ACC 311 Module 2 Job Order Costing Assignment Example

Job 26-114: Costing Six Municipal Plow Trucks With a Predetermined Overhead Rate

[Student Name]

Southern New Hampshire University

ACC 311: Cost Accounting

Module Two Assignment

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Job 26-114: Costing Six Municipal Plow Trucks With a Predetermined Overhead Rate

Introduction

Kettle River Truck Equipment, a composite family-owned shop in central Minnesota, builds custom plow trucks for municipalities one job at a time. In September it began Job 26-114, the upfit of six single-axle trucks for a city of about 40,000 people, at a fixed bid of $372,000. This assignment computes the shop's predetermined overhead rate, builds the job cost sheet, records the flow of costs through the accounts, measures the margin on the bid and analyzes the year's overhead application. Job order costing is the right system here because each job differs in configuration and the shop needs a separate cost for each customer order (Datar & Rajan, 2021).

Predetermined Overhead Rate

Overhead must be assigned to jobs as they are worked, long before the year's actual overhead is known, so the shop sets a rate at the start of the year. Because most overhead at Kettle River follows the work of fabricators and installers, direct labor hours are the allocation base.

Table 1. Predetermined Overhead Rate

Job Cost Sheet

Direct materials were charged from five requisitions, each covering six identical units. The plow moldboards and frames came from the shop's own forming line and were transferred at cost; the spreader bodies were purchased from a stainless steel supplier. Direct labor came from time tickets: fabricators worked 720 hours at $34.00 and installers and electricians 540 hours at $38.00. Overhead was applied at $35.00 for each of the 1,260 direct labor hours.

Table 2. Job Cost Sheet, Job 26-114

Summary Journal Entries

The entries below summarize how Job 26-114 moved through the accounts. Each debit to Work in Process matches a line on the job cost sheet, so the job's total in Work in Process equals the job cost sheet total before it is transferred.

Table 3. Summary Journal Entries for Job 26-114

Margin on the Bid

The bid of $372,000 against a job cost of $315,300 leaves a gross margin of $56,700, or 15.2 percent of the bid. That is close to the 15 percent markup the owner targets, but it is a gross margin, before selling and administrative costs such as the estimator's salary and the time spent at the city's pre-bid meeting. Those period costs are not part of the job cost, yet the bid has to cover them, so a 15 percent gross margin on custom municipal work leaves a thin net return.

The job cost also depends on the overhead rate. Because one plantwide rate charges every direct labor hour the same $35, the job received the same overhead per hour as a simple dealer plow package, even though municipal trucks require more engineering, purchasing and road testing per hour of labor. If those activities cost more than the average rate implies, the true cost of Job 26-114 is higher than $315,300 and the margin is overstated. Balakrishnan et al. (2012) note that a single volume-based rate is most likely to distort product cost when products differ in complexity, which is exactly the case here. Project One will test this with activity-based costing.

Year-End Overhead Analysis

At year end, actual manufacturing overhead was $1,905,400 and actual direct labor hours were 55,600. Applied overhead was therefore 55,600 hours at $35.00, or $1,946,000.

Table 4. Applied Versus Actual Overhead

Overhead was overapplied by $40,600, meaning jobs were charged more overhead than was actually incurred. The main cause was volume: the shop worked 3,600 more direct labor hours than budgeted during a heavy snow year, so fixed overhead such as depreciation and supervision was spread over more hours than planned. Because $40,600 is about 2 percent of total overhead and most of the year's jobs have already been delivered, the amount is immaterial and is closed to Cost of Goods Sold with a debit to Manufacturing Overhead and a credit to Cost of Goods Sold, reducing cost of goods sold by $40,600. Had the difference been large, the shop would have spread it across the three accounts that hold the year's overhead, in proportion to the applied overhead each one carries, so that inventory on the balance sheet was not left overstated.

The overapplication also carries a lesson for next year's rate. A budget of 52,000 hours assumed an average winter, and the shop has now exceeded that figure in three of the last five years. Labro (2019) points out that the denominator chosen for a rate is itself a management decision with consequences: a base set too low inflates the rate and the cost of every job, which can push bids above competitors in a busy year. The controller should consider basing next year's rate on practical capacity rather than an expected-volume figure that keeps proving too conservative.

Conclusion

Job 26-114 cost $315,300, or $52,550 per truck, and earned a 15.2 percent gross margin on the city's bid. The job cost sheet and journal entries tie out, and the year's overapplied overhead of $40,600 was closed to cost of goods sold. The more important finding is a question rather than a number: one plantwide labor-hour rate may be undercosting complex municipal jobs, and the next project will measure by how much.

References

Balakrishnan, R., Labro, E., & Sivaramakrishnan, K. (2012). Product costs as decision aids: An analysis of alternative approaches (Part 1). Accounting Horizons, 26(1), 1-20. https://doi.org/10.2308/acch-50086

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.

Labro, E. (2019). Costing systems. Foundations and Trends in Accounting, 13(3-4), 267-404. https://doi.org/10.1561/1400000058