Managerial Accounting Chapter 3 Key Terms

Activity cost pool

A "bucket" in which costs are accumulated that relate to a single activity. (p. 131)

Activity-based absorption costing

A costing method that assigns all manufacturing overhead costs to products based on the activities performed to make those products. (p. 130)

Absorption costing

A costing method that includes all manufacturing costs -- direct materials, direct labor, and both variable and fixed manufacturing overhead -- in the cost of a product. (p. 84)

Normal cost system

A costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job. (p. 90)

Job-order costing

A costing system used in situations where many different products, jobs, or services are produced each period. (p. 84)

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. (p. 107)

Overapplied overhead

A credit balance in the Manufacturing Overhead account that occurs when the amount of overhead cost applied to Work in Process exceeds the amount of overhead cost actually incurred during a period. (p. 104)

Underapplied overhead

A debit balance in the Manufacturing Overhead account that occurs when the amount of overhead cost actually incurred exceeds the amount of overhead cost applied to Work in Process during a period. (p. 104)

Time ticket

A document that is used to record the amount of time an employee spends on various activities. (p. 88)

Bill of materials

A document that shows the quantity of each type of direct material required to make a product. (p. 86)

Materials requisition form

A document that specifies the type and quantity of materials to be drawn from the storeroom and that identifies the job that will be charged for the cost of those materials. (p. 86)

Cost driver

A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs. (p. 91)

Job cost sheet

A form that records the materials, labor, and manufacturing overhead costs charged to a job. (p. 86)

Allocation base

A measure of activity such as direct labor-hours or machine-hours that is used to assign costs to cost objects. (p. 89)

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. (p. 89)

Schedule of cost of goods sold

A schedule that contains three elements of product costs -- direct materials, direct labor, and manufacturing overhead -- and that summarizes the portions of those costs that remain in ending Finished Goods inventory and that are transferred out of Finished Goods into Cost of Goods Sold. (p. 102)

Schedule of cost of goods manufactured

A schedule that contains three elements of product costs -- direct materials, direct labor, and manufacturing overhead -- and that summarizes the portions of those costs that remain in ending Work in Process inventory and that are transferred out of Work in Process into Finished Goods. (p. 102)

Plantwide overhead rate

A single predetermined overhead rate that is used throughout a plant. (p. 107)

Which of the following entries would record correctly the application of overhead cost? C) Manufacturing Overhead Work in Process

A) Work in Process Accounts Payable B) Manufacturing Overhead Accounts Payable C) Manufacturing Overhead Work in Process <---- D) Work in Process Manufacturing Overhead

Perabo Company uses a job-order costing system. Manufacturing overhead is applied to Work in Process using a predetermined overhead rate. During the current month, the company's transactions included the following: Direct materials issued to production $360,000 Indirect materials issued to production 32,000 Direct labor cost incurred 428,000 Manufacturing overhead cost applied 452,000 Manufacturing overhead cost incurred 500,000 The company had no beginning or ending inventories in the current month. What was the cost of goods manufactured? C) $1,240,000

A) $1,320,000 B) $1,288,000 C) $1,240,000 D) $1,208,000

Costanzo Company manufactures a specialty line of silk-screened blouses. The company uses a job-order costing system. During the month, the following costs were incurred on Job 1041: direct materials $54,800 and direct labor $19,200. In addition, selling and shipping costs of $28,000 were incurred on the job. Manufacturing overhead was applied at the rate of $25 per machine-hour (MH) and Job 1041 required 320 MHs. If Job 1041 consisted of 5,000 blouses (or units), what is the cost of goods sold per unit? C) $16.40

A) $50.00 B) $22.00 C) $16.40 D) $14.80

McCormack Company has the following estimated costs for next year: Sales commissions $150,000 Direct labor 110,000 Salary of production supervisor 70,000 Rent on factory equipment 32,000 Direct materials 30,000 Advertising expense 22,000 Indirect materials 10,000 The company estimates that 16,000 direct labor and 106,000 machine hours will be worked during the year. If overhead is applied on the basis of direct labor hours, what is the company's predetermined overhead rate? A) $7.00 Feedback: The predetermined overhead rate per hour is determined as follows.

