $120,000; insurance, $10,200; indirect labor, $18,300. Department depreciation was recorded, $21,500.

Oct 31-Paid the final bills for the month in the Construction Department: utilities, $ 5,300; direct labor, $144,500; indirect labor, $19,200; and insurance, $ 7,400. Depreciation was recorded on equipment was $9,450.

Oct 31-Applied overhead in each department. The precast department recorded 4,120 machine hours in October.

Oct 31-Billed the state of Montana for the completed bridge at the contract price of $3,850,000.

Oct 31-Please record the cost of the completed jobs to Finished Goods Inventory.

Instructions

1.Please journalize the entries for the preceding transactions. For purposes of this case study it is not necessary to transfer direct material and direct labor from one department to another.

2.Post the entries to T-accounts. (Please use the following accounts: Raw Materials, Mfg Overhead-Precast Department, Mfg Overhead-Construction Department, Work in Process-Precast Department; Work in Process-Construction Department; Finished Goods Inventory; Cost of Goods Sold).

3.Please prepare a job order cost sheet and include the estimated costs for the construction of the bridge.

4.Please comment on McMahon Construction Company's estimates in comparison to its actual costs.