Accounting 2: Chapter 2

Job-Order Costing - A Managerial Perspective - Part 2 (2 of 2) 1) Many companies use a single predetermined plantwide __ __ to allocate all manufacturing overhead costs to jobs based on their usage of direct-labor hours. 2) It is often overly-simplistic and ____ to assume that direct-labor hours is a company's only manufacturing overhead cost driver. 3) If more than one overhead cost driver can be identified, job cost accuracy is improved by using _____ predetermined overhead rates.

1) overhead rate 2) incorrect 3) multiple

Job-order costing systems are used when: 1. Many different products are _____ each period. 2. Products are manufactured to ____. 3. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each ____.

1) produced 2) order 3) job

1) In absorption costing, all manufacturing costs, both fixed and variable, are assigned to units of ____—units are said to fully absorb _____ costs. 2) Conversely, all nonmanufacturing costs are treated as ____ costs and they are not assigned to units of product.

1) product; manufacturing 2) period

Job-Order Costing for Financial Statements to External Parties The amount of overhead applied to all jobs during a period will differ from the actual amount of overhead costs incurred during the period. 1. When a company applies less overhead to production than it actually incurs, it creates what is known as _____ overhead. 2. When it applies more overhead to production than it actually incurs, it results in ______ overhead.

1) underapplied 2) overapplied

3. Use the following equation to estimate the total amount of manufacturing overhead: Y = a + bX Where, Y = a = b = X = 4. Then, compute the ___ ___ __

3) Y = The estimated total manufacturing overhead cost a = The estimated total fixed manufacturing overhead cost b = The estimated variable manufacturing overhead cost per unit of the allocation base X = The estimated total amount of the allocation base 4) predetermined overhead rate.

1) unit product cost = 2) used for valuing unsold units in ending inventory and for determining...

1) total product cost / number of units 2) COGS

why do some companies use predetermined overhead rates rather than actual manufacturing overhead

If actual manufacturing overhead cost is applied to jobs, the company must wait until the end of the accounting period to apply overhead and to cost jobs. If the company computes actual overhead rates more frequently to get around this problem, the rates may fluctuate widely due to seasonal factors or variations in output. For this reason, most companies use predetermined overhead rates to apply manufacturing overhead costs to jobs.

explain why some production costs must be assigned to products through an allocation process

Some production costs such as a factory manager's salary cannot be traced to a particular product or job, but rather are incurred as a result of overall production activities. In addition, some production costs such as indirect materials cannot be easily traced to jobs. If these costs are to be assigned to products, they must be allocated to the products

what is the purpose of a job cost sheet?

The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials costs traced to the job, direct labor costs traced to the job, and manufacturing overhead costs applied to the job. When a job is completed, the job cost sheet is used to compute the unit product cost.

Job Cost Sheets: Balance Sheet Reporting The job costs sheets provide an underlying set of financial records that explain what specific jobs comprise the amounts reported in ___ __ __ and ___ __ on the balance sheet.

Work-in-Process; Finished Goods

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 ___ ___ to particular jobs. b. Manufacturing overhead consists of many ____ items ranging from the grease used in machines to the production manager's salary. c. Many types of manufacturing overhead costs are ___ even though output fluctuates during the period.

a) overhead costs b) different c) fixed

Wilson Products uses a plantwide predetermined overhead rate of $10 per direct labor-hour. Direct material and direct labor associated with Job X23 are $4,000 and $1,200 respectively. If Job X23 used 100 direct labor-hours, what is the total cost assigned to this job?

answer: $6,200

Overhead Application Rate (1 of 2) PearCo estimates that it will require 160,000 direct labor-hours to meet the coming period's estimated production level. In addition, the company estimates total fixed manufacturing overhead at $200,000, and variable manufacturing overhead costs of $2.75 per direct labor hour. Y = a + bX Y = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours) Y = $200,000 + $440,000 Y = $640,000 What does the predetermined overhead rate equal?

answer: POHR = $4.00 per direct labor-hour

the predetermined overhead rate * allocation base is to find the actual overhead or applied overhead?

applied

The direct materials required to manufacture each unit of product are listed on a ________.

bill of materials

materials requisition forms are used for....

controlling flow of materials into production and making journal entries

categories of manufacturing costs include...

direct materials, direct labor, and manufacturing overhead

what is the formula for predetermined overhead rate?

estimated total manufacturing overhead cost / estimated total amount of the allocation base

A job cost sheet records the materials, labor, and manufacturing overhead costs charged to each ____

job

a job cost sheet contains...

materials costs, manufacturing overhead costs, labor costs

Companies can improve job cost accuracy by using ________.

multiple predetermined overhead rates

total inventory =

raw mat + WIP + finished goods

1) What is the term used when a company applies less overhead to production than it actually incurs? 2) The adjustment for overapplied overhead ________. 3) When all of a company's job cost sheets are viewed collectively they form what is known as a ________.

