Job-costing CH.4 (SU2)

*Fact Pattern:* Farber Company employs a normal (nonstandard) absorption cost system. The following information is from the financial records of the company for the year. • Total manufacturing costs were $2,500,000. • Cost of goods manufactured was $2,425,000. • Applied factory overhead was 30% of total manufacturing costs. • Factory overhead was applied to production at a rate of 80% of direct labor cost. • Work-in-process inventory at January 1 was 75% of work-in-process inventory at December 31. The carrying value of Farber Company's work-in-process inventory at December 31 is A. $300,000. B. $225,000. C. $100,000. D. $75,000.

A. $300,000. Answer (A) is correct. Cost of goods manufactured ($2,425,000) equals total manufacturing costs ($2,500,000) plus beginning work-in-process (75% of EWIP) minus ending work-in-process. The ending work-in-process is $300,000. $2,500,000 + .75 EWIP - EWIP = $2,425,000 $2,500,000 - .25 EWIP = $2,425,000 EWIP = $75,000 ÷ .25 EWIP = $300,000

The following were among Gage Co.'s costs during the month just ended: Normal spoilage $ 5,000 Freight out $10,000 Excess of actual manufacturing costs over standard costs $20,000 Standard manufacturing costs $100,000 Actual prime manufacturing costs $80,000 Gage's actual manufacturing overhead was: A. $40,000 B. $45,000 C. $55,000 D. $120,000

Answer (A) is correct. Factory (manufacturing) overhead consists of all costs other than direct materials and direct labor that are associated with the manufacturing process. Because the excess of actual manufacturing costs over standard costs is $20,000, and the standard costs are $100,000, the actual manufacturing costs are $120,000. However, because $80,000 of these costs are prime costs, the remainder is factory overhead. Thus, actual manufacturing overhead is therefore $40,000 ($120,000 - $80,000).

During the current accounting period, a manufacturing company purchased $70,000 of raw materials, of which $50,000 of direct materials and $5,000 of indirect materials were used in production. The company also incurred $45,000 of total labor costs and $20,000 of other manufacturing overhead costs. An analysis of the work-in-process control account revealed $40,000 of direct labor costs. Based upon the above information, what is the total amount accumulated in the manufacturing overhead control account? A. $25,000 B. $30,000 C. $45,000 D. $50,000

B. $30,000 Answer (B) is correct. Manufacturing overhead consists of all costs, other than direct materials and direct labor, associated with the manufacturing process. It includes both fixed and variable costs. The overhead control account should have the following costs: Indirect materials $ 5,000 Indirect labor ($45,000 - $40,000) 5,000 Other overhead 20,000 Total overhead $30,000

What is the entry to record completion of a particular product or group of products? A. Finished goods XXX Cost of goods sold XXX B. Work-in-process XXX Finished goods XXX C. Finished goods XXX Work-in-process XXX D. Cost of goods sold XXX Work-in-process XXX

C

Which of the following items is not included in (charged to) manufacturing overhead? A. Factory depreciation and supplies. B. Costs of service departments. C. Costs of marketing departments. D. Costs of maintenance departments.

C. Costs of marketing departments. Answer (C) is correct. Marketing costs, for example, salaries of sales personnel, sales commissions, and advertising, are period costs and are expensed as incurred. They cannot be assigned to the product because these marketing costs are not associated with the manufacturing process.

The debits in work-in-process are BWIP, direct labor, direct materials, and manufacturing overhead. The account should be credited for production that is completed and sent to finished goods inventory. The balance is A. Zero. B. EWIP (credit). C. EWIP (debit). D. Total production costs to be accounted for.

C. EWIP (debit). Answer (C) is correct. The sum of the debits to WIP equals total production costs. Ignoring possible spoilage, production consists either of completed goods or of those still in process. Accordingly, after the account is credited for the cost of goods completed and transferred to the FG inventory, the debit balance in the account is EWIP.

A nonmanufacturing organization may use A. Job-order costing but not process costing. B. Process costing but not job-order costing. C. Either job-order or process costing. D. Neither job-order costing nor process costing.

C. Either job-order or process costing. Answer (C) is correct. A nonmanufacturing entity may use either cost accumulation procedure. For example, banks frequently use process costing for certain departments and job-order costing for others. Public accounting firms ordinarily use job-order costing.

In a capital-intensive industry, which is most likely to be an appropriate basis for applying overhead? A. Direct labor hours. B. Direct labor cost. C. Machine hours. D. Sales value of product produced.

C. Machine hours. Answer (C) is correct. In capital-intensive industries, the amount of overhead probably is related more to machine hours than to either direct labor hours or direct labor cost.

In a traditional job-order cost system, the issuance of supplies to a production department increases A. Stores control. B. Work-in-process control. C. Manufacturing overhead control. D. Manufacturing overhead applied.

C. Manufacturing overhead control. Answer (C) is correct. As overhead is incurred, manufacturing overhead control is debited, and accounts payable, stores, etc., are credited. When overhead is applied, work-in-process is debited, and manufacturing overhead applied is credited. The difference between the debited and credited amounts is over- or underapplied overhead.

