Cost Management Measuring, Monitoring and Motivating Performance 2nd Edition By Susan K. Wolcott - Test Bank

Cost Management Measuring, Monitoring and Motivating Performance 2nd Edition By Susan K. Wolcott – Test Bank

 

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Sample Questions Are Posted Below

 

Chapter 5:  Job Costing

 

 

Learning Questions	True / False	Multiple Choice	Matching	Exercises	Short Answer	Problems
1.        How are costs assigned to customized goods and services?	1-5	9-12, 22, 63-72, 77-84 W: 104, 105, 108, 110-112, 114, 117, 120-121	1, 3	2, 3, 10, 11	1, 11, 12
2.        How is overhead allocated to individual jobs?	6-15	1,- 8, 13-16, 18-21, 23, 34,73,76,85,86 S:  97-99, 101-103 W: 119	1,2,3	1-4,9	2,6.7.8.13	1-3
3.
3,How does job costing information affect managers’ incentives and decisions?	16-20	35-42 W: 113			9, 10, 14, 15	1, 2, 3
4.        How are spoilage, rework and scrap handled in job costing?	21-25	43-46, 48-51, 54, 55, 58, 59 S:  88-93, 95 W: 107, 116	3		3, 4	4, 5, 6
5.        What are the quality and behavioral implications of spoilage?	26-29	47, 52, 53, 56, 57, 60-62 S:  87, 94	3			5, 6

S:  Questions from the study guide

W:  Questions from web quizzes on the student web site

 

Level of Complexity*	True / False	Multiple Choice	Matching	Exercises	Short Answer	Problems
Foundation:  Repeat or paraphrase information; Reason to single correct solution; Perform computations; etc.	All	All	All	All	2, 3, 6	1-6
Step 1: Identify the problem, relevant information, and uncertainties					1, 4, 9-13	2
Step 2: Explore interpretations and connections					7, 8, 14, 15	1, 3, 5, 6
Step 3: Prioritize alternatives and implement conclusions
Step 4: Envision and direct strategic innovation

 

*Based on level in Steps for Better Thinking (Exhibit 1.10, textbook p. 16):

Note:  Step 1, 2, 3, and 4 questions in this test bank are intentionally open-ended and subjective, giving students the opportunity to demonstrate skills such as judgment, reasoning, identification of uncertainties, identification or analysis of pros and cons, and so on.  Therefore, student answers may not exactly match those shown in the solutions.

True / False

1. When goods are customized, all costs are easily traced to individual cost objects.
2. Overhead allocation is the process of tracing costs to products or services.
3. Job costing can be used in both manufacturing and service organizations.
4. Direct material and direct labor costs are typically traced to individual jobs in a job costing system.
5. In a job costing system, costs flow out of work in process into finished goods inventory.
6. Overhead is typically allocated to jobs in a job costing system, rather than being traced directly.
7. A “job” refers to a group of individual overhead costs that are accumulated for a particular purpose.
8. The first step in overhead allocation is to identify the cost object.
9. Identifying a cost driver is the first step in allocating overhead in a job costing system.
10. A separate cost allocation base must be chosen for each job in a job costing system.
11. Actual costing and normal costing are two different names for the same overhead allocation system.
12. Both actual costing and normal costing systems use the actual quantity of the allocation base to assign overhead costs to jobs.
13. In actual costing systems, overhead is allocated using the following formula: actual allocation base volume ¸ actual allocation rate.
14. In normal costing systems, overhead is allocated using the following formula: normal allocation base volume ¸ normal allocation rate.
15. One of the primary differences between actual and normal costing systems is their treatment of direct material and direct labor costs.
16. In a job costing system, costs are very accurate because jobs are customized.
17. Information from job costing systems is subject to uncertainties, and implementing a job costing system requires judgment.
18. Because overhead costs are allocated in a job costing system, they can be considered “variable” for the purpose of decision making.
19. Direct costs are subject to less uncertainty than indirect costs in a job costing system, but managers still exercise judgment regarding direct cost tracing.
20. Allocated overhead generally does not accurately measure a job’s overhead resources.
21. Spoilage, rework, and scrap are irrelevant in job costing systems.
22. Spoilage is typically identified as part of the overhead allocation process.
23. Only spoiled goods are reworked.
24. Reworked units can always be sold at the regular market price.
25. Scrap can be sold, discarded, or used in other creative ways.
26. Potential loss of reputation and market share are opportunity costs of spoilage and rework.
27. Although they may be significant in amount, quality costs are often measured imprecisely.
28. Quality initiatives have both quantitative and qualitative benefits.
29. Accounting processes influence manager behavior in many organizations.

 

 

Multiple Choice

 

Use the following information for the next 2 questions.

Direct               Direct                Direct

Materials         Labor Cost        Labor Hours

Job 200               $   500                 $800                    40

Job 201                   350                   200                    10

Job 202                1,000                   600                    30

Franks Fabricating uses job costing and applies overhead using a normal costing system and uses direct labor cost as the allocation base.  This period’s estimated overhead cost is $100,000 and estimated direct labor cost of $50,000 and 2,500 direct labor hours.

1. What is the overhead allocation rate?
2. 200%
3. 50%
4. 30%
5. 60%
6. What is the total manufacturing cost of Job 201?
7. $550
8. $950
9. $850
10. $1,500

 

Use the following information for the next 2 questions.

Direct               Direct                Direct

Materials         Labor Cost        Labor Hours

Job 400                 $200                 $800                    40

Job 401                   250                   200                    10

Job 402                   500                   600                    32

O’Hare Sisters Manufacturing uses job costing and applies overhead using a normal costing system using direct labor hours as the allocation base.  This period’s estimated overhead cost is $400,000, estimated direct labor cost is $500,000 and estimated direct labor hours are 25,000.  This period actual overhead cost was $420,000, actual direct labor cost was $390,000, and actual direct labor hours were 20,000.

3. What is the overhead allocation rate?
4. $21/hour
5. $10/hour
6. $16/hour
7. $18/hour
8. What is the total manufacturing cost of Job 400?
9. $1,200
10. $1,000
11. $1,320
12. $1,640

 

Use the following information for the next 2 questions.

Direct               Direct                Direct

Materials         Labor Cost        Labor Hours

Job 400                 $200                 $800                    40

Job 401                   250                   200                    10

Job 402                   500                   600                    32

Sparkle Company uses job costing and applies overhead using an actual costing system using direct labor hours as the allocation base.  This period’s estimated overhead cost is $400,000, estimated direct labor cost is $500,000 and estimated direct labor hours are 25,000.  This period actual overhead cost was $420,000, actual direct labor cost was $390,000, and actual direct labor hours were 20,000.

5. What is the overhead allocation rate?
6. $21/hour
7. $10/hour
8. $16/hour
9. $18/hour
10. What is the total manufacturing cost of Job 402?
11. $1,100
12. $1,772
13. $1,320
14. $1,640

 

Use the following information for the next 2 questions.

Professional       Other Direct       Professional

Labor Cost             Costs            Labor Hours

Client 57             $2,000                 $800                    20

Client 58              1,000                   200                    10

Client 59              5,000                   600                    50

Allen’s Accounting Services uses job costing and applies overhead using a normal costing system using professional labor hours as the allocation base.  This period’s estimated overhead cost is $400,000, estimated professional labor cost is $800,000 and estimated direct labor hours are 8,000.  This period actual overhead cost was $426,400, actual direct labor cost was $820,000, and actual direct labor hours were 8,200.

7. What is the overhead allocation rate?
8. $60/hour
9. $55/hour
10. $52/hour
11. $50/hour
12. What is the total cost for Client 58?
13. $1,300
14. $1,200
15. $1,720
16. $1,700

 

Use the following information for the next 4 questions.

Kelita’s Kar Kare Kompany had the following cost and inventory data for the month.

Costs incurred for the month:

Direct labor                                $6,900

Indirect labor                               1,500

Direct materials purchased            4,500

Factory utilities                            2,200

Factory depreciation                     3,000

Factory supervision                      1,200

 

Inventories:

Ending           Beginning

Direct materials               $1,500             $1,800

Work-in-process               4,500               4,050

Finished goods                  6,000               5,250

9. What were the direct materials available for the month?
10. $4,500
11. $6,000
12. $6,300
13. $7,800
14. What were the direct costs of production incurred during the month?
15. $12,000
16. $11,700
17. $10,200
18. $10,500
19. Assume that the total production costs incurred for the month were $15,000. What was the cost of jobs completed?
20. $14,550
21. $19,050
22. $15,000
23. $15,450
24. Assume that total production costs incurred for the month were $15,000. What was the cost of goods sold?
25. $13,800
26. $15,300
27. $19,800
28. $20,550

 

Use the following information for the next 3 questions.

