Managerial Accounting 11th canadian edition By Garrison - Test Bank

Managerial Accounting 11th canadian edition By Garrison – Test Bank

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Sample Questions Are Posted Below

Chapter 05

Systems Design: Job-Order Costing

Multiple Choice Questions

Which of the following companies is most likely to use a job-order costing system rather than a process costing system?
A.Fast food restaurant
B. Shipbuilder
C. Crude oil refinery
D. Candy maker

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 05-01 Distinguish between process costing and job-order costing; and identify the production or service processes that fit with each costing method.
Topic: 05-03 Process Costing
Topic: 05-04 Job-Order Costing

Kelly Sportswear manufactures a specialty line of T-shirts. The company uses a job-order costing system. During March, the following costs were incurred on Job 1052:

Direct materials:	$13,700
Direct labour:	$4,800

Manufacturing overhead was applied at the rate of $25 per machine hour, and Job 1052 required 800 machine hours. In addition, selling and shipping costs of $7,000 were incurred. Job 1052 consisted of 7,000 shirts and was completed on March 24. The total cost of job 1052 transferred from Work in Process to Finished Goods on March 24 is:
A. $33,700
B. $38,500
C. $18,500
D. $20,000

Direct material = $13,700
Direct labour = 4,800
OH applied (800 hrs. @ $25/hr.) = 20,000.
Total Cost = $38,500.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-07 Job Cost Sheet
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-26 Summary of Cost Flows

Which of the following contain(s) the detailed cost data that support the Work in Process control account?
A.Job cost sheets.
B. The Manufacturing Overhead account.
C. The Finished Goods inventory account.
D. Purchase requisitions.

In a normal job-order costing system, the journal entry to record the application of overhead cost to jobs includes which of the following?
A.A credit to the Work in Process inventory account.
B. A credit to the Manufacturing Overhead account.
C. A debit to Cost of Goods Sold.
D. A debit to the Manufacturing Overhead account.

In a normal job-order costing system, the use of indirect materials would usually be recorded as a debit to which account?
A.Raw Materials.
B. Work in Process.
C. Manufacturing Overhead.
D. Finished Goods.

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Topic: 05-17 Issue of Direct and Indirect Materials
Topic: 05-20 Manufacturing Overhead Costs

In a normal job-order costing system, the salary of the factory supervisor would usually be recorded as a debit to which of the following accounts?
A.Manufacturing Overhead.
B. Salary Expense.
C. Work in Process.
D. Finished Goods.

In a job-order costing system, direct labour costs usually are recorded initially with a debit to which of the following accounts?
A.Manufacturing Overhead.
B. Finished Goods inventory.
C. Direct Labour Expense.
D. Work in Process.

Which of the following statements is true if a company applies overhead to jobs on the basis of a predetermined overhead rate and reports a credit balance in the Manufacturing Overhead account at the end of any period?
A.More overhead cost has been charged to jobs than has been incurred during the period.
B. More overhead cost has been incurred during the period than has been charged to jobs.
C. The amount of overhead cost charged to jobs is greater than the estimated cost for the period.
D. The amount of overhead cost charged to jobs is less than the estimated overhead cost for the period.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-20 Manufacturing Overhead Costs
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-28 Underapplied and Overapplied Overhead
Topic: 05-29 Disposition of Underapplied or Overapplied Overhead Balances

In a job-order costing system, when a job remains incomplete at the end of a period, how is the amount of overhead cost that has been applied to that job treated?
A.It is deducted on the Income Statement as overapplied overhead.
B. It is closed out to Cost of Goods Sold.
C. It is transferred to Finished Goods.
D. It is part of the ending balance of the Work in Process inventory account.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-20 Manufacturing Overhead Costs
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-26 Summary of Cost Flows

(Appendix 5A) Which level of activity, if used to set a predetermined overhead rate, may encourage managers to increase selling prices as demand falls?
A.Budgeted level of activity.
B. Actual level of activity.
C. Capacity (maximum) level of activity.
D. Normal level of activity.

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 05-08 Explain the implications of basing the predetermined overhead rate on activity at full capacity rather than on estimated activity for the period.
Topic: 05-37 Appendix 5A: The Predetermined Overhead Rate and Capacity

The Work in Process inventory account of a manufacturing company shows a balance of $2,400 at the end of an accounting period. The job cost sheets of two uncompleted jobs show charges of $400 and $200 for direct materials and charges of $300 and $500 for direct labour. From this information, what predetermined overhead rate, as a percentage of direct labour costs, does the company appear to be using?
A.80%.
B. 125%.
C. 240%.
D. 300%.

