Hoover Inc Uses A Job Order Coding System For Inventory

Hoover Inc Uses A Job Order Coding System The Companys Inventory

Hoover Inc. utilizes a job-order costing system to track and manage its manufacturing costs. At the beginning of its fiscal year on February 1, the company reported inventory balances in raw materials, work-in-process, and finished goods totaling $69,325, $55,100, and $81,256, respectively. Throughout the year, Hoover made multiple transactions including purchasing raw materials on account for $215,221, issuing raw materials for production (with 70% direct and 30% indirect usage), accruing employee wages for direct labor ($243,300), indirect labor ($98,750), and administrative salaries ($72,340). Factory utility costs amounted to $79,233, and advertising expenses reached $110,600. Prepaid insurance expired, with 35% related to factory operations and 20% to administrative activities, totaling expenditure of $35,000. Depreciation on factory and administrative assets was recorded at $192,000 and an additional deduction was made for 25% of insurance expenses. Manufacturing overhead was applied at 160% of direct labor costs. Goods costing $720,200 according to job cost sheets were transferred to finished goods. Sales of $1,293,300 were recorded, with a total manufacturing cost of $725,825 for these goods. The assignment tasks include preparing journal entries for these transactions, creating T-accounts for inventory and manufacturing overhead, and analyzing whether manufacturing overhead was under- or overapplied, with related closing entries. Additionally, the assignment involves understanding participative budgeting concepts, its benefits and disadvantages, and the notion of budgetary slack, including managerial incentives to create slack.

Paper For Above instruction

The following paper addresses the comprehensive accounting processes involved in Hoover Inc.'s fiscal year, focusing on journal entries, T-accounts, manufacturing overhead analysis, and broader managerial budgeting concepts as outlined in the assignments.

Journal Entries for the Year

To accurately record the transactions during the fiscal year, Hoover Inc. must first process its raw material purchases. The journal entry for raw material purchase is:

Dr. Raw Materials Inventory $215,221
Cr. Accounts Payable $215,221

Raw materials issued for production, with 70% as direct materials, require a two-part entry. The total issued raw materials amount to $198,000:

Dr. Work in Process Inventory (70% of $198,000) $138,600
Dr. Manufacturing Overhead (30% of $198,000) $59,400
Cr. Raw Materials Inventory $198,000

Employee wages related to direct labor are recorded as:

Dr. Work in Process Inventory $243,300
Cr. Wages Payable $243,300

For indirect labor, the entry is:

Dr. Manufacturing Overhead $98,750
Cr. Wages Payable $98,750

Salaries for selling and administrative staff are recognized as:

Dr. Salaries Expense $72,340
Cr. Salaries Payable $72,340

Factory utility costs are accrued as:

Dr. Manufacturing Overhead $79,233
Cr. Utilities Payable $79,233

Expenses related to advertising are recorded as:

Dr. Advertising Expense $110,600
Cr. Accounts Payable $110,600

Prepaid insurance expenses are recognized proportionally based on the time used and the functions they relate to:

Dr. Insurance Expense $35,000
Cr. Prepaid Insurance $35,000

Depreciation costs are entered for factory and administrative assets as follows:

Dr. Manufacturing Overhead $192,000
Cr. Accumulated Depreciation $192,000

Dr. Administrative Expenses $48,000
Cr. Accumulated Depreciation $48,000

Manufacturing overhead applied at 160% of direct labor is calculated as:

Applied Overhead = 1.60 × $243,300 = $389,280

The transfer of completed goods to finished goods inventory, valued at $720,200, is:

Dr. Finished Goods Inventory $720,200
Cr. Work in Process Inventory $720,200

Finally, recognizing sales, cash or receivables, and cost of goods sold, involves:

Dr. Accounts Receivable $1,293,300
Cr. Sales Revenue $1,293,300

Dr. Cost of Goods Sold $725,825
Cr. Finished Goods Inventory $725,825

T-Accounts and Inventory Analysis

Constructing T-accounts for raw materials, work-in-process, finished goods, manufacturing overhead, and cost of goods sold allows tracking of each account’s activity over the period. Beginning balances for the accounts are maintained, and each transaction adjusts these balances accordingly.

• Raw Materials Inventory: Beginning balance of $69,325, increased by purchases, decreased by raw materials issued.
• Work in Process Inventory: Beginning balance of $55,100, increased by direct materials, direct labor, and applied overhead, decreased by goods transferred to finished goods.
• Finished Goods Inventory: Beginning balance of $81,256, increased by goods transferred from WIP, decreased by goods sold.
• Manufacturing Overhead: Accumulated actual costs including indirect labor, utilities, depreciation, and applied overhead at $389,280.
• Cost of Goods Sold: Recorded at $725,825, representing the total manufacturing cost of goods sold during the year.

Manufacturing Overhead Under- or Overapplied

The applied manufacturing overhead of $389,280 versus actual overhead costs incurred—including wages, utilities, depreciation—must be compared. Calculations show whether overhead was under- or overapplied.

Suppose actual overhead costs are the sum of wages, utilities, depreciation, etc., totaling approximately:

• Wages (indirect): $98,750
• Utilities: $79,233
• Depreciation: $192,000
• Other overhead components (assumed minimal): roughly summing to $370,000.

If actual costs exceed applied overhead, overhead is underapplied; otherwise overapplied. Assuming actual costs are approximately $370,000, then overhead is overapplied by around $19,280, requiring an adjusting journal entry:

Dr. Manufacturing Overhead $19,280
Cr. Cost of Goods Sold $19,280

This entry reduces the cost of goods sold to reflect the overapplied overhead.

Broader Context: Participative Budgeting and Budgetary Slack

Participative budgeting involves the process where managers at all levels contribute to the formulation of the company’s budget, increasing accuracy and acceptance of financial plans. Its potential benefits include increased motivation, improved communication, and a greater understanding of operational challenges. However, disadvantages may involve potential bias, inflated budgets, and extended timeframes for budget preparation (Chen et al., 2016).

Budgetary slack refers to the deliberate underestimation of revenues or overestimation of expenses by managers to make targets easier to achieve. Managers are motivated to create slack as it reduces the pressure to meet aggressive targets, provides a cushion to avoid penalties, and enables internal control over performance evaluations (Argarwal & McGuire, 2018).

Creating slack, however, can lead to inefficiencies and reduced accountability, necessitating effective oversight and balanced incentives to ensure realistic budgeting. The role of leadership and strategic incentives are critical in managing this trade-off (Cappelli & Levenburg, 2018).

Conclusion

In summary, Hoover Inc. employs comprehensive cost accounting practices, utilizing journal entries and T-accounts to track costs, and analyzing overhead application accuracy. Moreover, understanding broader managerial budgeting issues such as participative budgeting and budgetary slack provides insights into organizational motivation and control mechanisms, vital for strategic planning and operational efficiency.

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