Question 1

You are required to Classify each of the following types of firms as either manufacturing or service. Explain the reasons for your choice in terms of the features of the service firms.

a. Bicycle production

b. Pharmaceuticals

c. Income tax preparation

d. Application of artificial nails

e. Glue production

f. Child care

Question 2

Elin Saunders, of Lawn Pro Company, designs and installs custom lawn and garden irrigation systems for homes and businesses throughout the province. Each job is different, requiring different materials and labour for installing the systems. Lawn Pro estimated the following for the year:

Number of installations 340

Number of direct labour hours 5440

Direct materials cost R102000

Direct labour cost R54400

Overhead cost R59840

During the year, the following actual amounts were experienced:

Number of installations 290

Number of direct labour hours 4 350

Direct materials cost R87000

Direct labour cost R43500

Overhead cost R53460

Required:

2.1 Should Lawn Pro use process costing or job costing? Explain.

2.2 If Lawn Pro uses a normal costing system and overhead is applied on the basis of direct labour hours, calculate the cost on an installation that takes R3500 of direct materials and 30 direct labour hours.

2.3 Explain why Lawn Pro would have difficulty using an actual costing system.

Question 3

During May, the following transactions were completed and reported by Jerico Company:

a. Materials purchased on account, R60100

b. Materials issued to production to fill job-order requisitions: direct materials R50000; indirect materials R8800.

c. Payroll for the month: direct labour R75000; indirect labour R36000; administrative R28000; sales R19000.

d. Depreciation on factory plant and equipment R10400.

e. Property taxes on the factory accrued during the month R1450

f. Insurance on the factory expired with a credit to the prepaid insurance account R6200

g. Factory utilities R5500

h. Advertising paid with cash R7900

i. Depreciation on office equipment R800; on sales vehicles R1650

j. Legal fees incurred but not yet paid for preparation of lease agreements R750

k. Overhead is charged to production at a rate or R18 per direct labour hour. Records show 4000 direct labour hours were worked during the month.

l. Cost of jobs completed during the month R160000

The company also reported the following beginning balances in its inventory accounts:

Materials inventory R7500

Work-in-process R37000

Finished Goods inventory R50000

Required:

3.1 Prepare journal entries to record the transactions occurring in May.

3.2 Prepare T-accounts for Materials Inventory, Overhead Control and Work-in-Process Inventory, and Finished Goods Inventory. Post all relevant entries to these accounts.

3.3 Prepare a statement of goods manufactured.

3.4 If the overhead variance is allocated to cost of goods sold, by how much will cost of goods sold decrease or increase?

Question 4

Management at Thomason Media has decided to allocate the costs of the papers two support departments (administration and human resources) to the two revenue-generating departments (advertising and circulation). Administration costs are to be allocated on the basis of Rands of assets employed; human resources costs are to be allocated on the basis of number of employees. The following costs and allocation bases are available:

Department

Direct Costs

Number of Employees

Rands of Assets Employed

Administration

R781 500

10

R387 100

Human resources

R492 700

7

R291 700

Advertising

R957 800

12

R762 400

Circulation

R1352 600

25

R1870 300

Totals

R3584 600

54

R3311 500

Required:

4.1 Using the direct method, allocate the support department costs to the revenue-generating departments.

4.2 Using the sequential method, allocate the support department costs to the revenue-generating departments.

4.3 Using the reciprocal method, allocate the support department costs to the revenue-generating departments.

Question 5

Plaid-Clad manufactures golf bags in a two-department process: Assembly and Finishing. The Assembly Department uses weighted average costing; the percentage completion of overhead in this department is unrelated to direct labour. The Finishing Department adds hardware to the assembled bags and uses FIFO costing; overhead is applied in this department on a direct labour basis. For June, the following production data and costs were gathered:

Assembly Department: Units

Beginning WIP inventory (100% complete for DM; 40% complete for DL and 30% complete for OH)

250

Units started

8 800

Ending WIP inventory (100% complete for DM; 70% complete for DL and 90% complete for OH)

400

Assembly Department: Costs

DM

DL

OH

Total

Beginning WIP inventory

3 755

690

250

4 695

Current period

100 320

63 606

27 681

191 607

Total costs

104 075

64 296

27 931

196 302

Finishing Department: Units

Beginning WIP inventory (100% complete for transferred in; 15% complete for DM and 40% complete for Conversion)

100

Units transferred in

8 650

Ending WIP inventory (100% complete for transferred in; 30% complete for DM and 65% complete for Conversion)

200

Finishing Department: Costs

Transferred in

DM

Conversion

Total

Beginning WIP inventory

2 176

30

95

2 301

Current period

188 570

15 471

21 600

225 641

Total costs

190 746

15 501

21 695

227 942

Required:

5.1 Prepare a Production Report for the Assembly Department.

5.2 Prepare a Production Report for the Finishing Department.