OH applied = 2,400 – 1,400 = 1,000 and rate = 1,000/800 = 1.25 or 125%.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Topic: 05-07 Job Cost Sheet
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-14 Summary of Document Flows
Topic: 05-20 Manufacturing Overhead Costs

Freeman Company uses a predetermined overhead rate based on direct labour hours to apply manufacturing overhead to jobs. At the beginning of the year, the company estimated manufacturing overhead would be $150,000 and direct labour hours would be 10,000. The actual figures for the year were $186,000 for manufacturing overhead and 12,000 direct labour hours. The cost records for the year will show which of the following?
A.Overapplied overhead of $30,000.
B. Underapplied overhead of $30,000.
C. Underapplied overhead of $6,000.
D. Overapplied overhead of $6,000.

OH rate = $150,000/10,000 hrs = $15/hr.
Applied = 12,000 hours @ $15/hr = $180,000
Less the actual overhead of $186,000 = underapplied overhead of $6,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-20 Manufacturing Overhead Costs
Topic: 05-22 The Concept of a Clearing Account

Harrell Company uses a predetermined overhead rate based on direct labour hours to apply manufacturing overhead to jobs. At the beginning of the year, the company estimated its total manufacturing overhead cost at $400,000 and its direct labour hours at 100,000 hours. The actual overhead cost incurred during the year was $350,000 and the actual direct labour hours incurred on jobs during the year was 90,000 hours. What would be the manufacturing overhead for the year?
A.$10,000 underapplied.
B. $10,000 overapplied.
C. $50,000 underapplied.
D. $50,000 overapplied.

Rate = $400,000/100,000 hrs. = $4/hr.
Applied = 90,000 hrs @$4/hr. = $360,000
Actual OH = $350,000 therefore overapplied by $10,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-20 Manufacturing Overhead Costs
Topic: 05-22 The Concept of a Clearing Account

For the current year, Paxman Company incurred $150,000 in actual manufacturing overhead cost. The Manufacturing Overhead account showed that overhead was overapplied in the amount of $6,000 for the year. If the predetermined overhead rate was $8.00 per direct labour hour, how many hours were worked during the year?
A.17,750 hours.
B. 18,000 hours.
C. 18,750 hours.
D. 19,500 hours.

Applied overhead = $150,000 + $6,000 = $156,000
DL Hours = $156,000/$8/hr = 19,500 hours.

Carlo Company uses a predetermined overhead rate based on direct labour hours to apply manufacturing overhead to jobs. The company estimated manufacturing overhead at $255,000 for the year and direct labour hours at 100,000 hours. Actual manufacturing overhead costs incurred during the year totalled $270,000; actual direct labour hours were 105,000. What was the overapplied or underapplied overhead for the year?
A.$2,250 overapplied.
B. $2,250 underapplied.
C. $15,000 overapplied.
D. $15,000 underapplied.

OH rate = $255,000/100,000 hrs. = $2.55/hr.
Applied = 105,000 hrs @ $2.55/hr = $267,750
Actual overhead = $270,000 therefore Underapplied $2,250.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-20 Manufacturing Overhead Costs
Topic: 05-22 The Concept of a Clearing Account

Sawyer Manufacturing Company uses a predetermined overhead rate based on direct labour hours to apply manufacturing overhead to jobs. Last year, the company worked 57,000 actual direct labour hours and used 40,000 machine hours. The company had estimated that it would work 55,000 direct labour hours using 44,000 machine hours during the year and incur $330,000 of manufacturing overhead cost. What was the company’s manufacturing overhead applied for the year?
A.$345,000.
B. $342,000.
C. $330,000.
D. $300,000.

OH rate = $330,000/55,000 DLH = $6/DLH
Applied = 57,000 DLH @ $6/DLH = $342,000.

The Watts Company uses predetermined overhead rates to apply manufacturing overhead to jobs. The predetermined overhead rate is based on labour cost in Department A and on machine hours in Department B. At the beginning of the year, the company made the following estimates:

	Department A	Department B
Direct labour cost	$30,000	$40,000
Manufacturing overhead	$60,000	$50,000
Direct labour hours	6,000	8,000
Machine hours	2,000	10,000

What predetermined overhead rates would be used in Departments A and B, respectively?
A. 50% and $8.00.
B. 50% and $5.00.
C. 110% and $15.00.
D. 200% and $5.00.

Dept. A = $60,000/$30,000 = 200% Dept. B = $50,000/10,000m. hrs = $5/m. hr.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-34 Multiple Predetermined Overhead Rates

Compton Company uses a predetermined overhead rate in applying overhead to production orders on a labour cost basis in Department A and on a machine hours basis in Department B. At the beginning of the most recently completed year, the company made the following estimates:

	Department A	Department B
Direct labour cost	$56,000	$33,000
Manufacturing overhead	$67,200	$45,000
Direct labour hours	8,000	9,000
Machine hours	4,000	15,000

What predetermined overhead rate would be used in Departments A and B, respectively?
A. 83% and $5.00.
B. 83% and $3.00.
C. 120% and $3.00.
D. 120% and $5.00.

Dept. A = $67,200/$56,000 = 120% Dept. B = $45,000/15,000m. hrs = $3/m. hr.

