Quiz 5: Job-Order Costing

are job-order costing and process costing? What types of firms use job-order costing? Process costing?

Which of the following statements is true? A) Job-order costing is used only in manufacturing firms. B) Process costing is used only for services. C) Job-order costing is simpler to use than process costing because the recordkeeping requirements are less. D) The job cost sheet is subsidiary to the work-in-process account. E) All of the above are true.

some examples of service firms that might use job-order costing, and explain why it is used in those firms.

ending balance of which of the following accounts is calculated by summing the totals of the open (unfinished) job-order cost sheets? A) Raw Materials B) Overhead Control C) Work in Process D) Finished Goods E) Cost of Goods Sold

is normal costing? How does it differ from actual costing?

a normal costing system, the cost of a job includes A) actual direct materials, actual direct labor, and estimated (applied) overhead. B) estimated direct materials, estimated direct labor, and estimated overhead. C) actual direct materials, actual direct labor, actual overhead, and actual selling cost. D) actual direct materials, actual direct labor, and actual overhead. E) None of the above. Job-order costing requires the use of actual, not normal, costing.

are actual overhead rates seldom used in practice?

predetermined overhead rate equals A) actual overhead divided by actual activity level for a period. B) estimated overhead divided by estimated activity level for a period. C) actual overhead minus estimated overhead. D) actual overhead multiplied by actual activity level for a period. E) one-twelfth of estimated overhead.

Explain how overhead is assigned to production when a predetermined overhead rate is used.

job-order cost sheet is a subsidiary account to A) Raw Materials. B) Work in Process. C) Finished Goods. D) Cost of Goods Sold. E) Jobs Started.

is underapplied overhead? When Cost of Goods Sold is adjusted for underapplied overhead, will the cost increase or decrease? Why?

Applied overhead is A) an important part of normal costing. B) never used in normal costing. C) an important part of actual costing. D) the predetermined overhead rate multiplied by estimated activity level. E) the predetermined overhead rate multiplied by estimated activity level for the month.

is overapplied overhead? When Cost of Goods Sold is adjusted for overapplied over-head, will the cost increase or decrease? Why?

overhead variance is overapplied if A) actual overhead is less than applied overhead. B) actual overhead is more than applied overhead. C) applied overhead is less than actual overhead. D) estimated overhead is less than applied overhead. E) estimated overhead is more than applied overhead.

Suppose that you and a friend decide to set up a lawn mowing service next summer. Describe the source documents that you would need to account for your activities.

Which of the following is typically a job-order costing firm? A) Paint manufacturer B) Pharmaceutical manufacturer C) Cleaning products manufacturer D) Cement manufacturer E) Large regional medical center

might a company decide to use departmental overhead rates instead of a plantwide overhead rate?

Which of the following is typically a process-costing firm? A) Paint manufacturer B) Custom cabinetmaker C) Large regional medical center D) Law office E) Custom framing shop

is the role of materials requisition forms in a job-order costing system? Time tickets? Predetermined overhead rates?

materials are requisitioned for use in production in a job-order costing firm, the cost of materials is added to the A) raw materials account. B) work-in-process account. C) finished goods account. D) accounts payable account. E) cost of goods sold account.

Carver Company uses a plantwide overhead rate based on direct labor cost. Suppose that during the year, Carver raises its wage rate for direct labor. How would that affect overhead applied? The total cost of jobs?

a job is completed, the total cost of the job is A) subtracted from the raw materials account. B) added to the work-in-process account. C) added to the finished goods account. D) added to the accounts payable account. E) subtracted from the cost of goods sold account.

is an overhead variance? How is it accounted for typically?

costs of a job are accounted for on the A) materials requisition sheet. B) time ticket. C) requisition for overhead application. D) sales invoice. E) job-order cost sheet.

the cost of a job related to the price charged? Explain.

