Question 1: Job-Order Costing [40 marks]

Quality boxes limited manufactures fine handcrafted, wooden jewellery boxes. The company uses a job costing system for its production costs, and manufacturing overhead is applied on the basis of direct labour costs to all jobs. It's predetermined manufacturing overhead rate is based on a cost formula that is estimated $390,000 of manufacturing overhead for an estimated activity level of $100,000 direct labor cost. During the month of July, the company processed three jobs: B50, C81, and G60, of which B50 was started in June.

July 1 July 31 Inventories:

Direct Materials $ 36,600 ?

Work-in-Process $ 41,200 ?

Finished Goods 0 0 Direct materials purchased in July $56,000 Direct materials issued to production:

B50 $ 16,500

C81 $ 25,020

G60 $ 14,050

Direct labour hours used for production ($30/hour) in July: B50 3,550 hours

C81 2,850 hours

G60 1,650 hours Other factory overhead costs incurred in July: Indirect labour $ 208,500

Rent $ 132,000

Utilities $ 218,250

Repairs and maintenance $ 189,000

Depreciation $ 131,600

Other expenses $ 56,500 Selling and administrative expenses incurred in July

Selling and administrative salaries $45,500 Advertising expenses $28,300 Administrative expenses $11,700 In July, Job B50 was completed and sold with a 20 percent mark-up. Jobs C81 and G60 were still in process.

2.Compute the companys predetermined overhead rate for July. Show your workings.

3.Compute the amount of underapplied or overapplied overhead for July. Show your workings.

4. What options are available for disposing of underapplied or overapplied overhead? Explain5.Prepare a schedule of cost of goods manufactured for the company for July (Hints: You need to figure out ending work-in-process inventory to prepare cost of goods manufactured amount

5.Prepare an income statement for the company for July. Assume that the companys underapplied or overapplied overhead is closed to the Cost of Goods Sold.

Question 1.5

Recently you have been appointed as the Management Accountant of Quality boxes company. Based on July performance, Kelly Megan, chief engineer, presented a proposal for automating the labour jobs. She suggested getting four robots that could replace the forty direct labour workers in the company. The cost savings outlined in Megans proposal included eliminating direct labour cost and reducing factory overhead cost to zero because the company currently charges factory overhead on the basis of direct labour costs using a plantwide rate (as requirement 1.1 above). The companys CEO, Sam Brown, is puzzled by Megans explanation of cost savings. The CEO has asked you to look into the matter and prepare a report for the next staff meeting. Your report should cover the following three issues: a. Describe the shortcomings of the companys current system for applying overhead. b. Explain the misconceptions in Kelley Megans argument that the manufacturing overhead cost would be reduced to zero if the automation proposal was implemented. c. Suggest ways to improve the allocation of overhead costs.