Kelsh Company uses a predetermined overhead rate based on machine hours to apply manufacturing overhead to jobs. The company has provided the following estimated costs for next year:

Direct materials	$10,000
Direct labour	30,000
Sales commissions	40,000
Salary of production supervisor	20,000
Indirect materials	4,000
Advertising expenses	8,000
Rent on factory equipment	10,000

Kelsh estimates that 5,000 direct labour hours and 10,000 machine hours will be worked during the year. What will be the predetermined overhead rate per hour?
A. $6.80.
B. $6.40.
C. $3.40.
D. $8.20.

($20,000 + 4,000 + 10,000)/10,000m. hrs. = $3.40/m.hr.

Simplex Company has the following estimated costs for next year:

Direct materials	$15,000
Direct labour	55,000
Sales commissions	75,000
Salary of production supervisor	35,000
Indirect materials	5,000
Advertising expenses	11,000
Rent on factory equipment	16,000

Simplex estimates that 10,000 direct labour and 16,000 machine hours will be worked during the year. If overhead is applied on the basis of machine hours, what will be the overhead rate per hour?
A. $3.50.
B. $6.94.
C. $7.63.
D. $8.56.

(35,000 + 5,000 + 16,000)/16,000m.hrs = $3.5/m.hr.

At the beginning of the current year CR Company estimated the following costs:

Direct materials	$4,000
Direct labour	20,000
Rent on factory building	15,000
Sales salaries	25,000
Depreciation on factory equipment	8,000
Indirect labour	10,000
Production supervisor’s salary	12,000

CR Company estimated 20,000 labour hours to be worked during the year. Actual labour hours worked were 22,000 hours. If overhead is applied on the basis of direct labour hours, what will be the overhead applied for the year?
A. $55,000.
B. $49,500.
C. $103,400.
D. $75,900.

OH rate = (15,000 + 8,000 + 10,000 + 12,000)/20,000 hrs. = $2.25/hr.
Applied = 22,000 hrs. @ $2.25/hr = $49,500.

Lucy Sportswear manufactures a specialty line of T-shirts. The company uses a job-order costing system. During March, the following costs were incurred on Job ICU2:

Direct materials:	$13,700
Direct labour:	$4,800

In addition, selling and shipping costs of $7,000 were incurred on the job. Manufacturing overhead was applied at the rate of $25 per machine hour, and Job ICU2 required 800 machine hours. If Job ICU2 consisted of 7,000 shirts, what was the Cost of Goods Sold per shirt?
A. $5.50.
B. $5.70.
C. $6.00.
D. $6.50.

Total Cost = DM + DL + OH applied = 13,700 + 4,800 + (800 hrs @$25/hr) = $38,500. CGS = $38,500/7,000 shirts = $5.50/shirt.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-07 Job Cost Sheet
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-13 Computation of Unit Costs
Topic: 05-25 Cost of Goods Sold

Worrell Corporation has a job-order costing system. The following debits (credits) appeared in the Work in Process account for the month of March:

March 1, balance	$12,000
March 31, direct materials	40,000
March 31, direct labour	30,000
March 31, manufacturing overhead applied	27,000
March 31, to finished goods	(100,000)

Worrell applies overhead at a predetermined rate of 90% of direct labour cost. Job No. 232, the only job still in process at the end of March, has been charged with manufacturing overhead of $2,250. What was the amount of direct materials charged to Job No. 232?
A. $2,250.
B. $2,500.
C. $4,250.
D. $9,000.

WIP ending inv. = 12,000 + 40,000 + 30,000 + 27,000 – 100,000 = $9,000
DL = 2250/.9 = $2,500. DM = $9,000 – 2500 – 2250 = $4,250.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-07 Job Cost Sheet
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-26 Summary of Cost Flows

The Samuelson Company uses a job-order costing system. The following data were recorded for June:

		Added During June
Job Number	Work in Process Inventory, June 1	Direct Materials	Direct Labour
475	$1,000	$400	$200
476	900	600	800
477	800	900	1,400
478	600	1,000	1,900

Overhead is charged to production at 70% of the direct materials cost. Jobs 475, 477, and 478 have been delivered to the customer. What was Samuelson’s Work in Process inventory balance for Job 476 on June 30?
A. $6,450.
B. $2,860.
C. $2,300.
D. $2,720.

WIP inv. June 30 Balance = 900 + 600 + 800 + (600 *.7) = $2,720.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-07 Job Cost Sheet
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-26 Summary of Cost Flows

Sweet Company applies overhead to jobs on the basis of 125% of direct labour cost. If Job 107 shows $10,000 of manufacturing overhead applied, how much was the direct labour cost on the job?
A.$8,000.
B. $12,500.
C. $11,250.
D. $10,000.

DL = 10,000/1.25 = $8,000.