In a job-order cost system, the application of manufacturing overhead is usually reflected in the general ledger as an increase in A. Manufacturing overhead control. B. Finished goods control. C. Work-in-process control. D. Cost of goods sold.

C. Work-in-process control. Answer (C) is correct. The entry to record the application of manufacturing overhead to specific jobs is to charge WIP control and credit manufacturing overhead applied (or manufacturing overhead control) using a predetermined overhead rate. The effect is to increase the WIP control account.

*Fact Pattern:* Farber Company employs a normal (nonstandard) absorption cost system. The following information is from the financial records of the company for the year. • Total manufacturing costs were $2,500,000. • Cost of goods manufactured was $2,425,000. • Applied factory overhead was 30% of total manufacturing costs. • Factory overhead was applied to production at a rate of 80% of direct labor cost. • Work-in-process inventory at January 1 was 75% of work-in-process inventory at December 31. Farber Company's total direct labor cost for the year is A. $750,000 B. $600,000 C. $909,375 D. $937,500

D. $937,500 Answer (D) is correct. Total manufacturing cost of $2,500,000 is composed of raw materials, direct labor, and factory overhead. Factory overhead is 30% of total manufacturing costs, or $750,000. If factory overhead is 80% of direct labor cost, direct labor cost is $937,500 ($750,000 ÷ 80%).

In a job-order cost system, direct labor costs usually are recorded initially as an increase in A. Manufacturing overhead applied. B. Manufacturing overhead control. C. Finished goods control. D. Work-in-process control.

D. Work-in-process control. Answer (D) is correct. Direct labor costs are inventoriable costs. They are initially debited to the work-in-process control account.

Carley Products has no work-in-process or finished goods inventories at year end. The balances of Carley's accounts include the following: Cost of goods sold $2,040,000 General selling and administrative expenses 900,000 Sales 3,600,000 Manufacturing overhead control 700,000 Manufacturing overhead applied 648,000 Carley's pretax income for the year is A. $608,000 B. $660,000 C. $712,000 D. $1,508,000

A. $608,000 Answer (A) is correct. The pretax income is equal to sales minus cost of goods sold, general selling and administrative expenses, and underapplied manufacturing overhead (the excess of actual overhead over the amount applied). Sales $3,600,000 Cost of goods sold (2,040,000) Underapplied overhead (52,000) Gross margin $1,508,000 GS&A expenses (900,000) Income before income taxes $ 608,000

A company services office equipment. Some customers bring their equipment to the company's service shop; other customers prefer to have the company's service personnel come to their offices to repair their equipment. The most appropriate costing method for the company is A. A job-order costing system. B. An activity-based costing system. C. A process costing system. D. An operation costing system.

A. A job-order costing system. Answer (A) is correct. Job-order costing systems accumulate costs for tasks or projects that are unique and nonrepetitive. An entity that services office equipment is interested in identifying the costs applicable to each customer each service call.

What is the journal entry to record the purchase of materials on account? A. Direct materials inventory XXX Accounts payable XXX B. Accounts payable XXX Direct materials inventory XXX C. Accounts receivable XXX Accounts payable XXX D. Cash XXX Accounts receivable XXX

A. A. Direct materials inventory XXX Accounts payable XXX Answer (A) is correct. The correct entry to record a purchase of materials on account is to increase the appropriate asset and liability accounts. Materials are charged to an inventory account, e.g., stores control or supplies, and the corresponding liability is credited to accounts payable. Also, subsidiary ledgers may be used to account for various individual items (a perpetual inventory system). The term control implies that a subsidiary ledger is being used.

In a manufacturing environment, job-order cost accounting systems and process cost accounting systems differ in the way A. Costs are assigned to production runs and the number of units for which costs are averaged. B. Orders are taken and the number of units in the orders. C. Product profitability is determined and compared with planned costs. D. Processes can be accomplished and the number of production runs that may be performed in a year.

A. Costs are assigned to production runs and the number of units for which costs are averaged. Answer (A) is correct. A cost system determines the manufacturing cost to be expensed (because output was sold) and the portion to be deferred (because output was still on hand). Process costing is used for continuous process output of units that are relatively homogeneous (e.g., oil refining and automobile production). Job-order costing is used to account for the cost of specific jobs or projects when output is heterogeneous. The difference is often overemphasized. Job-order costing simply requires subsidiary ledgers (to keep track of the specific jobs) for the same work-in-process and finished goods accounts that are basic to process costing.

In job-order costing, payroll taxes paid by the employer for manufacturing employees are usually accounted for as A. Direct labor. B. Manufacturing overhead. C. Indirect labor. D. Administrative costs.

A. Direct labor. Answer (A) is correct. Employer taxes on manufacturing payroll and fringe benefits (e.g., pensions and insurance) paid to manufacturing employees are treated as direct labor costs. The justification is that payroll taxes and fringe benefits are necessary to obtain such labor. The IMA in Statement of Management Accounting 4C, Definition and Measurement of Direct Labor Cost, supports this position.

A new advertising agency serves a wide range of clients including manufacturers, restaurants, service businesses, department stores, and other retail establishments. The accounting system the advertising agency has most likely adopted for its record keeping in accumulating costs is A. Job-order costing. B. Operation costing. C. Relevant costing. D. Process costing.

