CHAPTER 4

JOB COSTING
4-1

Cost poola grouping of individual cost items.

Cost tracingthe assigning of direct costs to the chosen cost object.
Cost allocationthe assigning of indirect costs to the chosen cost object.
Cost-allocation basea factor that links in a systematic way an indirect cost or group of
indirect costs to a cost object.

4-2
In a job-costing system, costs are assigned to a distinct unit, batch, or lot of a product or
service. In a process-costing system, the cost of a product or service is obtained by using broad
averages to assign costs to masses of identical or similar units.
4-3
An advertising campaign for Pepsi is likely to be very specific to that individual client.
Job costing enables all the specific aspects of each job to be identified. In contrast, the
processing of checking account withdrawals is similar for many customers. Here, process costing
can be used to compute the cost of each checking account withdrawal.
4-4
The seven steps in job costing are: (1) identify the job that is the chosen cost object, (2)
identify the direct costs of the job, (3) select the cost-allocation bases to use for allocating
indirect costs to the job, (4) identify the indirect costs associated with each cost-allocation base,
(5) compute the rate per unit of each cost-allocation base used to allocate indirect costs to the
job, (6) compute the indirect costs allocated to the job, and (7) compute the total cost of the job
by adding all direct and indirect costs assigned to the job.
4-5
Two major cost objects that managers focus on in companies using job costing are (1)
products or jobs, and (2) responsibility centers or departments.
4-6
Three major source documents used in job-costing systems are (1) job cost record or job
cost sheet, a document that records and accumulates all costs assigned to a specific job, starting
when work begins (2) materials requisition record, a document that contains information about
the cost of direct materials used on a specific job and in a specific department; and (3) labor-time
record, a document that contains information about the labor time used on a specific job and in a
specific department.
4-7
The main concern with the source documents of job cost records is the accuracy of the
records. Problems occurring in this area include incorrect recording of quantity or dollar
amounts, materials recorded on one job being borrowed and used on other jobs, and erroneous
job numbers being assigned to materials or labor inputs.
4-8
a.
b.

Two reasons for using an annual budget period are

The numerator reasonthe longer the time period, the less the influence of seasonal
patterns, and
The denominator reasonthe longer the time period, the less the effect of variations in
output levels on the allocation of fixed costs.

4-9
Actual costing and normal costing differ in their use of actual or budgeted indirect cost
rates:
Actual
Normal
Costing
Costing
Direct-cost rates
Actual rates
Actual rates
Indirect-cost rates
Actual rates
Budgeted rates
Each costing method uses the actual quantity of the direct-cost input and the actual quantity of
the cost-allocation base.
4-10 A house construction firm can use job cost information (a) to determine the profitability
of individual jobs, (b) to assist in bidding on future jobs, and (c) to evaluate professionals who
are in charge of managing individual jobs.
4-11 The statement is false. In a normal costing system, the Manufacturing Overhead Control
account will not, in general, equal the amounts in the Manufacturing Overhead Allocated
account. The Manufacturing Overhead Control account aggregates the actual overhead costs
incurred while Manufacturing Overhead Allocated allocates overhead costs to jobs on the basis
of a budgeted rate times the actual quantity of the cost-allocation base.
Underallocation or overallocation of indirect (overhead) costs can arise because of (a) the
Numerator reasonthe actual overhead costs differ from the budgeted overhead costs, and (b)
the Denominator reasonthe actual quantity used of the allocation base differs from the
budgeted quantity.
4-12 Debit entries to Work-in-Process Control represent increases in work in process.
Examples of debit entries under normal costing are (a) direct materials used (credit to Materials
Control), (b) direct manufacturing labor billed to job (credit to Wages Payable Control), and (c)
manufacturing overhead allocated to job (credit to Manufacturing Overhead Allocated).
4-13 Alternative ways to make end-of-period adjustments for underallocated or overallocated
overhead are as follows:
(i) Proration based on the total amount of indirect costs allocated (before proration) in
the ending balances of work in process, finished goods, and cost of goods sold.
(ii) Proration based on total ending balances (before proration) in work in process,
finished goods, and cost of goods sold.
(iii) Year-end write-off to Cost of Goods Sold.
(iv) Restatement of all overhead entries using actual indirect cost rates rather than
budgeted indirect cost rates.
4-14 A company might use budgeted costs rather than actual costs to compute direct labor
rates because it may be difficult to trace direct labor costs to jobs as they are completed (for
example, because bonuses are only known at the end of the year).
4-15 Modern technology such as electronic data interchange (EDI) is helpful to managers
because it provides them with quick and accurate product-cost information that facilitates the
management and control of jobs.