1) Underapplied 2) decreases cost of goods sold and increases net operating income. 3) subsidiary ledger

Multiple Predetermined Overhead Rates—An Activity-Based Approach 1) When a company creates overhead rates based on the activities that it performs, it is employing an approach called ___ __ __. 2) 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 ___, ____, _____, and other cost objects make on overhead resources.

1) activity-based costing 2) jobs, products, customers

Computing Predetermined Overhead Rates The predetermined overhead rate is computed before the period begins using a four-step process. 1. Estimate the total amount of the ___ ___ (the denominator) that will be required for next period's estimated level of production. 2. Estimate the total ____ manufacturing overhead cost for the coming period and the ____ manufacturing overhead cost per unit of the allocation base.

1) allocation base 2) fixed; variable

Manufacturing Overhead Application 1) The predetermined overhead rate (POHR) used to apply overhead to jobs is determined _____ the period begins. 2) formula? 3) Ideally, the allocation base is a __ __ that causes overhead.

1) before 2) estimated total manufacturing overhead cost / estimated total amount of allocation base 3) cost driver

Job-Order Costing - A Managerial Perspective - Part 1 Inaccurately assigning manufacturing costs to jobs adversely influences planning and decisions made by managers. 1) Job-order costing systems can accurately trace ____ materials and ____ labor costs to jobs. 2) Job-order costing systems often fail to accurately allocate the ____ ___ costs used during the production process to their respective jobs.

1) direct; direct 2) manufacturing overhead

The need for a predetermined overhead rate... - Predetermined overhead rates that rely upon estimated data are often used because: 1. Actual overhead for the period is not known until the ____ of the period, thus inhibiting the ability to ____ job costs during the period. 2. Actual overhead costs can fluctuate _____, thus misleading decision makers.

1) end; estimate 2) seasonally

Job-Order Costing - A Managerial Perspective - Part 2 (1 of 2) Choosing an Allocation Base 1) Job-order costing systems often use allocation bases that do not reflect how jobs actually use ____ ___ 2) The allocation base in the predetermined overhead rate must ____ the overhead cost to improve job cost ____. 3) A cost driver is a factor that causes ___ ____.

1) overhead resources. 2) drive; accuracy 3) overhead costs

A normal cost system applies overhead costs to jobs by ________.

multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job

Overhead cost formula: overhead applied to a particular job =

predetermined overhead rate * amount of the allocation base incurred by the job

the formula y = a +bX represents the estimated...

total FIXED manufacturing overhead cost

y = a = b = x =

y = estimated total manufacturing overhead cost a = estimated total fixed manufacturing overhead cost b = estimated variable manufacturing overhead cost per unit of allocation base x = estimated total amount of allocation base

Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53? (slide 26 explanation)

answer: $ 730.

Spartan Corporation estimates that it will incur $200,000 of total manufacturing overhead cost at an estimated activity level of 10,000 direct labor-hours. What is the amount of manufacturing overhead that would be applied to a job that required 200 direct labor-hours?

answer: $4,000 1) find predetermined overhead rate, 200,000 / 10,000 = 20 2) multiply it by the amount of allocation base incurred 200 20 * 200 = 4000

The management of Blue Ocean Company estimates that 50,000 machine-hours will be required to support the production planned for the year. It also estimates $300,000 of total fixed manufacturing overhead cost for the coming year and $4 of variable manufacturing overhead cost per machine-hour. What is the predetermined overhead rate?

answer: $10.00 per machine hour. step 1: find allocation base (denominator) (MH) = 50,000 step 2: fixed cost = 300,000 step 3: use formula to find manufacturing overhead cost (numerator) y = 300,000 + (4*50,000) y = 500,000 step 4: use formula 500,000/ 50,000 = 10.00 per machine hour

Job Cost Sheets: Income Statement Reporting The job costs sheets provide an underlying set of financial records that explain what specific jobs comprise the amounts reported in ___ __ __ ___ on the income statement.

answer: Cost of Goods Sold

Wilson Products uses a plantwide predetermined overhead rate of $10 per direct labor-hour. Direct material and direct labor associated with Job X23 are $4,000 and $1,200 respectively. If Job X23 used 100 direct labor-hours to produce 50 audio controllers, what is this job's unit product cost (per audio controller)?

answer: $124

Financial Adjust for Overhead Applied The cost of goods sold reported on a company's income statement must be adjusted to reflect underapplied or overapplied overhead. 1. The adjustment for underapplied overhead increases.... and decreases.... 2. The adjustment for overapplied overhead decreases... and increases...

1) cost of goods sold; net operating income. 2) cost of goods sold; net operating income.

1) estimated total manufacturing overhead cost includes... 2) estimated total amount of the allocation base includes...

1) depreciation, utilities, indirect labor, indirect materials 2) direct labor hours, machine hours, units of product