Question 2 (22.5 marks)
H2O Irrigation Continuing Case Study
H2O Irrigation has two major public-park projects to provide with comprehensive irrigation in one of its service locations this month. Job J57 and Job K52 involve 15 acres of landscaped terrain which will require special-order sprinkler heads to meet the specifications of the project. Using a job cost system to produce these parts, the following events occurred during December 2012.
Raw materials were requisitioned from the company’s inventory on December 2 for
$5,061; on December 8 for $1,059; and on December 14 for $3,459. In each instance, two thirds (2/3) of these materials were for J57 and the rest for K52.
Six time tickets were turned in for these two projects for a total amount of 18 hours of work. All the workers were paid $16.50 per hour. The time tickets were dated December 3, December 9, and December 15. On each of those days, 6 labour hours were spent on these jobs, two-thirds (2/3) for J57 and the rest for K52.
The predetermined overhead rate is based on machine hours. The expected machine hour use for the year is 2,112 hours, and the anticipated overhead costs are $840,576 for the year. The machine were used by workers on projects K52 and J57 on December 3, 9, and 15. Six machine hours were used for project K52 (2 each day), and 8.5 machine hours were used for project J57 (2.5 the first day and 3 each of the other days). Both of these special orders were completed on December 15, producing 237 sprinkler heads for J57 and 142 sprinkler heads for K52.
Additional job order activities during this period of time included:
Dec. 1 Purchased raw materials from Durbin Supply Company on account for $53,200.
Dec. 2 Issued $40,000 of direct materials to work in process for other jobs (not K52 and J57) and issued $3,000 of indirect materials.
Dec. 12 Paid H2O Irrigation’ factory salaries and wages in the amount of $65,000.
Dec. 13 Received and paid the factory’s water bill of $9,000.
Dec. 18 Transferred $50,000 of costs from other completed jobs to finished goods.
Dec. 21 Received and paid the factory’s electric bill of $12,000 for H2O Irrigation’ factory.
Dec. 31 Made adjusting entries for the factory that included accrued property taxes of $12,000, prepaid insurance of $8,800, and accumulated depreciation of $16,000.
Question 2 Requirements:
i. Journalise all activities for both jobs in the general journal. Also journalise the other costs that occurred during this period of time. Note: Provide single entries for both jobs activity for: i. Direct Materials, ii. Direct labour, and iii. Manufacturing overhead – do not make journal entries for every single activity, for example:
DR Work In process
CR Raw Materials
(Job 101 $75 DM and Job 102 $25 DM)
DR Work in process
CR Factory Labour
(Job 101 $45 DL and Job 102 $55 DL)
ii. Assuming that Manufacturing Overhead has an ending debit balance of $3,600. Is it over applied or under applied? Make the adjusting entry to remove this from Manufacturing overhead.
iii. Why would H2O Irrigation choose machine hours as the cost driver for the overhead rather than direct labour cost? What would H2O Irrigation be likely to choose as the cost driver for the overhead for the job of installing the irrigation system and why?
Total marks question 2: 22.5