EXERCISES
4-27
Solution
1. Budgeted indirect cost rate = Budgeted indirect costs/Budgeted direct labor hours
= Rs 40,00,000/Rs 80,000
= Rs 50 per direct labor hour
Actual indirect cost rate = Actual indirect costs/Actual direct labor hour
= Rs 1,37,76,000/3,28,000
Rs 42 per direct labor hour
These rates differ because both the numerator and the denominator in the two calculations are different one based on budgeted
numbers and the other based on actual numbers.
2 (a). Normal costing
Particulars
Direct costs
Direct materials
Direct labor

Gurgaon Model

Noida Model

Rs 2,12,900
72,552
2,85,452

2,55,208
82,820
3,38,028

90,000
3,75,452

1,01,000
4,39,028

Rs 2,12,900
72,552

2,55,208
82,820

2,85,452

3,38,028

Indirect costs
Assembly support (Rs 50 1,800; 50 2,020)
Total costs
2. (b) Actual costing
Direct costs
Direct materials
Direct labor
Indirect costs
Assembly support (Rs 42 1,800; 42 2020)
Total costs

75,600

84,840

3,61,052

4,22,868

3. Normal costing enables Ansal to report a job cost as soon as the job is completed assuming that both the direct materials and direct costs
are known at the time of use/work. Once the 1,800 direct labor-hours are known for the Gurgaon Model (June Year 2), Ansal can compute
the Rs 3,75,452 cost figure using normal costing. Ansal can use this information to manage the costs of the Gurgaon. Model job as well
as to bid on similar jobs later in the year. In contrast, Ansal has to wait until the December year-end 2 to compute the Rs 3,61,052 cost of
the Gurgaon Model using actual costing.
Although not required the following overview diagram summarizes Ansal Constructions job-costing system.
INDIRECT-COST
POOL

Assembly Support

INDIRECT
COST-ALLOCATION
BASE

Direct Labor-Hours

COST OBJECT:
S3 AND CL5
LENSES

DIRECT
COSTS

Indirect Costs
Direct Costs

Direct
Materials

Direct
Manufacturing
Labor

4-28
Solution
1. Budgeted indirect-cost rate = Rs 2,60,00,000/1,00,00,000 = 26 per cent of professional labor costs
INDIRECT
COST POOL
COST
ALLOCATION
BASE
COST OBJECT:
JOB FOR
CONSULTING CLIENT

DIRECT
COSTS

Consulting Support

Professional Labor-Costs

Indirect Costs
Direct Costs

Professional
Labor

2. At the budgeted revenues of Rs 4,00,00,000, Vaishs operating income of Rs 40,00,000 equals 10 per cent of revenues
Mark up rate = Rs 40,00,000/1,00,00,000 = 400 per cent of direct professional labor costs.
3. Budgeted costs
Direct costs
Director, Rs 2,000 3
Rs 6,000
Partner, Rs 1,000 16
16,000
Associate, Rs 500 40
20,000
48,000
Assistant, Rs 300 160
Indirect costs
Consulting support, 260% 90,000

90,000
2,34,000

Total costs

Rs 3,24,000

Bid price to earn target operating income to revenue margin of 10 per cent can be calculated as follows:
Let R = revenue to earn target income
R 0.10R = Rs 3,24,000
0.90R = Rs 3,24,000
R = Rs 3,24,000/0.90 = Rs 3,60,000
Or
Direct costs
Indirect costs
Profit (0.40 90,000)
Bid price
4-29

Rs 90,000
2,34,000
36,000
3,60,000

Solution
(1)
(2)
1.
2.
3.

