Chapter 3. Job-order Costing

Manufacturing overhead costs

-are indirect costs -consist of many different items Reason: Total manufacturing overhead costs tend to remain relatively constant due to the presence of fixed costs. Units produced fluctuate which causes the average cost per unit to vary.

Manufacturing overhead:

-contains fixed costs. -is an indirect cost. -consists of many different types of costs.

The total cost of a job includes:

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

Categories of manufacturing costs include

-direct materials -direct labor -manufacturing overhead

Costs assigned to units of product under absorption costing include:

-fixed manufacturing. -variable manufacturing.

Widely used allocation bases in manufacturing include

-machine hours -units of product -direct labor hours -direct labor cost

Labor charges that cannot be easily traced to a job are considered

-manufacturing overhead -indirect labor

A job cost sheet contains ______ the job.

-manufacturing overhead charged to -labor costs charged to -materials costs charged to

A bill of materials contains the

-type of each direct material needed to complete a unit of product -quantity of each direct material needed to complete a unit of product

When predetermined overhead rates are based on budgeted activity

-unit product costs fluctuate depending upon budgeted level of activity -products are charged for resources they don't use

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

Each production department may have its own predetermined overhead rate.

Activity-based absorption costing only assigns variable manufacturing overhead costs to products.

False Reason: Activity-based absorption costing assigns all manufacturing overhead costs to products based on activities performed to make the products.

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

Paperwork at a law firm

Which of the following is not a manufacturing cost category?

Selling & administrative costs

The costs accumulated in the numerator of an activity cost pool divided by the quantity of the activity measure in its denominator equals what is called an

activity rate

When a company creates overhead rates based on the actions it performs, it is employing an approach called _______

activity-based costing

Companies use a predetermined overhead rate rather than an actual overhead rate because

an actual rate is not known until the end of the period Reason: An actual rate would be more accurate, but it could only be calculated at the end of the period

Activity-based absorption costing

assigns overhead based on events that consume overhead resources

Setting up equipment, placing purchase orders, and arranging shipments to customers are all examples o

batch-level activities

Costs at the batch level depend on the number of

batches processed

The predetermined overhead rate is calculated

before the period begins

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

bill of materials

Costs assigned to units of product in absorption costing include ______ manufacturing costs.

both variable and fixed Reason: Units of product are always assigned manufacturing costs of some kind.

The difference between direct labor and indirect labor is that direct labor

can be easily traced to jobs, while indirect labor cannot

Which of the following would not be considered a direct labor cost in a service firm that uses job-order costing?

The salary of the manager at a hair salon.

Which of the following would not be considered a job in a service firm that uses job-order costing?

The tax department in an accounting firm Reason: This is a department; a job would be an individual client

Average manufacturing overhead cost per unit usually varies from one period to the next because

fixed manufacturing overhead remains constant in total even when production changes Reason: The makeup of manufacturing overhead is stable and does not change frequently.

The document that records the materials, labor, and manufacturing overhead costs charged to a job is the

job cost sheet

Companies that use job-order costing make

many different products Reason: Companies that make a few products in large numbers generally use process costing.

An allocation base is a(n)

measure of activity used to assign overhead costs to products and services Reason: An allocation base does not need to be a cost driver. For example, a factory supervisor's salary could be assigned to products using the allocation base, but the salary is not actually driven by the allocation base.

In the formula Y = a + bX, a represents the estimated

total fixed manufacturing overhead cost

The average manufacturing overhead cost per unit tends to

vary from one period to the next Reason: Total manufacturing overhead stays fairly constant, but the average manufacturing overhead per unit will increase (decrease) as the number of units produced decreases (increases) from one period to the next.

Traditional absorption costing systems allocate all manufacturing costs using a(n) ______ related allocation base.

volume

Allocation bases that do not drive overhead costs

will not accurately measure the cost of overhead used

An activity cost pool accumulates costs for ______ activity measure(s).

exactly one

Estimated manufacturing overhead $500,000 Estimated direct labor cost $250,000 Actual manufacturing overhead $720,000 Actual direct labor cost $300,000 Based on this information, the predetermined overhead rate per direct labor dollar is

$2.00 Reason: Predetermined Overhead rate = total manufacturing overhead/estimated allocation base $500,000 ÷ $250,000 = $2.00 per direct labor dollar

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:

$2.00. Reason: Total cost of Job #420 = Direct materials + direct labor + overhead (predetermined overhead rate × direct labor cost) = $4,000 + $5,000 + 1.20 × $5,000 = $15,000 Unit product cost = $15,000 ÷ 7,500 units = $2.00 per unit.