Asadi Company uses a job costing system and allocates overhead using an estimated overhead allocation rate based on direct labor hours.  Information for 20×5 is as follows:

Estimated              Actual

Manufacturing overhead                     $166,500          $165,000

Direct labor hours                                  50,000             60,000

13. The estimated overhead allocation rate for 20×5 was
14. $2.75
15. $3.30
16. $3.33
17. $2.76
18. The overhead allocated to work-in-process during 20×5 before the year-end adjustment was
19. $199,800
20. $165,000
21. $166,500
22. $198,000
23. The amount of over- or underapplied overhead for 20×5 was
24. $1,500 underapplied
25. $3,000 underapplied
26. $1,500 overapplied
27. $34,800 overapplied

16. Following are the budgeted costs for a manufacturing plant producing custom products:

Materials (70% direct and 30% indirect)                        $15,000

Labor (60% direct and 40% indirect)                               12,000

Supervision                                                                      5,000

Depreciation                                                                  10,000

Utilities                                                                            4,860

Total                                                                $46,860

The company uses a normal costing system, and overhead is allocated on the basis of direct labor cost. If actual direct labor cost was $7,500, the overhead allocated was

1. $29,160
2. $20,688
3. $30,375
4. $48,813

 

Use the following information for the next 2 questions.

Allen, Inc. has budgeted $120,000 in variable overhead and $72,000 in fixed overhead for the current month.  8,000 custom units were expected to be produced using 60,000 machine hours.  During the month, Allen actually used 68,096 machine hours and produced 8,960 units. Actual overhead costs were: $132,000 variable and $73,600 fixed.

17. Assume Allen uses an actual costing system. The amount of over- or underapplied overhead for the current month is
18. $9,440 overapplied
19. $12,307 overapplied
20. $0
21. $13,600 overapplied
22. Assume Allen uses a normal costing system. The variable overhead allocated would be
23. $136,192
24. $132,000
25. $134,400
26. $120,000
27. Kelita’s Kar Company projects the following costs:

Direct material                                    $300,000

Direct labor                                          500,000

Indirect labor wages                               50,000

Sales commissions                                  30,000

Production foremen salaries                    75,000

Production equipment leases                 125,000

Production depreciation                          60,000

Property taxes-plant                                25,000

If overhead is allocated on the basis of direct labor hours and 25,000 direct labor hours are budgeted for next year, the estimated overhead allocation rate will be

13. $13.40 per direct labor hours
14. $14.60 per direct labor hours
15. $12.40 per direct labor hours
16. $33.40 per direct labor hours
17. A firm had the following balances at the end of the period

Work in process                                      $   400

Finished goods                                            600

Cost of goods sold                                    1,000

Overapplied overhead                                  400

It was determined that the overapplied overhead should be treated as immaterial.  After any adjustments for overapplied overhead are made, the balance of work in process would be

1. $320
2. $400
3. $480
4. $534
5. Assume there is $2,000 of overapplied fixed overhead, which is to be prorated. Current balances of selected accounts are:

Work in process                       $15,000

Finished goods                           25,000

Cost of goods sold                      60,000

The adjusting journal entry is

1. Overapplied fixed overhead 2,000

Work in process                                                            300

Finished goods                                                              500

Cost of goods sold                                                      1,200

1. Work in process 300

Finished goods                                                  500

Cost of goods sold                                          1,200

Overapplied fixed overhead                                        2,000

1. Fixed overhead control 2,000

Work in process                                                            300

Finished goods                                                              500

Cost of goods sold                                                      1,200

1. Work in process 300

Finished goods                                                  500

Cost of goods sold                                          1,200

Fixed overhead allocated                                            2,000

22. For which of the following products would a job costing system be appropriate?
23. Brewery, where each brand is a produced in a separate batch process
24. Jewelry store that manufactures and sells handcrafted jewelry
25. Cement kiln, where a single identical type of cement product is manufactured
26. Chemical plant, where each polymer is produced in a separate continuous process
27. Assume that variable overhead is overapplied by $200 and fixed overhead is underapplied by $100. If these variances are considered immaterial, the effect on cost of goods sold is
28. $300 increase
29. $100 increase
30. $300 decrease
31. $100 decrease
32. When overhead is underapplied
33. Cost of goods sold is understated
34. Work in process inventory is overstated
35. Gross profit is understated
36. Finished goods inventory is overstated
37. The denominator in an overhead allocation rate for normal costing is
38. Actual overhead costs
39. Estimated activity level
40. Estimated overhead costs
41. Actual activity level
42. Normal costing overhead rates are developed at the beginning of each period based on the
43. Actual overhead costs of the previous period
44. Actual activity level of the previous period
45. Direct labor hours at maximum capacity
46. Expected activity level of the coming period
47. A costing system that charges jobs with actual direct costs and uses an estimated overhead allocation rate is called a(n)
48. Actual costing system
49. Normal costing system
50. Process costing system
51. Activity-based costing system
52. For which costing system is overhead allocated on the basis of the actual direct labor hours worked?
53. Actual costing system
54. Normal costing system
55. Process costing system
56. Activity-based costing system
57. Which costing system does not include over- or underapplied overhead?
58. Actual costing system
59. Normal costing system
60. Process costing system
61. Activity-based costing system
62. In a normal costing system, which of the following costs are traced to each job?

Direct Materials      Direct Labor

1. Yes Yes
2. No Yes
3. No No
4. Yes No
5. In an actual costing system, the overhead allocation rate is calculated as
6. Actual overhead cost + actual quantity of allocation base
7. Actual overhead cost ¸ actual quantity of allocation base
8. Actual quantity of allocation base ¸ actual overhead cost
9. Actual overhead cost ¸ actual quantity of allocation base
10. In a normal costing system, the overhead allocation rate is calculated as
11. Estimated overhead cost / estimated quantity of allocation base
12. Estimated overhead cost / actual quantity of allocation base
13. Actual overhead cost / actual quantity of allocation base
14. Actual overhead cost / estimated quantity of allocation base
15. Managers reconcile actual and allocated overhead when they use this job costing system.
16. Actual
17. Normal
18. Relevant
19. Product
20. In a normal costing system, an immaterial amount of overapplied overhead is allocated 100% to
21. Work in process
22. Finished goods
23. Retained earnings
24. Cost of goods sold

35. Job costing information can be used to
36. Report inventory and cost of goods sold on financial statements
37. Estimate average costs for future jobs

III. Report the costs of marketing for a product

1. I and II only
2. II and III only
3. I and III only
4. I, II, and III
5. Which of the following statements regarding the uses and limitations of job costing is true?
6. Job costs are measured accurately
7. The total job cost of an individual unit is an incremental cost, that is, it does not include average costs of any type
8. Developing information within job costing systems requires judgment
9. Job costing systems are not subject to uncertainties
10. Which of the following statements regarding the uses and limitations of job costing is true?
11. Overhead is allocated to match revenues and costs
12. Most overhead costs are relevant for short-term decisions
13. Managers frequently assume variable overhead costs are fixed
14. Overhead costs are not relevant for most short-term decisions
15. With respect to the uses and limitations of job costing information, accountants’ responsibilities include
16. Eliminating uncertainty
17. Educating managers about appropriate information use
18. Eliminating biases
19. Classifying fixed costs as variable whenever possible
20. Jerry and Damien are partners in a house-painting business. Which of the following costs is subject to the least uncertainty for a specific painting job?
21. Cost of supervisory labor
22. Depreciation on company vehicle
23. Cost of fuel used to drive to a specific job site
24. All of the preceding costs involve uncertainty
25. Managers use judgment in job costing systems to decide
26. Whether to use any source documents
27. Which direct costs to trace to a job
28. Which indirect costs to trace to a job
29. Which fixed costs to trace to a job
30. Managers use estimates in job costing systems to
31. Establish a bid for a job
32. Decide whether to accept a job

III. Monitor actual operations

1. I and II only
2. I and III only
3. II and III only
4. I, II, and III
5. Which of the following statements regarding overhead allocation is true?
6. Actual job costs are almost always higher than estimated job costs
7. Actual job costs are almost always lower than estimated job costs
8. Actual job costs are almost always the same as estimated job costs
9. Actual job costs are almost always different from estimated job costs
10. Units of product that are unacceptable and are either discarded or sold at a reduced price are called
11. Scrap
12. Rework
13. Spoilage
14. Work in process
15. Spoiled units that are repaired and sold as if they were originally produced correctly are called
16. Rework
17. Scrap
18. Normal spoilage
19. Abnormal spoilage
20. Bits of direct material left over from normal manufacturing processes are called
21. Scrap
22. Normal spoilage
23. Abnormal spoilage
24. Rework
25. How is spoilage typically identified?
26. Through analysis at the account level
27. Through an inspection process
28. By regression analysis
29. By using a scatter plot
30. An out-of-control manufacturing process is most likely to produce
31. Normal spoilage
32. Abnormal spoilage
33. Finished goods
34. Research and development expense
35. The cost of normal spoilage arising from a production process common to several jobs is
36. Written off as a period expense
37. Charged to overhead for the jobs with the greatest total cost
38. Charged to overhead for the jobs with the least total cost
39. Charged to overhead and allocated with other overhead costs to all jobs
40. Abnormal spoilage is recorded in a Loss from Abnormal Spoilage account so that managers can
41. Monitor abnormal spoilage problems
42. Hide them on the income statement
43. Minimize income taxes
44. Decide later which jobs to assign it to
45. Rework costs are
46. Always tracked
47. Never tracked
48. Sometimes tracked
49. Deferred until the cash cycle is complete
50. If the cost of rework is tracked, it is recorded in the accounting system in the same manner as
51. A period cost
52. Spoilage
53. Scrap
54. A deferred asset