An overview of the product costing system is:

Material control
Accounts payable control
Work-in-process control
Materials control
Manufacturing overhead control
Materials control

(Rs)
8,000

(Rs)
8,000

7,100
7,100
1,000
1,000

INDIRECT
COST POOL
COST
ALLOCATION
BASE

Manufacturing Overhead

Direct Manufacturing
Labor-Costs

Indirect Costs

COST OBJECT:
PRINT JOB

DIRECT
COSTS

4.

Direct Costs

Direct
Materials

Work-in-process control
Manufacturing overhead control
Wages payable control
5. Manufacturing overhead control
Accumulated depreciation-buildings and manufacturing equipment
6. Manufacturing overhead control
Miscellaneous accounts
7. Work-in-process control
Manufacturing overhead allocated
(1.60 Rs 13,000 = 20,800)
8. Finished Goods control
Work-in-process control
9. Accounts receivable control (or cash)
Revenues
10. Cost of Goods Sold
Finished goods control
11. Manufacturing overhead allocated
Manufacturing overhead control
Cost of goods sold
3.
Beginning balance
(1) Purchases
Closing balance
Beginning balance
(2) Direct materials
(4) Direct manufacturing labor
(7) Manufacturing overhead allocated
Closing balance
Beginning balance
(8) Goods completed
Closing balance
(10) Goods sold
Beginning balance
(11) To close

Direct
Manufacturing
Labor

13,000
9,000
22,000
4,000
4,000
5,500
5,500
20,800
20,800
41,200
41,200
80,000
80,000
40,200
40,200
20,800

Materials Control
Rs 1,000
(2) Issues
8,000
(3) Issues
900
Work-in-process Control
Rs 600
(8) Goods completed
7,100
13,000
20,800
300
Finished Goods Control
Rs 5,000
(10) Goods sold
41,200
6,000
Cost of Goods Sold
Rs 40,200
(11) Adjustment for over-allocation
38,900
Manufacturing Overhead Allocated
Rs 20,00
(7) Manufacturing overhead allocated
Balance

19,500
1,300
Rs 7,100
1,000

Rs 41,200

Rs 40,200

Rs 1,300

Rs 20,800
0

(3) Indirect materials

(4) Indirect manufacturing labor
(5) Depreciation
(6) Miscellaneous
Balance
4-30

Manufacturing Overhead Control

Rs 1,000
(11) To close
9,000
4,000
5,500
0

Rs 19,500

Solution
1. Actual direct cost rate for professional labor = Rs 58 per professional labor-hour
Actual indirect cost rate = Rs 7,44,000/15,500 hours = Rs 48 per professional labor-hour
Budgeted direct cost rate for professional labor = Rs 9,60,000/16,000 hours = Rs 60 per professional labor-hour
Budgeted indirect cost rate = Rs 7,20,000/16,000 hours = Rs 45 per professional labor-hour
(a)
Particulars
Direct-cost rate
Indirect-cost rate
2. (a)
Particulars
Direct-cost rate
Indirect-cost rate
Total job costs

(b)
Actual costing
Rs 58 (Actual rate)
Rs 48 (Actual rate)

(c)
Normal costing
Rs 58 (Actual rate)
Rs 45 (Budgeted rate)

Variation of normal costing

Rs 60 (Budgeted rate)
Rs 45 (Budgeted rate)