A) $7.00 B) $13.88 C) $15.26 D) $17.12

Leigh Company's predetermined overhead rate is based on direct labor costs. The company's Work in Process account has a balance of $2,400, which relates to the one job that was in process at the end of an accounting period. The related job cost sheet includes total charges of $400 for direct materials and $1,000 for direct labor. If overhead is applied on the basis of direct labor costs, what is the company's predetermined overhead rate? A) 100%

A) 100% B) 50% C) 40% D) 17%

Kasper Company uses predetermined overhead rates to apply manufacturing overhead to jobs. The predetermined overhead rate is based on machine hours in the Machining Department and direct labor cost in the Assembly Department. At the beginning of the year, the company made the following estimates: Machining Assembly Direct labor cost $20,000 $15,000 Manufacturing overhead $25,000 $30,000 Direct labor hours 16,000 12,000 Machine hours 5,000 1,000 What predetermined overhead rates would be used in the Machining and Assembly Departments, respectively? D) $5.00 and 200%

A) 110% and $15 B) $5.00 and 50% C) $8.00 and 50% D) $5.00 and 200%

Dane Company's predetermined overhead rate is based on direct labor hours (DLHs). At the beginning of the current year, the company estimated that its manufacturing overhead would total $220,000 during the year. During the year, the company incurred $200,000 in actual manufacturing overhead costs. The Manufacturing Overhead account showed that overhead was underapplied by $8,000 during the year. If the predetermined overhead rate was $40.00 per DLH, how many DLHs were worked during the year? D) 4,800 hours Feedback: First, determine the amount of overhead applied to production by reference to the information about the Manufacturing Overhead account as follows. Actual overhead of $200,000 - Amount applied to production = Amount underapplied of $8,000; Amount applied to production = $192,000 Then, solve for the DLHs (the activity base for the overhead rate) as follows. Predetermined overhead rate of $40.00 per DLH x Actual DLHs = Manufacturing overhead applied of $192,000 (from above); Actual DLHs = 4,800

A) 5,500 hours B) 5,200 hours C) 5,000 hours D) 4,800 hours

Which of the following statements is correct? A) A company that produces products with individual and unique features most likely would use a job-order costing system. Feedback: A job-order costing system is typically used in situations where many different products, each individual and unique features, are produced each period; thus, choice A is correct. Job-order costing is used extensively in service industries; thus choice B is not correct. In a job-order costing system, costs are traced and allocated to jobs (rather than being traced to departments and then allocated to units of product); thus, choice C is not correct.

A) A company that produces products with individual and unique features most likely would use a job-order costing system. B) Job-order costing systems cannot be used by service firms. C) Costs are traced to departments and then allocated to units of product when job-order costing is used. D) All of the above.

In a job order cost system, what account is debited when direct materials are requisitioned for use in production? D) Work in Process Feedback: When direct materials are requisitioned from the storeroom for use in production, they are recorded as a debit to the Work in Process account.

A) Finished Goods B) Manufacturing Overhead C) Raw Materials D) Work in Process

In a job-order cost system, what account is debited when indirect materials are requisitioned for use in production? B) Manufacturing Overhead Feedback: Indirect materials costs are a manufacturing overhead cost. Actual manufacturing overhead costs are recorded directly as a debit to the Manufacturing Overhead account.

