Job Costing - Service industry Jordan Brady schedules gigs for local bands and c

Question

Job Costing - Service industry

Jordan Brady schedules gigs for local bands and creates CDs and T-shirts to sell at each gig. Brady uses a normal-costing system with two direct-cost pools, labor and materials, and one indirect-cost pool, general overhead. General overhead is allocated to each gig based on 120% of direct labor cost. Actual overhead equaled allocated overhead as of March 2014. Actual overhead in April was $1,980. All costs incurred during the planning stage for a gig and during the gig are gathered in a balance sheet account called "Gigs in Progress (GIP)." When a gig is completed, the costs are transferred to an income statement account called "Cost of Completed Gigs (CCG)." Following is cost information for April 2014:

Incurred in April

As of April 1, there were three gigs in progress: Irok, Freke Out, and Bottom Rung. The gigs for Dish Towel and Rail Ride were started during April. The gigs for Freke Out and Dish Towel were completed during April.

1. Calculate GIP at the end of April.

2. Calculate CCG for April.

3. Calculate under- or over- allocated overhead at the end of April.

4. Calculate the ending balances in GIP and CCG if the under- or over- allocated overhead amount is as follows:

a) Written off to CCG

b) Prorated based on the ending balances (before proration) in GIP and CCG

c) Prorated based on the overhead allocated in April in the ending balances of GIP and CCG (before proration).

5. Which method would you choose? Explain. Would your choice depend on whether overhead cost is underallocated or overallocated? Explain.

From Beginning GIP

Incurred in April

Explanation / Answer

Answer:1

Answer:2

Answer:3 Overhead allocated = 1.20 × 1,250 a = $1,500

Underallocated overhead = Actual overhead – Allocated overhead = $1,980 – 1,500 = $480 underallocated

a Total direct labor in April = $200 + $100 + $250 + $450 + $250 = $1,250

Answer:4a. Underallocated overhead is written off to CCG

GIP inventory remains unchanged.

Answer:4b Underallocated overhead prorated based on April overhead in ending balances

a.April labor for Irok, Bottom Rung, and Rail Ride 120% = ($200 + $250 + $250) × 120% = $700 × 120% = $840

b . April labor for Freke Out and Dish Towel 120% = ($100 + $450) 120% = $550 120% = $660

Answer:5

I would choose the method in 4b (proration based on overhead allocated) because this method results in account balances based on actual overhead allocation rates. The account balances before proration in GIP and CCG are significant, and underallocated overhead is material. Of course, the method chosen affects reported operating income. In the case of underallocated overhead, writing off to CCG results in lower operating income compared to proration and lower taxes. If overhead had been overallocated, proration would result in lower operating income and lower taxes. Despite the tax considerations, I would choose proration because it best represents Brady’s performance during a period. I would use the simpler method of write off to CCG only if the amount were immaterial or if it represents inefficiency. I would apply this method consistently from period to period.

Gigs in Process (GIP) April 30, 2014 Author Materials Direct Labor Overhead Total 1 2 3-120%*2 4 Irok ($570 + $110; $750 + $200) 680 950 1140 2770 Bottom Rung ($250 + $310; $475 + $250) 560 725 870 2155 Rail Ride 225 250 300 775 Total 1465 1925 2310 5700

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