Wilson Company has a predetermined overhead rate of $5 per direct labor hour. The job-order cost sheet for Job 145 shows 500 direct labor hours costing $10,000 and materials requisitions totaling $17,500. Job 145 had 1,000 units completed and transferred to Finished Goods. What is the cost per unit for Job 145? A) $20 B) $17.50 C) $25 D) $30 E) $22,500

a company decides to increase advertising expense by $25,000, how will that affect the predetermined overhead rate? Eventual cost of goods sold?

(Appendix 5A) When a job costing $2,000 is finished but not sold, the following journal entry is made:

can a departmental overhead system be converted to a plantwide overhead system?

Appendix 5B ) Those departments responsible for creating products or services that are sold to customers are referred to as A) profit making departments. B) producing departments. C) cost centers. D) support departments. E) none of these.

(Appendix 5B) Describe the difference between producing and support departments.

Appendix 5B ) Those departments that provide essential services to producing departments are referred to as A) revenue generating departments. B) support departments. C) profit centers. D) production departments. E) none of these.

(Appendix 5B) Assume that a company has decided not to allocate any support department costs to producing departments. Describe the likely behavior of the managers of the producing departments. Would this be good or bad? Explain why allocation would correct this type of behavior.

Appendix 5B ) An example of a producing department is A) a materials storeroom. B) the maintenance department. C) engineering design. D) assembly. E) all of these.

Appendix 5B ) An example of a support department is A) data processing. B) personnel. C) a materials storeroom. D) payroll. E) all of these.

(Appendix 5B) Identify some possible causal factors for the following support departments: a. Cafeteria b. Custodial services c. Laundry d. Receiving, shipping, and storage e. Maintenance f. Personnel g. Accounting

Appendix 5B ) The method that assigns support department costs only to producing departments in proportion to each department's usage of the service is known as A) the sequential method. B) the proportional method. C) the reciprocal method. D) the direct method. E) none of these.

(Appendix 5B) Explain the difference between the direct method and the sequential method.

Appendix 5B ) The method that assigns support department costs by giving partial recognition to support department interactions is known as A) the sequential method. B) the proportional method. C) the reciprocal method. D) the direct method. E) none of these.

(Appendix 5B) The method that assigns support department costs by giving full recognition to support department interactions is known as A) the sequential method. B) the proportional method. C) the reciprocal method. D) the direct method. E) none of these.

Cornerstone Exercise 5-22 Predetermined Overhead Rate, Overhead Application At the beginning of the year, Ilberg Company estimated the following costs: Ilberg uses normal costing and applies overhead on the basis of direct labor cost. (Direct labor cost is equal to total direct labor hours worked multiplied by the wage rate.) For the month of December, direct labor cost was $43,700.

Overhead Variance (Over- or Underapplied), Closing to Cost of Goods Sold At the end of the year, Ilberg Company provided the following actual information: Ilberg uses normal costing and applies overhead at the rate of 80% of direct labor cost. At the end of the year, Cost of Goods Sold (before adjusting for any overhead variance) was $1,890,000.

Predetermined Departmental Overhead Rates, Applying Overhead to Production At the beginning of the year, Hallett Company estimated the following: Refer to the information for Hallett Company above. Hallett uses departmental overhead rates. In the cutting department, overhead is applied on the basis of machine hours. In the sewing department, overhead is applied on the basis of direct labor hours. Actual data for the month of June are as follows:

Convert Departmental Data to Plantwide Data, Plantwide Overhead Rate, Apply Overhead to Production At the beginning of the year, Hallett Company estimated the following: Refer to the information in Cornerstone Exercise 5-24 for data. Now, assume that Hallett has decided to use a plantwide overhead rate based on direct labor hours.

Cornerstone Exercise 5-26 Prepare Job-Order Cost Sheets, Predetermined Overhead Rate, Ending Balance of WIP, Finished Goods, and COGS At the beginning of June, Rhone Company had two jobs in process, Job 44 and Job 45, with the following accumulated cost information: During June, two more jobs (46 and 47) were started. The following direct materials and direct labor costs were added to the four jobs during the month of June: At the end of June, Jobs 44, 45, and 47 were completed. Only Job 45 was sold. On June 1, the balance in Finished Goods was zero.