(b)
Actual costing
Rs 58 120 = Rs 6,960
Rs 48 120 = 5,760
12,720

(c)
Normal costing
Rs 58 120 = Rs 6,960
Rs 45 120 = 5,400
12,360

Variation of normal costing

Rs 60 120 = Rs 7,200
Rs 45 120 = 5,400
12,600

All three costing system use the actual professional labor time of 120 hours. The budgeted 110 hours for Gupta Enterprises audit job is not used
in job costing. However, S.R. Batliboi & Co. may have used the 110 hour number in bidding for the audit.
The actual costing figure of Rs 12,720 exceeds the normal costing figure of Rs 12,360 because the actual indirect cost rate Rs 48 exceeds
the budgeted indirect cost rate (Rs 45). The normal costing figure of Rs 12,360 is less than the variation of normal costing (based on budgeted
rates for direct costs) figure of Rs 12,600, because the actual direct cost rate (Rs 58) is less than the budgeted direct-cost rate (Rs 60).
Overview diagram summarizes S. R. Batliboi & Co. job-costing system.
INDIRECT
COST POOL
COST
ALLOCATION
BASE
COST OBJECT:
JOB FOR AUDITING
GUPTA ENT.

DIRECT
COSTS

Audit Support

Professional Labor-Hours

Indirect Costs
Direct Costs

Professional
Labor

4-31
Solution
1. An overview of the job costing system is:
INDIRECT
COST POOL

Legal Support

COST
ALLOCATION
BASE

Professional Labor-Hours

COST OBJECT:
JOB FOR
CLIENT

Indirect Costs
Direct Costs

DIRECT
COSTS

Professional
Labor

2. Budgeted professional labor-hour direct cost rate = Budgeted direct labor compensation per professional/Budgeted direct labor-hours per
professional
= Rs 2,08,000/3,200 = Rs 65 per professional labor-hour
Note that the budgeted professional labor-hour direct cost rate can also be calculated dividing total budgeted professional labor costs of
Rs 1,04,00,000 (Rs 2,08,000 per professional 50 professionals) by total budgeted professional labor-hours of 1,60,000 (3,200 hours per
professional 50 professionals),
Rs 1,04,00,000/1,60,000 = Rs 65 per professional labor-hour.
3. Budgeted indirect cost rate = Budgeted total costs in indirect cost pool/Budgeted total professional labor-hours
= Rs 44,00,000/3,200 hours 50
= Rs 44,00,000/1,60,000 = Rs 27.5 per professional labor-hour
4. Direct costs:
Particulars
Professional labor, Rs 65 100; Rs 65 150
Indirect costs
Legal support, Rs 27.5 100; Rs 27.5 150

Saw Pipes
Rs 6,500

J. K. Paper
Rs 9,750

2,750
9,250

4,125
13,875

4-32
Solution
Although not required, the following overview diagram is helpful to understand Vaishs job-costing system.
INDIRECT
COST POOL

COST
ALLOCATION BASE

General Support

Secretarial Support

Professional Labor-Hours

Partner Labor-Hours

Indirect Costs

COST OBJECT:
JOB FOR CLIENT

DIRECT
COSTS

Direct Costs

Direct
Materials

Direct
Manufacturing
Labor

1. Particulars
Budgeted compensation per professional
Divided by budgeted hours of billable time per professional
Budgeted direct-cost rate

Professional
partner labor
Rs 4,00,000
3,200
Rs 125 per hour

Professional
associate labor
Rs 1,60,000
3,200
Rs 50 per hour

Alternative solution:
Total budgeted partner -labor costs = (Rs 4,00,000 10)/ 3,200 10 = (Rs 40,00,000)/ 32,000
Total budgeted partner labor-hours
Total budgeted associate labor costs
=
Rs 64,00,000/1,28,000

