Quality Painters, Inc., uses a job cost system. As of January 1, 2014, its records showed the following inventory balances:
Materials $ 7,000
Work in Process 50,000
Finished Goods 0
The Work in Process Inventory consisted of two jobs:
Direct Direct
Job Number Materials Labor Overhead Total
100--Community Housing $9,000 $12,000 $4,000 $25,000
101--Regal Apartments 10,000 9,000 6,000 25,000
$19,000 $21,000 $10,000 $50,000
Here are data for the company for January:
1. Materials purchased, $90,000.
2. Direct labor costs: direct labor to Job No. 100, $20,000; to Job No. 101, $48,000; and to Job No. 102 (a new job), $50,000. Indirect labor, $10,000.
3. Direct materials used: direct materials for Job No. 100, $15,600; for Job No. 101, $28,800; and for Job No. 102, $48,000. Supplies (indirect materials) used amounted to $4,000.
4. Overhead is assigned to jobs at $5 per labor-hour, with 1,000 labor-hours to Job 100 and 2,000 labor-hours each to Jobs 101 and 102.
5. All three jobs were completed in January.
6. Sales revenues for January were $350,000 for the three jobs.
7. Overhead costs incurred other than indirect labor and indirect materials were depreciation, $6,000, and utilities, fuel, and miscellaneous, $6,000.
Management is concerned about the relationship between costs incurred on jobs and the costs expected to be incurred, and has asked for your help. Here are the expected total costs (direct materials, direct labor, and overhead) for the three jobs:
Job 100 $ 60,000
Job 101 120,000
Job 102 130,000
These cost estimates cover the entire job, including both costs in beginning Work in Process Inventory and costs incurred during January.
a. Compare the costs incurred on each job, including the costs in beginning Work in Process Inventory and costs incurred during January with the expected costs. Is the company keeping its costs below the expected costs for each job?
b. Prepare an income statement for January 2014 assuming selling and administrative expenses for January were $50,000. Don’t forget to transfer any underapplied or overapplied overhead balance to Cost of Goods Sold.
c. Is the company profitable (that is, showing net income greater than zero)? What suggestions can you make for management to help increase the company’s net income?