A. Job-order costing. Answer (A) is correct. Job-order costing is used by organizations whose products or services are readily identified by individual units or batches. The advertising agency accumulates its costs by client. Job-order costing is the most appropriate system for this type of nonmanufacturing firm.

Cox Company found that the differences in product costs resulting from the application of predetermined overhead rates rather than actual overhead rates were immaterial even though actual production was substantially less than planned production. The most likely explanation is that A. Overhead was composed chiefly of variable costs. B. Several products were produced simultaneously. C. Fixed manufacturing overhead was a significant cost. D. Costs of overhead items were substantially higher than anticipated.

A. Overhead was composed chiefly of variable costs. Answer (A) is correct. Total variable overhead costs change in proportion to changes in the activity level. Total fixed costs do not. For the difference between applied and actual overhead to be immaterial when actual production is substantially less than planned production, overhead costs must be composed chiefly of variable costs.

How does a job-order cost accounting system differ from a process cost accounting system? A. Subsidiary ledgers for the work-in-process and finished goods inventories are necessary in job-order costing. B. The procedures to apply overhead to product cost are different. C. Both the timing and nature of entries to transfer cost from the work-in-process account to the finished goods inventory account are different. D. Most of the journal entries that require debits and/or credits to the work-in-process account are different.

A. Subsidiary ledgers for the work-in-process and finished goods inventories are necessary in job-order costing. Answer (A) is correct. Job-order systems account for processes that produce distinctly different products or groups of products. By contrast, process costing is suitable to production of a homogeneous product. Given identifiably different products, costs need to be collected separately for each product or group of products. Accordingly, although the same general ledger accounts are used for both cost systems, subsidiary ledgers are maintained in job-order costing for the inventory accounts.

Many companies recognize three major categories of costs of manufacturing a product. These are direct materials, direct labor, and overhead. Which of the following is an overhead cost in the production of an automobile? A. The cost of small tools used in mounting tires on each automobile. B. The cost of the tires on each automobile. C. The cost of the laborers who place tires on each automobile. D. The delivery costs for the tires on each automobile.

A. The cost of small tools used in mounting tires on each automobile. Answer (A) is correct. The cost of small tools used in mounting tires cannot be identified solely with the manufacture of a specific automobile. This cost should be treated as manufacturing overhead because it is identifiable with production.

Which measure of capacity applies the least amount of overhead to units of production? A. Theoretical capacity. B. Expected capacity. C. Normal capacity. D. Practical capacity.

A. Theoretical capacity. Answer (A) is correct. The larger the denominator in the overhead application rate, the smaller the rate and the lower the cost assigned to the product. Theoretical capacity, the absolute capacity during continuous operations, ignoring holidays, maintenance time, etc., provides the largest denominator.

In a job-order cost system, the use of direct materials previously purchased usually is recorded as an increase in A. Work-in-process control. B. Manufacturing overhead control. C. Manufacturing overhead applied. D. Stores control.

A. Work-in-process control. Answer (A) is correct. The purchase of direct materials requires a debit to (an increase in) direct materials inventory (stores control). This account is credited and work-in-process control is debited when direct materials are issued to a production department.

Regan Company operates its factory on a two-shift basis and pays a late-shift differential of 15%. Regan also pays a premium of 50% for overtime work. Because Regan manufactures only for stock, the cost system provides for uniform direct-labor hourly charges for production done without regard to shift worked or work done on an overtime basis. Overtime and late-shift differentials are included in Regan's manufacturing overhead application rate. The May payroll for production workers is as follows: Wages at base direct-labor rates $325,000 Shift differentials 25,000 Overtime premiums 10,000 For the month of May, what amount of direct labor should Regan charge to work-in-process? A. $325,000 B. $335,000 C. $350,000 D. $360,000

Answer (A) is correct. Regan's cost system provides for uniform direct hourly charges for production done without regard to shift work or work done on an overtime basis. The shift pay differentials and overtime premiums are included in manufacturing overhead. Accordingly, both the $25,000 and $10,000 amounts should be charged to overhead, and $325,000 should be charged to the WIP account as direct labor.

Ajax Corporation transferred $72,000 of materials to its production department in February and incurred $37,000 of conversion costs ($22,000 of direct labor and $15,000 of overhead). At the beginning of the period, $14,000 of inventory (direct materials and conversion costs) was in process. At the end of the period, $18,000 of inventory was in process. What was the cost of goods manufactured? A. $105,000 B. $109,000 C. $123,000 D. $141,000

Answer (A) is correct. The total cost incurred in the production process, the sum of BWIP, direct materials, direct labor, and overhead, minus the cost of goods not completed during the period (EWIP), is the cost of goods manufactured. BWIP $14,000 Materials $72,000 Conversion costs $37,000 Minus EWIP $(18,000) COGM $105,000

The following information is available from the records of a manufacturing company that applies manufacturing overhead based on direct labor hours: Estimated overhead cost $500,000 Estimated labor hours 200,000 Actual overhead cost $515,000 Actual labor hours 210,000 Based on this information, manufacturing overhead is A. Underapplied by $9,524. B. Overapplied by $10,000. C. Overapplied by $15,000. D. Overapplied by $40,750.