= Rs 125 per hour

(Rs 1,60,000 40)/3,200 40

Total budgeted associate labor-hours

Rs 50 per hour

2. Particulars
Budgeted total costs
Divided by budgeted quantity of allocation base
Budgeted indirect cost rate
3. Particulars
Direct costs
Professional partners, Rs 125 120; Rs 125 60
Professional associates, Rs 50 80; Rs 50 240
Direct costs
Indirect costs
General support, Rs 22.5 200; Rs 22.5 300
Secretarial support, Rs 25 120; Rs 25 60
Indirect costs
Total costs
4. Particulars
Single direct Single indirect (from previous problem)
Multiple direct Multiple indirect (from requirement 3)
Difference

General support
Rs 36,00,000
1,60,000
Rs 22.5 per hour

Secretarial support
Rs 8,00,000
32,000 hours
Rs 25 per hour

Saw Pipes

J. K. Paper

Rs 15,000
4,000
19,000

Rs 7,500
12,000
19,500

4,500
3,000
7,500
26,500

6,750
1,500
8,250
27,750

Saw Pipes
Rs 9,250
26,500
17,250
undercosted

J. K. Paper
Rs 13,875
27,750
13,875
undercosted

The Saw Pipes and J K Paper jobs differ in their use of resources. The Saw Pipes job has a mix of 60 per cent partners and 40 per cent
associates, while J K Paper has a mix of 20 per cent partners and 80 per cent associates. Thus, the Saw Pipes job is a relatively high user of the
more costly partner-related resources (both direct partner costs and indirect partner secretarial support). The refined-costing system in this
problem increases the reported cost in previous problem for the Saw Pipes job by 186 per cent (from Rs 9,250 to Rs 26,500) and J K Paper job
by 100 per cent (from Rs 13,875 to Rs 27,750).
4-33
Solution
1. Manufacturing overhead allocated = 200% Direct manufacturing labor costs
Rs 72,00,000 = 2 Direct manufacturing labor costs
Direct manufacturing labor costs = Rs 72,00,000/2 = Rs 36,00,000
2. Total manufacturing costs = Direct material used + Direct manufacturing labor costs + Manufacturing overhead allocated
Rs 1,60,00,000 = Direct material used + Rs 36,00,000 + Rs 72,00,000
Direct material used = 52,00,000
3. Beginning work in process + Total manufacturing costs = Cost of goods manufactured + Ending work in Process
Let ending work in process be X
Rs 6,40,000 + 1,60,00,000 = Rs 1,58,40,000 + X
X = Rs 8,00,000

4-34
Solution

(Rs)

1. Jobs-in-Process Control
Cash Control
2. Direct Professional Labor Control
Cash Control
3. Jobs-in-Process Control
Direct Professional Labor Allocated
4. Engineering Support Overhead Control
Cash Control
5. Jobs-in-Process Control
Engineering Support Overhead Allocated
6. Cost of Jobs Billed
Jobs-in-Process Control
(2) Direct Professional Labor Allocated
Engineering Support Overhead Allocated
Cost of Jobs Billed
Direct Professional Labor Control
Engineering Support Overhead Control
4-35

(Rs)

3,00,000
3,00,000
3,00,000
3,00,000
29,00,000
29,00,000
23,60,000
23,60,000
24,00,000
24,00,000
50,00,000
50,00,000
29,00,000
24,00,000
60,000
30,00,000
23,60,000

Solution
(1) and (3) An effective approach to this problem is to draw T-accounts and insert all the known figures. Then working with T-account
relationships, solve for the unknown figures (here coded by the letter X for beginning inventory figures and Y for ending inventory figures)
Materials Control
X
Rs 15,000
(1)
Rs 70,000
Purchases
85,000
1,00,000
Y
X
(1) Direct material 70,000
(2) Direct labor 1,50,000
(3) Overhead 90,000

30,000
Work-in-process Control
Rs 10,000
(4)

X
(4)

5,000
3,000
23,000
Finished Good Control
Rs 20,000
(5)
3,05,000
3,25,000

Y
(5)

(a)
(b)

