Multiple Choice Questions
1. Product costing in a manufacturing firm is
the process of:
A. accumulating the company's period costs.
B. allocating costs among the firm's
departments.
C. placing a value on the company's fixed
assets.
D. assigning costs to the firm's inventory.
E. assigning costs to the company's managers.
Answer:
D LO: 1 Type: RC
2. Which of the following statements is true?
A. Service firms have little need for
determining the cost of their services.
B. The concept of product costing is relevant
only for manufacturing firms.
C. The cost of year-end inventory appears on the
balance sheet as an expense.
D. Service companies use cost information for
planning and control purposes.
E. Mining and petroleum companies have no
inventoriable costs.
Answer:
D LO: 1 Type: RC
3. Which of the following manufacturers would
most likely use job-order costing?
A. Chemical manufacturers.
B. Microchip processors.
C. Custom-furniture manufacturers.
D. Gasoline refiners.
E. Fertilizer manufacturers.
Answer:
C LO: 3 Type: RC
4. A custom-home builder would likely utilize:
A. job-order costing.
B. process costing.
C. mass customization.
D. process budgeting.
E. joint costing.
Answer:
A LO: 3 Type: RC
5. Which of the following types of companies
would most likely use process costing?
A. Aircraft manufacturers.
B. Textile manufacturers.
C. Textbook publishers.
D. Custom-machining firms.
E. Shipbuilders.
Answer:
B LO: 3 Type: RC
6. A manufacturing firm produces goods in
accordance with customer specifications, commencing production upon receipt of
a purchase order. To accumulate the cost
of each order, the company would use a:
A. job-cost record.
B. cost allocation matrix.
C. production log.
D. overhead sheet.
E. manufacturing cost record.
Answer:
A LO: 3 Type: RC
7. A typical job-cost record would provide
information about all of the following items related to an order except:
A. the cost of direct materials used.
B. administrative costs.
C. direct labor costs incurred.
D. applied manufacturing overhead.
E. direct labor hours worked.
Answer:
B LO: 3 Type: RC
8. Which of the following statements about
material requisitions is false?
A. Material requisitions are often computerized.
B. Material requisitions are a common example of
source documents.
C. Material requisitions contain information
that is useful to the cost accounting department.
D. Material requisitions authorize the transfer
of materials from the production floor to the raw materials warehouse.
E. Material requisitions are routinely linked to
a bill of materials that lists all of the materials needed to complete a job.
Answer:
D LO: 3 Type: RC
9. Pruitt Company has developed an integrated
system that coordinates the flow of all goods, services, and information into
and out of the organization, working with raw material vendors as well as
customers to improve service and reduce costs.
The firm is said to be using:
A. participative management.
B. top-down management.
C. strategic cost management.
D. supply chain management.
E. management by objectives (MBO).
Answer:
D LO: 3 Type: RC
10. The assignment of direct labor cost to individual
jobs is based on:
A. an estimate of the total time spent on the
job.
B. actual total payroll cost divided equally
among all jobs in process.
C. estimated total payroll cost divided equally
among all jobs in process.
D. the actual time spent on each job multiplied
by the wage rate.
E. the estimated time spent on each job
multiplied by the wage rate.
Answer:
D LO: 3 Type: N
11. The total production cost of a job is
composed of:
A. direct material and direct labor.
B. direct material, direct labor, manufacturing
overhead, and outlays for selling costs.
C. direct material, direct labor, manufacturing
overhead, and outlays for both selling and administrative costs.
D. direct material, direct labor, and applied
manufacturing overhead.
E. direct material, direct labor, and actual
manufacturing overhead.
Answer:
D LO: 3 Type: RC
12. Manufacturing overhead:
A. includes direct materials, indirect
materials, indirect labor, and factory depreciation.
B. is easily traced to jobs.
C. includes all selling costs.
D. should not be assigned to individual jobs
because it bears no obvious relationship to them.
E. is a pool of indirect production costs that
must somehow be attached to each unit manufactured.
Answer:
E LO: 3
Type: RC
13. As production takes place, all manufacturing
costs are added to the:
A. Work-in-Process Inventory account.
B. Manufacturing-Overhead Inventory account.
C. Cost-of-Goods-Sold account.
D. Finished-Goods Inventory account.
E. Production Labor account.
Answer:
A LO: 2, 5 Type: RC
14. Which of the following statements regarding
work in process is not correct?
A. Work in process is partially completed
inventory.
B. Work in process consists of direct labor,
direct material, and manufacturing overhead.
C. Work-in-Process Inventory is debited to
record direct material used and direct labor incurred.
D. Work-in-Process Inventory appears on the
year-end balance sheet.
E. Work-in-Process Inventory is credited when
goods are sold.
Answer:
E LO: 2, 5 Type: N
15. Which of the following statements about
manufacturing cost flows is false?
A. Direct materials, direct labor, and
manufacturing overhead are entered in the Work-in-Process Inventory account.
B. The Finished-Goods Inventory account will
contain entries that reflect the cost of goods sold during the period.
C. The cost of units sold during the period will
typically appear on the income statement.
D. When a company sells goods that cost $54,000
for $60,000, the firm will enter $6,000 in an account entitled Profit on Sale.
E. Units are normally transferred from
Work-in-Process Inventory to Finished-Goods Inventory.
Answer:
D LO: 2, 5 Type: N
16. Which of the following statements about
materials is false?
A. Acquisitions of materials are normally
charged to the Purchases account.
B. The use of direct materials gives rise to a
debit to Work-in-Process Inventory.
C. The use of indirect materials gives rise to a
debit to Manufacturing Overhead.
D. The use of indirect materials gives rise to a
credit to Manufacturing Supplies Inventory.
E. Direct materials are accounted for in a
different manner than indirect materials.
Answer:
A LO: 5 Type: A
17. Longview Corporation recently used $72,000 of
direct materials and $3,000 of indirect materials in production
activities. The journal entries
reflecting these transactions would include:
A. a debit to Raw-Material Inventory for
$72,000.
B. a debit to Manufacturing Overhead for $3,000.
C. a credit to Manufacturing Overhead for
$3,000.
D. a debit to Work-in-Process Inventory for
$75,000.
E. a debit to Manufacturing Overhead for
$75,000.
Answer:
B LO: 5 Type: A
18. A review of a company's Work-in-Process Inventory
account found a debit for materials of $67,000.
If all procedures were performed in the correct manner, this means that
the firm:
A. also recorded a credit to Raw-Material
Inventory.
B. also recorded a credit to Manufacturing
Supplies Inventory.
C. was accounting for the usage of direct
materials.
D. was accounting for the usage of indirect
materials.
E. was accounting for the usage of direct
materials by also crediting the Raw-Material Inventory account.
Answer:
E LO: 5 Type: N
19. Oregon Manufacturing incurred $106,000 of
direct labor and $11,000 of indirect labor.
The proper journal entry to record these events would include a debit to
Work in Process for:
A. $0 because Work in Process should be
credited.