Manufacturing overhead is overapplied for the year by $3,000. The unadjusted cost of goods sold is $360,000. Closing manufacturing overhead into cost of goods sold will result in which of the following?
A.Adjusted cost of goods sold of $363,000.
B. A credit balance in manufacturing overhead of $6,000.
C. Adjusted cost of goods sold of $357,000.
D. Adjusted cost of goods sold of $360,000.

Adjusted cost of goods sold = $360,000 – 3,000 overapplied = $357,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-14 Summary of Document Flows
Topic: 05-28 Underapplied and Overapplied Overhead
Topic: 05-29 Disposition of Underapplied or Overapplied Overhead Balances
Topic: 05-30 Close out Underapplied Overhead to Cost of Goods Sold

Knowlton Company applies overhead to completed jobs on the basis of 70% of direct labour cost. If Job 501 shows $21,000 of manufacturing overhead applied, what was the direct labour cost on the job?
A.$14,700.
B. $21,000.
C. $30,000.
D. $27,300.

$21,000/.7 = $30,000.

Beaver Company used a predetermined overhead rate last year of $2 per direct labour hour based on an estimate of 25,000 direct labour hours to be worked during the year. Actual costs and activity during the year were:

Actual manufacturing overhead cost incurred	$47,000
Actual direct labour hours worked	24,000

What was the under- or overapplied overhead last year?
A. $1,000 underapplied.
B. $1,000 overapplied.
C. $2,000 underapplied.
D. $3,000 overapplied.

(24,000@ $2) – 47,000 = $1,000 overapplied.

Dowan Company uses a predetermined overhead rate based on direct labour hours to apply manufacturing overhead to jobs. During the year, Dowan Company incurred $156,600 in actual manufacturing overhead cost. The Manufacturing Overhead account showed that overhead was underapplied by $12,600 for the year. If the predetermined overhead rate is $6.00 per direct labour-hour, how many hours did the company work during the year?
A.24,000 hours.
B. 25,000 hours.
C. 26,000 hours.
D. 28,200 hours.

$156,000 – 12,600 = $144,000 applied. Actual hours worked = $144,000/$6/hr. = 24,000 hrs.

During the year, Paul Company used a predetermined overhead rate of $3.50 per direct labour hour, based on an estimate of 22,000 direct labour hours to be worked during the year. Actual overhead cost and activity during the year were:

Actual manufacturing overhead cost incurred	$90,000
Actual direct labour hours worked	25,000

What was the under- or overapplied overhead for the year?
A. $2,500 overapplied.
B. $2,500 underapplied.
C. $10,500 overapplied.
D. $13,000 underapplied.

$90,000 – (25,000 @ $3.50) = $2,500 underapplied.

Bitter Company incurs a direct labour rate of $15 per hour applies overhead to jobs on the basis of $1.25 per direct labour hour. If Job 107 shows $86,000 of direct material and $10,000 of manufacturing overhead applied, what is the total cost of job 107?
A.$96,000.
B. $120,000.
C. $130,000.
D. $216,000.

DL hours worked = $10,000/$1.25 per hour = 8,000 hours.
Total cost = $86,000 + (8,000 hrs. @ $15/hr) + $10,000 = $216,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Topic: 05-07 Job Cost Sheet
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-19 Labour Cost
Topic: 05-20 Manufacturing Overhead Costs

Kanuck Company applies overhead to completed jobs on the basis of $0.70 per machine hour. If Job 501 shows $28,000 of manufacturing overhead applied, how many machine hours were used for the job?
A.19,600.
B. 28,000.
C. 30,000.
D. 40,000.

$28,000/$0.70/hr = 40,000 machine hours.

The balances in White Company’s Work in Process inventory account were $15,000 on August 1 and $18,000 on August 31. The company incurred $30,000 in direct labour cost during August and requisitioned $25,000 in raw materials (all direct material). The sum of the debits to the Manufacturing Overhead account totalled $28,000 for the month while the sum of the credits totalled $30,000. Which of the following statements is correct?
A.Finished Goods was debited for $82,000 during the month.
B. Finished Goods was debited for $52,000 during the month.
C. Manufacturing Overhead was underapplied by $2,000 at the end of the month
D. Finished Goods was credited for $82,000 during the month

Total transferred out of WIP (credit) = 15,000 + 30,000 + 25,000 + 30,000 – 18,000
Therefore debit Finished Goods $82,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-14 Summary of Document Flows
Topic: 05-26 Summary of Cost Flows
Topic: 05-28 Underapplied and Overapplied Overhead

Under Lamprey Company’s job-order costing system, manufacturing overhead is applied to Work in Process inventory using a predetermined overhead rate. During January, Lamprey’s transactions included the following:

Direct materials issued to production	$90,000
Indirect materials issued to production	8,000
Manufacturing overhead cost incurred	125,000
Manufacturing overhead cost applied	113,000
Direct labour cost incurred	107,000

Lamprey Company had no beginning or ending inventories. What was the cost of goods manufactured for January?
A. $318,000.
B. $310,000.
C. $322,000.
D. $330,000.