Appendix 5B ) Assigning Support Department Costs by Using The Direct Method Quillen Company manufactures a product in a factory that has two producing departments, Cutting and Sewing, and two support departments, S1 and S2. The activity driver for S1 is number of employees, and the activity driver for S2 is number of maintenance hours. The following data pertain to Quillen: Refer to the information for Quillen Company on the previous page.

Appendix 5B ) Sequential Method Quillen Company manufactures a product in a factory that has two producing departments, Cutting and Sewing, and two support departments, S1 and S2. The activity driver for S1 is number of employees, and the activity driver for S2 is number of maintenance hours. The following data pertain to Quillen: Refer to the information for Quillen Company on the previous page. Now assume that Quillen uses the sequential method to allocate support department costs. S1 is allocated first, then S2.

Job-Order Costing versus Process Costing a. Hospital services b. Custom cabinet making c. Toy manufacturing d. Soft-drink bottling e. Airplane manufacturing (e.g., 767s) f. Personal computer assembly g. Furniture making (e.g., computer desks sold at discount stores) h. Custom furniture making i. Dental services j. Paper manufacturing k. Nut and bolt manufacturing l. Auto repair m. Architectural services n. Landscape design services o. Flashlight manufacturing

Job-Order Costing versus Process Costing a. Auto manufacturing b. Dental services c. Auto repair d. Costume making

Calculating the Predetermined Overhead Rate, Applying Overhead to Production At the beginning of the year, Debion Company estimated the following: Debion uses normal costing and applies overhead on the basis of direct labor hours. For the month of March, direct labor hours were 7,600.

Calculating the Predetermined Overhead Rate, Applying Overhead to Production, Reconciling Overhead at the End of the Year, Adjusting Cost of Goods Sold for Under- and Overapplied Overhead At the beginning of the year, Horvath Company estimated the following: Horvath uses normal costing and applies overhead on the basis of direct labor hours. For the month of January, direct labor hours were 7,830. By the end of the year, Horvath showed the following actual amounts: Assume that unadjusted Cost of Goods Sold for Horvath was $707,000.

Calculating Departmental Overhead Rates and Applying Overhead to Production At the beginning of the year, Glaser Company estimated the following: Glaser uses departmental overhead rates. In the assembly department, overhead is applied on the basis of direct labor hours. In the testing department, overhead is applied on the basis of machine hours. Actual data for the month of March are as follows:

Job-Order Costing Variables On July 1, Job 46 had a beginning balance of $1,235. During July, prime costs added to the job totaled $560. Of that amount, direct materials were three times as much as direct labor. The ending balance of the job was $1,921.

Source Documents For each of the following independent situations, give the source document that would be referred to for the necessary information.

Applying Overhead to Jobs, Costing Jobs Jagjit Company designs and builds retaining walls for individual customers. On August 1, there were two jobs in process: Job 93 with a beginning balance of $8,750, and Job 94 with a beginning balance of $7,300. Jagjit applies overhead at the rate of $8 per direct labor hour. Direct labor wages average $18 per hour. Data on August costs for all jobs are as follows: During August, Jobs 95 and 96 were started. Job 93 was completed on August 17, and the client was billed at cost plus 40%. All other jobs remained in process.

Applying Overhead to Jobs, Costing Jobs Gorman Company builds internal conveyor equipment to client specifications. On October 1, Job 877 was in process with a cost of $18,640 to date. During October, Jobs 878, 879, and 880 were started. Data on costs added during October for all jobs are as follows: Overhead is applied to production at the rate of 80% of direct labor cost. Job 877 was completed on October 28, and the client was billed at cost plus 50%. All other jobs remained in process.

Balance of Work in Process and Finished Goods, Cost of Goods Sold Derry Company uses job-order costing. At the end of the month, the following information was gathered: The beginning balance of Finished Goods was $300, consisting of Job 300 which was not sold by the end of the month.