B. $0 because Work in Process is not affected.
C. $11,000.
D. $106,000.
E. $117,000.
Answer:
D LO: 5 Type: A
20. The following information relates to October:
Production
supervisor's salary: $2,500
Factory
maintenance wages: 250 hours at $8 per hour
The
journal entry to record the preceding information is:
A.
|
Manufacturing Overhead
|
4,500
|
|
Wages Payable
|
4,500
|
||
B.
|
Wages
Payable
|
4,500
|
|
Manufacturing Overhead
|
4,500
|
||
C.
|
Work-in-Process
Inventory
|
4,500
|
|
Wages Payable
|
4,500
|
||
D.
|
Wages
Payable
|
4,500
|
|
Work-in-Process Inventory
|
4,500
|
||
E.
|
Work-in-Process
Inventory
|
2,500
|
|
Manufacturing
Overhead
|
2,000
|
||
Wages Payable
|
4,500
|
Answer:
A LO: 5 Type: A
21. Electricity costs that were incurred by a
company's production processes should be debited to:
A. Utilities Expense.
B. Accounts Payable.
C. Cash.
D. Manufacturing Overhead.
E. Work-in-Process Inventory.
Answer:
D LO: 5 Type: A
22. The journal entry needed to record $5,000 of
advertising for Westwood Manufacturing would include:
A. a debit to Advertising Expense.
B. a credit to Advertising Expense.
C. a debit to Manufacturing Overhead.
D. a credit to Manufacturing Overhead.
E. a debit to Projects-in-Process.
Answer:
A LO: 5 Type: A
23. Regency Company incurred $90,000 of
depreciation for the year. Eighty
percent relates to the firm's production facilities, and 20% relates to sales
and administrative offices. If all items
are handled in the proper manner, a review of the company's accounting records
should reveal a:
A. debit to Depreciation Expense for $90,000.
B. debit to Manufacturing Overhead for $90,000.
C. debit to Manufacturing Overhead for $72,000.
D. debit to Work-in-Process Inventory for $18,000.
E. credit to Cash for $90,000.
Answer: C LO: 5
Type: A
24. The process of assigning overhead costs to
the jobs that are worked on is commonly called:
A. service department cost allocation.
B. overhead cost distribution.
C. overhead application.
D. transfer costing.
E. overhead cost apportionment.
Answer:
C LO: 4, 5 Type: RC
25. Which of the following is the correct method
to calculate a predetermined overhead rate?
A. Budgeted total manufacturing cost ÷ budgeted
amount of cost driver.
B. Budgeted overhead cost ÷ budgeted amount of
cost driver.
C. Budgeted amount of cost driver ÷ budgeted
overhead cost.
D. Actual overhead cost ÷ budgeted amount of
cost driver.
E. Actual overhead cost ÷ actual amount of cost
driver.
Answer:
B LO: 4, 5 Type: RC
26. Metro Corporation uses a predetermined
overhead rate of $20 per machine hour. In
deriving this figure, the company's accountant used:
A. a denominator of budgeted machine hours for
the current accounting period.
B. a denominator of actual machine hours for the
current accounting period.
C. a denominator of actual machine hours for the
previous accounting period.
D. a numerator of budgeted machine hours for the
current accounting period.
E. a numerator of actual machine hours for the
current accounting period.
Answer:
A LO: 4, 5 Type: N
27. Horton Company applies overhead based on
direct labor hours. At the beginning of
20x1, the company estimated that manufacturing overhead would be $500,000, and
direct labor hours would be 10,000. Actual
overhead by the conclusion of 20x1 amounted to $400,000. On the basis of this information, Horton's
20x1 predetermined overhead rate is:
A. $0.02 per direct labor hour.
B. $0.025 per direct labor hour.
C. $40 per direct labor hour.
D. $50 per direct labor hour.
E. none of the above.
Answer:
D LO: 4, 5 Type: A
28. Dale Company, which applies overhead at the
rate of 190% of direct labor cost, began work on job no. 101 during June. The job was completed in July and sold during
August, having accumulated direct material and labor charges of $27,000 and
$15,000, respectively. On the basis of
this information, the total overhead applied to job no. 101 amounted to:
A. $0.
B. $28,500.
C. $51,300.
D. $70,500.
E. $79,800.
Answer:
B LO: 4, 5 Type: A
29. Huxtable charges manufacturing overhead to
products by using a predetermined application rate, computed on the basis of
machine hours. The following data
pertain to the current year:
Budgeted
manufacturing overhead: $480,000
Actual
manufacturing overhead: $440,000
Budgeted
machine hours: 20,000
Actual
machine hours: 16,000
Overhead
applied to production totaled:
A. $352,000.
B. $384,000.
C. $550,000.
D. $600,000.
E. some other amount.
Answer:
B LO: 4, 5 Type: A
30. Treetops worked on four jobs during its first
year of operation: nos. 401, 402, 403, and 404.
Nos. 401 and 402 were completed by year-end, and no. 401 was sold at a
profit of 40% of cost. A review of job
no. 403's cost record revealed direct material charges of $20,000 and total
manufacturing costs of $25,000. If
Treetops applies overhead at 150% of direct labor cost, the overhead applied to
job no. 403 must have been:
A. $0.
B. $2,000.
C. $3,000.
D. $3,333.
E. $5,000.
Answer:
C LO: 4, 5 Type: A
31. The left side of the Manufacturing Overhead
account is used to accumulate:
A. actual manufacturing overhead costs incurred
throughout the accounting period.
B. overhead applied to Work-in-Process
Inventory.
C. underapplied overhead.
D. predetermined overhead.
E. overapplied overhead.
Answer:
A LO: 5 Type: RC
32. Throughout the accounting period, the credit
side of the Manufacturing Overhead account is used to accumulate:
A. actual manufacturing overhead costs.
B. overhead applied to Work-in-Process
Inventory.
C. overapplied overhead.
D. underapplied overhead.
E. predetermined overhead.
Answer:
B LO: 5 Type: RC
33. An accountant recently debited Work-in-Process
Inventory and credited Manufacturing Overhead.
The accountant was:
A. applying a predetermined overhead amount to
production.
B. recognizing receipt of the factory utilities
bill.
C. recording a year-end adjustment for an
insignificant amount of underapplied overhead.
D. recognizing actual overhead incurred during
the period.
E. recognizing the completion of production.
Answer:
A LO: 5 Type: N
34. The final step in recognizing the completion
of production requires a company to:
A. debit Finished-Goods Inventory and credit
Work-in-Process Inventory.
B. debit Work-in-Process Inventory and credit
Finished-Goods Inventory.
C. add direct labor to Work-in-Process
Inventory.
D. add direct materials, direct labor, and
manufacturing overhead to Work-in-Process Inventory.
E. add direct materials to Finished-Goods
Inventory.
Answer:
A LO: 2, 5 Type: RC
35. Job no. C12 was completed in November at a
cost of $18,500, subdivided as follows: direct material, $3,500; direct labor,
$6,000; and manufacturing overhead, $9,000.
The journal entry to record this information is:
A.
|
Finished-Goods
Inventory
|
18,500
|
|
Work-in-Process Inventory
|
18,500
|
||
B.
|
Work-in-Process
Inventory
|
18,500
|
|
Finished-Goods Inventory
|
18,500
|
||
C.
|
Work-in-Process
Inventory
|
18,500
|
|
Raw-Material Inventory
|
3,500
|
||
Wages Payable
|
6,000
|
||
Manufacturing Overhead
|
9,000
|
||
D.
|
Cost of
Goods Sold
|
18,500
|
|
Finished-Goods Inventory
|
18,500
|
||
E.
|
Finished-Goods
Inventory
|
18,500
|
|
Cost of Goods Sold
|
18,500
|
Answer:
A LO: 5 Type: A
36. If a company sells goods that cost $70,000
for $82,000, the firm will:
A. reduce Finished-Goods Inventory by $70,000.
B. reduce Finished-Goods Inventory by $82,000.
C. report sales revenue on the balance sheet of
$82,000.
