Question 1 (20 marks)

Sam Company uses job-order costing system to record and track the costs of its projects. The following

information is provided for the decorating projects in January 2020:

Project AQ01 Project AQ02

Direct labour hours 300 450

Machine hours 100 120

Direct materials $108,000 $150,000

Direct labour cost $520,000 $480,000

There was no work in process at the beginning of January 2020. Actual manufacturing overhead costs were

$36,000 for January 2020.

Sam computes its predetermined overhead rate annually on the basis of machine hours. At the beginning of

2020, Sam estimated that its total manufacturing overhead would be $900,000, the total direct labour cost

would be $6,000,000, and the company would work a total of 40,000 direct labour hours and 5,000 machine hours

on all projects.

Required:

(a) Project AQ01 was successfully completed and sold on 31 January 2020. Determine the job cost of

Project AQ01 and its contract price if the markup percentage of this job is 50%. (5 marks)

(b) Assume that the company allocates any underapplied or overapplied manufacturing overhead to work

in process, finished goods and cost of goods sold on the basis of 2:2:6, prepare the adjusting entry to

show the allocation for January 2020. (8 marks)

(c) Sam Company has just completed a major change in its quality control (QC) process. Previously,

products had been reviewed by QC inspectors at the end of each major process, and the compensation

of company's eight QC inspectors were charged as direct labour to the operation or job. In an effort to

improve efficiency and quality, a computerized video QC system will be purchased in 2021 for $500,000.

The machining staff will be offered voluntary redundancy. The company's President is confused. His

Director of Operation has told him how efficient the new system is, yet there is a large increase in the

manufacturing overhead rate. The information for automation in 2021 is shown below:

2021

Budgeted manufacturing overhead $1,500,000

Budgeted direct labour cost $5,000,000

Budgeted machine hours 6,000 hours

"Budgeted manufacturing overhead cost for 2021 increased significantly," lamented the President, "how

can we compete with such a high manufacturing overhead rate?"

(i) Explain why companies develop manufacturing overhead rates. (2 marks)

(ii) Explain why the increase in the manufacturing overhead cost should not have a negative financial

impact on Sam Company. (2 marks)

(iii) Explain what other factors Sam Company should take into account before deciding whether or

not to purchase the computerized video QC system. (3 marks)