ACCT 3030: CH. 2

Jones Company uses a job-order costing system with a predetermined overhead rate of 120% of direct labor cost. The job cost sheet for Job #420 listed $4,000 in direct materials cost and $5,000 in direct labor cost to manufacture 7,500 units. The unit cost of Job #420 is:

$2

Murphy Manufacturing estimated total manufacturing overhead for the year to be $100,000 and that 5,000 direct-labor hours would be used. Actual overhead was $120,000 and actual direct labor-hours were 7,500. The overhead applied to a job completed during the year that used 200 direct labor-hours was Blank______.

$4,000 The predetermined overhead rate = $100,000 ÷ 5,000 direct labor-hours = $20 per direct labor-hour × 200 direct labor-hours = $4,000.

predetermined overhead rates that rely upon estimated data are often used because

1. Actual overhead for the period is not known until the end of the period, thus inhibiting the ability to estimate job costs during the period. 2.Actual overhead costs can fluctuate seasonally, thus misleading decision makers.

What is the predetermined overhead rate's 4 step process? that's computed before the period begins

1. Estimate the total amount of the allocation base (the denominator) that will be required for next period's estimated level of production. 2. Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base. 3. Use the following equation to estimate the total amount of manufacturing overhead: Y = a + bX Where, Y= The estimated total manufacturing overhead cost a= The estimated total fixed manufacturing overhead cost b= The estimated variable manufacturing overhead costper unit of the allocation base X= The estimated total amount of the allocation base 4.Compute the predetermined overhead rate.

What 3 circumstances make assigning manufacturing overhead to a specific job complicated?

1. Manufacturing overhead is an indirect cost = it's either impossible or difficult to trace these costs to a particular product or job. 2. Manufacturing overhead consists of different type of costs ranging from the grease used in machines to the annual salary of the production manager. Some of these costs are variable overhead costs because they vary in direct proportion to changes in the level of production (eg. indirect materials, supplies, and power) and some are fixed overhead costs because they remain constant as the level of production fluctuates (eg. heat and light, property taxes, and insurance) 3. Many companies have large amounts of fixed manufacturing overhead. Therefore, their total manufacturing overhead costs tens to remain relatively constant from one period to the next even though the number of units that they product can fluctuate widely ---average cost per unit will vary from one period to the next

Job-order costing systems are used when: Examples of companies that would use job-order costing include:

1.Many different products are produced each period. 2.Products are manufactured to order. 3.The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. 1.Boeing (aircraft manufacturing) 2.Bechtel International (large scale construction) 3.Walt Disney Studios (movie production)

SPL Enterprises assigns overhead based on number of machine hours. For the upcoming year, they plan to use a total of 250,000 machine hours and 50,000 direct labor hours. Total overhead cost is expected to be $500,000. The predetermined overhead rate per machine hour is $

2

Job XYZ has a total manufacturing cost of $600. If the mark-up percentage is 40%, the job will sell for $

840

job-order costing

A costing system used in situations where many different products, jobs, or services are produced each period. -used in situations where many different products, each with individual and unique features, are produced each period -ex: construction company, repaired job at an auto repair shop, a client at a law firm, a patient at a hospital

multiple predetermined overhead rates

A costing system with multiple overhead cost pools and a different predetermined overhead rate for each cost pool, rather than a single predetermined overhead rate for the entire company. Each production department may be treated as a separate overhead cost pool.

cost driver

A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs. (aka: activity base/driver)

allocation base

A measure of activity such as direct labor-hours or machine-hours that is used to assign costs to cost objects. -most widely used allocation bases in manufacturing are direct labor-hours, direct labor cost, machine-hours, and (when comp only has single product) units of product aka:measure of activity used to assign overhead costs to products and services should be a cost driver

predetermined overhead rate

A rate used to charge manufacturing overhead cost to jobs that is established in advance for each period. It is computed by dividing the estimated total manufacturing overhead cost for the period by the estimated total amount of the allocation base for the period. Is computed before the period begins

Why use an allocation base?

An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. We use an allocation base because: a.It is impossible or difficult to trace overhead costs to particularjobs. b. Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager's salary. c. Many types of manufacturing overhead costs are fixed event hough output fluctuates during the period.

Which of the following is only true in a multiple predetermined overhead rate system?

Each production department may have its own predetermined overhead rate.

job cost sheet

Records the materials, labor, and manufacturing overhead costs charged to that job and are recorded when the materials are issued to the job The job costs sheets provide an underlying set of financial records that explain what specific jobs comprise the amounts reported in Work-in-ProcessandFinished Goodson the balance sheet. The job costs sheets provide an underlying set of financial records that explain what specific jobs comprise the amounts reported in Cost of Goods Soldon the income statement.

manufacturing overhead application

The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. POHR = Estimated total manufacturing overhead cost for the coming period / Estimated total units in theallocation base for the coming period --- denominator is typically the cost driver that causes overhead

overhead application

The process of assigning overhead cost to specific jobs. Formula = predetermined overhead rate x amount of the allocation base incurred by the job

How are nonmanufacturing costs treated?

Treated as period costs under absorption/full costing and they are not assigned to units of product

activity-based costing

When a company creates overhead rates based on the actions it performs, it is employing an approach called activity- based costing Activity-based costing is an alternative approach to developing multiple predetermined overhead rates. Managers use activity-based costing systems to more accurately measure the demands that jobs, products, customers, and other cost objects make on overhead resources.

materials requisition form

a document that specifies the type and quantity of materials to be drawn from the storeroom and identifies the job that will be charged for the cost of materials -used to control the flow of materials into production and also for making journal entries in the accounting records

cost plus pricing occurs when_______

a markup percentage is added to the cost of a job

cost-plus pricing

a pricing method in which a predetermined markup is applied to a cost base to determine the target selling price

plantwide overhead rate

a single predetermined overhead rate that is used throughout a plant Many companies use a single predetermined plantwideoverhead rateto allocate all manufacturing overhead costs to jobs based on their usage of direct-labor hours.

Absorption costing

all manufacturing costs, both fixed and variable, are assigned to units of product -- units are said to fully absorb manufacturing cots

time ticket

an hour-by-hour summary of the employee's activities throughout the day

normal cost system

applies overhead to jobs by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the jobs

An essential quality of an overhead allocation base is that is must______.

be common to all the company's products and services

An essential quality of an overhead allocation base is that it must ______.

be common to all the company's products and services

The type and quantity of each type of direct material needed to complete a unit of product is listed on the Blank______.

bill of materials (a document that lists the quantity of each type of direct material needed to complete a unit of product)

Widely used allocation bases in manufacturing include:

direct labor cost direct labor hours units of product machine hours

The total costs of a job includes

direct materials cost. direct labor cost. predetermined manufacturing overhead.

To calculate the unit product cost using the job cost sheet _________by the number of units produced.

divide the total job cost

The predetermined overhead rate per direc labor dollar is calculated by:

estimated manufacturing overhead / estimated direct labor

When a company applies more overhead to production than it actually incurs, it results in the adjustment for this is....

overapplied overhead decreases cost of goods sold and increases net operating income

Which of the following would be considered direct materials in a service firm that uses job-order costing?

paperwork at a law firm -anything that's not an asset

A multiple predetermined overhead rate system is more accurate than a plantwide overhead rate system because it Blank______.

reflects differences in how overhead costs are incurred within departments

When all of a company's job cost sheets are viewed collectively, they form what is known as a(n)

subsidiary ledger

When a company applies less overhead to production than it actually incurs, it creates... the adjustment for this is....

underapplied overhead increases cost of goods sold and decreases net operating income