A) Finished Goods B) Manufacturing Overhead C) Raw Materials D) Work in Process

Macht Company uses a predetermined overhead rate based on direct labor hours (DLHs) to apply manufacturing overhead to jobs. At the beginning of the year, the company estimated manufacturing overhead would be $200,000 and DLHs would be 20,000. The actual figures for the year were $215,000 for manufacturing overhead and 21,000 DLHs. What is the amount of over- or underapplied overhead for the year? B) Underapplied overhead of $5,000

A) Overapplied overhead of $5,000 B) Underapplied overhead of $5,000 C) Overapplied overhead of $10,000 D) Underapplied overhead of $10,000

A debit balance in the Manufacturing OH account at the end of the period means that: A) actual OH cost was greater than the amount charged to production.

A) actual OH cost was greater than the amount charged to production. B) actual OH cost was less than the amount of direct labor cost. C) more OH cost has been charged to production than has been charged to finished goods during the period. D) actual OH cost was less than the amount charged to production.

Under a job-order costing system, the dollar amount transferred from Work in Process to Finished Goods is the sum of the costs charged to all jobs: D) completed during the period.

A) started in process during the period. B) in process during the period. C) completed and sold during the period. D) completed during the period.

When manufacturing overhead is applied to production, it is added to: C) the Work in Process account.

A) the Cost of Goods Sold account. B) the Raw Materials account. C) the Work in Process account. D) the Finished Goods inventory account.

On the Schedule of Cost of Goods Manufactured, the final Cost of Goods Manufactured figure represents: D) the amount of cost of goods completed during the current year whether they were started before or during the current year.

A) the amount of cost charged to Work in Process during the period. B) the amount of cost transferred from Finished Goods to Cost of Goods Sold during the period. C) the amount of cost placed into production during the period. D) the amount of cost of goods completed during the current year whether they were started before or during the current year.

Overapplied overhead means that: B) the applied overhead cost was greater than the actual overhead cost.

A) the applied overhead cost was less than the actual overhead cost. B) the applied overhead cost was greater than the actual overhead cost. C) the estimated overhead cost was less than the actual overhead cost. D) the estimated overhead cost was less than the applied overhead cost.

Underapplied overhead might be explained by which of the following situations? C) Less than est. Greater than est

Actual activity Actual OH costs A) Greater than est Greater than est. B) Greater than est Less than est. C) Less than est. Greater than est D) Less than est. Less than est.

Manufacturing overhead underapplied by $4,600

Actual direct labor-hours 12,000 x Predetermined overhead rate $18.70 = Manufacturing overhead applied (b) $224,400 Less: Manufacturing overhead incurred (a) 229,000 Manufacturing overhead under-applied (a) - (b) $4,600

Exercise 3-2 Luthan Company uses a predetermined overhead rate of $23.40 per direct labor-hour. This predetermined rate was based on a cost formula that estimated $257,400 of total manufacturing overhead for an estimated activity level of 11,000 direct labor-hours. The company incurred actual total manufacturing overhead costs of $240,000 and 10,800 total direct labor-hours during the period. REQUIRED: Determine the amount of manufacturing overhead that would have been applied to all jobs during the period.

Actual direct labor-hours 10,800 × Predetermined overhead rate $23.40 = Manufacturing overhead applied $252,720

REQUIRED: 1. Compute the amount of underapplied or overapplied overhead cost for the year.

Actual manufacturing overhead costs $473,000 Manufacturing overhead cost applied: 19,400 MH × $25 per MH 485,000 Overapplied overhead cost $ 12,000

Batch-level activity

An activity that is performed each time a batch is handled or processed, regardless of how many units are in the batch. The amount of resources consumed depends on the number of batches run rather than on the number of units in the batch. (p. 131)

Product-level activity

An activity that relates to specific products and typically must be carried out regardless of how many batches are run or units of product are produced and sold. (p. 131)

activity measure

An allocation base that is used as the denominator for an activity cost pool. (p. 131)

Activity

An event that causes the consumption of manufacturing overhead resources. (p. 130)

Raw materials

Any materials that go into the final product. (p. 93)

2. Assuming that the entire amount of the underapplied or overapplied overhead is closed out to Cost of Goods Sold, what would be the effect of the underapplied or overapplied overhead on the company's gross margin for the period?

