Question

Chelsea Household Renovations (CHR) is a rapidly growing company that has not been profitable despite increases in sales. It has hired you as a consultant to find ways to improve profitability. You believe that the problem results from poor cost control and inaccurate cost estimation on jobs. The company has essentially no accounting system from which to collect data. You are able, however, to piece together the following information for June. Production 1. Completed Job 61. 2. Started and completed Job 62. 3. Started Job 63. . Inventory values 1. Work-in-process inventory (excluding applied overhead): May 31: Job 61 Direct materials Labor (1,010 hours * $45) $ 8,500 45,450 June 30: Job 63 Direct materials Labor (1,090 hours $45) $ 6,900 49,050 . Each job in work-in-process inventory was exactly 50 percent completed as to labor-hours; however, all direct materials necessary to do the entire job were charged to each job as soon as it was started. • There were no direct materials inventories or finished goods inventories at either May 31 or June 30. • Actual overhead was $85,000. Cost of goods sold (before adjustment for over- or underapplied overhead): Job 61 Material Labor Overhead Total $ 8,500 ? ? $144,850 Job 62 Materials Labor Overhead Total ? ? ? ? • Overhead was applied to jobs using a predetermined rate per labor dollar that has been used since the company began operations. • All direct materials were purchased for cash and charged directly to Work-in-Process Inventory when purchased. Direct materials purchased in June amounted to $19,400.

Answer 1

Direct materials	Direct materials purchased in June for new started job 62 and Job 63
	=total direct costs-Job 63 WIP
	=19400-6900
Job 62	12500
Direct labor
Job 61	=50% completed as labor
total labor	=direct labor expense assigned*2
	=45450*2
	90900
Job 63	=ending WIP
	=49050
Total labor cost June	133000
Labor cost job 62	=total cost-job 61-job 63
	=133000-45450-49050
	38500
Overhead
Job 61	=total cost-direct material-direct labor
	=144850-8500-90900
	45450
Thus overhead rate is half labor costs
Job 62	=38500*0.5
	19250
Job 63	=49050*0.5
	24525

	job 62
Direct materials	12500
Direct labors	38500
Overhead applied	19250
Finished goods	70250

	WIP
	Job 61
Beg balance
Direct materials	8500
Labor (1010*45)	45450
Current costs
Labor (1010*45)	45450
Overhead applied	45450
End balance	144850
	WIP Job 62
Beg balance	0
Current costs
Direct materials	12500
Direct labors	38500
Overhead applied	19250
End balance	70250
	WIP Job 63
Beg balance	0
Current costs
Direct materials	6900
Labor (1090*45)	49050
Overheads applied	24525
End balance	80475
Cost of goods sold Job 61
Beg balance	0
Finished goods Job 61	144850
Overapplied overheads	-2968
End balance	147818
Cost of goods sold Job 62
Beg balance	0
Finished goods Job 61	70250
Overapplied overheads	-1257
End balance	71507
Overheads
Beg Balance	0
Current month costs	85000
Applied overheads	89225
Under/overapplied	-4225
End balance	0
Wages payable
Beg balance	45450
Current month	133000
End balance	178450
Cash/account payable
Beg balance	8500
Current month	19400
end balance	27900

	Job 61
Direct materials	8500
Labor (1010*45)	45450
Labor (1010*45)	45450
Overhead applied	45450
Finished goods	144850

	Job 63
Direct materials	6900
Labor (1090*45)	49050
Overheads applied	24525
WIP	80475

Cost elements of Cost of goods sold before under and over applied overhead
Job 61	144850
Job 62	70250

Cost elements WIP before under over applied overheads
Job 63	80475

Under or overapplied overheads
Actual overhead costs	85000
Applied overheads
JOb61	45450
Job 62	24525
Job 63	19250
	89225