Case 1: Greetings Inc : Job Order Costing
Chapter 2
Case 1: Greetings Inc.: Job Order Costing
Solution:
1. As seen in the case, using a traditional job-order costing system Wall Décor charges the actual costs of direct materials and direct labor to its specific jobs- unframed prints, steel-framed and no matting prints, wood-framed and mating prints. Since costs of manufacturing overhead related to production operations as whole, these costs cannot be assigned to specific jobs on the basis of actual costs incurred. Instead, Wall Décor assigns manufacturing overhead to work in process and to specific jobs on an estimated basis through the use of a predetermined overhead rate. The accountant team of Wall Décor calculates this rate as total estimated manufacturing overhead cost divided by total estimated cost of prints. Once the rate is available the overhead cost can be allocated to the prints using the cost of the print. This means that Wall Décor will assign this rate to a specific job to determine total cost of each specific job when it is completed.
2. The advantage of using the cost of each print as manufacturing overhead cost driver is that the base is easily determined since we know the cost of the prints. But the disadvantage is that the overhead incurred may not relate to the cost of print. An unframed print actually does not require much effort as compared to the framed print but would get a much higher share of overhead cost since the overall cost would be more due to higher volume.
3. Wall Décor allocates its overhead on basis of the cost of the print. The predetermined overhead rate is 28% or 0.28 of cost of print, computed as follows:
Predetermined overhead rate = total expected overhead / total expected cost of prints
The estimated overhead is $375,200
The total cost of print = number of units to be sold × cost of print
The cost of prints is 80,000×12 + 15,000×16 + 7,000×20 = $1,340,000
Predetermined overhead rate is 375,200/1,340,000 = 28%
4. The product cost for the
Case 1: Greetings Inc.: Job Order Costing
Solution:
1. As seen in the case, using a traditional job-order costing system Wall Décor charges the actual costs of direct materials and direct labor to its specific jobs- unframed prints, steel-framed and no matting prints, wood-framed and mating prints. Since costs of manufacturing overhead related to production operations as whole, these costs cannot be assigned to specific jobs on the basis of actual costs incurred. Instead, Wall Décor assigns manufacturing overhead to work in process and to specific jobs on an estimated basis through the use of a predetermined overhead rate. The accountant team of Wall Décor calculates this rate as total estimated manufacturing overhead cost divided by total estimated cost of prints. Once the rate is available the overhead cost can be allocated to the prints using the cost of the print. This means that Wall Décor will assign this rate to a specific job to determine total cost of each specific job when it is completed.
2. The advantage of using the cost of each print as manufacturing overhead cost driver is that the base is easily determined since we know the cost of the prints. But the disadvantage is that the overhead incurred may not relate to the cost of print. An unframed print actually does not require much effort as compared to the framed print but would get a much higher share of overhead cost since the overall cost would be more due to higher volume.
3. Wall Décor allocates its overhead on basis of the cost of the print. The predetermined overhead rate is 28% or 0.28 of cost of print, computed as follows:
Predetermined overhead rate = total expected overhead / total expected cost of prints
The estimated overhead is $375,200
The total cost of print = number of units to be sold × cost of print
The cost of prints is 80,000×12 + 15,000×16 + 7,000×20 = $1,340,000
Predetermined overhead rate is 375,200/1,340,000 = 28%
4. The product cost for the