52. How do managers decide whether to incur rework costs for a spoiled unit?
53. Based on materiality
54. Based on the matching concept
55. Based on its relationship to the total cost of a job
56. Based on cost/benefit analysis
57. Manufacturers may track scrap to determine whether
58. Resources are being used efficiently
59. Machines need replacing
60. Job costs are being recorded accurately
61. Cash flow forecasts are accurate.
62. If scrap can be traced to a specific job, revenue from the scrap is
63. Debited to work in process
64. Debited to finished goods
65. Credited to work in process
66. Credited to finished goods
67. Scrap can be planned for and guarded by setting up a
68. Double-entry accounting system
69. Job costing system
70. Control system
71. Forecasting system
72. Some organizations use scrap in creative ways to benefit employees and others. Such uses can
73. Improve employee satisfaction
74. Enhance the firm’s reputation

III. Provide social value

1. I and II only
2. II and III only
3. I and III only
4. I, II, and III
5. Opportunity costs of spoilage should be
6. Charged to an individual job
7. Charged to a separate loss account
8. Considered, but not recorded
9. Recorded at the time of production
10. Which of the following costs are charged to overhead?
11. Scrap traced to individual jobs
12. Normal spoilage occurring periodically as a regular part of all jobs

III. Scrap common to all jobs

1. I only
2. II only
3. I and III only
4. II and III only
5. Which of the following costs are credited to a separate loss account?
6. Abnormal spoilage
7. Rework for abnormal defects

III. Rework for normal spoilage

1. I only
2. II and III only
3. I, II, and III
4. I and II only
5. Spoilage has implications for
6. Quality
7. Behavior

III. Reputation

1. I only
2. I and II only
3. I, II, and III
4. II and III only
5. To improve quality, many organizations adopt a variety of business practices. Which of the following is not such a practice?
6. Total quality management
7. Linear programming
8. Six Sigma
9. Kaizen costing
10. Accounting practices are likely to influence manager behavior
11. When bonuses are based on employee turnover
12. Only in manufacturing organizations
13. Only in for-profit organizations
14. When managers are compensated based on accounting earnings

 

Use the following information for the next 2 questions.

The quarterly income statement for Largent is as follows:

Sales                                                                  $1,600

Less variable expenses:

Direct materials                       $280

Direct labor                               300

Manufacturing overhead              60

Administrative expenses              30

Selling expenses                          70                   740

Contribution margin                                                860

Less fixed expenses:

Manufacturing overhead          $180

Administrative expenses            440

Selling expenses                        100                   720

Income before taxes                                            $   140

 

63. What total amount represents the period costs?
64. $60
65. $640
66. $600
67. $720
68. What total amount represents the product costs?
69. $640
70. $820
71. $580
72. $900

65. Sludge, Inc. has an ending work-in-process inventory of $180 and an ending finished goods inventory of $300. Cost of goods manufactured was $630, and cost of goods sold $540. Production costs incurred during the period were $620. What are the beginning inventories for work-in-process and finished goods, respectively?
66. $l70 and $390
67. $190 and $210
68. $270 and $390
69. $170 and $210

 

Use the following information for the next 2 questions.

Tern’s Toys incurred $1,500 in production costs for the week. Work-in-process decreased by $100, and finished goods inventory increased by $500.

66. What was the cost of jobs completed?
67. $1,100
68. $1,400
69. $1,500

$1,600

67. What was the cost of goods sold?
68. $1,100
69. $1,400
70. $1,500
71. $1,800

 

 

More Difficult Multiple Choice

These multiple choice questions require more complex computations or present information differently than in the textbook.

68. The total manufacturing costs incurred for the year are $200,000. Overhead cost was 60% of direct labor cost, and direct materials cost was $25,000. Direct labor cost was
69. $105,000
70. $109,375
71. $ 65,625
72. $ 70,000

 

Use the following information for the next 2 questions.

Direct materials are 30% of the year’s manufacturing costs incurred. The beginning work in process is 125% of the ending work in process. Labor and overhead costs total $56,000 and the cost of goods manufactured is $90,000.

69. Direct materials cost is
70. $24,000
71. $34,000
72. $27,000
73. None of the above
74. Assume the total manufacturing costs incurred were $80,000. The cost of the beginning work in process is
75. $10,000
76. $40,000
77. $50,000
78. None of the above
79. The total cost of Job No. 175 was $1,200. Direct materials amounted to $30. Overhead is allocated at the rate of 30% of direct labor cost. The direct labor cost on this job was
80. $923.08
81. $900.00
82. $853.32
83. $692.31
84. The total cost of Job No. 195 was $1,500. Direct materials for this job amounted to $660. Overhead is allocated at the rate of 40% of direct labor cost. The overhead cost on this job was
85. $600
86. $840
87. $470
88. $240

 

Use the following information for the next 4 questions.

Star Company’s accountants estimate total overhead for each month will be $64,000. They will allocate overhead on the basis of direct labor cost. During the current month, 3 jobs were worked on:

Job 745             Job 746            Job 747

Direct material              $36,000            $56,000           $24,000

Direct labor                   $56,000            $72,000           $40,000

 

Job 745 was completed and sold, Job 746 was completed, and Job 747 is still in process. Budgeted direct labor cost for the month was $160,000 and actual overhead was $65,800.

73. The amount of over- or underapplied overhead for the month was
74. $1,400 overapplied
75. $1,800 underapplied
76. $4,848 overapplied
77. $8,000 underapplied
78. Assuming overhead was $2,000 underapplied and that this amount is considered material, the balance of work in process after allocation of the underapplied overhead based on overhead charged to the accounts during the period is
79. $115,073
80. $80,456
81. $113,727
82. $79,544
83. Assuming overhead was $2,000 overapplied and that this amount is considered material, the final adjusted balance of finished goods inventory is
84. $157,693
85. $115,053
86. $113,747
87. $155,907
88. Assuming overhead was $100 underapplied and that this amount is considered immaterial, the final adjusted balance of cost of goods sold is
89. $92,100
90. $211,900
91. $114,500
92. $79,900

 

Use the following information for the next 4 questions.

Rayfield Company’s management accountant collected the following inventory and transaction data for the month:

Inventories                       Ending           Beginning

Direct materials                 $220                $190

Work-in-process                  160                  140

Finished goods                    190                  220

 

The cost of goods available for sale was $1,370. Total manufacturing costs assigned to work-in-process during the month was $1,170. Manufacturing overhead was $334; and direct materials used were $386.

77. Direct materials purchased during the month were
78. $356
79. $416
80. $386
81. $606
82. Direct labor costs incurred during the month were
83. $450
84. $458
85. $720
86. $844
87. Cost of jobs completed for the month was
88. $1,170
89. $1,310
90. $1,190
91. $1,150
92. Cost of goods sold for the month was
93. $1,150
94. $1,370
95. $1,180
96. $1,120

 

Use the following information for the next 5 questions.

• The overhead is allocated to jobs using an estimated rate applied to direct labor hours. The budget for the year called for $180,000 of overhead cost and 60,000 direct labor hours.
• Accounts payable is used for materials only. The balance on 9/1 was $6,000. September’s payments were $40,000.
• September 1 finished goods inventory was $11,000.
• Cost of jobs completed in September was $89,000.
• On September 30 there was a single job unfinished, consisting of $1,800 (300 hours) of direct labor and $2,600 of direct material.
• 5,200 direct hours were worked during September. All workers earn the same rate of pay.
• All actual overhead costs incurred have been recorded.