D. reduce Cost of Goods Sold by $70,000.
E. follow more than one of the above procedures.
Answer:
A LO: 2, 5 Type: A
37. Selto Manufacturing recently sold goods that
cost $35,000 for $45,000 cash. The
journal entries to record this transaction would include:
A. a credit to Work-in-Process Inventory for
$35,000.
B. a debit to Sales Revenue for $45,000.
C. a credit to Profit on Sale for $10,000.
D. a debit to Finished-Goods Inventory for
$35,000.
E. a credit to Sales Revenue for $45,000.
Answer:
E LO: 2, 5 Type: A
38. A computer manufacturer recently shipped
several laptops to a customer (cost: $25,000) and billed the customer
$30,000. Which of the following options
correctly expresses the accounts that are debited and credited to record this
transaction?
A. Debits: Accounts Receivable, Finished-Goods
Inventory; credits: Sales Revenue, Cost of Goods Sold.
B. Debits: Accounts Receivable, Cost of Goods
Sold; credits: Sales Revenue, Finished-Goods Inventory.
C. Debits: Sales Revenue, Cost of Goods Sold;
credits: Accounts Receivable, Finished-Goods Inventory.
D. Debits: Sales Revenue, Finished-Goods
Inventory; credits: Accounts Receivable, Cost of Goods Sold.
E. Debits: Accounts Receivable; credits:
Finished-Goods Inventory, Profit on Sale.
Answer:
B LO: 5 Type: A
39. Barney Company applies manufacturing overhead
by using a predetermined rate of 200% of direct labor cost. The data that follow pertain to job no. 764:
Direct
material cost $55,000
Direct
labor cost 40,000
If
Barney adds a 40% markup on total cost to generate a profit, which of the
following choices depicts a portion of the accounting needed to record the sale
of job no. 764?
Account Debited
|
Amount
|
|
A.
|
Cost of Goods
Sold
|
$175,000
|
B.
|
Cost of Goods
Sold
|
$245,000
|
C.
|
Finished-Goods
Inventory
|
$175,000
|
D.
|
Finished-Goods
Inventory
|
$245,000
|
E.
|
Sales Revenue
|
$245,000
|
Answer:
A LO: 5 Type: A
40. Armada Company applies manufacturing overhead
by using a predetermined rate of 150% of direct labor cost. The data that follow pertain to job no. 831:
Direct
material cost $72,000
Direct
labor cost 38,000
If
Armada adds a 30% markup on total cost to generate a profit, which of the
following choices depicts a portion of the accounting needed to record the sale
of job no. 831?
Account Debited
|
Amount
|
|
A.
|
Accounts
Receivable
|
$167,000
|
B.
|
Accounts
Receivable
|
$217,100
|
C.
|
Finished-Goods
Inventory
|
$167,000
|
D.
|
Finished-Goods
Inventory
|
$217,100
|
E.
|
Sales Revenue
|
$217,100
|
Answer:
B LO: 5 Type: A
41. Media, Inc., an advertising agency, applies
overhead to jobs on the basis of direct professional labor hours. Overhead was estimated to be $150,000, direct
professional labor hours were estimated to be 15,000, and direct professional
labor cost was projected to be $225,000.
During the year, Media incurred actual overhead costs of $146,000,
actual direct professional labor hours of 14,500, and actual direct labor cost
of $222,000. By year-end, the firm's
overhead was:
A. $1,000 underapplied.
B. $1,000 overapplied.
C. $4,000 underapplied.
D. $4,000 overapplied.
E. $5,000 underapplied.
Answer:
A LO: 5 Type: A
42. Maher, Inc., applies manufacturing overhead
at the rate of $60 per machine hour.
Budgeted machine hours for the current period were anticipated to be
80,000; however, a lengthy strike resulted in actual machine hours being worked
of only 65,000. Budgeted and actual
manufacturing overhead figures for the year were $4,800,000 and $4,180,000,
respectively. On the basis of this
information, the company's year-end overhead was:
A. overapplied by $280,000.
B. underapplied by $280,000.
C. overapplied by $620,000.
D. underapplied by $620,000.
E. underapplied by $900,000.
Answer:
B LO: 5 Type: A
43. Carlson charges manufacturing overhead to
products by using a predetermined application rate, computed on the basis of
labor hours. The following data pertain
to the current year:
Budgeted
manufacturing overhead: $1,600,000
Actual manufacturing overhead: $1,632,000
Budgeted
labor hours: 50,000
Actual
labor hours: 48,000
Which
of the following choices denotes the correct status of manufacturing overhead
at year-end?
A. Overapplied by $32,000.
B. Underapplied by $32,000.
C. Overapplied by $68,000.
D. Overapplied by $96,000.
E. Underapplied by $96,000.
Answer: E LO: 5
Type: A
44. Sanger Corporation debited Cost of Goods Sold
and credited Manufacturing Overhead at year-end. On the basis of this information, one can
conclude that:
A. budgeted overhead exceeded actual overhead.
B. budgeted overhead exceeded applied overhead.
C. budgeted overhead was less than applied
overhead.
D. actual overhead exceeded applied overhead.
E. actual overhead was less than applied
overhead.
Answer:
D LO: 5 Type: N
45. Howard Manufacturing's overhead at year-end
was underapplied by $5,800, a small amount given the firm's size. The year-end journal entry to record this
amount would include:
A. a debit to Cost of Goods Sold.
B. a debit to Manufacturing Overhead.
C. a debit to Work-in-Process Inventory.
D. a credit to Cost of Goods Sold.
E. a credit to Work-in-Process Inventory.
Answer:
A LO: 5 Type: A
46. Fog Company, which uses labor hours to apply
overhead to manufacturing, may have increased amounts of underapplied overhead
at month-end if:
A. suppliers of direct materials have an
across-the-board price increase.
B. an accountant failed to record the period's
charges for plant maintenance and security.
C. employees are hit hard with a widespread
outbreak of the flu.
D. direct laborers are granted a wage increase.
E. outlays for advertising expenditures are
increased.
Answer:
C LO: 5 Type: N
47. The estimates used to calculate the
predetermined overhead rate will virtually always:
A. prove to be correct.
B. result in a year-end balance of zero in the
Manufacturing Overhead account.
C. result in overapplied overhead that is closed
to Cost of Goods Sold if it is immaterial in amount.
D. result in underapplied overhead that is
closed to Cost of Goods Sold if it is immaterial in amount.
E. result in either underapplied or overapplied
overhead that is closed to Cost of Goods Sold if it is immaterial in amount.
Answer:
E LO: 5 Type: N
48. Under- or overapplied manufacturing overhead
at year-end is most commonly:
A. charged or credited to Work-in-Process
Inventory.
B. charged or credited to Cost of Goods Sold.
C. charged or credited to a special loss
account.
D. prorated among Work-in-Process Inventory,
Finished-Goods Inventory, and Cost of Goods Sold.
