ACCT202 - Ch 15
Veronica R. is working with the controller of her company on the year-end financial statements. Earlier in the year, the company had an intern working in the accounting department. While the intern did a great job, she failed to leave any notes regarding her work. Veronica and the controller can see that $785,025 of manufacturing overhead has been applied throughout the year. Further, they can see that the company has incurred $82,573 of direct labor costs and $85,413 of direct materials. The company's pay rate for direct labor is $14.20 per hour. If the intern applied overhead based on direct labor hours, what rate did she use to apply overhead (if necessary, round your answer)?
$135/DLH
The Raw Materials Inventory account had a balance of $13,463 on January 1. During the month of January, the company had the following transactions: 1. Purchased $12,481 of wool. 2. Purchased $15,327 of cotton. 3. Spent $312 on freight charges. 4. Received a discount of $153 for their cotton order. 5. Returned $1,722 of flawed polyester. 6. Used $8,318 of wool. 7. Used $16,964 of cotton. What is the balance of the Raw Materials Inventory account on January 31?
$14,426
Use the following information to compute the predetermined overhead rate using machine hours as the activity base: Estimated annual manufacturing overhead costs: $400,000. Estimated annual machine hours: 100,000 machine hours. Predetermined overhead rate $ per machine hour.
$400,000 / 100,000 machine hours = $4 per machine hour
The Cline Company is a real estate consulting firm that works with corporations to relocate employees. In May, Sandra Palmer, an engineer with the GP Corporation, used the services of the Cline Company to help coordinate a move from Atlanta, Georgia, to Singapore. Cline assigned the number PalmerGP2014 to this job. Cline charges $150 per hour and allocates overhead at 50% of direct labor costs. What cost is on the Palmer GP2014 job cost sheet for May, assuming the job is not yet complete and Cline also dedicated 25 direct labor hours to Palmer GP2014 at the end of April?
$5,625 Calculation Actual hours used for Job 25 Multiply: Houlry labor rate$ 150 Direct labor cost$ 3,750 Direct labor cost$ 3,750 Multiply: Predermined overhead rate (%) based on direct labor cost50% Applied overhead cost$ 1,875 Direct labor cost$ 3,750 Applied overhead cost$ 1,875 Total cost of Job Palmer GP2014$ 5,625 = $ 5,625
There are 2 major steps in the flow of costs :
1. accumulating the manufacturing costs incurred 2. assigning the accumulated costs Work in Process Inventory.
In a manufacturing company, the cost of factory labor consists of
1. gross earnings of factory workers 2. employer payroll taxes on such earnings 3. fringe benefits incurred by the employer
Overapplied overhead means that
1. manufacturing overhead has a credit balance and 2. the overhead assigned to work in process is greater than the overhead incurred.
Underapplied Overhead means that
1. manufacturing overhead has a debit balance and 2. the overhead assigned to work in process is less than the overhead incurred.
Merrick Company computes a predetermined overhead rate at the beginning of the year and uses it to apply overhead to jobs throughout the year. Merrick has several custom jobs in process. One of these jobs, C628, was in Work in Process Inventory at the beginning of the month. Job C628 had direct materials of $6,200, direct labor of $8,680, and overhead of $17,360. If Merrick applies overhead based on direct labor cost, what is Merrick's predetermined overhead rate for the year?
17360 overhead/8680 direct labor = 200% predetermined overhead rate for the year
Manufacturing overhead T chart layout
Actual cost incurred: debit (left) Applied costs assigned: credit (right)
Ending work in process inventory formula
Beginning WIP Inventory + Manufacturing Costs - COGM = Ending WIP Inventory
Cindy, Lana, and David all work for different companies. Cindy has noticed that her Manufacturing Overhead has a debit balance, while Lana has noticed the opposite, as her balance has a credit. David is focused on his Work in Process Inventory account, which has a debit balance. What is implied here?
Cindy's overhead is underapplied, while Lana's overhead is overapplied.
Wallace Products Inc. purchases 2,000 lithium batteries at $5 per unit ($10,000) and 800 modules at $40 per unit ($32,000) for a total cost of $42,000.