Answer (B) is correct. Applied overhead equals the actual labor hours (210,000) times the estimated application rate ($500,000 ÷ 200,000 DLH = $2.50 per direct labor hour), or $525,000. This amount is $10,000 ($525,000 - $515,000 actual cost) higher than the actual overhead cost incurred. Thus, overhead was overapplied by $10,000.

The work-in-process of Parrott Corporation increased $11,500 from the beginning to the end of November. Costs incurred during November included $12,000 for direct materials, $63,000 for direct labor, and $21,000 for overhead. What was the cost of goods manufactured during November? A. $75,000 B. $84,500 C. $96,000 D. $107,500

Answer (B) is correct. Because the work-in-process inventory increased by $11,500 from the beginning to the end of November, not all of the $96,000 in costs incurred during the period was transferred out. Consequently, the cost of goods manufactured must have been $84,500 ($12,000 DM + $63,000 DL + $21,000 OH - $11,500).

Under Pick Co.'s job-order costing system, manufacturing overhead is applied to work-in-process using a predetermined annual overhead rate. During January, Pick's transactions included the following: Direct materials issued to production $ 90,000 Indirect materials issued to production 8,000 Manufacturing overhead incurred 125,000 Manufacturing overhead applied 113,000 Direct labor costs 107,000 Pick had neither beginning nor ending work-in- process inventory. What was the cost of jobs completed in January? A. $302,000 B. $310,000 C. $322,000 D. $330,000

Answer (B) is correct. Given no beginning or ending work-in-process, the cost of jobs completed equals the sum of direct materials, direct labor, and manufacturing overhead applied. Indirect materials costs are charged to overhead control and are not included in the amount transferred from work-in- process to finished goods except to the extent they are reflected in applied overhead. The difference between overhead incurred and overhead applied, if material, is assigned to finished goods, cost of goods sold, and ending work-in-process ($0 in this case). Thus, the cost of jobs completed was $310,000 ($90,000 + $113,000 + $107,000).

Application rates for manufacturing overhead best reflect anticipated fluctuations in sales over a cycle of years when they are computed under the concept of A. Maximum capacity. B. Normal capacity. C. Practical capacity. D. Expected actual capacity.

Answer (B) is correct. Normal capacity is the output level that will approximate demand over a period of years that includes seasonal, cyclical, and trend variations. Deviations in one year will be offset in other years.

Accounting for manufacturing overhead costs involves averaging in -Job-Order Costing -Process Costing A. Yes, No B. Yes, Yes C. No, Yes D. No, No

Answer (B) is correct. Overhead consists of costs other than direct materials and labor that are averaged over the entire period, usually a year, based upon an estimated output level. The total of the estimated indirect costs is divided by the base used for cost assignment, e.g., direct labor hours, and assigned to the product based upon the actual output level. Consequently, manufacturing overhead costs are averaged in both job-order and process costing systems.

The accountant for Champion Brake, Inc., applies overhead based on machine hours. The budgeted overhead and machine hours for the year are $260,000 and 16,000, respectively. The actual overhead and machine hours incurred were $275,000 and 20,000. The cost of goods sold and inventory data compiled for the year is as follows: Direct materials $ 50,000 COGS 450,000 WIP (units) 100,000 Finished goods (units) 150,000 What is the amount of over/underapplied overhead for the year? A. $15,000 B. $50,000 C. $65,000 D. $67,000

Answer (B) is correct. The budgeted overhead application rate is $16.25 per machine hour ($260,000 budgeted total ÷ 16,000 budgeted hours). The amount of overhead applied was therefore $325,000 (20,000 actual machine hours × $16.25 budgeted rate). Actual overhead incurred was $275,000. Overhead was thus overapplied by $50,000 ($325,000 applied - $275,000 actual).

A company manufactures plastic products for the home and restaurant market. The company also does contract work for other customers and uses a job-order costing system. The flexible budget covering next year's expected range of output is Direct labor hours 50,000 80,000 110,000 Machine hours 40,000 64,000 88,000 Variable OH costs $100,000 $160,000 $220,000 Fixed OH costs 150,000 150,000 150,000 Total OH costs $250,000 $310,000 $370,000 A predetermined overhead rate based on direct labor hours is used to apply total overhead. Management has estimated that 100,000 direct labor hours will be used next year. The predetermined overhead rate per direct labor hour to be used to apply total overhead to the individual jobs next year is A. $3.36 B. $3.50 C. $3.70 D. $3.88

Answer (B) is correct. The predetermined overhead rate is calculated by dividing the total fixed overhead by the activity level to arrive at a unit fixed overhead cost that is added to the unit variable overhead cost. The unit variable overhead rate is the same at each activity level. Thus, the predetermined overhead rate is $3.50 [($150,000 FOH ÷ 100,000 hrs.) + ($220,000 VOH ÷ 110,000 hrs.)].