Because manufacturing overhead is under-applied, the cost of goods sold would increase by $5,700 and the gross margin would decrease by $5,700.

ABC Company has the following balances for October: Oct 1st Oct 31st Raw Materials $10,000 $5,000 Work in Process $15,000 $16,000 Finished Goods $30,000 $20,000 If the company purchased $10,000 of Raw Material during October, what was the cost of Raw Materials used in production?

Beg. Balance + Purchases - Ending Bal = Raw Mat'l Used $10,000 + $10,000 - $5,000 = $15,000

Direct labor cost (a) 21,000 Actual direct labor hours worked (b) 1,400 Direct labor hourly wage rate (a) / (b) $15

Direct labor cost (a) 7,500 Actual direct labor hours worked (b) 500 Direct labor hourly wage rate (a) / (b) $15

Feedback: Note that the selling and shipping costs should be ignored; these costs are operating costs, and, as such, are not a component of cost of goods sold. First, determine the amount of manufacturing overhead applied to the job was follows. Overhead applied = Predetermined overhead rate x Actual machine-hours Overhead applied = $25.00 per MH x 320 machine-hours = $8,000 Then, accumulate the total manufacturing costs for the job, and divide by the number of units in the job to determine the cost (or cost of goods sold) per unit as follows.

Direct materials $54,800 Direct labor 19,200 Manufacturing overhead 8,000 Total manufacturing costs of job 82,000 Number of units in job divided by 5,000 Cost of goods sold per unit $16.40

2. Prepare a scedule of cost of goods manufactured for the year.

Direct materials: Raw materials inventory, beginning $ 20,000 Add purchases of raw materials 400,000 Raw materials available for use 420,000 Deduct raw materials inventory, ending 30,000 Raw materials used in production 390,000 Less indirect materials 15,000 $375,000 Direct labor 60,000 Manufacturing overhead cost applied to work in process 485,000 Total manufacturing costs 920,000 Add: Work in process, beginning 40,000 960,000 Deduct: Work in process, ending 70,000 Cost of goods manufactured $890,000

[The following information applies to the questions displayed below.] Sweeten Company had no jobs in progress at the beginning of March and no beginning inventories. It started only two jobs during March—Job P and Job Q. Job P was completed and sold by the end of the March and Job Q was incomplete at the end of the March. The company uses a plantwide predetermined overhead rate based on direct labor-hours. The following additional information is available for the company as a whole and for Jobs P and Q (all data and questions relate to the month of March):

Estimated total fixed manufacturing overhead $ 10,000 Estimated variable manufacturing overhead per direct labor-hour $ 1.00 Estimated total direct labor-hours to be worked 2,000 Total actual manufacturing overhead costs incurred $ 12,500

CORRECT ONE

Estimated total manufacturing overhead cost (a) $12,000 / Estimated total direct labor hours (DLHs) (b) 2,000 DLHs (a) / (b) = Predetermined overhead rate $6.00 per DLH

Variable Cost per unit decreases as production increases.

FALSE Variable Cost per unit is constant.

Conversion Cost = Direct Materials + Direct Labor

False ! Prime Cost = Direct Materials + Direct Labor Conversion Cost = Mangf. Overhead + Direct Labor

Warranty Repairs are an example of "Internal Failure" quality costs.

False ! Warranty Repairs are an example of "External Failure" quality costs.

Discussion Questions 3-5 Why do companies use predetermined overhead rates rather than actual manufacturing overhead costs to apply overhead to jobs?

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 over-head rates to apply manufacturing overhead costs to jobs.