Rs 3,05,000

3,10,000
3,20,000

(a)
(c)
Y

70,000

25,000
Cost of Goods Sold
Rs 3,00,000
(d)
Manufacturing Department Overhead Control
Rs 85,000
(d)
1,000
1,000

3,05,000

Rs 3,00,000
3,00,000

Rs 6,000
Rs 87,000

Manufacturing Overhead Allocated

Rs 93,000
(3)
(c)

(d)

Rs 90,000
3,000

Manufacturing overhead cost rate = Rs 90,000/Rs 1,50,000 = 60%

Wages Payable Control
(a)
Rs 6,000
Various Account
(b)
Rs 1,000
(2) Adjusting and closing entries
i. Work-in-Process Control
Manufacturing department Overhead Control
Wages Payable control
(To recognize payroll costs)
ii. Manufacturing Department Overhead Control
Various Accounts
(To recognize miscellaneous manufacturing overhead)
iii. Work-in-Process Control
Manufacturing Overhead Allocated
(To allocate manufacturing overhead)
iv. Manufacturing Overhead Allocated
Manufacturing Department Overhead Control
Cost of Goods Sold
(To close manufacturing overhead accounts and overallocated overhead to cost of goods sold.
An overview of product costing system:
INDIRECT
COST POOL
COST
ALLOCATION
BASE

(Rs)

6,000
1,000
1,000
3,000
3,000
93,000
87,000
6,000

Manufacturing Overhead

Direct Manufacturing
Labor-Costs

Indirect Costs

COST OBJECT:
JOB

DIRECT
COSTS

(Rs)
5,000
1,000

Direct Costs

Direct
Materials

Direct
Manufacturing
Labor

4-36
Solution
1. Overhead allocated to Job A21 as of January 31 = 0.80 Actual direct labor costs of Job A21 = 0.80 Rs 50,000 = Rs 40,000
Overhead allocated to Job A24 as of February 29 = 0.80 Actual direct labor costs of Job A24 = 0.80 Rs 40,000 = Rs 32,000
2. Overhead allocated to jobs in February = 0.80 Actual direct labor costs in February = 0.80 Rs 1,20,000 = Rs 96,000
Actual overhead costs incurred in February = Rs 1,02,000
Underallocated overhead costs = Rs 1,02,000 Rs 96,000 = Rs 6,000
3. Cost of Jobs Billed for February Current Year
Jobs-in-Process Control Balance January 31
Rs 1,20,000*
Manufacturing costs in February
Direct materials
Rs 1,50,000
Direct labor
1,20,000

Overhead costs allocated

Manufacturing costs to account for
Jobs-in-process control balance February 29
Cost of jobs bills unadjusted
Adjustment for underallocated overhead costs in February
Actual overhead costs
Allocated overhead costs
Cost of jobs billed adjusted
* Cost of Job A21 = Direct Material + Direct labor + Overhead allocated
= Rs 30,000 + Rs 50,000 + Rs 40,000 = Rs 1,20,000
** Cost of Job A24 = Direct materials + Direct labor + Overhead allocated
= Rs 20,000 + Rs 40,000 + Rs 32,000 = Rs 92,000
4-37

96,000

3,66,000
4,86,000
92,000**
3,94,000

Rs 1,02,000
96,000

6,000
4,00,000

Solution
1. The Work-in-Process inventory break down at the end of 2001 for Jobs 1768B and 1819C is:
Particulars
Job 1768B
Job 1819C
Direct materials (given)
Rs 44,000
Rs 84,000
Direct manufacturing labor (given)
22,000
78,000
Manufacturing overhead allocated,
13,200
46,800
Rs 5,04,000/Rs 8,40,000 = 0.60 DML
Total manufacturing costs
79,200
2,08,800