E. ignored because there is no effect on the
Cash account.
Answer:
B LO: 5 Type: RC
49. When underapplied or overapplied manufacturing
overhead is prorated, amounts can be assigned to which of the following
accounts?
A. Raw-Material Inventory, Manufacturing
Overhead, and Direct Labor.
B. Cost of Goods Sold, Work-in-Process
Inventory, and Finished-Goods Inventory.
C. Work-in-Process Inventory, Raw-Material
Inventory, and Cost of Goods Sold.
D. Raw-Material Inventory, Finished-Goods
Inventory, and Cost of Goods Sold.
E. Raw-Material Inventory, Work-in-Process
Inventory, and Finished-Goods Inventory
Answer:
B LO: 5 Type: RC
50. Fletcher, Inc., disposes of under- or overapplied overhead at
year-end as an adjustment to cost of goods sold. Prior to disposal, the firm reported cost of
goods sold of $590,000 in a year when manufacturing overhead was underapplied
by $15,000. If sales revenue totaled
$1,400,000, determine (1) Fletcher's adjusted cost of goods sold and (2) gross
margin.
Adjusted
Cost
of Goods Sold
|
Gross Margin
|
|
A.
|
$575,000
|
$810,000
|
B.
|
$575,000
|
$825,000
|
C.
|
$590,000
|
$810,000
|
D.
|
$605,000
|
$795,000
|
E.
|
$605,000
|
$810,000
|
Answer: D LO: 6 Type: A
51. Which of the following statement(s) is (are)
correct regarding overhead application?
I.
Actual
overhead rates result in more accurate but less timely information.
II.
Predetermined
overhead rates result in less accurate but more timely information.
III.
Predetermined
overhead rates tend to smooth product costs over time.
A. III only.
B. I and II.
C. I and III.
D. II and III.
E. I, II, and III.
Answer: E LO: 6
Type: RC
52. The term "normal costing" refers to
the use of:
A. job-costing systems.
B. computerized accounting systems.
C. targeted overhead rates.
D. predetermined overhead rates.
E. actual overhead rates.
Answer:
D LO: 6 Type: RC
53. Which of the following statements about the
use of direct labor as a cost driver is false?
A. Direct labor is the most commonly used cost
driver when calculating a predetermined overhead rate.
B. Direct labor is gaining in importance in many
manufacturing applications with respect to being a significant cost driver.
C. Direct labor is an inappropriate cost driver
to use if a company is highly automated.
D. If direct labor is a good cost driver,
increases in direct labor are matched with increases in manufacturing overhead.
E. Companies can use either direct labor cost or
direct labor hours as a cost driver.
Answer:
B LO: 6 Type: RC
54. If the amount of effort and attention to
products varies substantially throughout a firm's various manufacturing
operations, the firm might consider the use of:
A. a plant-wide overhead rate.
B. departmental overhead rates.
C. actual overhead rates instead of
predetermined overhead rates.
D. direct labor hours to determine the overhead
rate.
E. machine hours to determine the overhead rate.
Answer:
B LO: 6 Type: N
55. In the two-stage cost allocation process,
costs are assigned:
A. from jobs, to service departments, to
production departments.
B. from service departments, to jobs, to
production departments.
C. from service departments, to production
departments, to jobs.
D. from production departments, to jobs, to
service departments.
E. from the balance sheet (when goods are
produced), to the income statement (when goods are sold).
Answer:
C LO: 7 Type: RC
56. Which of the following entities would not
likely be a user of job-costing systems?
A. Custom-furniture manufacturers.
B. Repair shops.
C. Hospitals.
D. Accounting firms.
E. None of the above, as all are likely users.
Answer: E LO: 8
Type: N
57.
Which of the
following would not likely be used by service providers to accumulate
job costs?
A. Projects.
B. Contracts.
C. Clients.
D. Processes.
E. All of the above, as service providers cannot use
job-costing systems.
Answer:
D LO: 8 Type: RC
58.
At the Nassau
Advertising Agency, partner and staff compensation cost is a key driver of
agency overhead. In light of this fact,
which of the following is the correct expression to determine the amount of
overhead applied to a particular client job?
A. (Budgeted overhead ÷ budgeted compensation) x budgeted
compensation cost on the job.
B. (Budgeted overhead ÷ budgeted compensation) x actual
compensation cost on the job.
C. (Budgeted compensation ÷ budgeted overhead) x budgeted
compensation cost on the job.
D. (Budgeted compensation ÷ budgeted overhead) x actual
compensation cost on the job.
E. None of the above, because service providers do not
apply overhead to jobs.
Answer: B LO: 8 Type: RC
59.
In comparison
with firms that use plantwide overhead rates and departmental overhead rates,
companies that have adopted activity-based costing will typically use:
A.
more cost pools
and more cost drivers.
B. more cost pools and fewer cost drivers.
C. fewer cost pools and more cost drivers.
D. fewer cost pools and fewer cost drivers.
E. only one cost pool and one cost driver.
Answer: A LO:
9 Type: RC
EXERCISES
Manufacturing
Cost Flows, Journal Entries
60. The selected data that follow relate to the
Berger Furniture Company.
Direct
material purchased
|
$160,000
|
Direct
material used
|
79,000
|
Direct labor
|
170,000
|
Manufacturing
overhead incurred
|
100,000
|
Manufacturing
overhead applied
|
90,000
|
During
the year, products costing $310,000 were completed, and products costing
$316,000 were sold for $455,000.
Required:
Prepare
journal entries to record the preceding transactions and events.
LO: 2,
5 Type: A
Answer:
Raw-Material
Inventory
|
160,000
|
|
Accounts Payable
|
160,000
|
|
Work-in-Process
Inventory
|
79,000
|
|
Raw-Material Inventory
|
79,000
|
|
Work-in-Process
Inventory
|
170,000
|
|
Wages Payable
|
170,000
|
|
Manufacturing
Overhead
|
100,000
|
|
Miscellaneous Accounts
|
100,000
|
|
Work-in-Process
Inventory
|
90,000
|
|
Manufacturing Overhead
|
90,000
|
|
Finished-Goods
Inventory
|
310,000
|
|
Work-in-Process Inventory
|
310,000
|
|
Cost of
Goods Sold
|
316,000
|
|
Finished-Goods Inventory
|
316,000
|
|
Accounts
Receivable
|
455,000
|
|
Sales Revenue
|
455,000
|
Basic Journal Entries, Job-Order Costing
61. Quartz Products started and finished job no.
C19 during June. The job required $15,000
of direct material and 75 hours of direct labor at $12 per hour. The predetermined overhead rate is $16 per
direct labor hour.
During
June, direct materials requisitions for all jobs totaled $149,000; the total
direct labor hours and cost were 6,200 hours at $12 per hour; and the total
cost of jobs completed was $337,500. All
of these figures include data that pertain to job no. C19.
Required:
A.
Prepare
journal entries that summarize June's total activity.
B.
Determine
the cost of job no. C19.