81. Materials purchased in September were
82. $43,000
83. $48,000
84. $54,000
85. $42,000
86. Cost of goods sold during September was
87. $89,000
88. $84,000
89. $100,000
90. $83,200
91. Materials used during September were
92. $48,000
93. $42,000
94. $43,000
95. None of the above
96. Work in process balance at September 30 was
97. $4,400
98. $4,500
99. $800
100. None of the above
101. Over- or underapplied overhead for September was
102. $800 underapplied
103. $800 overapplied
104. $1,600 underapplied
105. $1,600 overapplied
106. The following activity took place in the past year:

Raw materials purchased                                                         $160,000

Raw materials used (90% direct, 10% indirect)                         $140,000

Factory utility costs incurred                                                     $40,000

Salaries and wages incurred (80% direct, 10% indirect,
10% administrative)                                                          $250,000

Factory depreciation                                                                 $25,000

Depreciation on sales staff cars                                                  $12,000

Estimated overhead allocation rate                     52% of direct labor cost

Cost of jobs completed                                                            $300,000

The under- or overapplied overhead for the year was

1. $0
2. $12,00 underapplied
3. $20,000 underapplied
4. None of the above

 

 

Multiple Choice from Study Guide

^s87.      The cost of poor quality products includes

1. Company’s loss of reputation
2. Lost contribution margin from sales of high quality products
3. Potential loss of future market share
4. All of the above

^s88.      Abnormal spoilage costs appear on the

1. Balance sheet as part of work in process
2. Income statement as part of cost of good sold
3. Balance sheet as part of finished goods
4. Income statement as a loss

^s89.      If spoiled goods have a positive disposal value, then the disposal value

1. Increases the debit to Overhead control if the spoilage is normal
2. Decreases the job’s cost per unit if the spoilage is directly attributable to the job
3. Increases the job’s cost per unit if the spoilage is normal
4. Decreases the debit to Overhead control if the spoilage is abnormal

^s90.      Mike’s Bikes makes gears for mountain bikes. It is considered normal for 3% of the good gears in a batch to be defective.  The spoilage costs of a defective gear are $20, but a defective gear can be sold for $5 as scrap.  Batch #248 contains 103 gears, and 3 are defective.  Which of the following is the correct entry to record the costs of spoilage and the sale of the scrap?

1. Cash 15

Loss from abnormal spoilage                               45

Work in process inventory                                               60

1. Work in process inventory 45

Cash                                                                   15

Overhead control                                                             60

1. Cash 15

Overhead control                                                 45

Work in process inventory                                               60

1. Cash 15

Finished goods inventory                                     45

Work in process inventory                                               60

 

^s91.      Gloria’s Garments makes house dresses.  Defective units have their labels removed and are sold as “seconds”.  This is an example of

1. Scrap
2. Rework
3. Abnormal spoilage
4. Normal spoilage

^s92.      Pete’s Plastic Products makes plastic toys and car parts.  The injection molding machines leave behind plastic that can be sold to a plastic supplier. This is an example of

1. Scrap
2. Rework
3. Abnormal spoilage
4. Normal spoilage

^s93.      Upon inspection, Joe’s Jumpsuits found that all of the jumpsuits in Batch #987 had the sleeves sewn in backwards.  One of the new seamstresses had not been properly trained, which is highly unusual.  The jumpsuits had to be thrown away.  This is an example of

1. Scrap
2. Rework
3. Abnormal spoilage
4. Both (a) and (c)

^s94.      Patsy’s Products recently moved the inspection point for spoilage to an earlier point in the production process.  The most likely effect of this is

1. Reduce the costs associated with normal spoilage
2. Reduce the costs associated with abnormal spoilage
3. Eliminate abnormal spoilage
4. Both (a) and (b)

^s95.      Pete’s Plastic Products makes plastic toys and car parts.  The injection molding machines leave behind plastic that can be ground up and used again in the next batch of production.  The entry to record this includes

1. Credit to Work in process inventory
2. Credit to Overhead control
3. Debit to Raw materials inventory
4. Both (a) and (c)

^s96.      For Fiona Company, defective units of 2% of the good units completed are considered normal.  Job #456 included some unusual specifications.  Because of these, 5% of the units in Job #456 were defective.  Which of the following is true?

1. The cost of producing 3% of the units in Job #456 is abnormal spoilage.
2. The cost of producing 2% of the units in Job #456 is part of overhead.
3. The cost of producing 5% of the units in Job #456 is part of overhead.
4. None of the above

^s97.      In job costing, the allocation of overhead results in a debit to

1. Overhead control
2. Work in process inventory
3. Finished goods inventory
4. Cost of goods sold

^s98.      When developing an estimated overhead allocation rate, which of the following is used in the numerator?

1. Actual annual overhead cost
2. Estimated output in units
3. Estimated annual overhead cost
4. Estimated direct labor hours

 

Use the following information for the next 2 questions.

Tulalip uses a job costing system that allocates overhead as a percentage of direct labor costs.  The budget for this year was: direct materials $60,000, direct labor $30,000, and overhead $45,000.  Actual costs for this year were: direct materials $50,000, direct labor $35,000, and overhead $45,000.

^s99.      What is the estimated overhead allocation rate?

1. 50% of direct labor costs
2. 129% of direct labor costs
3. 150% of direct labor costs
4. 67% of direct labor costs

^s100.    What is the over- or underapplied overhead for this year?

1. $0
2. $150 overapplied
3. $21,550 underapplied
4. $7,500 overapplied

 

Use the following information for the next 3 questions.

Bothell Company uses a job costing system that allocates estimated overhead as 40% of prime costs (direct materials plus direct labor).  The normal cost of its products is 80% of the products’ billed prices to customers.

^s101.    What is the cost of a job that required direct materials of $2,000 and direct labor of $5,200?

1. $9,280
2. $10,080
3. $7,200
4. $8,000

^s102.    Assume total revenue for the month is $1,750,000 and that all units produced were sold.  There were no beginning or ending work in process inventories.  How much overhead was allocated this period?

1. $560,000
2. $600,000
3. $875,000
4. $400,000

^s103.    Assume the full cost of Job #392 was $12,000.  What was the price billed?

1. $15,000
2. $14,400
3. $16,000
4. $16,500

 

 

Multiple Choice from Web Quizzes (Available on Student Web Site)

^w104.   Job order costing is used when products are

1. Mass produced
2. Custom produced or processed in small batches
3. Uniform in their use of materials
4. Easy to cost

^w105.    Process costing is used when products are

1. Mass produced
2. Custom produced or processed in small batches
3. Individualized services
4. Easy to cost

^w106.   To develop a cost allocation rate for overhead, normal costing uses

1. Actual costs and the actual volume of the allocation base
2. Estimated costs and estimated volumes of the allocation base
3. Actual costs and estimated volumes of the allocation base
4. Estimated costs and actual volumes of the allocation base

^w107.   Abnormal spoilage arises

1. As part of regular operations
2. From out-of-control processes

III. From unusual circumstances, such as flooding that interrupts work

1. I and III only
2. II and III only
3. II only
4. III only

^w108.   Job costing is used in manufacturing for the following products

1. Beverages
2. Tax returns for small businesses
3. Lumber
4. One-of-a-kind motorcycles

^w109.    Underapplied and overapplied overhead arise because

1. The actual amount of overhead costs are known at the beginning of the period
2. An estimate of production volume is used for the denominator quantity
3. The actual production volume is known at the beginning of the period
4. Estimates of direct materials costs are used

^w110.    Direct materials in job costing

1. Can be traced to each product
2. Are allocated to each product
3. Are the only costs recorded in cost of goods sold
4. Are expensed as period costs, not product costs

^w111.   Indirect materials

1. Flow into the overhead account
2. Can be traced to each product
3. Are always material in amount
4. Are ignored in job costing

^w112.    Direct labor

1. Always flows into an overhead T-account
2. Is recorded to each custom product or service
3. Cannot be easily traced to a custom product or service
4. Is not used in service sector job costing

^w113.   Job costing is used to

1. Value inventory or service production for financial statements when custom products or services are sold
2. Value inventory for financial statements in a mass production manufacturing setting
3. Allocate operating costs such as administration and marketing
4. Allocate all costs, direct and indirect, based on the volume of expected activity

^w114.   All of the following products or services are likely to use job costing except

1. An audit of a town library
2. A private yacht
3. A can of pineapple slices
4. A dry cleaner’s bankruptcy case

^w115.   When underapplied or overapplied overhead is large, it is

1. Closed to cost of goods sold
2. Prorated among work in process, finished goods, and cost of goods sold
3. Closed to the largest account for the period
4. Rolled into the next period’s overhead cost

^w116.   Abnormal spoilage is accounted for by

1. Separating it out as a loss for the period.
2. Adding its cost to the specific jobs where it arose
3. Adding its cost to overhead to be spread among all of the current period jobs
4. Ignoring it in the accounting records

^w117.   Under job costing, the cost of inventory in finished goods

1. Includes actual direct materials, direct labor, and allocated factory overhead costs
2. Can be used in short term decisions
3. Is an incremental cost
4. Excludes indirect costs

^w118.   Jorgensen Furniture uses job costing and allocates its $500,000 of budgeted overhead costs using labor hours.  The rate is $25 per labor hour.  How many hours are used as normal volume for the overhead allocation base?

1. 25,000
2. 20,000
3. 30,000
4. 10,000

^w119.    (CMA)  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.  Factory overhead was allocated 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

6. $6.50
7. $6.30
8. $5.70
9. $5.50

 

Use the following information for the next 2 questions.

(CPA)  Barron’s Corp. manufactures custom made wire baskets used to hold computer components in computer manufacturing operations.