DateAccount Titles and ExplanationDebitCredit (1) Jan. 4Raw Materials Inventory42,000 indentedAccounts Payable 42,000 double indented(Purchase of raw materials on account)
Wallace Products incurs $32,000 of factory labor costs, of which $27,000 relates to wages payable and $5,000 relates to payroll taxes payable in January. The entry is:
DateAccount Titles and ExplanationDebitCredit (2) Jan. 31Factory Labor32,000 indentedFactory Wages Payable 27,000 indentedEmployer Payroll Taxes Payable 5,000 double indented(To record factory labor costs)
A summary entry for overhead in Wallace Products Company is:
DateAccount Titles and ExplanationDebitCredit (3) Jan. 31Manufacturing Overhead13,800 indentedUtilities Payable 4,800 indentedPrepaid Insurance 2,000 indentedAccounts Payable (for repairs) 2,600 indentedAccumulated Depreciation 3,000 indentedProperty Taxes Payable 1,400 double indented(To record overhead costs)
At Wallace Products, direct labor cost is the activity base. Annual overhead costs are expected to be $280,000 and $350,000 of direct labor costs are anticipated. The overhead rate is 80% ($280,000 ÷ $350,000). Overhead applied for January is $22,400 (direct labor cost of $28,000 × 80%). This application is recorded through the entry below.
DateAccount Titles and ExplanationDebitCredit (6) Jan. 31Work in Process Inventory22,400 indentedManufacturing Overhead 22,400 double indented(To assign overhead to jobs)
Total manufacturing cost
Direct Materials + Direct Labor + Manufacturing Overhead = tmc
Formula for predetermined overhead rate
Estimated Annual Overhead Costs / Expected Annual Operating Activity = Predetermined Overhead Rate
In a job order cost system, factory labor costs incurred are debited to which account?
FACTORY LABOR
Labor costs are debited to
Factory Labor when they are incurred
T/F: Labor costs are debited to Work in Process Inventory when they are incurred.
False
T/F: The predetermined overhead rate is based on the relationship between actual annual overhead costs and expected annual operating activity.
False
Describe cost systems and the flow of costs in a job order system.
Goal
A cost system that is best for producing items with unique, distinguishing features
JOB ORDER COST SYSTEM
Bowen's HVAC installs heating and cooling systems in commercial buildings. In August, Bowen started and completed two jobs, Job 1248 and Job 1249. The job cost sheet for Job 1248 showed $15,000 of direct materials and 175 direct labor hours. The job cost sheet for Job 1249 showed $9,500 of direct materials and 80 direct labor hours. Overhead is applied at $15 per direct labor hour. The employees who worked on these two jobs were paid $25 per hour. What is the total cost for each of these two jobs for August?
Job 1248, $22,000; Job 1249, $12,700 Job 1248Job1249ADirect Material150009500BLabour Hrs17580CLabour rate2525DLabour cost (B*C)43752000EOverhead Rate1515FOverhead Cost (B*E)26251200GTotal Cost (A+C+F)2200012700 Comment
Job and Batch example in job order cost system
Job: manufacture of high-speed drilling machine Batch: printing of 225 wedding invitations
The cost of goods manufactured schedule in job order costing is the same as in the preceding chapter Managerial Accounting, with one exception:
Manufacturing overhead applied, rather than actual overhead costs, is added to direct materials and direct labor to determine total manufacturing costs. The schedule is prepared directly from the Work in Process Inventory account.
Susan has recently noticed that her company's overhead is underapplied. A friend of Susan's, Jim, says that he has been having the opposite problem with his company's overhead being overapplied. Maura, Jim's wife, explains that she realized today that the Manufacturing Overhead at her company has a debit balance. What is implied here? Why
Maura and Susan's Manufacturing Overhead has a debit balance, while Jim's Manufacturing Overhead has a credit balance. The debit balance in a Manufacturing overhead account signifies that the Manufacturing overheads have been under-applied. Since Susan and Maura have underapplied overheads and Jim has the opposite, this is the correct option.
Kayleigh is looking over a number of material requisition slips from her employees. She has to sign off on each request after reviewing it, which she thinks is a waste of time and effort. Kayleigh believes that having the name of the employee who requested the materials should be enough. Is she correct?