LO: 5 Type: A
Answer:
A.
|
Work-in-Process
Inventory
|
149,000
|
|
Raw-Material Inventory
|
149,000
|
||
Work-in-Process
Inventory
|
74,400
|
||
Wages Payable
|
74,400
|
||
Work-in-Process
Inventory
|
99,200
|
||
Manufacturing Overhead
|
99,200
|
||
Finished-Goods
Inventory
|
337,500
|
||
Work-in-Process Inventory
|
337,500
|
||
B.
|
Direct
material
|
$15,000
|
|
Direct labor
(75 x $12)
|
900
|
||
Manufacturing
overhead applied (75 x $16)
|
1,200
|
||
Total cost of
job no. C19
|
$17,100
|
Job Costing: Journal-Entry Emphasis
62. Dexter Corporation, which uses a job costing
system, had two jobs in process at the start of 20x1: job no. 59 ($95,000) and
job no. 60 ($39,500). The following
information is available:
·
The
company applies manufacturing overhead on the basis of machine hours. Budgeted overhead and machine activity for
the year were anticipated to be $720,000 and 20,000 hours, respectively.
·
The
company worked on three jobs during the first quarter. Direct materials used, direct labor incurred,
and machine hours consumed were:
Job No.
|
Direct Material
|
Direct Labor
|
Machine Hours
|
|||
59
|
$18,000
|
$45,000
|
900
|
|||
60
|
----
|
25,000
|
600
|
|||
61
|
37,000
|
35,000
|
1,200
|
|||
·
Manufacturing
overhead during the first quarter included charges for depreciation ($20,000),
indirect labor ($50,000), indirect materials used ($4,000), and other factory
costs ($108,700).
·
Dexter
completed job no. 59 and job no. 60. Job
no. 59 was sold for cash, producing a profit of $24,600 for the firm.
Required:
A.
Determine
the company's predetermined overhead application rate.
B.
Prepare
journal entries as of March 31 to record the following. (Note: Use summary entries where
appropriate by combining individual job data.)
1.
The
issuance of direct material to production, and the direct labor incurred.
2.
The
manufacturing overhead incurred during the quarter.
3.
The
application of manufacturing overhead to production.
4.
The
completion of job no. 59 and no. 60.
5.
The
sale of job no. 59.
LO: 4,
5 Type: A
Answer:
A.
|
Predetermined
overhead rate: $720,000 ÷ 20,000 hours = $36 per machine hour
|
|||
B.
|
1.
|
Work-in-Process
Inventory
|
55,000*
|
|
Raw-Material Inventory
|
55,000
|
|||
Work-in-Process
Inventory
|
105,000**
|
|||
Wages
Payable
|
105,000
|
|||
* $18,000 + $37,000
= $55,000
|
||||
**$45,000 + $25,000 + $35,000 = $105,000
|
||||
2.
|
Manufacturing
Overhead
|
182,700
|
||
Accumulated
Depreciation
|
20,000
|
|||
Wages
Payable
|
50,000
|
|||
Manufacturing
Supplies Inventory
|
4,000
|
|||
Miscellaneous
Accounts
|
108,700
|
|||
3.
|
Work-in-Process
Inventory
|
97,200*
|
||
Manufacturing
Overhead
|
97,200
|
|||
*(900 + 600 + 1,200) x $36 = $97,200
|
||||
4.
|
Finished-Goods
Inventory
|
276,500*
|
||
Work-in-Process
Inventory
|
276,500
|
|||
*No. 59: $95,000 + $18,000 + $45,000 +
(900 x $36) = $190,400
No. 60:
$39,500 + $25,000 + (600 x $36) = $86,100
|
||||
5.
|
Cash
|
215,000*
|
||
Sales
Revenue
|
215,000
|
|||
*$190,400 + $24,600 = $215,000
|
||||
Cost of Goods
Sold
|
190,400
|
|||
Finished-Goods
Inventory
|
190,400
|
|||
Fundamentals
of Manufacturing Accounting
63.
Brickman
Corporation, which began operations on January 1 of the current year, reported
the following information:
Estimated
manufacturing overhead
|
$ 600,000
|
Actual
manufacturing overhead
|
639,000
|
Estimated
direct labor cost
|
480,000
|
Actual
direct labor cost
|
500,000
|
Total
debits in the Work-in-Process account
|
1,880,000
|
Total
credits in the Finished-Goods account
|
920,000
|
Brickman applies manufacturing overhead to jobs on the
basis of direct labor cost and adds a 60% markup to the cost of completed
production when finished goods are sold.
On December 31, job no. 18 was the only job that remained in
production. That job had direct-material
and direct-labor charges of $16,500 and $36,000, respectively.
Required:
A. Determine the company’s predetermined overhead rate.
B. Determine the amount of under- or overapplied
overhead. Be sure to label your answer.
C. Compute the amount of direct materials used in
production.
D.
Calculate the
balance the company would report as ending work-in-process inventory.
E.
Prepare the
journal entry(ies) needed to record Brickman’s sales, which are all made on
account.
LO: 2, 4, 5
Type: A
Answer:
A. Predetermined overhead rate: $600,000 ÷ $480,000 =
125% of direct labor cost
B.
Actual
manufacturing overhead ($639,000) - applied overhead ($500,000 x 125% =
$625,000) = $14,000 underapplied
C.
Total debits to
Work-in-Process ($1,880,000) - direct labor ($500,000) - applied overhead
($625,000) = direct materials used ($755,000)
D.
The only job in
production is job no. 18, which has direct material of $16,500 and direct labor
of $36,000. Applied overhead amounts to
$45,000 ($36,000 x 125%), yielding a total job cost of $97,500 ($16,500 +
$36,000 + $45,000).
E.
The company’s
cost of goods sold equals $920,000, resulting in sales revenues of $1,472,000
($920,000 x 160%). Thus:
Accounts
Receivable
|
1,472,000
|
|
Sales
Revenue
|
1,472,000
|
|
Cost of Goods
Sold
|
920,000
|
|
Finished-Goods
Inventory
|
920,000
|
|
Job-Costing Computations, Overhead Application
64. Montgomery, Inc., which uses a job-costing
system, is a labor-intensive firm, with many skilled craftspeople on the payroll. Job no. 789 was the only job in process on
January 1, having costs of $22,500 as of that date. Direct materials used and direct labor
incurred during January were:
Job No.
|
Direct Materials
|
Direct Labor
|
||
789
|
$ 2,000
|
$ 6,000
|
||
790
|
9,000
|
10,000
|
||
791
|
14,000
|
8,000
|
||
Job
no. 791 was the only job in production as of January 31.
Required:
A.
Should
Montgomery use direct labor or machine hours as a cost driver. Why?
B.
Assume
that the company decided to use direct labor as its cost driver. If the budgeted amounts of direct labor and
manufacturing overhead are anticipated to be $200,000 and $300,000,
respectively, what is the firm's predetermined overhead rate?
C.
Compute
the cost of work-in-process inventory as of January 31.
D.
Compute
the cost of jobs completed during January.
E.
Suppose
that the company sold all of its completed jobs, adding a 40% markup to
cost. How much would the firm report as
sales revenue?
LO: 4, 5 Type: A
Answer:
A.
|
The company
should use direct labor because it is a labor-intensive firm, with many
skilled craftspeople on the payroll.