Wages:

Machine operators                                    $400,000

Maintenance workers                                    45,000

Factory supervisors                                       90,000

Materials used:

Metal wire                                                $600,000

Lubricant for oiling machines                         5,000

Clear plastic coating                                   420,000

^w120.   Barron’s direct labor cost amounted to

1. $400,000
2. $445,000
3. $135,000
4. $535,000

^w121.   Barron’s direct material costs amounted to

1. $600,000
2. $605,000
3. $1,020,000
4. $1,025,000

 

 

Matching

1. Fly-By-Night Studios produced three films this year: Bassets on the Run, My Life as a Cat, and I Wanna Be a Fish.  The overhead allocation rate was $500 per direct labor hour based on estimated overhead costs of $3,000,000.  Data on each film appear in the table below:

Overapplied or

(Underapplied)                 Labor

Overhead                     Hours

Bassets on the Run                        $100,000                     2,500

My Life as a Cat                            (500,000)                    2,300

I Wanna Be a Fish                          (700,000)                    2,800

Several costs or other quantitative values are described in the left-hand column below.  Match each explanation with the appropriate value in the right-hand column.  Each numbered item has only one correct answer.  Each lettered item may be used once, more than once, or not at all.

____     1.   Actual direct labor hours this period ____     2.   Actual overhead cost for Bassets on the Run ____     3.   Actual overhead cost for I Wanna Be a Fish ____     4.   Estimated direct labor hours for this period ____     5.   Overhead allocated for My Life as a Cat ____     6.   Total estimated overhead cost for next period

A.  6,000 B.   7,600 C.   $1,150,000 D.  $1,250,000 E.   $2,100,000 F.   Not enough information given to determine amount

2. Several statements that may apply to actual costing, normal costing, both, or neither appear below. Choose the best answer from the four that follow.  Each numbered item has only one correct answer.  Each lettered item may be used once, more than once, or not at all.
3. Actual costing only
4. Normal costing only
5. Both actual and normal costing
6. Neither actual nor normal costing

 

____     1.   Actual activity and an estimated rate are used to allocate overhead

____     2.   Actual direct materials are traced to each job

____     3.   Direct labor estimates are debited to work in process

____     4.   Estimated direct materials are traced to each job

____     5.   Jobs absorb the actual cost of direct labor

____     6.   Managers allocate overhead using estimated activity and an estimated rate

____     7.   May result in underapplied overhead

____     8.   Overhead is allocated using the actual activity and an actual rate

____     9.   Overhead is not allocated

____   10.   Used to prepare interim income statements

3. Several terms, concepts, and formulas associated with job costing are listed in the left column below. Various explanations, definitions, and situations are listed on the right.  Match each item on the left to the most appropriate item on the right.  Each numbered item has only one correct answer.  Each lettered item may be used once, more than once, or not at all.

____     1.   Allocated to work in process ____     2.   Allocation base ____     3.   Cost of direct labor incurred ____     4.   Cost pool ____     5.   Deducted from gross margin on the income statement ____     6.   Direct and indirect costs of producing goods and services ____     7.   Direct material used ____     8.   Identified through an inspection process ____     9.   Increases to work in process inventory ____   10.   Job cost record ____   11.   Loss of market share ____   12.   Normal costing ____   13.   Overapplied overhead ____   14.   The process of assigning costs to customized goods ____   15.   Units in batches of clothing with flaws in the material

A.  Credit B.   Debit C.   Denominator of overhead allocation rate D.  Group of costs accumulated for a specific purpose E.   Job costing F.   May result in underapplied overhead G.  Never results in under- or overapplied overhead H.  Numerator of overhead allocation rate I.    Occurs when actual overhead < allocated overhead J.    Occurs when actual overhead > allocated overhead K.  Opportunity cost of spoilage or rework L.   Overhead costs M.  Period costs N.  Process costing O.  Product cost P.   Rework Q.  Scrap R.   Source document S.   Spoilage

 

 

Exercises

1. The Franklin Manufacturing Company uses a job costing system with machine hours as the allocation base for overhead. The company uses normal costing to develop the overhead allocation rate.  The following data are available for the latest accounting period:

Estimated fixed factory overhead cost                          $160,000

Estimated machine-hours                                              100,000

Actual fixed factory overhead cost incurred                  $170,000

Actual machine-hours used                                           110,000

(continued)

Jobs worked on:

Job No.                          Machine Hours Used

1020                                    12,000

1030                                    18,000

1040                                    15,000

1050                                    10,000

 

1. Compute the overhead allocation rate.
2. Determine the overhead allocated to job 1040.
3. Determine total over or underapplied overhead at the end of the year
4. Should cost of goods sold be increased or decreased at the end of the year? Explain.
5. When Franklin incurs an amount of overapplied or underapplied overhead that is quite large (i.e., above 10% of the total allocated cost), how is it assigned?
6. Fabulous Surf Boards makes custom boards for professional surfers. The boards vary according to the types of materials requested by customers and the amount of direct labor required for the finishing process.

The following costs are estimated for 20×5:

Number of surf boards                              3,000

Direct labor hours                                   45,000

Direct material cost                             $175,000

Direct labor cost                                 $900,000

Overhead cost                                     $675,000

 

During 20×5 actual costs were:

Number of surfboards                               3,300

Direct labor hours                                   46,300

Direct materials                                  $185,000

Direct labor                                        $850,000

Overhead                                           $664,000

 

1. Explain why job costing, and not process costing, should be used for this organization.
2. Fabulous uses a normal costing system. Overheard is allocated on the basis of direct labor hours.  Calculate the manufacturing cost of a surfboard that takes $150 of direct materials and 36 hours of direct labor.
3. At the end of 20×5, how much overhead had been allocated to production?
4. Is the overhead over or underapplied, and by how much?
5. Assume that any over or underapplied overhead is closed to cost of goods sold. Prepare the journal entry for the adjustment.
6. During a recent month, Pisces, Inc. reported the following activity:

                            Jobs                    

1             2             3             4

Beginning balance     $1,500     $2,000     $1,000     $   400

Direct materials                 0          100       1,200      3,000

Direct labor                   495          405          300         450

Direct labor hours            33           27           20           30

Overhead is allocated at $7.50 per direct labor hour.  Jobs 1, 2, and 4 were completed, and Job 2 was delivered to the customer.

(continued)

Determine the following amounts:

1. Ending WIP inventory
2. Cost of the jobs that were completed
3. Costs of goods sold
4. Ending finished goods inventory

 

4. PNG Corporation designs and builds roller coasters for amusement parks. At the end of 20×1, managers estimated overhead costs for 20×2 of $150,000 based on expected production of 5 roller coasters using 5,000 labor hours each.  Actual overhead costs for 20×2 were $170,000.  PNG actually designed and built 6 roller coasters with the following direct labor usage and overhead costs:

Overhead Cost           Labor Hours

The Big Dipper                               $28,000                     3,500

The Ultimate Scream                         35,000                     4,000

Loop Me                                           27,000                     5,000

The Screaming Chicken                     40,000                     2,500

You Don’t Know Coasters                 25,000                     6,000

Old Faithful                                      15,000                     4,500

 

Assume PNG uses a normal costing system with the number of jobs as the overhead allocation base.

 

1. How much overhead would be allocated to each job?
2. Calculate the total over- or underapplied overhead (specify which) for each job.
3. PNG Corporation designs and builds roller coasters for amusement parks. At the end of 20×1, managers estimated overhead costs for 20×2 of $150,000 based on expected production of 5 roller coasters using 5,000 labor hours each.  Actual overhead costs for 20×2 were $170,000.  PNG actually designed and built 6 roller coasters with the following direct labor usage and overhead costs:

Overhead Cost           Labor Hours

The Big Dipper                               $28,000                     3,500

The Ultimate Scream                         35,000                     4,000

Loop Me                                           27,000                     5,000

The Screaming Chicken                     40,000                     2,500

You Don’t Know Coasters                 25,000                     6,000

Old Faithful                                      15,000                     4,500

Assume PNG uses a normal costing system with the number of labor hours as the overhead allocation base.

 

2. Calculate the allocation rate for 20×2.
3. Calculate the total corporate over- or underapplied overhead (specify which) for 20×2.
4. HLY Corporation’s accounting information system showed the following balances at the end of this period:

Work in process                       $20,000

Finished goods                           30,000

Cost of goods sold                      50,000

Overapplied overhead this period totaled $60,000; HLY maintains a single overhead account in its general ledger.

 

Does HLY use an actual or a normal costing system?  Explain your answer.

7. HLY Corporation’s accounting information system showed the following balances at the end of this period:

Work in process                       $20,000

Finished goods                           30,000

Cost of goods sold                      50,000

Overapplied overhead this period totaled $60,000; HLY maintains a single overhead account in its general ledger.

 

If the overapplied overhead is considered material, prepare the journal entry to record its disposition.  If no journal entry is required, explain why.

8. HLY Corporation’s accounting information system showed the following balances at the end of this period:

Work in process                       $20,000

Finished goods                           30,000

Cost of goods sold                      50,000

Overapplied overhead for this period totaled $60,000; HLY maintains a single overhead account in its general ledger.

 

If the overapplied overhead is not considered material, prepare the journal entry to record its disposition.  If no journal entry is required, explain why.