3. What is the direct labor hourly wage rate?

Job P Job Q Direct labor hourly wage rate $15 $15

2. How much manufacturing overhead was applied to Job P and Job Q?

Job P Job Q Manufacturing overhead applied $8,400 $3,000

Direct Materials $8,000 Direct Labor $7,500 Overhead $3,000 Total Costs 18,500

Job Q Actual direct labor-hours 500 x Predetermined overhead rate $6 = Manufacturing overhead applied $3,000

Job P Actual direct labor-hours 1,400 x Predetermined overhead rate $6 = Manufacturing overhead applied $8,400

Job Q Actual direct labor-hours 500 x Predetermined overhead rate $6 = Manufacturing overhead applied $3,000

3-10 Provide two reasons why overhead might be underapplied in a given year.

Manufacturing overhead may be under-applied for several reasons. Control over over-head spending may be poor. Or, some of the overhead may be fixed and the actual amount of the allocation base may be less than estimated at the beginning of the period. In this situation, the amount of overhead applied to inventory will be less than the actual overhead cost incurred.

Predetermined overhead rate $6 per DLH Predetermined overhead rate = Estimated total manufacturing overhead costs / Estimated total amount of the allocation base

Predetermined OH Rate = Estimated total fixed manufacturing overhead / (Estimated total direct labor-hours to be worked + Estimated variable manufacturing overhead per direct labor-hour) = 10,000 / 2,000 + 1.00 = 5 + 1.00 = 6 per DLH

Exercise 3-7 Osburn Manufacturing uses a a predetermined overhead rate of $18.20 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $218,400 of total manufacturing overhead for an estimated activity level of 12,000 direct labor-hours.

REQUIRED: 1. Determine the amount of underapplied or overapplied manufacturing overhead for the period.

Osborn Manufacturing uses a predetermined overhead rate of $18.70 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $233,750 of total manufacturing overhead for an estimated activity level of 12,500 direct labor-hours. The company incurred actual total manufacturing overhead costs of $229,000 and 12,000 total direct labor-hours during the period.

Required: 1. Determine the amount of underapplied or overapplied manufacturing overhead for the period.

Job P Job Q Direct materials $ 13,000 $ 8,000 Direct labor cost $ 21,000 $ 7,500 Actual direct labor-hours worked 1,400 500

Required: 1. What is the company's predetermined overhead rate?

Advertising Expense is an example of a Period Cost.

TRUE

Beginning Finished Goods + Cost of Goods Manufactured Cost of Goods Sold = Ending Inventory

TRUE

Electricity used in a factory to manufacture products is an example of a variable cost.

TRUE

If a company closes any under- or overapplied overhead to the Cost of Goods Sold account, then Cost of Goods Sold will be credited if manufacturing overhead is overapplied for the period.

TRUE

If a company uses predetermined overhead rates, actual manufacturing overhead costs of a period will be recorded in the Manufacturing Overhead account, but they will not be recorded on the job cost sheets for the period.

TRUE

Raw Materials is an example of a Product Cost.

TRUE

Exercise 3-12 The following cost data relate to the manufacturing activities of Chang Company during the just completed year: Manufacturing overhead costs incurred Indirect materials $15,000 Indirect labor 130,000 Property taxes, factory 8,000 Utilities, factory 70,000 Depreciation, factory 240,000 Insurance, factory 10,000 Total actual manufacturing overhead costs incurred $473,000 Other costs incurred: Purchases of raw materials (both direct and indirect) $400,000 Direct labor cost $60,000 Inventories: Raw materials, beginning $20,000 Raw materials, ending $30,000 Work in process, beginning $40,000 Work in process, ending $70,000

The company uses a predetermined overhead rate to apply overhead cost to jobs. The rate for the year was $25 per machine-hour. A total of 19,400 machine-hours was recorded for the year.

Exercises Exercise 3-1 Harris Fabrics computes its predetermined overhead rate annually on the basis of direct labor-hours. At the beginning of the year, it estimated that 20,000 direct labor-hours would be required for the period's estimated level of production. The company also estimated $94,000 of fixed manufacturing overhead expenses for the coming period and variable manufacturing overhead of $2.00 per direct labor-hour. Harris's actual manufacturing overhead for the year was $123,900 and its actual total direct labor was 21,000 hours. REQUIRED: Computer the company's predetermined overhead rate for the year.