A job-order cost system uses a predetermined manufacturing overhead rate based on expected volume and expected fixed cost. At the end of the year, underapplied overhead might be explained by which of the following situations? -Actual Volume -Actual Fixed Costs A. Greater than expected, Greater than expected B. Greater than expected, Less than expected C. Less than expected, Greater than expected D. Less than expected, Less than expected

Answer (C) is correct. If too little fixed overhead is applied at the predetermined rate (expected fixed cost ÷ expected volume), the result is underapplied overhead (actual manufacturing overhead exceeds overhead applied). If the actual and expected fixed costs are the same, but the actual volume is less than the expected (denominator) volume, overhead will be underapplied. If the actual volume equals expected volume, but actual fixed costs exceed the expected (numerator) fixed costs, overhead is likewise underapplied.

In a job-cost system, manufacturing overhead is: - An Indirect Cost of Jobs - A Necessary Element of Production A. No, Yes B. No, No C. Yes, Yes D. Yes, No

Answer (C) is correct. Manufacturing overhead consists of indirect costs that cannot feasibly be traced to specific units but are necessarily incurred as part of the production process. Examples are depreciation, utilities expense, insurance, and supervisors' salaries. Manufacturing overhead, in a traditional system, is usually allocated to products based upon some indirect measure, e.g., direct labor hours or machine hours.

Mason Co. uses a job-order cost system and applies manufacturing overhead to jobs using a predetermined overhead rate based on direct-labor dollars. The rate for the current year is 200% of direct-labor dollars. This rate was calculated last December and will be used throughout the current year. Mason had one job, No. 150, in process on August 1 with raw materials costs of $2,000 and direct-labor costs of $3,000. During August, raw materials and direct labor added to jobs were as follows: No. 150 No. 151 No. 152 Raw materials $ -- $4,000 $1,000 Direct labor 1,500 5,000 2,500 Actual manufacturing overhead for the month of August was $20,000. During the month, Mason completed Job Nos. 150 and 151. For August, manufacturing overhead was A. Overapplied by $4,000. B. Underapplied by $7,000. C. Underapplied by $2,000. D. Underapplied by $1,000.

Answer (C) is correct. Mason incurred direct-labor costs in August of $9,000 ($1,500 Job 150 + $5,000 Job 151 + $2,500 Job 152). Thus, overhead applied was $18,000 ($9,000 × 200%). The amount underapplied was $2,000 ($20,000 actual OH - $18,000).

The Childers Company manufactures widgets. During the fiscal year just ended, the company incurred prime costs of $1.5 million and conversion costs of $1.8 million. Overhead is applied at the rate of 200% of direct labor cost. How much of the above costs represent direct materials cost? A. $1,500,000 B. $300,000 C. $900,000 D. $600,000

Answer (C) is correct. Prime cost is the sum of direct materials and direct labor costs. Conversion cost is the sum of direct labor and overhead costs. OH = 200% × DL DL + OH = $1,800,000 DL + 2DL = $1,800,000 DL =$600,000 DM + DL = $1,500,000 DM + $600,000 = $1,500,000 DM = $900,000

Schneider, Inc., had the following information relating to Year 1: Budgeted manufacturing overhead $74,800 Actual manufacturing overhead $78,300 Applied manufacturing overhead $76,500 Estimated direct labor hours 44,000 If Schneider decides to use the actual results from Year 1 to determine the Year 2 overhead rate, what is the Year 2 overhead rate? A. $1.700 B. $1.738 C. $1.740 D. $1.780

Answer (C) is correct. The Year 1 overhead rate was $1.70 ($74,800 budgeted overhead ÷ 44,000 estimated DLH). Because applied manufacturing overhead equals actual DLH times the overhead rate, the actual direct labor hours for Year 1 were 45,000 ($76,500 ÷ $1.70). Thus, the overhead rate for Year 2 is $1.74 ($78,300 actual Year 1 overhead ÷ 45,000 actual Year 1 DLH).

Worley Company has underapplied overhead of $45,000 for the year. Before disposition of the underapplied overhead, selected year-end balances from Worley's accounting records were: Sales $1,200,000 Cost of goods sold 720,000 Direct materials inventory 36,000 Work-in-process inventory 54,000 Finished goods inventory 90,000 Under Worley's cost accounting system, over- or underapplied overhead is assigned to appropriate inventories and COGS based on year-end balances. In its year-end income statement, Worley should report COGS of: A. $682,500 B. $684,000 C. $757,500 D. $765,000

Answer (C) is correct. The assignment of underapplied overhead increases COGS. The underapplied overhead of $45,000 for the year should be assigned on a pro rata basis to work-in-process ($54,000), finished goods ($90,000), and COGS ($720,000). The sum of these three items is $864,000. Thus, $37,500 should be assigned to COGS [($720,000 ÷ $864,000) × $45,000]. COGS after assignment is $757,500 ($37,500 + $720,000). The remaining $7,500 should be assigned proportionately to work-in-process and finished goods.