9. Following is information about Allen’s Accounting Services.

Professional                                       Professional

Labor Cost              Direct Costs       Labor Hours

Client 57                         $2,000                       $800                    20

Client 58                         $1,000                       $200                    10

Client 59                         $5,000                       $600                    50

Allen’s Accounting Services uses job costing and applies overhead using a normal costing system using professional labor cost as the allocation base.  This period’s estimated overhead cost is $400,000, estimated professional labor cost is $800,000 and estimated direct labor hours are 8,000.  This period actual overhead cost was $426,400, actual direct labor cost was $820,000, and actual direct labor hours were 8,200.

 

1. What is the overhead allocation rate?
2. What is the total cost for Client 57?

 

More Difficult Exercises

Although the cost of goods sold schedule is not formally developed in Chapter 5 of the textbook, some instructors may introduce it.  Therefore, we have included several exercises covering it.

10. Given the following data from the Fun Toys and Games Company for Year X2:

1/1/X2          12/31/X2

Direct materials inventory                                  $40,000          $  20,000

WIP inventory                                                    25,000             15,000

Finished goods inventory                                     20,000             25,000

Sales                                                                                        390,000

Gross margin                                                                            115,000

Direct material purchases                                                            80,000

Prime costs (direct material + direct labor)                                 210,000

 

Prepare a schedule of cost of goods manufactured.

11. The following information for August, 20X3 comes from the Jones Co. books.

The balance in Materials Inventory on 8/1 was $35,000

Purchases of direct materials during August were $60,000

Work in Process on 8/1 was $10,000

Finished Goods had a balance on 8/1 of $15,000

Payroll Payable had a balance on 8/1 of $5,000

August payroll totaling $80,000 was credited to Payroll Payable

2,500 indirect hours were worked during the month

All workers make $6.40/hour

Overhead is allocated at $5.00/direct labor hour

Materials used during the month were $70,000

Cost of goods sold for the month was $105,000

Finished goods at 8/30 was $64,000

 

Prepare a schedule of cost of goods manufactured and sold.

 

 

Short Answer

1. Bright Smile Dentistry is a dental practice with three dentists. The accountant has developed a job costing system for the practice.  List one cost each for direct materials, direct labor, and overhead for this type of organization.
2. Can overhead be over- or underapplied in an actual job costing system? Explain.
3. Explain the difference between normal and abnormal spoilage.
4. Provide one reason why abnormal spoilage is recorded as a loss for the accounting period.
5. Provide one reason why normal spoilage is considered part of overhead costs and, therefore, as part of the cost of good units completed.
6. Suppose the amount of underapplied overhead is considered material. In what ways would costs in the financial statements be misstated if 100% of the underapplied overhead is assigned to cost of goods sold?
7. Describe one advantage and one disadvantage of using actual costing in a job costing system.
8. Describe one advantage and one disadvantage of using a normal job costing system.
9. Explain why it is usually inappropriate to use the total job cost per unit of product or service in making short-term decisions.
10. Job costing information comes from the general ledger system, and yet uncertainties arise when assigning job costs. List two uncertainties that accountants face when developing a job costing system.
11. Explain how job costing in a service business is different than job costing in a manufacturing business.
12. Explain, in general terms, the steps taken to implement a job costing system.
13. Under a normal costing system, explain why the volume used to calculate the estimated allocation rate will not usually be equal to the actual volume.
14. Critique the following statement: “Our accountants always use past job cost information to estimate the costs for future jobs.  Therefore, we always know how much profit to expect on our jobs.”
15. An accountant compares the actual costs of jobs with the cost estimates that were developed at the time each job was accepted. She discovers that actual costs are almost always higher than estimated costs.  What does this finding suggest about the quality of information used to estimate job costs?

 

 

Problems

1. Stonebarger Fountains manufactures customized fountains and uses two types of assembly processes. Some parts of the fountains are completely assembled by labor.  Other parts, such as the pump mechanisms, are made by machines.  The company uses job costing, but has modified the system to reflect the different types of processes that fountains undergo.  The following department overhead rates are used for the production plant:

Overhead cost pool                               Allocation rate

Labor assembly                                    $25 per direct labor hour

Machine assembly                                $10 per machine hour

Quality testing                                      $30 per testing hour

 

Resources used for Fountain #35

Direct labor hours                                 5.0 hours

Machine hours                                     2.5 hours

Testing hours                                       2.0 hours

If a single plantwide overhead rate were used instead of separate overhead cost pool rates, overhead would have been allocated to jobs at $56 per direct labor hour.

 

1. What overhead cost should be allocated to Fountain #35 using the plantwide manufacturing overhead rate?
2. What total overhead cost should be allocated to Fountain #35 using the separate process overhead rates?
3. Why do the allocated amounts in parts (a) and (b) differ?
4. Explain why Stonebarger would use three different overhead allocation bases.
5. Discuss whether increasing the number of overhead cost pools always increases the accuracy of costs allocated to jobs.
6. Short Stay Surgery uses a job costing system for all patients who have surgery. The clinic uses a normal costing system with operating hours as the allocation base.  For the month of March, 3,200 operating hours were estimated for use of the surgery suites.  The estimated overhead costs for the suites were $640,000.  Patient Sarah Handy was in surgery for 2.5 hours.

 

Other costs related to Handy’s surgery include:

Patient medicine                $  50

Cost of nurses                     250

Cost of supplies                  150

 

1. Determine the budgeted (i.e., estimated) overhead rate for the surgery suites.
2. Determine the total costs for Handy’s surgery.
3. Short Stay Surgery would like to know which of its services is more profitable so that it can emphasize that service in advertisements. Discuss whether each of the following types of information is relevant for this product emphasis decision:

1)   Direct labor (doctors and nurses)

2)   Direct supplies and medicine

3)   Overhead

1. Describe a qualitative factor that might affect the decision in part (c).
2. Customer Survey Research estimated that indirect overhead costs would be $50,000 per month and that professional labor would work 250 hours. Actual overhead costs were $53,250, and actual professional labor hours were 263.  The company uses a normal costing system.

 

1. Determine the total cost charged to Job 717 if direct costs (labor and materials) were $23,000 and 120 professional labor hours were incurred.
2. The accountant at Customer Survey Research wants to increase the proportion of direct costs that are traced because she believes it would improve cost control. List one advantage and one disadvantage of this plan.
3. Currently, only professional labor cost is traced to individual jobs. Staff members who work exclusively on specific jobs could potentially track their time.  If these labor hours were traced as direct costs, would total job costs change for jobs that use about the same amount of professional labor but less staff labor compared to other jobs?  Explain.
4. At the end of 20×2, BRV Corporation’s accounting information system contained the following balances:

Job 101                 $300

Job 102                   500

Job 103                   600

Job 104                   100

Spoilage costs, which are not included in the preceding data, were as follows:

40. Job 103 had to be stored under very specific temperature and humidity conditions. An electrical failure in the warehouse created a deviation from those conditions.  The resulting spoilage cost for Job 103 was $40.
41. Additional spoilage costs from the electrical failure totaled $70.

III. While Job 102 was in process, handling errors with material created spoilage costs of $60.  These types of handling errors occur occasionally as part of regular operations.

30. A key production machine, normally used extensively for all jobs, broke down unexpectedly while Job 104 was in process, in spite of regular preventive maintenance. Associated spoilage costs were $30.

 

1. Classify each spoilage cost as normal or abnormal. Explain your reasoning.
2. Using your classifications in part (a), determine revised total costs for each of the 4 jobs. Also identify any other cost accounts that would be affected.
3. TPM Corporation’s accounting information system showed a balance for Job 405 of $1,700. The job can be reworked at a cost of $150 and sold for $2,000, or sold “as is” for $1,800.

 

1. Should TPM rework the job or sell it as is? Justify your answer with appropriate computations.
2. Assume TPM reworks the job. Write out the journal entry to record the sale of Job 405 (assume the rework cost has already been appropriately recorded).
3. Assume TPM does not rework the job. Write out the journal entry to record the sale of Job 405.
4. Suppose the spoilage on this job was caused by raw material defects. TPM’s managers are thinking about hiring an employee to inspect raw materials before they are placed in production.  Identify one argument in favor and one argument against this idea.

6. BRF Company operates a machine shop, in which it mills custom parts out of titanium, steel, aluminum, and other metals. During the month of May it completed Job 356, consisting of titanium parts, for a total cost of $20,000.  During May, the company accumulated titanium scrap worth $1,000 from all jobs.  During June, the scrap was sold for $1,000.  The company’s accountant considers the value of titanium scrap to be material.

 

1. Assume that 50% of the scrap can be associated with Job 356, but that the rest of the scrap resulted from several other jobs and was not traced individually. Write out the scrap journal entry(ies) required for May and June if the company’s policy is to record titanium scrap during the month of production.
2. Assume that none of the scrap is traced to individual jobs. Write out the scrap journal entry(ies) required for May and June if the company’s policy is to record titanium scrap at the time of sale.
3. Describe one advantage and one disadvantage to BRF of recording scrap at the time of production.
4. Describe one advantage and one disadvantage to BRF of tracing the cost of titanium scrap to individual jobs.