The estimated total manufacturing overhead cost is computed as follows: Y = $94,000 + ($2.00 per DLH)(20,000 DLHs) Estimated fixed manufacturing overhead $94,000 Estimated variable manufacturing overhead: $2.00 per DLH × 20,000 DLHs 40,000 Estimated total manufacturing overhead cost $134,000 The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead $134,000 ÷ Estimated total direct labor hours (DLHs) 20,000 DLHs = Predetermined overhead rate $6.70 per DLH

2. Assuming that the entire amount of the underapplied or overapplied overhead is closed out to cost of goods sold, what would be the effect of the underapplied or overapplied overhead on the company's gross margin for the period?

The gross margin would decrease by $4,600 Because manufacturing overhead is under-applied, the cost of goods sold would increase by $4,600 and the gross margin would decrease by $4,600.

Cost of goods manufactured

The manufacturing costs associated with the goods that were finished during the period. (p. 93)

3-6 What factors should be considered in selecting a base to be used in computing the predetermined overhead rate?

The measure of activity used as the allocation base should drive the overhead cost; that is, the allocation base should cause the overhead cost. If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and product costs will be distorted.

Overhead application

The process of charging manufacturing overhead cost to job cost sheets and to the Work in Process account. (p. 89)

4-b. What is the total amount of manufacturing cost assigned to Job Q as of the end of March (including applied overhead)?

Total manufacturing cost $ 18,500

Discussion Questions 3-9 What is underapplied overhead? Overapplied overhead? What disposition is made of these amounts at the end of the period?

Under-applied overhead occurs when the actual overhead cost exceeds the amount of overhead cost applied to Work in Process inventory during the period. Over-applied overhead occurs when the actual overhead cost is less than the amount of overhead cost applied to Work in Process inventory during the period. Under-applied or over-applied overhead is disposed of by either closing out the amount to Cost of Goods Sold or by allocating the amount among Cost of Goods Sold and ending inventories in proportion to the applied overhead in each account. The adjustment for under-applied overhead increases Cost of Goods Sold (and inventories) whereas the adjustment for over-applied overhead decreases Cost of Goods Sold (and inventories).

4-a. If Job P includes 20 units, what is its unit product cost?

Unit product cost $ 2,120

Work in process

Units of product that are only partially complete and will require further work before they are ready for sale to the customer. (p.93)

Finished goods

Units of product that have been completed but not yet sold to customers. (p. 93)

ABC Company has the following production levels and costs for the past two months: Oct Nov Production Volume 2000 units 3000 units Direct Materials $40,000 $60000 Direct Labor $48,000 $72,000 Overhead $50,000 $60,000 Use the Hi-Low Method to calculate the variable cost and fixed costs for October.

Var Cost per Unit = $54,000 / 1000 units = $54 per unit Var Cost for October = $54 per unit x 2000 units = $108,000 Fixed Cost for October = Total Cost - Variable Cost = $138,000 - $108,000 = $30,000

Feedback: The cost of goods manufactured is determined as follows.

Work in process, beginning of period $ 0 Direct materials issued to production 360,000 Direct labor cost incurred 428,000 Manufacturing overhead cost applied 452,000 Total manufacturing costs 1,240,000 Less: work in process, end of period (0) Cost of goods manufacturing $1,240,000

estimated total manufacturing overhead cost Y = $10,000 + ( $1.00 per DLH) (2,000 DLHs) Y = $10,000 + 2,000 Y = $12,000

estimated fixed manufacturing overhead $10,000 estimated variable manufacturing overhead: $1.00 DLH x 2,000 DLHs 2,000 Estimated total manufacturing overhead cost $12,000