CGM = 90,000 + 107,000 + 113,000 = $310,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows

What was the amount of direct materials used during November if $20,000 in raw materials were purchased during the month, all raw materials are direct, and if the inventories were as follows?

	Balance November 1	Balance November 30
Raw materials	$4,000	$3,000
Work in process	$12,000	$15,000
Finished goods	$24,000	$27,000

$15,000.
B.$20,000.
C. $21,000.
D. $24,000.

DM used = 4,000 + 20,000 – 3,000 = $21,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-16 The Purchase and Issue of Materials
Topic: 05-17 Issue of Direct and Indirect Materials
Topic: 05-26 Summary of Cost Flows

Sharp Company’s records show that overhead was overapplied by $10,000 last year. This overapplied overhead was closed out to the Cost of Goods Sold account at the end of the year. In trying to determine why overhead was overapplied by such a large amount, the company has discovered that $6,000 of depreciation on factory equipment was charged to administrative expense in error. Given the above information, which of the following statements is true?
A.Manufacturing overhead was actually overapplied by $16,000 for the year.
B. The company’s net income is understated by $6,000 for the year.
C. Under the circumstances described above, the error in recording depreciation would have no effect on net income for the year.
D. The $6,000 in depreciation should have been charged to Work in Process rather than to administrative expense.

Although the actual overhead should have been $6,000 greater and therefore overapplied overhead of $4,000 the effect on NI is zero because the depreciation was still deducted (as an operating expense instead of CGS) to compute NI therefore no error on the NI amount.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-23 Non-manufacturing Costs
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows
Topic: 05-28 Underapplied and Overapplied Overhead

The following partially completed T-accounts summarize last year’s transactions for Kelshaw Company:

At the end of the year, the company closes out the balance in the Manufacturing Overhead account to Cost of Goods Sold.

What is the indirect labour cost?
A.$5,000.
B. $12,000.
C. $15,000.
D. $35,000.

The debit to OH represents the indirect labour of $5,000. Credit to Wages and Salaries payable i.e.$30,000. Debit WIP = DL $15,000, Debit sales Salaries expense = 10,000 and debit OH = $5,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-19 Labour Cost
Topic: 05-26 Summary of Cost Flows

What is the cost of goods manufactured?
A.$50,000.
B. $55,000.
C. $56,000.
D. $61,000.

This is the debit to finished goods and the credit to WIP which represents CGM = $50,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-07 Job Cost Sheet
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows

What is the cost of goods sold (after adjustment for under- or over applied overhead)?
A.$51,000.
B. $54,000.
C. $55,000.
D. $56,000.

Total debits to Man. OH = $29,000 = actual less #6 applied 28,000 = $1,000 underapplied. From Fin. Goods t-account the unadjusted CGS = 17,000 + 50,000 – 12,000 = $55,000. Therefore CGS adjusted = 55,000 + 1,000 underapplied = $56,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-07 Job Cost Sheet
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows
Topic: 05-30 Close out Underapplied Overhead to Cost of Goods Sold

What is the manufacturing overhead applied?
A.$27,000.
B. $28,000.
C. $29,000.
D. $36,000.

transaction #6 MOH applied = $28,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-20 Manufacturing Overhead Costs
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-26 Summary of Cost Flows

What is the cost of direct materials used?
A.$11,000.
B. $12,000.
C. $15,000.
D. $20,000.

WIP account transaction #2 = $12,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-17 Issue of Direct and Indirect Materials
Topic: 05-26 Summary of Cost Flows

What would be the ending Work in Process account balance?
A.$2,000.
B. $13,000.
C. $50,000.
D. $55,000.

From WIP t-account; 8,000 + 12,000 + 15,000 + 28,000 – 50,000 = $13,000.

What is the total manufacturing cost for the year?
A.$27,000
B. $50,000
C. $55,000
D. $63,000

DM + DL + OH applied = 12,000 + 15,000 + 28,000 = $55,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows

Mallet Company has only Job 844 in process on March 1 of the current year. The job has been charged with $2,000 of direct material cost, $2,500 of direct labour cost, and $1,750 of manufacturing overhead cost. The company assigns overhead cost to jobs at a predetermined rate of 70% of direct labour cost. Any under- or overapplied overhead cost is closed out to Cost of Goods Sold at the end of the month.

During March, the following activity and amounts were recorded by the company:

Raw materials (all direct materials):

Purchased during the month	$29,500
Used in production	$30,500

Labour:

Direct labour hours worked during the month	2,500
Direct labour cost incurred	$26,500
Indirect labour costs incurred	$5,500
Manufacturing overhead costs incurred (total)	$18,500

Inventories:

Raw materials (all direct) March 31	$7,500
Work in process, March 31	$14,500

Work in Process inventory contains $5,500 of direct labour cost.

