Problem: EEC has introduced a new 1.5 gigabyte (GB) computer memory chip.
Should EEC use a job-order costing system, which is a costing system where costs are collected and assigned to units of production for each individual job, or a process costing system, which is a costing system that accumulates production costs by process or department for a given period of time, to report the costs of this new product?
How are the systems different?
Describe how the selected system would work to track the costs of the product.
Identify the cost driver, and explain the process of tracking the costs.
Provide examples of products that EEC might offer for which a job-order costing system would be appropriate.
Provide examples of products that EEC might offer for which a process costing system would be appropriate.
Eddison Electronic Company
Journal Entries 2005
| |
Activity |
|
| 1 |
Sales not on account |
$29,440 |
| 2 |
Sales on account |
28,060 |
| 3 |
Selling Expense |
3,220 |
| 4 |
Administrative Expense |
6,210 |
| 5 |
Supplies Factory |
3,450 |
| 6 |
Insurance Factory |
920 |
| 7 |
Indirect Labor |
6,900 |
| 8 |
Factory Salaries |
288 |
| 9 |
Factory Property Tax |
173 |
| 10 |
Maintenance Expense Factory |
2,001 |
| 11 |
Depreciation Expense Factory |
3,726 |
| 12 |
Utilities Factory |
828 |
| 13 |
Purchases of Raw Materials |
17,250 |
| 14 |
Direct Labor Factory |
3,450 |
| 15 |
Raw Material Inventory, January 1 |
2,070 |
| 16 |
Raw Material Inventory, December 31 |
1,380 |
| 17 |
Work in Process Inventory, January 1 |
4,140 |
| 18 |
Work in Process Inventory, December 31 |
2,300 |
| 19 |
Finished Goods Inventory, January 1 |
5,980 |
| 20 |
Finished Goods Inventory, December 31 |
4,830 |
| 21 |
Bad Debt Expense |
276 |
| 22 |
Accounts Receivable, net |
9,430 |
| 23 |
Prepaid Expenses |
840 |
| 24 |
Land |
2,760 |
| 25 |
Plant and Equipment |
37,950 |
| 26 |
Cash 1/1/05 |
4,646 |
| 27 |
Accounts Payable |
14,410 |
| 28 |
Interest Expense |
28 |
| 29 |
Notes Payable, 10% |
2,070 |
| 30 |
Bonds Payable 8% |
8,510 |
| 31 |
Stockholders' Equity |
31,510 |
| 32 |
Retained Earnings |
6,670 |
| 33 |
Income tax rate |
30% |
Eddison Electronics Company
1.5GB Chip Project - USA
| |
Plan |
Actual
2005 |
Difference |
| Investment in Equipment |
$5,000,000 |
$5,000,000 |
$0 |
| |
|
|
|
| Income |
|
|
|
| Sales |
$5,250,000 |
$6,000,000 |
$750,000 |
| Variable Expenses |
2,500,000 |
2,800,000 |
$300,000 |
| Contribution Margin |
$2,750,000 |
$3,200,000 |
$450,000 |
| Less Fixed Expenses: |
|
|
|
| Costs |
900,000 |
950,000 |
$50,000 |
| Depreciation |
500,000 |
500,000 |
$0 |
| Net Operating Income |
$1,350,000 |
$1,750,000 |
$400,000 |
| |
|
|
|
| Cash Flow |
|
|
|
| Sales |
$5,250,000 |
$6,000,000 |
$750,000 |
| Less Variable Expenses |
2,500,000 |
2,800,000 |
300,000 |
| Contribution Margin |
2,750,000 |
3,200,000 |
450,000 |
| Less Costs |
900,000 |
950,000 |
$50,000 |
| Net Annual Cash Inflow |
$1,850,000 |
$2,250,000 |
$400,000 |