No, approval by an individual other than the requestor establishes greater accountability over inventory.
A cost system that identifies costs with a set time period is a
PROCESS SYSTEM
Overhead costs may also be recorded periodically through adjusting entries. ___________________________________ are recorded periodically.
Property taxes, depreciation, and insurance
Perpetual inventory system
Provides immediate, up-to-date information on the cost of a product; important feature of cost accounting system
In a job order cost system, raw materials purchased are debited to which account?
RAW MATERIALS INVENTORY
The costs of raw materials purchased are debited to
Raw Materials Inventory when the materials are received.
In a process cost system...
Similar products are produced over a specified time period.
Dan and another manager Susie are arguing about how their company has set up the material requisition slips. In their company, a manager has to sign off on all request slips in addition to the individual who is requesting the materials. Dan thinks this is an unnecessary extra step, while Susie believes this is important for the company. Who is correct?
Susie is correct. Approval by an individual other than the requestor establishes greater accountability over inventory.
In a job order cost system, manufacturing costs are recorded in
The period in which they are incurred.
What is the predetermined overhead rate relationship expressed in terms of
This relationship is expressed in terms of a common activity base such as direct labor costs, direct labor hours, machine hours, or any other measure that will provide an equitable basis for applying overhead costs to jobs.
T/F: Each entry to Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets.
True
T/F: The accuracy of product cost information is critical to the success of a company.
True
T/F: in a job order cost system, no effort is made at this point to associate the cost of materials with specific jobs or orders.
True
Assuming that all jobs are unfinished, proof of the agreement of the control and subsidiary accounts in Wallace Products is shown below.
Work in Process Inventory Job Cost SheetsJan. 3124,000 No. 101$ 39,000Jan. 3128,000 10223,200Jan. 3122,400 10312,200 $ $
A cost accounting system consists of
accounts for the various manufacturing costs. These accounts are fully integrated into the general ledger of a company.
Any year-end balance in Manufacturing Overhead is eliminated by
an adjusting entry.
When is a predetermined overhead rate is established and what is it based on
at the beginning of the year and is based on the relationship between estimated annual overhead costs and expected annual operating activity.
Under- or overapplied overhead is usually considered to be an adjustment to
cost of goods sold.
Job order cost system
costs are assigned to each job or to each batch of goods
Argon Chemicals had a total overhead amount of $47,200 during the month of June. Of that total, 58% was related to the factory, and 42% was related to the office building. On June 30, Argon should ________ the Manufacturing Overhead account for
debit $27,376
underapplied overhead is _________ to Cost of Goods Sold and overapplied overhead is _____________ to Cost of Goods Sold.
debited; credited
Common activity base
direct labor costs, direct labor hours, machine hours, or any other measure that will provide an equitable basis for applying overhead costs to jobs.
A cost system that identifies costs by batch rather than a set time period
job order cost system
Two basic types of cost accounting systems
job order cost system and process cost system
Overhead costs may be recognized daily, as in the case of ___________
machinery repairs and the use of indirect materials and indirect labor.
In a job order cost system, indirect materials used are debited to which account?
manufacturing overhead
direct labor formula
manufacturing overhead = overhead % labor cost x Direct labor
If actual is less than applied, manufacturing overhead is
overapplied.
Manufacturing overhead is estimated and assigned to work in process and to specific jobs on an estimated basis through a
predetermined overhead rate
Process costing accounts for and accumulates ______________________
product-related costs for a period of time.
In cost accounting, both the total cost and the unit cost of each product are determined from
the accumulated data
Cost of goods sold is obtained from
the finished goods inventory records
Cost accounting involves
the measuring, recording, and reporting of product costs.
The flow of costs in job order cost accounting parallels ____________________
the physical flow of the materials as they are converted into finished goods.
At the end of each month, the balance in Work in Process Inventory should equal
the sum of the costs shown on the job cost sheets of unfinished jobs.
The objective of a Job Order Cost System is..
to calculate the cost per job
T/F: Underapplied overhead means that the overhead assigned to work in process is less than the overhead incurred.
true
If actual is greater than applied, manufacturing overhead is
underapplied.
Process cost system
used when a series of connected manufacturing processes or departments produce a large volume of similar products.