Job-Order Cost Sheets, Balance in Work in Process and Finished Goods Golding Company, a job-order costing firm, worked on three jobs in July. Data are as follows: Overhead is applied to jobs at the rate of $16 per machine hour. By July 31, Jobs 106 and 108 were completed. Jobs 102 and 106 were sold. Job 107 remained in process. On July 1, the balance in Finished Goods was $49,000 (consisting of Job 102 for $25,600 and Job 104 for $23,400). Golding prices its jobs at cost plus 30%. During July, variable marketing expenses were 5% of sales, and fixed marketing expenses were $2,000; administrative expenses were $4,800. (Round all amounts to the nearest dollar.)

Flows Consider the following independent jobs. Overhead is applied in Department 1 at the rate of $6 per direct labor hour. Overhead is applied in Department 2 at the rate of $8 per machine hour. Direct labor wages average $10 per hour in each department.

Cost Flows Roseler Company uses a normal job-order costing system. The company has two departments through which most jobs pass. Overhead is applied using a plantwide overhead rate of $10 per direct labor hour. During the year, several jobs were completed. Data pertaining to one such job, Job 9-601, follow:

Calculation of Work in Process and Cost of Goods Sold with Multiple Jobs Ensign Landscape Design designs landscape plans and plants the material for clients. On April 1, there were three jobs in process, Jobs 39, 40, and 41. During April, two more jobs were started, Jobs 42 and 43. By April 30, Jobs 40, 41, and 43 were completed and sold. The following data were gathered: Overhead is applied at the rate of 110% of direct labor cost. Jobs are sold at cost plus 30%. Selling and administrative expenses for April totaled $4,575. (Round all amounts to the nearest dollar.)

Appendix 5A ) Journal Entries Yurman Inc. uses a job-order costing system. During the month of May, the following transactions occurred: a. Purchased materials on account for $29,670. b. Requisitioned materials totaling $24,500 for use in production. Of the total, $9,200 was for Job 58, $8,900 for Job 59, and the remainder for Job 60. c. Incurred direct labor for the month of $32,400, with an average wage of $18 per hour. Job 58 used 800 hours; Job 59, 600 hours; and Job 60, 400 hours. d. Incurred and paid actual overhead of $17,880 (credit Various Payables). e. Charged overhead to production at the rate of $4.80 per direct labor hour. f. Completed and transferred Jobs 58 and 59 to Finished Goods. g. Sold Job 57 (see beginning balance of Finished Goods) and Job 58 to their respective clients on account for a price of cost plus 40%. Beginning balances as of May 1 were:

Appendix 5B ) Direct Method of Support Department Cost Allocation Stevenson Company is divided into two operating divisions: Battery and Small Motors. The company allocates power and general factory costs to each operating division using the direct method. Power costs are allocated on the basis of the number of machine hours and general factory costs on the basis of square footage. Support department cost allocations using the direct method are based on the following data:

Appendix 5B ) Sequential Method of Support Department Cost Allocation Refer to Exercise 5-44 for data. Now assume that Stevenson uses the sequential method to allocate support department costs to the operating divisions. General Factory is allocated first in the sequential method for the company.

Overhead Application and Job-Order Costing Heurion Company is a job-order costing firm that uses a plantwide overhead rate based on direct labor hours. Estimated information for the year is as follows: Heurion worked on five jobs in July. Data are as follows: By July 31, Jobs 741 and 743 were completed and sold. The remaining jobs were in process.