More than likely, a majority of overhead is "driven" by
people rather than machine operation.
|
||
B.
|
$300,000 ¸ $200,000 = 150% of direct labor cost
|
||
C.
|
Direct
material
|
$14,000
|
|
Direct labor
|
8,000
|
||
Manufacturing
overhead ($8,000 x 150%)
|
12,000
|
||
Total cost of
job no. 791
|
$34,000
|
||
D.
|
Beginning
work in process
|
$22,500
|
|
Direct
material ($2,000 + $9,000)
|
11,000
|
||
Direct labor
($6,000 + $10,000)
|
16,000
|
||
Manufacturing
overhead ($16,000 x 150%)
|
24,000
|
||
Total cost of
job nos. 789 and 790
|
$73,500
|
||
E.
|
Sales
revenue: $102,900 ($73,500 x 140%)
|
||
Overview of Job-Costing Systems, Overhead Accounting
65. Rockville, Inc., which uses a job-costing
system, began business on January 1, 20x3 and applies manufacturing overhead on
the basis of direct-labor cost. The
following information relates to 20x3:
·
Budgeted direct
labor and manufacturing overhead were anticipated to be $200,000 and $250,000,
respectively.
·
Job
nos. 1, 2, and 3 were begun during the year and had the following charges for
direct material and direct labor:
Job No.
|
Direct Materials
|
Direct Labor
|
||
1
|
$145,000
|
$35,000
|
||
2
|
320,000
|
65,000
|
||
3
|
55,000
|
80,000
|
||
·
Job
nos. 1 and 2 were completed and sold on account to customers at a profit of 60%
of cost. Job no. 3 remained in
production.
·
Actual
manufacturing overhead by year-end totaled $233,000. Rockville adjusts all under- and overapplied
overhead to cost of goods sold.
Required:
A.
Compute
the company's predetermined overhead application rate.
B.
Compute
Rockville's ending work-in-process inventory.
C.
Determine
Rockville's sales revenue.
D.
Was
manufacturing overhead under- or overapplied during 20x3? By how much?
E.
Present
the necessary journal entry to handle under- or overapplied manufacturing
overhead at year-end.
F.
Does
the presence of under- or overapplied overhead at year-end indicate that Rockville's accountants made a serious
error? Briefly explain.
LO: 4,
5 Type: A, N
Answer:
A.
|
$250,000 ÷ $200,000 = 125%
of direct labor cost
|
||
B.
|
Job no. 3:
|
||
Direct
material
|
$ 55,000
|
||
Direct
labor
|
80,000
|
||
Manufacturing
overhead ($80,000 x 125%)
|
100,000
|
||
Total
cost of job no. 3
|
$235,000
|
||
C.
|
Job nos. 1 and 2:
|
||
Direct
material ($145,000 + $320,000)
|
$465,000
|
||
Direct
labor ($35,000 + $65,000)
|
100,000
|
||
Manufacturing
overhead ($100,000 x 125%)
|
125,000
|
||
Total
cost of job nos. 1 and 2
|
$690,000
|
||
Sales revenue: $1,104,000
($690,000 x 160%)
|
|||
D.
|
Actual overhead
|
$233,000
|
|||
Applied overhead: [($35,000
+ $65,000 +
|
|||||
$80,000)
x 125%]
|
225,000
|
||||
Underapplied overhead
|
$
8,000
|
||||
E.
|
Cost of Goods Sold
|
8,000
|
|||
Manufacturing
Overhead
|
8,000
|
||||
F.
|
No. Companies use a predetermined application
rate for several reasons, including the fact that manufacturing overhead is
not easily traced to jobs and products.
The predetermined rate is based on estimates of both overhead and an
appropriate cost driver, and situations where these amounts coincide
precisely with actual experiences are rare.
As a result, under- or overapplied overhead typically arises at
year-end.
|
||||
Overhead
Calculations
66. Athens Corporation uses a job-cost system and
applies manufacturing overhead to products on the basis of machine hours. The company's accountant estimated that
overhead and machine hours would total $800,000 and 50,000, respectively, for
20x1. Actual costs incurred follow.
Direct
material used
|
$250,000
|
Direct labor
|
300,000
|
Manufacturing
overhead
|
816,000
|
The
manufacturing overhead figure presented above excludes $27,000 of sales
commissions incurred by the firm. An
examination of job-cost records revealed that 18 jobs were sold during the year
at a total cost of $2,960,000. These
goods were sold to customers for $3,720,000.
Actual machine hours worked totaled 51,500, and Athens adjusts under- or
overapplied overhead at year-end to Cost of Goods Sold.
Required:
A.
Determine
the company's predetermined overhead application rate.
B.
Determine
the amount of under- or overapplied overhead at year-end. Be sure to indicate whether overhead was
under- or overapplied.
C.
Compute
the company's cost of goods sold.
D.
What
alternative accounting treatment could the company have used at year-end to
adjust for under- or overapplied overhead?
Is the alternative that you suggested appropriate in this case? Why?
LO: 4, 5,
6 Type: A, N
Answer:
A.
|
$800,000 ÷ 50,000
= $16 per machine hour
|
|
B.
|
Applied
overhead (51,500 x $16)
|
$ 824,000
|
Actual
overhead
|
816,000
|
|
Overapplied
overhead
|
$ 8,000
|
|
C.
|
Cost of goods
sold, as reported
|
$2,960,000
|
|
Less:
Overapplied overhead
|
8,000
|
||
Cost of goods
sold, adjusted
|
$2,952,000
|
||
D.
|
The company could have
allocated the overapplication to work in process, finished goods, and cost of
goods sold. Although this method is
acceptable, it is not suggested in this case because of the immaterial dollar
amount in relation to cost of goods sold.
|
||
Job
Costing: Focus on Overhead
67. Packard Products uses a job-costing system
for its units, which pass from the Machining Department, to the Assembly
Department, to finished-goods inventory.
The Machining Department is heavily automated; in contrast, the Assembly
Department performs a number of manual-assembly activities. The following information relates to the Machining
Department for the year just ended:
Budgeted manufacturing overhead
|
$8,000,000
|
Actual manufacturing overhead
|
7,975,000
|
Budgeted machine hours
|
500,000
|
Actual machine hours
|
510,000
|
The
Machining Department data that follow pertain to job no. 243, the only job in
production at year-end.
Direct materials
|
$64,800
|
Direct labor cost
|
35,200
|
Machine hours
|
450
|
Required:
A.
Assuming
the use of normal costing, calculate the predetermined overhead rate that is
used in the Machining Department.
B.
Compute
the cost of the Machining Department's year-end work-in-process inventory.
C.
Determine
whether overhead was under- or overapplied during the year in the Machining
Department.
D.
If
Packard disposes of the Machining Department's under- or overapplied overhead
as an adjustment to Cost of Goods Sold, would the company's Cost-of-Goods-Sold
account increase or decrease? Explain.
E.
How
much overhead would have been charged to the Machining Department's
Work-in-Process account during the year?
F.
Comment
on the appropriateness of direct labor cost to apply manufacturing overhead in
the Assembly Department.
LO: 4, 5,
6 Type: A
Answer:
A.
Machining
overhead rate: $8,000,000 ÷ 500,000 hours = $16 per machine hour
B.
The
ending work in process is carried at a cost of $107,200, computed as follows:
Direct materials
|
$ 64,800
|
Direct labor
|
35,200
|
Manufacturing overhead
(450 x $16)
|
7,200
|
Total cost
|
$107,200
|
C. Actual
overhead in the Machining Department amounted to $7,975,000, whereas applied
overhead totaled $8,160,000 (510,000 hours x $16). Thus, overhead was overapplied by $185,000
during the year.
