Managerial Accounting- Test 1 Ch 2

What is the purpose of the job cost sheet in a job-order costing system?

A form that records the materials, labor, and manufacturing overhead costs charged to a job

Why aren't actual manufacturing overhead costs traced to jobs just as direct materials and direct labor costs are traced to jobs?

We have to consider how costs are calculated. Absorption costing is where all manufacturing costs, both fixed and variable, are assigned to units of product---which fully absorb manucacturing costs. Direct and Indirect must be considered

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

Basically, the method of applying overhead to jobs using a predetermined overhead rate assumes that actual overhead costs will be proportional to the actual amount of the allocation base incurred during the period. If, for example, the predetermined overhead rate is $6 per machine-hour, then it is assumed that actual overhead costs incurred will be $6 for every machine-hour that is actually worked. There are at least two reasons why this may not be true. First, much of the overhead often consists of fixed costs that do not change as the number of machine-hours incurred goes up or down. Second, spending on overhead items may or may not be under control. If individuals who are responsible for overhead costs do a good job, those costs should be less than were expected at the beginning of the period. If they do a poor job, those costs will be more than expected.

If a company fully allocates all of its overhead costs to jobs, does this guarantee that a profit will be earned for the period?

No

What is underapplied overhead? Overapplied overhead? What disposition is made of these amounts at the end of the period?

The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is called either underapplied or overapplied overhead. For Ruger Corporation, overhead was underapplied by $5,000 because the applied cost ($90,000) was $5,000 less than the actual cost ($95,000). If the situation had been reversed and the company had applied $95,000 in overhead cost to Work in Process while incurring actual overhead costs of only $90,000, then the overhead would have been overapplied.

Explain the four-step process used to compute a predetermined overhead rate.

The rate is determined at the beginning of the period so that jobs can be costed throughout the period rather than waiting until the end of the period. The predetermined overhead rate is determined by dividing the estimated total manufacturing overhead cost for the period by the estimated total amount of the allocation base for the period. Overhead is applied to jobs by multiplying the predetermined overhead rate by the actual amount of the allocation base used by the job.

What account is credited when overhead cost is applied to Work in Process? Would you expect the amount applied for a period to equal the actual overhead costs of the period? Why or why not?

When overhead cost is applied to work in process, Work in Processs is debited for the cost of direct materials, direct labor, and manucacturing overhead and Credited for the cost of goods manucactured all under work in progress. At the beginning of the period, Total OC / Total amount of base = predetermined overhead rate. During the period, Predetermined OH rate x actual amt of base incurred = total MO applied and at the end, Total Overhead cost - total manufacturing OH applied = Underapplied or overapplied overhead.

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

Basically, the method of applying overhead to jobs using a predetermined overhead rate assumes that actual overhead costs will be proportional to the actual amount of the allocation base incurred during the period. If, for example, the predetermined overhead rate is $6 per machine-hour, then it is assumed that actual overhead costs incurred will be $6 for every machine-hour that is actually worked. There are at least two reasons why this may not be true. First, much of the overhead often consists of fixed costs that do not change as the number of machine-hours incurred goes up or down. Second, spending on overhead items may or may not be under control. If individuals who are responsible for overhead costs do a good job, those costs should be less than were expected at the beginning of the period. If they do a poor job, those costs will be more than expected. Consider Machine Hours and Direct materials costs for the allocation base.

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

If an actual rate is computed monthly or quarterly, seasonal factors in overhead costs or in the allocation base can produce fluctuations in the overhead rate. For example, the costs of heating and cooling a factory in Illinois will be highest in the winter and summer months and lowest in the spring and fall. If the overhead rate is recomputed at the end of each month or each quarter based on actual costs and activity, the overhead rate would go up in the winter and summer and down in the spring and fall. As a result, two identical jobs, one completed in the winter and one completed in the spring, would be assigned different manufacturing overhead cost. '

Summary of Ch 2

LO1 Compute a predetermined overhead rate. Manufacturing overhead costs are assigned to jobs using a predetermined overhead rate. The rate is determined at the beginning of the period so that jobs can be costed throughout the period rather than waiting until the end of the period. The predetermined overhead rate is determined by dividing the estimated total manufacturing overhead cost for the period by the estimated total amount of the allocation base for the period. LO2 Apply overhead cost to jobs using a predetermined overhead rate. Overhead is applied to jobs by multiplying the predetermined overhead rate by the actual amount of the allocation base used by the job. LO3 Compute the total cost and average cost per unit of a job. The total cost of a job includes the actual direct materials and direct labor costs assigned to the job plus the applied overhead. The average cost per unit of a job is computed by dividing the total cost of a job by the number of units included in the job. Importantly, the average cost per unit does not represent the additional cost that would be incurred if another unit were produced. LO4 Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costs. Direct materials costs are debited to Work in Process when they are released for use in production. Direct labor costs are debited to Work in Process as incurred. Actual manufacturing overhead costs are debited to the Manufacturing Overhead account as incurred. Manufacturing overhead costs are applied to Work in Process using the predetermined overhead rate. The journal entry that accomplishes this is a debit to Work in Process and a credit to Manufacturing Overhead. LO5 Use T-accounts to show the flow of costs in a job-order costing system. See Exhibits 2-10 and 2-14 for summaries of the cost flows through the T-accounts. Page 92 LO6 Prepare schedules of cost of goods manufactured and cost of goods sold and an income statement. See Exhibits 2-11 and 2-12 for an example of these schedules and an income statement. LO7 Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts. The difference between the actual overhead cost incurred during a period and the amount of overhead cost applied to production is referred to as underapplied or overapplied overhead. Underapplied or overapplied overhead is closed out to Cost of Goods Sold. When overhead is underapplied, the balance in the Manufacturing Overhead account is debited to Cost of Goods Sold. This has the effect of increasing the Cost of Goods Sold and occurs because costs assigned to products have been understated. When overhead is overapplied, the balance in the Manufacturing Overhead account is credited to Cost of Goods Sold. This has the effect of decreasing the Cost of Goods Sold and occurs because costs assigned to products have been overstated.

Why do companies use predetermined overhead rates rather than actual manufacturing overhead costs to apply overhead to jobs?

the _________ is established before the period begins and is based entirely on estimated data, the overhead cost applied to Work in Process will generally differ from the amount of overhead cost actually incurred. cause of underapplied or overapplied overhead? Basically, the method of applying overhead to jobs using a predetermined overhead rate assumes that actual overhead costs will be proportional to the actual amount of the allocation base incurred during the period.