What is the amount of direct materials cost in the March 31 work in process inventory account?
A.$5,150.
B. $9,350.
C. $9,000.
D. $3,850.

DM = WIP e.i. – DL – OH applied = 14,500 – 5500 – (5500 *.7) = $5,150.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-17 Issue of Direct and Indirect Materials
Topic: 05-26 Summary of Cost Flows

What is the cost of goods manufactured for March?
A.$67,250.
B. $67,300.
C. $81,800.
D. $75,550.

CGM = 2,000 + 2,500 + 1750 + 30,500 + 26,500 + (26,500 *.7) – 14,500 = $67,300.

Which of the following would be included in the entry to dispose of the under- or over applied overhead cost for the month?
A.A debit of $50 to Cost of Goods Sold.
B. A debit of $50 to Manufacturing Overhead.
C. A debit of $5,500 to Manufacturing Overhead.
D. A credit of $5,500 to Cost of Goods Sold.

OH applied = 26,500 *.7 = 18,550 less actual of 18,500 = $50 overapplied.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-26 Summary of Cost Flows
Topic: 05-28 Underapplied and Overapplied Overhead
Topic: 05-29 Disposition of Underapplied or Overapplied Overhead Balances

What was the March 1 balance in the Raw Materials inventory?
A.$10,500.
B. $9,500.
C. $6,500.
D. $8,500.

Op.RM inventory = 7,500 + 30,500 – 29,500 = $8,500.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Topic: 05-14 Summary of Document Flows
Topic: 05-16 The Purchase and Issue of Materials
Topic: 05-17 Issue of Direct and Indirect Materials

The Milo Company’s records for May contain the following information:

Actual direct labour hours	9,000 hours
Actual direct labour cost	$47,000
Direct material purchased	$16,000
Direct material used	$14,000
Cost of goods sold	$100,000
Overapplied overhead	$5,000

Ending inventories:

Raw materials	$30,000
Work in process	50,000
Finished goods	70,000

The company uses a predetermined overhead rate of $5.00 per direct labour hour to apply manufacturing overhead to jobs.

What was the actual overhead cost incurred during the month?
A.$50,000.
B. $55,000.
C. $40,000.
D. $45,000.

Actual OH = 9,000 hrs. @$5/hr = $45,000 less overapplied 5,000 = $40,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-20 Manufacturing Overhead Costs
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-28 Underapplied and Overapplied Overhead

What was the total cost added to Work in Process during May?
A.$101,000.
B. $106,000.
C. $61,000.
D. $111,000.

Total cost = 14,000 + 47,000 + (9,000 hrs @$5) = $106,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-16 The Purchase and Issue of Materials
Topic: 05-19 Labour Cost
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-26 Summary of Cost Flows

Assuming no beginning inventory for Work in Process, the cost of goods manufactured is:
A.$156,000.
B. $51,000.
C. $56,000.
D. $11,000.

CGM = 14,000 + 47,000 + (9,000 hrs @$5) = $106,000 less 50,000 E.I = $56,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows

The information below has been taken from the cost records of Tercel Company for the past year:

Raw materials used in production (all direct)	$326,000
Total manufacturing costs charged to jobs during the year (includes raw materials, direct labour, and manufacturing overhead applied at the rate of 60% of direct labour cost)	$686,000
Cost of goods available for sales	$826,000
Selling and administrative expenses	$25,000

	Inventories
	Beginning	Ending
Raw materials (all direct)	$75,000	$85,000
Work in process	80,000	30,000
Finished goods	90,000	110,000

What was the cost of raw materials purchased during the year?
A.$411,000.
B. $360,000.
C. $316,000.
D. $336,000.

RM purchased = 85,000 + 326,000 – 75,000 = $336,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Topic: 05-16 The Purchase and Issue of Materials
Topic: 05-17 Issue of Direct and Indirect Materials

What amount of direct labour cost was charged to production during the year?
A.$135,000.
B. $225,000.
C. $360,000.
D. $216,000.

MC – RM used = 686,000 – 326,000 = $360,000, therefore DL cost = 360,000/1.6 = $225,000.

What was the cost of goods manufactured during the year?
A.$636,000.
B. $766,000.
C. $736,000.
D. $716,000.

CGM = 80,000 + 686,000 – 30,000 = $736,000.

What was the cost of goods sold for the year (before disposition of any under- or overapplied overhead)?
A.$736,000.
B. $716,000.
C. $691,000.
D. $801,000.

CGS = 90,000 + (80,000 + 686,000 – 30,000) – 110,000 = $716,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows

The following data are for Potras Company:

	Beginning	Ending
Finished goods inventory	$30,000	$40,000
Work-in-process inventory	20,000	13,000
Raw materials inventory	21,000	26,000
Purchases of raw materials	71,000
Factory depreciation	5,000
Other factory costs	10,000
Direct labour	27,000
Indirect labour	6,000
Selling expense	12,000
Over- or underapplied overhead	-0

What is the cost of raw materials used in production?
A.$26,000.
B. $71,000.
C. $76,000.
D. $66,000.