D.
The
department's manufacturing overhead was overapplied by $185,000. As a result of this situation, excessive
overhead flowed from Work in Process, to Finished Goods, to Cost of Goods Sold,
meaning that the Cost-of-Goods-Sold account must be decreased at year-end.
E.
The
Work-in-Process account is charged with applied overhead, or $8,160,000.
F.
The
firm's selection of application bases is likely appropriate. The bases should "drive" the costs,
meaning there should be a strong cause-and-effect relationship between the base
that is used and the amount of overhead incurred. In the Assembly Department, a considerable
portion of the overhead incurred is related to manual-assembly (i.e., labor)
operations.
Overhead Accounting:
Working Backwards
68. Kent Products uses a predetermined overhead
application rate of $18 per labor hour.
A review of the company's accounting records revealed budgeted
manufacturing overhead for the period of $621,000, applied manufacturing
overhead of $590,400, and overapplied overhead of $11,900.
Required:
A.
Determine
Kent's actual labor hours, budgeted labor hours, and actual manufacturing
overhead.
B.
Present
the necessary year-end journal entry to handle the overapplied overhead,
assuming that the firm allocates over- or underapplied overhead to Cost of
Goods Sold.
LO: 4,
5 Type: A
Answer:
A.
Actual
labor hours: $590,400 ÷ $18 per hour = 32,800 hours
Budgeted
labor hours: $621,000 ÷ $18 per hour = 34,500 hours
Actual
manufacturing overhead: $590,400 - $11,900 = $578,500
B. Manufacturing Overhead 11,900
Cost of Goods Sold 11,900
Analysis of Accounts to
Derive Overhead Figures; Working Backwards
69. A review of the records of Milgrim, Inc., a
new company, disclosed the following year-end information:
·
Manufacturing
Overhead account: Contained
debits of $872,000, which included $20,000 of sales commissions.
·
Work-in-Process
Inventory account: Contained
charges for overhead of $875,000.
·
Cost-of-Goods-Sold
account: Contained a
year-end debit balance of $3,680,000.
This amount was computed prior to any year-end adjustment for under- or
overapplied overhead.
Milgrim
applies manufacturing overhead to production by using a predetermined rate of
$20 per machine hour. Budgeted overhead
for the period was anticipated to be $900,000.
Required:
A.
Determine
the actual manufacturing overhead for the year.
B.
Determine
the amount of manufacturing overhead applied to production.
C.
Is
overhead under- or overapplied? By how
much?
D.
Compute
the adjusted cost-of-goods-sold figure that should be disclosed on the
company's income statement.
E.
How
many machine hours did Milgrim actually work during the year?
F.
Compute
budgeted machine hours for the year.
LO: 4, 5,
6 Type: A
Answer:
A.
|
$872,000 - $20,000 sales
commissions = $852,000
|
||
B.
|
$875,000 (given)
|
||
C.
|
Manufacturing overhead is
overapplied by $23,000 ($875,000 - $852,000).
|
||
D.
|
Cost of goods sold
|
$3,680,000
|
|
Less: Overapplied overhead
|
23,000
|
||
Cost of goods sold,
adjusted
|
$3,657,000
|
||
E.
|
Milgrim would have applied
overhead to production by using the actual machine hours worked and the $20
application rate. Thus, the actual
hours worked total 43,750 ($875,000 ÷ $20).
|
||
F.
|
$900,000 ÷ $20 = 45,000
hours
|
||
Project Costing in a Service
Business
70. Fine & Associates is an interior
decorating firm in Tucson. The following
costs were incurred in a project to redecorate the mayor's offices:
Direct
material
|
$ 29,000
|
Direct
professional labor
|
42,000
|
The
firm's budget for the year included the following estimates:
Budgeted
overhead
|
$800,000
|
Budgeted
direct professional labor
|
640,000
|
Overhead
is applied to contracts by using a predetermined overhead rate that is based on
direct professional labor cost. Actual
professional labor during the year was $655,000 and actual overhead was
$793,000.
Required:
A.
Determine
the total cost to redecorate the mayor's offices.
B.
Calculate
the under- or overapplied overhead for the year. Be sure to label your answer.
LO: 8 Type: A
Answer:
A.
|
Direct
material
|
$ 29,000
|
Direct
professional labor
|
42,000
|
|
Applied
overhead ($42,000 x 125%*)
|
52,500
|
|
Total cost to
redecorate
|
$123,500
|
|
*$800,000 ¸ $640,000 =
125%
|
||
B.
|
Applied
overhead ($655,000 x 125%)
|
$818,750
|
Actual
overhead
|
793,000
|
|
Overapplied
overhead
|
$ 25,750
|
|
Project Costing, Architecture Firm
71. Boswell and Associates designs relatively small sports
stadiums and arenas at various sites throughout the country. The firm’s accountant prepared the following
budget for the upcoming year:
Professional staff salaries
|
$3,000,000
|
Administrative support staff
|
800,000
|
Other operating costs
|
200,000
|
Eighty percent of professional staff salaries are
directly traceable to client projects, a figure that falls to 60% for the
administrative support staff and other operating costs. Traceable costs are charged directly to
client projects; nontraceable costs, on the other hand, are treated as firm
overhead and charged to projects by using a predetermined overhead application
rate.
Boswell had one project in process at year-end: an
arena that was being designed for Charlotte County. Costs directly chargeable to this project were:
Professional staff salaries
|
$90,000
|
Administrative support staff
|
17,300
|
Other operating costs
|
6,700
|
Required:
A.
Determine
Boswell’s overhead for the year and the firm’s predetermined overhead
application rate. The rate is based on
costs directly chargeable to firm projects.
B. Compute the cost of the Charlotte County arena project
as of year-end.
C. Present three examples of “other operating costs” that
might be directly traceable to the Charlotte County project.
LO: 8 Type: A, N
Answer:
A.
|
Professional staff salaries
|
$3,000,000
|
|
Administrative support staff
|
800,000
|
||
Other operating costs
|
200,000
|
||
Subtotal
|
$4,000,000
|
||
Less: Direct costs
|
|||
Professional staff salaries ($3,000,000 x 80%)
|
$2,400,000
|
||
Administrative support
staff and other costs [($800,000 + $200,000) x 60%]
|
600,000
|
3,000,000
|
|
Nontraceable costs
(i.e., overhead)
|
$1,000,000
|
||
Predetermined application rate: $1,000,000 ÷
$3,000,000 = 33.33%
|
|||
B.
|
Professional staff salaries
|
$ 90,000
|
|
Administrative support staff
|
17,300
|
||
Other operating costs
|
6,700
|
||
Subtotal
|
$114,000
|
||
Overhead: $114,000 x 33.33%
|
38,000
|
||
Total
|
$152,000
|
||
C.
|
Possible examples include
travel, overnight delivery fees, postage, selected costs related to
conducting focus-group studies, photocopying, and supplies related to model
construction.
|
||
Job Costing in a Consulting Firm
72. KLP provides consulting services and uses a
job-order system to accumulate the cost of client projects. Traceable costs are charged directly to
individual clients; in contrast, other costs incurred by KLP, but not
identifiable with specific clients, are charged to jobs by using a
predetermined overhead application rate.