Jonathan Manufacturing adopted a job-costing system. For the current year, budgeted cost driver activity levels for direct labor hours and direct labor costs were 20,000 and $100,000, respectively. In addition, budgeted variable and fixed factory overhead costs were $50,000 and $25,000, respectively. Actual costs and hours for the year were as follows: Direct labor hours 21,000 Direct labor costs $110,000 Machine hours 35,000 For a particular job, 1,500 direct-labor hours were used. Using direct-labor hours as the cost driver, what amount of overhead should be applied to this job? A. $3,214 B. $5,357 C. $5,625 D. $7,500

Answer (C) is correct. To apply overhead to the job, both variable and fixed overhead must be properly allocated using standard rates and direct-labor hours as the cost driver. The pertinent information given for this year's budget includes direct-labor hours of 20,000 and the budgeted variable and fixed factory overhead of $50,000 and $25,000, respectively. The variable overhead cost per direct labor hour is $2.50 ($50,000 ÷ 20,000 DLH), and the fixed overhead per direct labor hour is $1.25 ($25,000 ÷ 20,000 DLH). Thus, the total standard overhead cost per direct labor hour is $3.75. The total overhead to be applied is $5,625 (1,500 DLH × $3.75).

Lucy Sportswear manufactures a specialty line of T-shirts using a job-order cost system. During March, the following costs were incurred in completing Job ICU2: direct materials, $13,700; direct labor, $4,800; administrative, $1,400; and selling, $5,600. Manufacturing overhead was applied at the rate of $25 per machine hour, and Job ICU2 required 800 machine hours. If Job ICU2 resulted in 7,000 good shirts, the cost of goods sold per unit would be A. $6.50 B. $6.30 C. $5.70 D. $5.50

Answer (D) is correct. Cost of goods sold is based on the manufacturing costs incurred in production but does not include selling or general and administrative expenses. Manufacturing costs equal $38,500 [$13,700 DM + $4,800 DL + (800 hours × $25) FOH]. Thus, per-unit cost is $5.50 ($38,500 ÷ 7,000 units).

At the beginning of the year, Smith, Inc., budgeted the following: Units 10,000 Sales $100,000 Total variable expenses 60,000 Total fixed expenses 20,000 Manufacturing overhead: Variable 30,000 Fixed 10,000 There were no beginning inventories. At the end of the year, no work was in process, total manufacturing overhead incurred was $39,500, and underapplied manufacturing overhead was $1,500. Manufacturing overhead was applied on the basis of budgeted unit production. How many units were produced this year? A. 10,250 B. 10,000 C. 9,875 D. 9,500

Answer (D) is correct. Given actual overhead of $39,500 and underapplied overhead of $1,500, overhead applied was $38,000 ($39,500 - $1,500). Overhead is applied at the rate of $4 per unit ($40,000 budgeted overhead ÷ 10,000 budgeted units). Accordingly, 9,500 units were produced ($38,000 applied overhead ÷ $4 per unit application rate).

Generally, individual departmental rates rather than a plantwide rate for applying manufacturing overhead are used if A. A company wants to adopt a standard cost system. B. A company's manufacturing operations are all highly automated. C. Manufacturing overhead is the largest cost component of its product cost. D. The manufactured products differ in the resources consumed from the individual departments in the plant

Answer (D) is correct. Overhead is usually assigned to products based on a predetermined rate or rates. The activity base for overhead allocation should have a high degree of correlation with the incurrence of overhead. Given only one cost driver, one overhead application rate is sufficient. If products differ in the resources consumed in individual departments, multiple rates are preferable.

Assuming two overhead accounts are used, what is the entry to close them and to charge underapplied overhead to cost of goods sold? A. Cost of goods sold XXX Finished goods XXX B. Manufacturing OH applied XXX Manufacturing OH control XXX Cost of goods sold XXX C. Cost of goods sold XXX Manufacturing OH applied XXX D. Cost of goods sold XXX Manufacturing OH applied XXX Manufacturing OH control XXX

Answer (D) is correct. Total under- or overapplied overhead often is debited (credited) to COGS rather than allocated among COGS, EWIP, and finished goods. The correct entry to close the overhead accounts and to charge underapplied overhead to COGS is to debit manufacturing overhead applied for the amount of overhead applied for the period and to credit manufacturing overhead control for the amount of overhead actually incurred for the period. The amount actually incurred exceeds the amount of overhead applied because overhead is underapplied. The difference is the amount charged to COGS.

*Fact Pattern:* Farber Company employs a normal (nonstandard) absorption cost system. The following information is from the financial records of the company for the year. • Total manufacturing costs were $2,500,000. • Cost of goods manufactured was $2,425,000. • Applied factory overhead was 30% of total manufacturing costs. • Factory overhead was applied to production at a rate of 80% of direct labor cost. • Work-in-process inventory at January 1 was 75% of work-in-process inventory at December 31. Total cost of direct material used by Farber Company for the year is A. $750,000 B. $812,500 C. $937,500 D. $1,150,000

B. $812,500 Answer (B) is correct. Factory overhead is 30% of total manufacturing costs, or $750,000. Direct labor is $937,500 (750,000 ÷ 0.8). Thus, raw materials must account for the remaining $812,500 ($2,500,000 - $750,000 - $937,500).

The work-in-process account is A. Neither a real nor a nominal account. B. An inventory account indicating the beginning and ending inventory of goods being processed. C. A hybrid account (both a real and a nominal account). D. A nominal account to which overhead costs are charged as incurred and credited as these costs are charged to production.