RM used in production = 21,000 + 71,000 – 26,000 = $66,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Topic: 05-16 The Purchase and Issue of Materials
Topic: 05-17 Issue of Direct and Indirect Materials

What is the cost of goods manufactured?
A.$114,000.
B. $133,000.
C. $121,000.
D. $138,000.

OH applied = OH actual since no variance.
CGM = 66,000 + 27,000 + 21,000 + 20,000 – 13,000 = $121,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-17 Issue of Direct and Indirect Materials
Topic: 05-19 Labour Cost
Topic: 05-26 Summary of Cost Flows
Topic: 05-28 Underapplied and Overapplied Overhead

What is the cost of goods sold?
A.$131,000.
B. $91,000.
C. $81,000.
D. $111,000.

CGM = 121,000 as in previous question no.56;
CGS = 30,000 + 121,000 – 40,000 = $111,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows
Topic: 05-28 Underapplied and Overapplied Overhead

The Bus Company uses a job-order costing system. The following information was recorded for September:

Added During September

Job Number	September 1 Inventory	Direct Materials	Direct Labour
1	$1,000	$300	$200
2	1,400	250	300
3	500	1,500	150
4	750	4,000	400

The direct labour wage rate is $10 per hour. Overhead is applied at the rate of $5 per direct labour hour. Jobs 1, 2, and 3 have been completed and transferred to finished goods. Job 2 has been delivered to the customer.

What is the ending Work in Process inventory?
A.$7,575.
B. $5,350.
C. $4,325.
D. $5,150.

Direct labour hours = $400/$10 per hour = 40 hours.
Job 4 = EI = 750 + 4,000 + 400 + 40 hrs @ $5/hr = $5,350.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-07 Job Cost Sheet
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-14 Summary of Document Flows
Topic: 05-26 Summary of Cost Flows

What is the cost of goods manufactured for September?
A.$10,750.
B. $11,275.
C. $5,925.
D. $7,625.

CGM = total cost of jobs 1, 2 and 3 BI + DM + DL + OH applied
= 2,900 + 2,050 + 650 + (650 * $5/$10) = $5,925.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-07 Job Cost Sheet
Topic: 05-14 Summary of Document Flows
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows

What is the cost of goods sold for September (before disposition of any under- or overapplied overhead)?
A.$2,100.
B. $5,925.
C. $3,700.
D. $1,950.

CGS = total cost of Job #2 = 1,400 + 250 + 300 + (300 * $5/$10) = $2,100.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-07 Job Cost Sheet
Topic: 05-14 Summary of Document Flows
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows

The following journal entries (without dollar data) were taken from the accounting records of Case Company. Case Company has a job-order costing system and applies overhead to jobs using a predetermined overhead rate.

1. Work in process	XXX
Manufacturing overhead	XXX
Wages payable		XXX
2. Salary expense	XXX
Wages payable		XXX
3. Manufacturing overhead	XXX
Accumulated amortization		XXX
4. Work in process	XXX
Raw materials		XXX
5. Work in process	XXX
Manufacturing overhead		XXX
6. Manufacturing overhead	XXX
Raw materials		XXX
7. Finished goods	XXX
Work in process		XXX
8. Raw materials	XXX
Accounts payable		XXX

Which entry records the purchase of raw materials?
A.8.
B. 4.
C. 6.
D. 1.

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Topic: 05-16 The Purchase and Issue of Materials
Topic: 05-17 Issue of Direct and Indirect Materials

Which entry transfers the cost of goods manufactured for the period?
A.1.
B. 4.
C. 7.
D. 5.

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows

Which entry records the application of overhead?
A.1.
B. 5.
C. 6.
D. 3.

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Topic: 05-20 Manufacturing Overhead Costs
Topic: 05-22 The Concept of a Clearing Account

Which entry records amortization on manufacturing equipment?
A.1.
B. 3.
C. 4.
D. 5.

Summit Company has provided the following inventory balances and manufacturing cost data for the month of January:

Inventories:	January 1	January 31
Direct materials	$30,000	$40,000
Work in process	15,000	20,000
Finished goods	65,000	50,000

	Month of January
Cost of goods manufactured	$515,000
Manufacturing overhead applied	150,000
Direct materials used	190,000
Actual manufacturing overhead	144,000

Under Summit’s job-order costing system, any over- or underapplied overhead is closed out to the Cost of Goods Sold account at the end of the calendar year (that is, December 31).

What was the total amount of direct material purchases during January?
A.$180,000.
B. $190,000.
C. $195,000.
D. $200,000.

DM purchased = 30,000 + 190,000 – 40,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-16 The Purchase and Issue of Materials
Topic: 05-26 Summary of Cost Flows

How much direct labour cost was incurred during January?
A.$170,000.
B. $175,000.
C. $180,000.
D. $186,000.