Clients are billed for directly chargeable costs, overhead, and a
markup.
KLP
anticipates the following costs for the upcoming year:
Cost
|
Percentage of Cost
Directly Traceable
to Clients
|
||
Professional staff salaries
|
$5,000,000
|
80%
|
|
Administrative support
staff
|
600,000
|
50
|
|
Travel
|
200,000
|
80
|
|
Other operating costs
|
200,000
|
20
|
|
Total
|
$6,000,000
|
||
KLP's
partners desire to make a $480,000 profit for the firm and plan to add a
percentage markup on total cost to achieve that figure.
On
May 14, KLP completed work on a project for Lawson Manufacturing. The following costs were incurred:
professional staff salaries, $68,000; administrative support staff, $8,900;
travel, $10,500; and other operating costs, $2,600.
Required:
A.
Determine
KLP's total traceable costs for the upcoming year and the firm's total
anticipated overhead.
B.
Calculate
the predetermined overhead rate. The
rate is based on total costs traceable to client jobs.
C.
What
percentage of total cost will KLP add to each job to achieve its profit target?
D.
Determine
the total cost of the Lawson Manufacturing project. How much would Lawson be billed for services
performed?
LO: 8 Type: A, N
Answer:
A.
Traceable
costs total $4,500,000, computed as follows:
Total Cost
|
Percent
Traceable
|
Traceable
Cost
|
||
Professional staff
salaries
|
$5,000,000
|
80%
|
$4,000,000
|
|
Administrative support
staff
|
600,000
|
50
|
300,000
|
|
Travel
|
200,000
|
80
|
160,000
|
|
Other operating costs
|
200,000
|
20
|
40,000
|
|
Total
|
$6,000,000
|
$4,500,000
|
||
KLP's overhead
(i.e., the nontraceable costs) totals $1,500,000 ($6,000,000 - $4,500,000).
B.
Predetermined
overhead rate: $1,500,000 ÷ $4,500,000 = 33.33%
C.
Target
profit percentage: $480,000 ÷ $6,000,000 = 8%
D.
The
total cost of the Lawson Manufacturing project is $120,000, and the billing is
$129,600, as follows:
Professional
staff salaries
|
$ 68,000
|
Administrative
support staff
|
8,900
|
Travel
|
10,500
|
Other
operating costs
|
2,600
|
Subtotal
|
$ 90,000
|
Overhead
($90,000 x 33.33%)
|
30,000
|
Total cost
|
$120,000
|
Markup
($120,000 x 8%)
|
9,600
|
Billing
to Lawson
|
$129,600
|
DISCUSSION QUESTIONS
Process Costing Versus
Job-Order Costing
73. Describe the types of manufacturing
environments that would best be suited for (1) job-order costing and (2)
process costing. Include two examples of
manufacturers that would likely use job-cost systems.
LO: 3 Type: RC
Answer:
Job-order
costing is typically used in manufacturing environments where goods are
produced in distinct batches, called jobs.
Typically, there are differences among the various jobs produced. In contrast, process costing is used in
environments where large numbers of identical product units are
manufactured. Two examples of
job-costing firms are aircraft and custom-furniture manufacturers.
Underapplied
Manufacturing Overhead
74. Manufacturing overhead is applied to
production.
A.
Describe
several situations that may give rise to underapplied overhead.
B.
Assume
that underapplied manufacturing overhead is treated as an adjustment to Cost of
Goods Sold. Explain why an underapplication
of overhead increases Cost of Goods Sold.
LO: 5 Type: N
Answer:
A.
Overhead
will be underapplied when total actual overhead costs exceed applied
overhead. This can occur for a variety
of reasons including underestimation of some overhead costs, incorrect
estimation of the application base and/or production, or changes in the mix of
products that affect the level of overhead costs incurred.
B.
In
most manufacturing environments, many products made during the period are also
sold and ending work in process is modest relative to the amount of goods
manufactured. Therefore the vast
majority of the overhead applied to the Work-in-Process Inventory account will
flow through Finished-Goods Inventory and on to Cost of Goods Sold. However, if overhead is underapplied, Cost of
Goods Sold has been increased by an insufficient amount. Consequently, the underapplied overhead
should be added to Cost of Goods Sold.
Applied Overhead Versus
Actual Overhead
75. Discuss the reasons for using applied
overhead rather than actual overhead to determine the cost of production jobs.
LO: 4,
6 Type: RC
Answer:
There are
several reasons. First, overhead costs
usually bear no direct relationship to individual jobs or products, but must be
incurred for the production process to take place. Therefore, it is crucial that overhead be
applied to products in order to have a complete picture of manufacturing
costs. Second, actual overhead is not
known until after the end of the accounting period. The cost of jobs would not be available in a
timely fashion if actual overhead costs were used. Finally, overhead costs often vary due to
seasonal factors. This variation is not
relevant (once a decision has been made to operate through the seasonal
factors) to decisions that involve products or pricing in the short term. It is therefore better to use applied
overhead to eliminate cost variations from one season to another.
Use of Predetermined
Overhead Application Rates
76. The use of predetermined overhead application
rates results in a trade-off between accuracy and timeliness. Explain what this statement means.
LO: 6 Type: RC
Answer:
Predetermined
rates are computed by using budgeted (rather than actual) amounts of both
manufacturing overhead and cost drivers.
Thus, the rate is really an estimate of overhead per "unit" of
driver, a rate that can be employed to cost products and jobs as the products
and jobs are completed. In addition,
such rates may be helpful in decision making.
If one desired to focus on actual overhead amounts, the proper rate can
be developed only at the conclusion of the period when such amounts become
known.
In view of
this situation, a trade-off arises.
Namely, the user is forsaking accuracy (estimated amounts vs. actual amounts)
in exchange for the ability to generate more timely accounting information.
Selecting the Proper
Cost Driver
77. Harris, Inc., has just completed job nos. 78
and 79, which were similar in terms of complexity, production processes, and
units manufactured. Job no. 78 was
manufactured by Joe Barton who earns $14 per hour, whereas job no. 79 was
completed by Susan Franklin who earns $20 per hour. If Joe and Susan are equally efficient, would
the company be better off using direct labor cost or direct labor hours as the
cost driver in its predetermined overhead rate?
Briefly explain.
LO: 6 Type: N
Answer:
The jobs
produced by Barton and Franklin are similar in terms of complexity, production
processes, and units manufactured, and both workers are equally efficient. Thus, the amount of overhead incurred on job
no. 78 should be relatively the same as that incurred on job no. 79. If direct labor hours are used in the
predetermined overhead rate, the overhead applied to the two jobs will be the
same, which is good accounting in this case.
Conversely, if direct labor cost were used, Susan's job would absorb
more overhead because of the higher labor cost—an improper accounting since
both jobs incurred the same amount.
The Two-Stage Allocation
Process for Assigning Overhead Costs
78. Briefly describe the stages used in the
two-stage allocation process for assigning overhead costs.
LO: 7 Type: RC
Answer:
In Stage
One (Cost Distribution or Allocation), all manufacturing costs are assigned to
departmental overhead centers. For
service departments, the related costs are reassigned to the production
departments through this process. In
Stage Two (Overhead Application), all of the manufacturing costs accumulated in
each production department are then assigned to the production jobs that passed
through the department.
No comments:
Post a Comment