Question

The Print Shop produces custom paintings. Costs are tracked for each painting, with shop overhe: being applied at 125% of direct labor cost. Print Shop began July with one job in process. This job had beginning work in process which include total costs of $6,500 (direct labor, direct material, and applied overhead). During July, four new jobs were begun. These consisted of the Smith family portrait, the Wilde family reunion portrait, the county courthouse painting, and the Waterson baby painting. The only job remaining in process at the end of July was the Wilde family portrait. To date, $8,000 in direct labor and $2,500 of direct materials had been committed to the Wilde job. Total direct labor incurred on all jobs during July was $21,900. Total direct material incurred on all jobs during June was $6,900. a) Compute the ending work in process inventory balance and the total cost assigned to finished jobs. b) Why is it necessary to track costs to individual jobs? c) The overhead application rate is based on estimates. What happens if the amount of overhead applied to individual jobs differs from the amount of overhead actually incurred?

Answer 1

a. Ending work in process ( Wilde job ) inventory balance = $ 2,500 + $ 8,000 + $ 8,000 x 125 % = $ 20,500.

Total cost assigned to finished jobs :$ 42,175

Cost of beginning work in process	$ 6,500
Add: Costs incurred during July:
Direct materials	6,900
Direct labor	21,900
Shop overhead	27,375
Total cost of work in process	62,675
Less: Ending work in process	(20,500)
Cost assigned to finished jobs	$ 42,175

b. In job costing, jobs are heterogeneous, and their demands on resources are diverse. It is necessary therefore to track costs to individual jobs, so that it is possible to compute the margin earned on each job, or vice versa the loss incurred on individual jobs.

c. If the actual overhead incurred on a job exceeds the amount of overhead applied, overhead would be underapplied and vice versa. If overhead is underapplied on a particular job, the cost of goods sold for that job would need an upward adjustment to reflect the true cost of the job.