Cost, Source Documents Spade Millhone Detective Agency performs investigative work for a variety of clients. Recently, Alban Insurance Company asked Spade Millhone to investigate a series of suspicious claims for whiplash. In each case, the claimant was driving on a freeway and was suddenly rear-ended by an Alban-insured client. The claimants were all driving old, uninsured automobiles. The Alban clients reported that the claimants suddenly changed lanes in front of them, and the accidents were unavoidable. Alban suspected that these ''accidents'' were the result of insurance fraud. Basically, the claimants cruised the freeways in virtually worthless cars, attempting to cut in front of expensive late-model cars that would surely be insured. Alban believed that the injuries were faked. Rex Spade spent 37 hours shadowing the claimants and taking pictures as necessary. His surveillance methods located the office of a doctor used by all claimants. He also took pictures of claimants performing tasks that they had sworn were now impossible to perform due to whiplash injuries. Victoria Millhone spent 48 hours using the Internet to research court records in surrounding states to locate the names of the claimants and their doctors. She found a pattern of similar insurance claims for each of the claimants. Spade Millhone Detective Agency bills clients for detective time at $120 per hour. Mileage is charged at $0.50 per mile. The agency logged in 510 miles on the Alban job. The film and developing amounted to $120.

Calculating Ending Work in Process, Income Statement Pavlovich Prosthetics Company produces artificial limbs for individuals. Each prosthetic is unique. On January 1, three jobs, identified by the name of the person being fitted with the prosthetic, were in process with the following costs: During the month of January, two more jobs were started, Jasper and Dashell. Materials and labor costs incurred by each job in January are as follows: Tillson and Jasper's prosthetics were completed and sold by January 31.

Overhead Applied to Jobs, Departmental Overhead Rates Xania Inc. uses a normal job-order costing system. Currently, a plantwide overhead rate based on machine hours is used. Xania's plant manager has heard that departmental overhead rates can offer significantly better cost assignments than a plantwide rate can offer. Xania has the following data for its two departments for the coming year:

Overhead Rates, Unit Costs Folsom Company manufactures specialty tools to customer order. There are three producing departments. Departmental information on budgeted overhead and various activity measures for the coming year is as follows: Currently, overhead is applied on the basis of machine hours using a plantwide rate. However, Janine, the controller, has been wondering whether it might be worthwhile to use departmental overhead rates. She has analyzed the overhead costs and drivers for the various departments and decided that Welding and Finishing should base their overhead rates on machine hours and that Assembly should base its overhead rate on direct labor hours. Janine has been asked to prepare bids for two jobs with the following information: The typical bid price includes a 35% markup over full manufacturing cost. Round all overhead rates to the nearest cent. Round all bid prices to the nearest dollar.

Calculate Job Cost and Use It to Calculate Price Suppose that back in the 1970s, Steve was asked to build speakers for two friends. The first friend, Jan, needed a speaker for her band. The second friend, Ed, needed a speaker built into the back of his hatchback automobile. Steve figured the following costs for each: Steve knew that Jan's job would be easier, since he had experience in building the type of speaker she needed. Her job would not require any special equipment or specialized fitting. Ed's job, on the other hand, required specialized design and precise fitting. Steve thought he might need to build a mock-up of the speaker first, to fit it into the space. In addition, he might have to add to his tool collection to complete the job. Normally, Steve figured a wage rate of $6 per hour and charged 20% of labor and materials as an overhead rate.

Appendix 5A ) Unit Cost, Ending Work in Process, Journal Entries During August, Leming Inc. worked on two jobs. Data relating to these two jobs follow: Overhead is assigned on the basis of direct labor hours at a rate of $11. During August, Job 64 was completed and transferred to Finished Goods. Job 65 was the only unfinished job at the end of the month.

Appendix 5A ) Journal Entries, Job Costs The following transactions occurred during the month of April for Nelson Company: a. Purchased materials costing $4,610 on account. b. Requisitioned materials totaling $4,800 for use in production, $3,170 for Job 518 and the remainder for Job 519. c. Recorded 65 hours of direct labor on Job 518 and 90 hours on Job 519 for the month. Direct laborers are paid at the rate of $14 per hour. d. Applied overhead using a plantwide rate of $6.20 per direct labor hour. e. Incurred and paid in cash actual overhead for the month of $973. f. Completed and transferred Job 518 to Finished Goods. g. Sold on account Job 517, which had been completed and transferred to Finished Goods in March, for cost ($2,770) plus 25%.