B. An inventory account indicating the beginning and ending inventory of goods being processed. Answer (B) is correct. Work-in-process is an inventory account to which direct materials, direct labor, and manufacturing overhead costs are charged as they are incurred in the production process. The sum of these costs plus the cost of BWIP is the total production cost to be accounted for in any one period. The total is assigned to goods completed during the period, i.e., to finished goods and to EWIP. Work-in-process may also be credited for abnormal spoilage.

A direct labor overtime premium should be charged to a specific job when the overtime is caused by the A. Increased overall level of activity. B. Customer's requirement for early completion of the job. C. Management's failure to include the job in the production schedule. D. Management's requirement that the job be completed before the annual manufacturing vacation closure.

B. Customer's requirement for early completion of the job. Answer (B) is correct. A direct labor overtime premium ordinarily is an indirect cost, charged to overhead, and allocated to all jobs. The association of overtime with a specific job may be attributable solely to random scheduling and an abnormally large production volume, a condition affecting all jobs. However, if overtime directly results from the demands of a specific job, it is a direct cost of that job.

In a labor-intensive industry in which more overhead (service, support, more expensive equipment, etc.) is incurred by the more highly skilled and paid employees, what denominator measure is most likely to be appropriate for applying overhead? A. Direct labor hours. B. Direct labor cost. C. Machine hours. D. Sales value of product produced.

B. Direct labor cost. Answer (B) is correct. In labor-intensive industries, overhead is traditionally assigned on the basis of labor time. However, if more overhead is incurred by the more highly skilled and paid employees, the overhead rate should be based upon direct labor cost rather than direct labor hours.

Practical capacity as a plant capacity concept A. Assumes all personnel and equipment will operate at peak efficiency and total plant capacity will be used. B. Does not consider idle time caused by inadequate sales demand. C. Includes consideration of idle time caused by both limited sales orders and human and equipment inefficiencies. D. Is the production volume that is necessary to meet sales demand for the next year.

B. Does not consider idle time caused by inadequate sales demand. Answer (B) is correct. Practical capacity is the maximum level at which output is produced efficiently. It includes consideration of idle time resulting from holidays, downtime, change-over time, etc., not from inadequate sales demand.

The denominator of the overhead application rate can be based on one of several production capacities. Which results in the lowest expected over- or underapplied overhead? A. Theoretical capacity. B. Expected capacity. C. Normal capacity. D. Practical capacity.

B. Expected capacity. Answer (B) is correct. If actual output differs from the predetermined capacity level, a volume variance occurs. This variance equals the over- or underapplied overhead. The expected volume is that predicted for the period. Thus, the use of expected capacity as a denominator should result in the lowest expected over- or underapplied overhead.

Which method of measuring the costs to be assigned to products or services uses budgeted rates for direct costs but applies those rates to the actual quantities of the inputs? A. Actual costing. B. Normal costing. C. Extended costing. D. Standard costing.

C. Extended costing. Answer (C) is correct. Extended costing assigns both direct costs (such as labor and materials) and overhead to cost objects by using budgeted rates. The direct cost assigned equals the budgeted rate times the actual amount of the direct-cost input. The overhead assigned equals the budgeted rate times the actual amount of whichever driver or other base is used for cost assignment purposes. The use of budgeted rates for overhead as well as direct costs may be helpful to avoid fluctuations during the year. It is also helpful when some direct costs, such as direct labor, may not be known until year-end.

A specialty instrument manufacturer is in the process of establishing a cost system. The company produces machines that are unique and distinctive. These machines are produced when purchase requests are received from customers. Although some common parts and sub-assemblies are to be held in inventory, no finished goods inventory is maintained since each purchase request is for a customized specialty instrument. The type of cost accumulation system that would be best suited for this type of environment would be A. Backflush costing. B. Batch-level costing. C. Job-order costing. D. Process costing.

C. Job-order costing. Answer (C) is correct. Job-order costing is concerned with accumulating costs by specific job. This method is appropriate when producing products with individual characteristics or when identifiable groupings are possible. Units (jobs) should be dissimilar enough to warrant the special recordkeeping required by job-order costing. Products are usually custom-made for a specific customer.

Effective cost capacity management A. Minimizes the value delivered to customers. B. Maximizes required future investments. C. Matches the firm's resources with market opportunities. D. Is limited to eliminating short-term worth.

C. Matches the firm's resources with market opportunities. Answer (C) is correct. Maximizing the value created within an organization starts with understanding the nature and capabilities of all of the entity's resources (capacity), which may be defined from different perspectives. Managing capacity cost starts when a product or process is first envisioned. It continues through the subsequent disposal of resources downstream. Effective capacity cost management requires supporting effective matching of a firm's resources with current and future market opportunities.

Units of production is an appropriate method of assigning overhead when A. Several well-differentiated products are manufactured. B. Direct labor costs are low. C. Only one product is manufactured. D. The manufacturing process is complex.

C. Only one product is manufactured. Answer (C) is correct. Assigning overhead on the basis of the number of units produced is usually not appropriate. Costs should be assigned on the basis of some plausible relationship between the cost object and the incurrence of the cost, preferably cause and effect. Overhead costs, however, may be incurred regardless of the level of production. Nevertheless, if a firm manufactures only one product, this method may be acceptable because all costs are to be charged to the single product.

