ACC 1020 Module 2 Job Costing Homework Example

Pinelands Drum Works, Inc.: Costing a Custom Touring Kit and a School Order With Job-Order Costing

Student Name

Bachelor of Science in Business Administration, Thomas Edison State University

ACC-1020: Principles of Managerial Accounting

Mentor Name

Month Day, Year

Pinelands Drum Works, Inc.: Costing a Custom Touring Kit and a School Order With Job-Order Costing

Pinelands Drum Works, Inc., the composite Burlington County drum maker introduced in Module 1, builds every order as a separate job: a custom kit for one drummer, a batch of practice snares for a retailer or a set of marching drums for a school. Because each job differs, it uses job-order costing, in which direct materials, direct labor and manufacturing overhead are accumulated on a job cost sheet for each order. This homework classifies the company's costs, sets the 2026 predetermined overhead rate, completes job cost sheets for two contrasting jobs, disposes of the year's over- or underapplied overhead and considers whether the overhead rate treats both jobs fairly.

Part A: Classifying Costs

Product costs ride along with the drums in inventory and reach the income statement only when a drum ships; period costs are charged as they happen. Among product costs, direct materials such as maple plies, hoops, lugs and heads, and direct labor such as the hours craftspeople spend building a specific drum, can be traced to a job. Manufacturing overhead covers production costs that cannot be traced economically: lacquer and sandpaper, the finishing booth's ventilation, depreciation on the shell press, factory supervision and the plant's utilities. The showroom manager's salary, advertising in drum magazines and office rent are period costs, recorded as selling or administrative expenses.

Part B: The Predetermined Overhead Rate

Overhead is incurred all year, but jobs must be costed as they are completed, so the company applies overhead with a rate set at the start of the year. Pinelands estimated 2026 manufacturing overhead of $420,000 and 21,000 direct labor hours, giving a rate of $20 per direct labor hour.

When Job 2614 is finished, its $3,588 cost moves from work in process to finished goods; when it is delivered, the cost moves to cost of goods sold and $6,200 of revenue is recorded. The same flow applies to the school order.

Part C: Over- or Underapplied Overhead

At the end of 2026, actual manufacturing overhead was $437,600, while actual direct labor hours were 21,400. Overhead applied to jobs was 21,400 hours times $20, or $428,000. Because applied overhead was $9,600 less than actual, overhead was underapplied, meaning the jobs completed during the year were costed too low. Because the shortfall is only about 2% of actual overhead, Pinelands simply adds it to the year's cost of goods sold, clearing the manufacturing overhead account to zero. Had the gap been large, it would have been spread across the three accounts holding that year's jobs: unfinished work, finished drums and drums already sold.

Part D: Does One Rate Fit Both Jobs?

The labor-hour rate assumes overhead is driven by how long people work on a job. At Pinelands that is only partly true. The largest overhead cost is the finishing booth, and a custom kit with a hand-rubbed lacquer finish spends many hours in the booth, with five to seven coats and long curing times, while student snares get a single wrapped finish and almost no booth time. The custom kit took 38 labor hours; the 40 student drums took 60. Under the current rate, the school order absorbs more overhead than the custom kit, even though it uses far less of the most expensive overhead resource.

Research supports the concern. Banker et al. (1995) studied manufacturing plants and found that overhead costs were driven not only by production volume but also by transactions such as setups and engineering changes, the kinds of activities that vary with product complexity rather than labor time. A second cost pool for the finishing booth, applied by booth hours, would shift overhead from simple jobs like the school order to complex jobs like the custom kit. That would likely show the custom kits are less profitable, and the school orders more profitable, than the current figures suggest, which matters because the company bids competitively on school contracts.

Cost assignment is also an ethical matter. The professional code for management accountants expects reports that are fair and objective and that leave out nothing a reader would need (Institute of Management Accountants, 2017). Shifting overhead to win a bid or to make a favored product line look better would breach those standards; adopting a better driver because it reflects how resources are actually used does not. Williams et al. (2023) present activity-based costing as one way to refine assignments like this when overhead is large and products differ widely.

References

Banker, R. D., Potter, G., & Schroeder, R. G. (1995). An empirical analysis of manufacturing overhead cost drivers. Journal of Accounting and Economics, 19(1), 115-137. https://doi.org/10.1016/0165-4101(94)00372-C

Institute of Management Accountants. (2017). IMA statement of ethical professional practice.

Williams, J. R., Bettner, M. S., & Smith, K. R. (2023). Financial & managerial accounting: The basis for business decisions (20th ed.). McGraw-Hill Education.