Appendix 5A ) Predetermined Overhead Rates, Variances, Cost Flows Barrymore Costume Company, located in New York City, sews costumes for plays and musicals. Barrymore considers itself primarily a service firm, as it never produces costumes without a preexisting order and only purchases materials to the specifications of the particular job. Any finished goods ending inventory is temporary and is zeroed out as soon as the show producer pays for the order. Overhead is applied on the basis of direct labor cost. During the first quarter of the year, the following activity took place in each of the accounts listed: Job 32 was the only job in process at the end of the first quarter. A total of 1,000 direct labor hours at $10 per hour were charged to Job 32.

Appendix 5A ) Overhead Application, Journal Entries, Job Cost At the beginning of the year, Smith Company budgeted overhead of $129,600 as well as 13,500 direct labor hours. During the year, Job K456 was completed with the following information: direct materials cost, $2,750; direct labor cost, $5,355. The average wage for Smith Company employees is $17 per hour. By the end of the year, 18,100 direct labor hours had actually been worked, and Smith incurred the following actual overhead costs for the year:

Appendix 5A ) Journal Entries, T-Accounts Lowder Inc. builds custom conveyor systems for warehouses and distribution centers. During the month of July, the following occurred: a. Purchased materials on account for $42,630. b. Requisitioned materials totaling $27,000 for use in production: $12,500 for Job 703 and the remainder for Job 704. c. Recorded direct labor payroll for the month of $26,320 with an average wage of $14 per hour. Job 703 required 780 direct labor hours; Job 704 required 1,100 direct labor hours. d. Incurred and paid actual overhead of $19,950. e. Charged overhead to production at the rate of $10 per direct labor hour. f. Completed Job 703 and transferred it to Finished Goods. g. Kept Job 704, which was started during July, in process at the end of the month. h. Sold Job 700, which had been completed in May, on account for cost plus 30%. Beginning balances as of July 1 were:

Appendix 5B ) Support Department Cost Allocation MedServices Inc. is divided into two operating departments: Laboratory and Tissue Pathology. The company allocates delivery and accounting costs to each operating department. Delivery costs include the costs of a fleet of vans and drivers that drive throughout the state each day to clinics and doctors' offices to pick up samples and deliver them to the centrally located laboratory and tissue pathology offices. Delivery costs are allocated on the basis of number of samples. Accounting costs are allocated on the basis of the number of transactions processed. No effort is made to separate fixed and variable costs; however, only budgeted costs are allocated. Allocations for the coming year are based on the following data:

Appendix 5B ) Support Department Cost Allocation: Comparison of Methods of Allocation Bender Automotive Works Inc. manufactures a variety of front-end assemblies for automobiles. A front-end assembly is the unified front of an automobile that includes the headlamps, fender, and surrounding metal/plastic. Bender has two producing departments: Drilling and Assembly. Usually, the front-end assemblies are ordered in batches of 100. Two support departments provide support for Bender's producing departments: Maintenance and Power. Budgeted data for the coming quarter follow. The company does not separate fixed and variable costs. The predetermined overhead rate for Drilling is computed on the basis of machine hours. Direct labor hours are used for Assembly. Recently, a truck manufacturer requested a bid on a 3-year contract that would supply front-end assemblies to a nearby factory. The prime costs for a batch of 100 front-end assemblies are $1,817. It takes two machine hours to produce a batch in the drilling department and 50 direct labor hours to assemble the 100 front-end assemblies in the assembly department. Bender's policy is to bid full manufacturing cost, plus 15%. (Note: Round allocation ratios to four decimal places, allocated support department cost to the nearest dollar, and the job cost components to the nearest cent.)