Estimated manufacturing overhead $500,000 $338,000 $162,000 Estimated direct labor cost $250,000 $130,000 $120,000 Actual manufacturing overhead $720,000 $400,000 $320,000 Actual direct labor cost $300,000 $160,000 $140,000 Based on this information, the predetermined overhead rate per direct labor dollar for Dept. A is

$2.60 Reason: $338,000 ÷ $130,000 = $2.60

Which of the following statements are true?

-Too much fixed overhead may be applied to products when the predetermined overhead rate is based on estimated activity. -When overhead is based on estimated activity, units produced must shoulder the cost of unused capacity.

Estimated manufacturing overhead $500,000 $338,000 $162,000 Estimated direct labor cost $250,000 $130,000 $120,000 Actual manufacturing overhead $720,000 $400,000 $320,000 Actual direct labor cost $300,000 $160,000 $140,000 Based on this information, the predetermined overhead rate per direct labor dollar for Dept. B is $

1.35 Reason: Predetermined Overhead rate per direct labor = total manufacturing overhead / estimated allocation base (direct labor cost)

Given a predetermined overhead rate of $1.60 per direct labor hour, a capacity of 50,000 hours and 42,000 actual hours, the cost of unused capacity is $

12,800

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 Reason: Predetermined Overhead rate per machine = total overhead cost / machine hours 500,000/250,000 = 2

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

840 Reason: (Total manufacturing cost x mark-up percentage) + total manufacturing cost

What type of activities are performed each time a group of units is processed, regardless of how many units are in the group?

Batch-level

One reason to use a predetermined overhead rate is to eliminate the effect of seasonal factors.

True Reason: For example, if actual rates were used, costs may be higher in summer and winter than in spring or fall due to heating and cooling costs.

An allocation base should be:

a cost driver. Reason: An ideal allocation base should really drive or cause overhead costs. Machine hours is not always an appropriate allocation base. Reason: An ideal allocation base should really drive or cause overhead costs. Machine hours is not always an appropriate allocation base. An ideal allocation base should really drive or cause overhead costs. Direct labor hours is not always an appropriate allocation base.

A cost driver is

a factor that causes overhead costs to occur

Cost-plus pricing occurs when

a markup percentage is added to the cost of a job

A "bucket" in which costs are accumulated that relate to a single activity measure is called an

activity cost pool

An allocation base used as the denominator for an activity cost pool is called an

activity measure

In the formula Y = a + bX, X represents the estimated

total amount of the allocation base

Job-order costing would most likely be used in a(n)

construction company Reason: A costing system used in situations where many different products, jobs, or services are produced each period.

A factor that causes overhead costs is called a

cost driver

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

divide the total job cost

To calculate a predetermined overhead rate, divide estimated total manufacturing overhead by the

estimated total allocation base Reason: Estimated manufacturing overhead is divided by estimated direct labor hours only if direct labor hours is the allocation base.

When compared to a traditional approach, activity-based absorption costing uses

more

Compared to a plantwide overhead rate system, a multiple predetermined overhead rate system is

more complex and more

When compared to a departmental approach, using activity-based costing results in

more overhead rates

The predetermined overhead rate is multiplied by the actual allocation base incurred by a job to find

overhead applied to the job

The capacity-based approach treats unused capacity as a

period cost

The total cost of a job is calculated by adding the total of direct labor cost, direct materials cost, and:

predetermined manufacturing overhead cost.

The formula for applying overhead to a specific job is: ______ amount of allocation base incurred by job.

predetermined overhead rate ×

Designing and advertising a product are examples of

product-level activities

Activities that are carried out to support entire product lines, but are not performed every time a new unit or batch is produced, are ______

product-level activities.

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

reflects differences in how overhead costs are incurred within departments

Total manufacturing overhead costs tend to

remain fairly constant

An hour-by-hour summary of an employee's activities throughout the day is found on the

time ticket

The document used to record the hours workers spend on each job and task is called a

time ticket