 

Answers

 

True / False

 

 

1. F
2. F
3. T
4. T
5. T
6. T
7. F
8. T
9. F
10. F
11. F
12. T
13. T
14. F
15. F
16. F
17. T
18. F
19. T
20. T
21. F
22. F
23. T
24. F
25. T
26. T
27. T
28. T
29. T

 

 

 

Multiple Choice

 

 

1. A ($100,000/$50,000)
2. B ($350 + $200 + $200×200%)
3. C $400,000/25,000 = $16
4. D $640 + $200 + $800 = $1,640
5. A $420,000/20,000 = $21
6. B ($21 x 32) + $500+ 600 = $1,772
7. D $400,000/$800,000
8. D ($50 x 10) +$1,000 + $200
9. C $1,800 + $4,500
10. B $1,800 + $4,500 – material used = $1,500 à material used = $4,800;  $4,800 + $6,900
11. A $4,050 + $15,000 – CGM  = $4,500
12. A $5250 + $14,550 – COGS = $6000
13. C $166,500 / 50,000
14. A 60,000 * $3.33
15. D actual OH = $165,000; allocated OH = $199,800
16. C budgeted DL = $12,000 * 60% = $7,200; budgeted OH= $15,000 * 30% + $12,000 * 40% + $19,860 = $29,160;  OH rate = $29,160 / $7,200 = 4.05;  alloc OH = $7,500 * 4.05 = $30,375
17. C
18. A $120 / 60 * 68,096
19. A total OH (in thousands) = $50 + 75 + 125 + 60 + 25 = $335;  $335 / 25 DL hours = $13.40
20. B
21. C
22. B
23. D
24. A
25. B
26. D
27. B
28. B
29. A
30. C
31. B
32. A
33. B
34. D
35. A
36. C
37. A
38. B
39. D
40. B
41. D
42. D
43. C
44. A
45. A
46. B
47. B
48. D
49. A
50. C
51. B
52. D
53. A
54. C
55. C
56. D
57. C
58. B
59. A
60. C
61. B
62. D
63. B $30 + $70 + $440 + $100
64. B $280 + $300 + $60 + $180
65. B Beg WIP + $620 – $630 = $180; Beg FG + $630 – $540 = $300
66. D Beg WIP + total mfg costs – CGM = ending WIP; $100 + $1,500 – CGM = 0
67. A Beg FG + CGM – COGS = End FG; 0 + $1600 – COGS = $500
68. B $200,000 = $25,000 + L + (0.6 * L)
69. A Total mfg cost = 0.3*total mfg cost + $56,000 à total mfg cost = $80,000; material = $80,000 * 0.3 = $24,000
70. C 1.25 * End WIP + $80K – $90K = End WIP à End WIP = $40,000; Beg WIP = $50,000
71. B $1,200 = $30 + labor + 0.3 * labor
72. D $1,500 = $660 + labor + 0.4 * labor
73. A alloc rate = $64 / $160 = 40%;  DL = $168,000; alloc OH = $168,000 * 40% = $67,200; actual OH = $65,800
74. B Job 745 = $36,000 + $56,000 + 40% ($56,000) = $114,400 (COGS); Job 746 = $56,000 + $72,000 + 40% ($72,000) = $156,800 (finished goods); Job 747 = $24,000 + $40,000 + 40% ($40,000) = $80,000 (WIP);  total cost = $351,200;  underapplied OH to WIP = $80,000 / $351,200 * $2,000 = $456
75. D overapplied OH to FG = $156,800 / $351,200 = $893
76. C
77. B $190 + purchases – $386 = $220
78. A $1,170 = $386 + labor + $334
79. D $140 + $1,170 – CGM = $160
80. C $220 + $1,150 – COGS = $190
81. D $6,000 + purchases – $40,000 = $8,000
82. B $11,000 + $89,000 – COGS = $16,000
83. C End WIP = $2,600 + $1,800 + 300 * (180 / 60) = $5,300;  $4,500 + total mfg costs – $89,000 = $5,300 à TMC = $89,800;       $89,800 = material + labor + overhead;  $89,800 = material + (5,200 * $6) + (5,200 * $3) à material = $43,000
84. D $4,500 + $89,800 – $89,000
85. B actual = $14,800;  allocated = $3 * 5,200 = $15,600
86. A DL  = $250,000 * 80% = $200,000;  alloc OH = $200,000 * 52% = $104,000;  actual OH = $140,000 * 10% + $40,000 + $250,000 * 10% + $25,000 = $104,000

^s87.    D

^s88.    D

^s89.    B

^s90.    C

^s91.    B

^s92.    A

^s93.    D

^s94.    D

^s95.    D

^s96.    D

^s97.    B

^s98.    C

^s99.    C  $45,000 est OH / $30,000 est DL costs = 150% of DL cost

^s100.  D  Alloc OH = $35,000 x 150% = $52,500; $52,500 – $45,000 = $7,500 overapplied

^s101.  B  OH alloc = $7,200 times 40% = $2,880; $7,200 + $2,880 = $10,080

^s102.  D  COGS = 80% x $1,750,000 = $1,400,000; All units sold àCGM = COGS; $1,400,000 = prime costs + 40% x prime costs à Prime costs = $1,000,000; OH = $400,000

^s103.  A  Cost = $12,000 = 80% x price; Price = $15,000

^w104. B

^w105. A

^w106. B

^w107. B

^w108. D

^w109. B

^w110. A

^w111. A

^w112. B

^w113. A

^w114. C

^w115. B

^w116. A

^w117. A

^w118. B

^w119. D

^w120. A

^w121. C

 

 

Matching

1. Fly-By-Night Studios
2. B 2,500 + 2,300 + 2,800 = 7,600
3. C Allocated overhead = 2,500 * $500 = $1,250,000, Overapplied overhead = $100,000, Actual overhead = $1,250,000 – $100,000 = $1,150,000
4. E Allocated overhead = 2,800 * $500 = $1,400,000, Underapplied overhead = $700,000, Actual overhead = $1,400,000 + $700,000 = $2,100,000
5. A $3,000,000 / $500 = 6,000
6. C 2,300 * $500 = $1,150,000
7. F

 

2. Actual and Normal Costing

 

1. B
2. C
3. D
4. D
5. C
6. D
7. B
8. A
9. D
10. B

 

 

3. Job Costing Terms, Concepts, and Formulas

 

1. L
2. C
3. O
4. D
5. M
6. O
7. O
8. S
9. B
10. R
11. K
12. F
13. I
14. E
15. S

 

 

 

Exercises

1. a. Allocation rate = $160,000/100,000 = $1.60 per machine hour
2. For job 1040 allocated overhead = $24,000 (15,000 hours x $1.60)
3. Allocated = 110,000 x $1.60 = $176,000 and actual = $170,000, so overhead was overapplied by $6,000.
4. Cost of goods sold should be decreased by $6,000
5. If the amount is material, it is pro-rated among WIP, finished goods, and COGS.
6. a. Each surfboard is built to a customer’s specifications and the direct materials and direct labor can be traced to the board.  For these types of products, job costing is appropriate.  Process costing is more appropriate for mass-produced products.
7. Total cost = $1,410 ($150 + 36 x $20 + 36 x $15)
8. $15 x 46,300 = $694,500
9. It is overapplied by $30,500
10. Overhead cost control $30,500

Cost of goods sold                                                                        $30,500

3. a. $2,650.00 (= Cost of Job 3); See table below
4. $9,025.00 (= Cost of Job 1 + Job 2 + Job 4)
5. $2,707.50 (= Cost of Job 2)
6. $6,317.50 (= Cost of Job 1 + Job 4)

 

4. a. $30,000 (=$150,000 / 5)
5. See table below

 

6. HLY is using a normal costing system, as evidenced by the presence of overapplied overhead.
7. Overhead Control $60,000

Work in process                                                    $12,000

Finished goods                                                      $18,000

Cost of goods sold                                                $30,000

8. Overhead Control $60,000

Cost of goods sold                                                $60,000

9. a. $400,000/$800,000 = 50%
10. Client 57 cost = $2,000 + $800 + ($800 x 50%) = $3,200

 

 

Short Answer

1. Below are examples of costs; students will think of other examples.

Direct materials costs:  filling material, crowns, bridges

Direct labor – could be dentist or hygienist

Overhead would include all of the office cost, receptionist, and dental equipment

