Job
costing, accounting for manufacturing overhead, budgeted rates. The Pisano
Company uses a job-costing system at its Dover, Delaware, plant. The plant has a machining
department and a finishing department. Pisano uses normal costing with two direct-cost
categories (direct materials and direct manufacturing labor) and two manufacturing
overhead cost pools (the machining department with machine-hours as the allocation base
and the finishing department with direct manufacturing labor costs as the allocation base).
The 2014 budget for the plant is as follows:
1. Prepare an overview diagram of Pisano’s job-costing system. 2. What is the budgeted
manufacturing overhead rate in the machining department? In the finishing
department? 3. During the month of January, the job-cost record for Job 431 shows the
following:
Compute the total manufacturing overhead cost allocated to Job 431. 4. Assuming that Job
431 consisted of 300 units of product, what is the cost per unit? 5. Amounts at the end of
2014 are as follows:
Compute the under- or overallocated manufacturing overhead for each department and for
the Dover plant as a whole. 6. Why might Pisano use two different manufacturing overhead
cost pools in its job-costing system?
:: Solution ::
step: 1 of 7
1.
An overview Diagram of Pisano’s job costing system diagram:
step: 2 of 7
2.
Compute Budgeted manufacturing overhead rate:
Particulars Machining Department Finishing Department
Manufacturing overhead 9,065,000 8,181,000
Machine hours 185,000 37,000
Direct manufacturing labor cost 970,000 4,050,000
Machining Department:
step: 3 of 7
Finishing Department:
step: 4 of 7
Compute allocation of total manufacturing overhead cost to job 431:
Allocate manufacturing overhead cost.
Machining Department:
Number of machine hours in Machining Department = 140 hours
Finishing Department:
Total allocation of cost to Job 431 is calculated as follows:
4.
Compute cost per unit assuming that job 431 consisted of 300 units of product:
Particulars Machining Department Finishing Department
Direct materials 13,000 5,000
Direct manufacturing labor cost 900 1,250
Manufacturing overheads 6,860 2,525
Total (A) 20,760 8,775
Number of units(B) 300 300
69.20 29.25
Cost per unit
Cost per unit job 431 is calculated as follows:
step: 5 of 7
5.
Compute under/over allocation of overheads to each department:
Machine Department:
Actual overhead is $ 10,000,000. However overheads allocated as calculated above is $
9,800,000. Hence, there is under allocation of overheads of $ 200,000
step: 6 of 7
Finishing Department:
Actual overhead in this department is $ 7,982,000. However overheads allocated as
calculated above is $ 8,282,000. Hence, there is over allocation of overheads of $ 300,000
step: 7 of 7
Calculate over allocation of overheads for the D plant as a whole:
Cost Allocation base is the most appropriate cost driver (No. of Machine Hours, No. of
Labour Hours) of allocating the cost to cost object (Product, Department). It is the way of
linking the cost with the cost object in order to allocate the cost in the best possible way. In
order to identify the cost driver, using which cost is to be allocated to different cost objects;
the best way is to know the cause and effect relationship between cost and cost object.
Here, in this case also Pisano use two different manufacturing overhead cost pools in its Job
costing system as Machining Department has its cause and effect relation with Machine
hours and Assembling Department has its cause and effect relation with Labor hours.