Overhead Assignment: Actual and Normal Activity Compared Reynolds Printing Company specializes in wedding announcements. Reynolds uses an actual job-order costing system. An actual overhead rate is calculated at the end of each month using actual direct labor hours and overhead for the month. Once the actual cost of a job is determined, the customer is billed at actual cost plus 50%. During April, Mrs. Lucky, a good friend of owner Jane Reynolds, ordered three sets of wedding announcements to be delivered May 10, June 10, and July 10, respectively. Reynolds scheduled production for each order on May 7, June 7, and July 7, respectively. The orders were assigned job numbers 115, 116, and 117, respectively. Reynolds assured Mrs. Lucky that she would attend each of her daughters' weddings. Out of sympathy and friendship, she also offered a lower price. Instead of cost plus 50%, she gave her a special price of cost plus 25%. Additionally, she agreed to wait until the final wedding to bill for the three jobs. On August 15, Reynolds asked her accountant to bring her the completed job-order cost sheets for Jobs 115, 116, and 117. She also gave instructions to lower the price as had been agreed upon. The cost sheets revealed the following information: Reynolds could not understand why the overhead costs assigned to Jobs 116 and 117 were so much higher than those for Job 115. She asked for an overhead cost summary sheet for the months of May, June, and July, which showed that actual overhead costs were $20,000 each month. She also discovered that direct labor hours worked on all jobs were 500 hours in May and 250 hours each in June and July.

Assigning Overhead to Jobs-Ethical Issues Tonya Martin, CMA and controller of the Parts Division of Gunderson Inc., was meeting with Doug Adams, manager of the division. The topic of discussion was the assignment of overhead costs to jobs and their impact on the division's pricing decisions. Their conversation was as follows: Tonya : Doug, as you know, about 25% of our business is based on government contracts, with the other 75% based on jobs from private sources won through bidding. During the last several years, our private business has declined. We have been losing more bids than usual. After some careful investigation, I have concluded that we are overpricing some jobs because of improper assignment of overhead costs. Some jobs are also being underpriced. Unfortunately, the jobs being overpriced are coming from our higher-volume, labor-intensive products, so we are losing business. Doug : I think I understand. Jobs associated with our high-volume products are being assigned more overhead than they should be receiving. Then when we add our standard 40% markup, we end up with a higher price than our competitors, who assign costs more accurately. Tonya : Exactly. We have two producing departments, one labor-intensive and the other machine-intensive. The labor-intensive department generates much less overhead than the machine-intensive department. Furthermore, virtually all of our high-volume jobs are labor-intensive. We have been using a plantwide rate based on direct labor hours to assign overhead to all jobs. As a result, the high-volume, labor-intensive jobs receive a greater share of the machine-intensive department's overhead than they deserve. This problem can be greatly alleviated by switching to departmental overhead rates. For example, an average high-volume job would be assigned $100,000 of overhead using a plantwide rate and only $70,000 using departmental rates. The change would lower our bidding price on high-volume jobs by an average of $42,000 per job. By increasing the accuracy of our product costing, we can make better pricing decisions and win back much of our private-sector business. Doug : Sounds good. When can you implement the change in overhead rates? Tonya : It won't take long. I can have the new system working within four to six weeks-certainly by the start of the new fiscal year. Doug : Hold it. I just thought of a possible complication. As I recall, most of our government contract work is done in the labor-intensive department. This new overhead assignment scheme will push down the cost on the government jobs, and we will lose revenues. They pay us full cost plus our standard markup. This business is not threatened by our current costing procedures, but we can't switch our rates for only the private business. Government auditors would question the lack of consistency in our costing procedures. Tonya : You do have a point. I thought of this issue also. According to my estimates, we will gain more revenues from the private sector than we will lose from our government contracts. Besides, the costs of our government jobs are distorted. In effect, we are overcharging the government. Doug : They don't know that and never would unless we switch our overhead assignment procedures. I think I have the solution. Officially, let's keep our plantwide overhead rate. All of the official records will reflect this overhead costing approach for both our private and government business. Unofficially, I want you to develop a separate set of books that can be used to generate the information we need to prepare competitive bids for our private-sector business.