2. In an actual job costing system, actual costs are allocated using the actual volume of allocation base, so there are no amounts that are either over or underapplied.
3. Normal spoilage arises as part of ordinary operations and is expected to occur. Abnormal spoilage is unexpected.  It can be unexpectedly large amount of spoilage because processes are out of control, or it can be due to a natural disaster, employee strike, or other unusual event.
4. Because abnormal spoilage is unusual and sometimes large, top level managers want information about these occurrences. If the spoilage is booked separately as a loss, it can be identified and analyzed more easily.
5. Because normal spoilage arises as part of everyday operations, it is considered unavoidable and a cost that should be part of the other costs to manufacture goods or provide services. Therefore, it should be spread across all good units.
6. More cost is added to cost of good sold than should be, so it is overstated, and the inventory accounts on the balance sheet (WIP and finished goods) are understated.
7. A disadvantage of using an actual costing system is that costs are unknown until the end of the accounting period, so costs cannot be assigned during the period. An advantage is that accountants know the actual cost, and if costs are higher than usual, they will know right away.  In addition, actual costing is more accurate because it is not based on estimates, but on the actual outcomes.
8. An advantage of using a normal costing system is that costs can be allocated during the period. Costs can also be used in estimates needed for bidding.  A disadvantage is that estimates of future costs and volumes need to be developed, and at the end of the period accounting adjustments need to be made.  Further, managers may not know actual costs of overhead during the period and not be alerted to increasing costs that should be investigated.
9. Job costing information includes allocated fixed costs that do not change in the short-term and, therefore, are irrelevant for short-term decision-making.
10. Accountants may be uncertain whether some costs are direct or indirect. For example, when small amounts of direct materials are used per product, accountants may be uncertain about the benefits of tracking these costs as direct materials.  Accountants might be uncertain about the most appropriate allocation base for a product that uses about the same amount of alternative allocation bases such as machine use and direct labor.  Students will have other correct responses.
11. Job costing in a service industry usually involves less direct materials, more direct labor, and a different type of overhead than manufacturing plants incur. For example, most service organizations would not use machines.  Direct costs in a service industry are any costs of supplies and resources such as copying that can easily traced to a client or job.  Direct labor is often professional labor.  In manufacturing, direct costs are usually just direct materials and direct labor only.
12. The general steps for implementing a job costing system are listed below. Students might organize their answer differently and will vary in the detail provided, but their answers should include the following basic components.

Define jobs (i.e., the cost object) for purposes of the job costing system.  Establish a recordkeeping system to accumulate the costs assigned to each job.

Identify the direct costs that will be traced to each job and establish necessary source documents.  Accountants often use judgment to determine which costs will be directly traced, based on the expected cost/benefit.  Source documents may include direct labor time sheets, material requisitions, or other appropriate manual or mechanical recordkeeping methods.

Decide whether to use actual costing or normal costing to allocate overhead to each job, establish one or more overhead cost pools, and choose overhead allocation base(s).  The company must also establish a bookkeeping system to measure allocation base usage and assign overhead using either an actual or estimated allocation rate.  If normal costing is used, adjustments must also be made to eliminate overapplied or underapplied overhead.

13. Under a normal costing system, the volume must be estimated at the beginning of the period so that an estimated rate can be used to allocate overhead. It is usually not possible to forecast volumes perfectly.  Variations in volume can occur because of random fluctuations in productivity, changes in operating procedures (such as new machinery or work schedule changes), and so on.
14. Past job costs can provide useful information for estimating future job costs. However, past cost information must be updated before estimating future costs.  Even when past costs are updated, it is never possible to know exactly how much profit to expect on future jobs.  Costs can fluctuate because of changes in resource prices or efficiency.  In addition, each job may be unique, making it difficult to estimate resource requirements.
15. The fact that actual costs are almost always higher than estimated costs suggests that the cost estimates are biased downward—in other words, that there is a quality problem in the cost estimates.

 

 

 

Problems

1. a. $56 x 5 = $280
2. Total costs = $210 (5 x $25 + 2.5 x $10 + 2 x $30)
3. The use of multiple overhead cost pools will cause a change in the amount of allocated overhead to individual jobs whenever different jobs use different proportions of the allocation base resources (in this problem the allocation bases are direct labor hours, machine hours, and testing hours). When only one overhead cost pool is used, overhead is allocated to jobs without regard to use of any resource other than direct labor.
4. As stated in the answer to part (c), the amount of overhead allocated to individual jobs will vary only if different jobs use different proportions of the allocation base resources. If the same allocation base were used for all three cost pools, then there would be no reason to separate overhead into three pools.  The purpose of using different cost pools is to more accurately reflect the use of resources by separately assigning the costs to each job based on an estimate of the resources it uses.  This purpose can be achieved only when a different allocation base is selected for each cost pool.
5. Increasing the number of overhead cost pools increases the accuracy of costs allocated to jobs only when (1) jobs use different proportions of resources, and (2) the cost pools and allocation bases reasonably reflect the use of resources. Depending on the type of work performed, different jobs may not use different proportions of overhead resources.  Overhead might consist largely of fixed costs that are not expected to vary with an allocation base, making any allocation base arbitrary.  In addition, greater measurement error can occur when assigning costs to more pools and when gathering information for a larger number of allocation bases.  Thus, increasing the number of overhead cost pools does not necessarily increase the accuracy of cost allocations.
6. a $640,000/3,200 hours = $200 per hour.
7. Total cost = $950   [($200 x 2.5) + $50 + $250 + $150]
8. Product emphasis decisions require knowledge of the contribution margin per product or service. To calculate a contribution margin, accountants need to separate fixed and variable costs to find the contribution margin (price – variable costs).

1)    Direct labor costs might be fixed or variable, depending on the work schedules and pay of doctors and nurses.  However, direct labor is a constrained resource and managers want to emphasize operations having the highest contribution margin per hour, then direct labor should be viewed as a variable cost for this decision.

2)    Direct supplies and medicine are most likely variable, making them relevant to this decision.

3)    Unless there are multiple overhead cost pools, overhead probably includes both fixed and variable costs.  Variable overhead would include indirect materials and indirect labor, such as housekeeping costs, which are relevant to this decision.  Fixed overhead would not be relevant, so they should be separated from variable overhead for this decision, if possible.

1. A major qualitative factor for product emphasis decisions is whether the product emphasis would agree with the organization’s strategic plans (see Chapter 4). For example, the surgery might have a strategy to establish a reputation for handling a wide range of services.  Adopting a product emphasis in advertising might conflict with this strategy.  Students might think of other relevant qualitative factors.
2. a. Total cost = $23,000 + 120 x $200 ($50,000/250 hours) = $47,000
3. An advantage of tracking more costs as direct costs is that it increases the accuracy of the job costing system and also should help with cost control because those costs can be more easily monitored. A disadvantage is that it can sometimes be costly to track such costs.  For example for some employees it is easy to track their hours per job because they spend a lot of hours per job, but other employees, such as receptionists, would find it difficult and time consuming to track time spent per job.
4. For those jobs that use less staff time but about the same amount of professional labor time, the cost of the job would be less under the new system because the actual staff costs would be less than the allocation of these costs based on professional labor hours.
5. a. I and II would be considered abnormal spoilage, assuming that the electrical failure is considered unusual—i.e., not part of normal operations.

III is most likely normal spoilage.  The language indicates that BRV incurs some spoilage costs for the specialized material every month.

IV would be abnormal spoilage because the breakdown cost occurred in spite of regular machine maintenance.

 

1. Loss from Abnormal Spoilage = $40 + $60 + $30 = $130

Job 101:  $300 + 20% ($70) = $314

Job 102:  $500 + 33% ($70) = $523

Job 103:  $600 + 40% ($70) = $628

Job 104:  $100 + 7% ($70) = $105

5. a. The $1,700 is a sunk cost, it will be incurred not matter the decision.

Profit from reworking = $2,000 – $150) = $1,850

Profit from selling as is = $1,800

Therefore, TPM should rework the job.

1. Cost of Goods Sold $1,850

A/R (or Cash)                                               $2,000

Finished Goods                                                            $1,850

Sales                                                                               $2,000

1. Cost of Goods Sold $1,700

A/R (or Cash)                                               $1,800

Finished Goods                                                            $1,700

Sales                                                                               $1,800

1. Advantages include the ability to remove defective raw materials from production before spending additional resources (reducing opportunity costs) and, potentially, the ability to return defective materials to vendors for a refund. Inspection might also help to emphasize the importance of raw material quality, leading to a company change in vendors or purchase contracts.  Disadvantages include the cost of hiring the inspector; the cost of inspection might exceed the benefits.
2. a. May JE:         Scrap inventory                                       $1,000

Work in Process (Job 356)                                               $500

Overhead Control                                                               $500

June JE:         Cash                                                          $1,000

Scrap inventory                                                               $1,000

1. May JE:  None

June JE:         Cash                                                          $1,000

Overhead Control                                                           $1,000

1. Advantages of recording scrap at the time of production include establishing control over the titanium scrap (which, according to the problem are material for this company) and more quickly recognizing the value of scrap in the cost of jobs and in overhead. Disadvantages include the time and effort to measure and maintain records of the physical quantities and values.  If scrap prices fluctuate rapidly, then this method also distorts costs (until the scrap is ultimately sold).
2. The advantage of tracing the cost of titanium scrap is to more accurately measure the cost of individual jobs. The cost of jobs that generate titanium scrap is appropriately reduced, and the cost of overhead is not understated.  The disadvantage is the time and effort to measure and maintain records of the physical quantity of scrap associated with each job.  The costs of maintaining the records might not be worth the benefit.