Under a job-order system of cost accounting, the dollar amount of the general ledger entry involved in the transfer of inventory from work-in-process to finished goods is the sum of the costs charged to all jobs 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.

D. Completed during the period. Answer (D) is correct. The entry to transfer inventory from WIP to FG is to debit finished goods and credit work-in-process. The amount of the entry is the sum of the costs (irrespective of the period in which they were incurred) charged to all jobs completed during the period.

When the amount of overapplied manufacturing overhead is significant, the entry to close overapplied manufacturing overhead will most likely require A. A debit to cost of goods sold. B. Debits to cost of goods sold, finished goods inventory, and work-in-process inventory. C. A credit to cost of goods sold. D. Credits to cost of goods sold, finished goods inventory, and work-in-process inventory.

D. Credits to cost of goods sold, finished goods inventory, and work-in-process inventory. Answer (D) is correct. Under a normal costing system, overhead is applied to all jobs worked on during the period at a predetermined rate. Because cost of goods sold, finished goods inventory, and work-in-process inventory all relate to these jobs, each should be adjusted by its proportionate share of over- or underapplied overhead. This apportionment may be based on either the percentage of total overhead (theoretically preferable) or the percentage of total cost. The entry to close overapplied overhead requires credits to these three accounts.

In job-order costing, the basic document to accumulate the cost of each order is the A. Invoice. B. Purchase order. C. Requisition sheet. D. Job-cost sheet.

D. Job-cost sheet. Answer (D) is correct. The job-cost sheet, or job-order sheet, is used to accumulate product costs in a job-order costing system. Direct materials, direct labor, and overhead are the costs accumulated.

During an accounting period, which production account is debited and credited many times? A. Manufacturing overhead applied. B. Manufacturing overhead control. C. Both. D. Neither.

D. Neither. Answer (D) is correct. When both manufacturing overhead control and manufacturing overhead applied are used, all overhead incurred is debited to the control account. All overhead applied is credited to manufacturing overhead applied.

There are several alternative denominator measures for applying overhead. Which is not commonly used? A. Direct labor hours. B. Direct labor cost. C. Machine hours. D. Sales value of product produced.

D. Sales value of product produced. Answer (D) is correct. Overhead in traditional systems normally is applied to production according to an allocation base, such as direct labor hours, direct labor cost, or machine hours. An allocation base is an indirect measure, but it should have a relatively close correlation with the incurrence of overhead. The sales value of the product produced is not a variable with a causal relationship to the incurrence of overhead.

Annual overhead application rates are used to A. Budget overhead. B. Smooth seasonal variability of overhead costs. C. Smooth seasonal variability of output levels. D. Smooth seasonal variability of both overhead costs and output levels.

D. Smooth seasonal variability of both overhead costs and output levels. Answer (D) is correct. Annual overhead application rates smooth seasonal variability of overhead costs and output levels. If overhead is applied to products or service units as incurred, the overhead rate per unit in most cases varies considerably from week to week or month to month. The purpose of an annual overhead application rate is to simulate constant overhead throughout the year.

Two basic costing systems for assigning costs to products or services are job costing and process costing. These two costing systems are usually viewed as being on opposite ends of a spectrum. The fundamental criterion employed to determine whether job costing or process costing should be employed is A. Proportion of direct (traceable) costs expended to produce the product or service. B. Number of cost pools employed to allocate the indirect costs to the product or service. C. Type of bases used in allocating the indirect cost pools to the product or service. D. The nature and amount of the product or service brought to the marketplace for customer consumption.

D. The nature and amount of the product or service brought to the marketplace for customer consumption. Answer (D) is correct. Job costing is used if resources are expended to bring a distinct, identifiable product or service to the market. An entity is providing heterogeneous products or services that are often customized for the consumer. Process costing is used when masses of identical or similar units of product or services are provided for general consumer use.

A company experienced a machinery breakdown on one of its production lines. As a consequence of the breakdown, manufacturing fell behind schedule, and a decision was made to schedule overtime to return manufacturing to schedule. Which one of the following methods is the proper way to account for the overtime paid to the direct laborers? A. The overtime hours times the sum of the straight-time wages and overtime premium would be charged entirely to manufacturing overhead. B. The overtime hours times the sum of the straight-time wages and overtime premium would be treated as direct labor. C. The overtime hours times the overtime premium would be charged to repair and maintenance expense, and the overtime hours times the straight-time wages would be treated as direct labor. D. The overtime hours times the overtime premium would be charged to manufacturing overhead, and the overtime hours times the straight-time wages would be treated as direct labor.

D. The overtime hours times the overtime premium would be charged to manufacturing overhead, and the overtime hours times the straight-time wages would be treated as direct labor. Answer (D) is correct. Direct labor costs are wages paid to labor that can feasibly be specifically identified with the production of finished goods. Manufacturing overhead consists of all costs, other than direct materials and direct labor, that are associated with the manufacturing process. Thus, straight-time wages would be treated as direct labor. However, because the overtime premium is a cost that is borne by all production, the overtime hours times the overtime premium should be charged to manufacturing overhead.