Total
Rs 1,28,000
1,00,000
60,000
2,88,000

The finished goods inventory at the end of current year is Rs 3,12,000(given). A direct manufacturing labor cost of Rs 80,000 implies a
budgeted manufacturing overhead cots component of Rs 48,000.
The cost of goods sold is Rs 32,00,000 (given). The total direct manufacturing labor of Rs 8,00,000 implies direct manufacturing labor
in Cost of Goods Sold of Rs 6,20,000 (Rs 8,00,000 Rs 22,000 Rs 78,000 Rs 80,000). Hence, manufacturing overhead allocated in
cost of goods sold is 60 per cent Rs 6,20,000 = Rs 3,72,000. Direct materials in cost of goods sold is Rs 22,08,000 (Rs 32,00,000
6,20,000 Rs 3,72,000).
The summary account information is:
Accounts
Direct
Direct Manufacturing
Manufacturing Overhead
Total
Materials
Labor
Allocated
Work-in-process
Rs 1,28,000
Rs 1,00,000
Rs 60,000
Rs 2,88,000
Finished goods
1,84,000
80,000
48,000
3,12,000
Cost of goods sold
22,08,000
6,20,000
3,72,000
32,00,000
Total

25,20,000

8,00,000

4,80,000

38,00,000

2. Overallocated manufacturing overhead = Manufacturing overhead allocated Manufacturing overhead incurred

= Rs 4,80,000 3,73,680 = Rs 1,06,320
3. (a)
Account
Account Balance
Proration of Rs 1,06,320
End-of- Year Balance
(before proration)
Overallocated Manufacturing
(after proration)
Overhead
(1)
(2)
(3) = (1) + (2)
Work in process
Rs 2,88,000 (7.58%)
Rs (8,060)
Rs 2,79,940
Finished goods
3,12,000 (8.21%)
(8,728)
3,03,272
Cost of goods sold
32,00,000 (84.21%)
(89,532)
31,10,468
Total
38,00,000 (100%)
(1,06,320)
36,93,680
3. (b)
Account
Account
Allocated
Proration of Rs
Account
Balance
Manufacturing
1,06,320
Balance
(before
Overhead in
Overallocated
(after
proration)
Account Balance
Manufacturing
proration)
(before proration)
Overhead
Work in process
Rs 2,88,000
Rs 60,000 (12.5%)
Rs (13,290)
Rs 2,74,710
Finished goods
3,12,000
48,000 (10%)
(10,632)
3,01,368
Cost of goods sold
32,00,000
3,72,000 (77.5%)
(82,398)
31,17,602
Total
38,00,000
4,80,000 (100%)
1,06,320
36,93,680

4. The Cost of Goods Sold amount when the overallocated overhead is immediately written off to cost of goods sold is Rs 30,93,680 (see
below) compared to Rs 31,10,468 in 3(a) and Rs 31,17,602 in 3(b). Thus with a lower cost of goods sold, there is a higher operating
income.
Account
Account Balance
Write-off to Cost of Goods
Account Balance
(before proration)
Sold of 1,06,320 Overallocated
(after proration)
Work in process
Rs 2,88,000
Re 0
Rs 2,88,000
Finished goods
3,12,000
0
3,12,000
Cost of goods sold
32,00,000
(1,06,320)
30,93,680
Total
Rs 38,00,000
Rs 1,06,320
Rs 36,93,680
5. The adjusted allocation rate approach would adjust the cost of job 1819C for the amount of manufacturing overhead overallocated to it.
For current year, manufacturing overhead is overallocated to each job by 22.15 per cent (Rs 1,06,320/ Rs 4,80,000). Hence, the cost of job
1819C would be decreased by 22.15 per cent Manufacturing overhead allocated to 1819C = 22.15% Rs 46,800 = Rs 10,366.20
Cost of Job 1819C would then appear as follows:
Direct materials
Direct manufacturing labor
Manufacturing overhead allocated
Adjustment for manufacturing overhead overallocated
Cost of job after adjustment for overallocation

Rs 84,000
72,000
46,800
(10,366.20)
1,92,433.80