DL = 515,000 + 20,000 – 15,000 – 190,000 – 150,000 = $180,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-19 Labour Cost
Topic: 05-26 Summary of Cost Flows

The Tse Manufacturing Company uses a job-order costing system and applies overhead to jobs using a predetermined overhead rate. The company closes out any balance in the Manufacturing Overhead account to Cost of Goods Sold. During the year the company’s Finished Goods inventory account was debited for $125,000 and credited for $110,000. The ending balance in the Finished Goods inventory account was $28,000. At the end of the year, manufacturing overhead was overapplied by $4,500.

What was the balance in the Finished Goods inventory account at the beginning of the year?
A.$28,000.
B. $13,000.
C. $17,500.
D. $8,500.

Beginning FG = 28,000 + 110,000 – 125,000 = $13,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows

If the estimated manufacturing overhead for the year was $24,000, and the applied overhead was $26,500, what was the actual manufacturing overhead cost for the year?
A.$19,500.
B. $22,000.
C. $28,500.
D. $31,000.

Actual MOH = 26,500 – 4,500 overapplied = $22,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-26 Summary of Cost Flows
Topic: 05-28 Underapplied and Overapplied Overhead

Sai Company uses a job order cost system and applies manufacturing overhead costs to jobs using a predetermined overhead rate based on direct labour-hours. The following data were extracted from the company’s accounting records for Year 6

	Estimated	Actual
Manufacturing overhead costs	$50,000	$54,000
Direct labour hours	20,000 hours	24,000 hours

Job #461 was completed during the year and the following costs had been incurred on that job:

Direct materials:	$4,000
Direct labour:	$1,500 (at $5.00 per direct labour hour)

Suppose Job #461 contained 100 units. What unit cost would appear on the job cost sheet for job #461?
A.$55.00 per unit.
B. $61.00 per unit.
C. $61.75 per unit.
D. $62.50 per unit.

DLH = $1,500/$5/DLH = 300 hrs.
OH rate = $50,000/20,000 DLH = $2.5.
Cost of Job = 4,000 + 1,500 + (300 hrs. @ $2.50/hr) = $6,250
Therefore $6,250/100 units = $62.50 per unit.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Topic: 05-07 Job Cost Sheet
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-13 Computation of Unit Costs

What was the underapplied or over applied overhead for the year?
A.$6,000 overapplied.
B. $4,000 underapplied.
C. $10,000 underapplied.
D. $10,000 overapplied.

Applied = 24,000 hrs @ $2.50/hr. = $60,000 – 54,000 actual = $6,000 overapplied.

How much of any underapplied or overapplied overhead would have been due to the fact that the estimated overhead allocation base was different from the actual?
A.$4,000.
B. $6,000.
C. $10,000.
D. $14,000.

Actual hours – estimated hours = 4,000 hours @ $2.50/hr = $10,000. See page 173 for brief explanation of causes. Causes are explained further in chapter 10.

How much of any underapplied or overapplied overhead would have been due to the fact that the estimated overhead costs were different from the actual?
A.$4,000.
B. $6,000.
C. $10,000.
D. $14,000.

See page 173 for brief explanation of causes. Causes are explained further in chapter 10.

(Appendix 5A) Secrease Corporation uses machine-hours as the allocation base for applying its manufacturing overhead.

Estimated manufacturing overhead cost for the year	$594,000
Capacity	110,000 machine-hours
Estimated amount of the allocation base for the year	108,000 machine-hours
Amount of the allocation base for the actual output of the year	88,000 machine-hours
Actual manufacturing overhead cost for the year	$589,000

All of the company’s manufacturing overhead is fixed.

(Appendix 5A) What is the predetermined overhead rate based on capacity to 2 decimal places?
A.$5.35
B. $6.69
C. $5.50
D. $5.40

OH rate = $594,000/110,000 hours = $5.40.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 05-08 Explain the implications of basing the predetermined overhead rate on activity at full capacity rather than on estimated activity for the period.
Topic: 05-37 Appendix 5A: The Predetermined Overhead Rate and Capacity

(Appendix 5A) If the predetermined overhead rate is based on capacity, by how much was manufacturing overhead for the year over applied or underapplied?
A.Manufacturing overhead underapplied $113,800
B. Manufacturing overhead overapplied $113,800
C. Manufacturing overhead overapplied $105,000
D. Manufacturing overhead underapplied $105,000

88,000 @ $5.40/hr = $475,200 applied therefore underapplied $113,800.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-08 Explain the implications of basing the predetermined overhead rate on activity at full capacity rather than on estimated activity for the period.
Topic: 05-37 Appendix 5A: The Predetermined Overhead Rate and Capacity

True / False Questions

Job-order costing is more likely to be used than process costing in situations where many different products or services are produced each period to customer specifications.
TRUE

Job-order costing is used in manufacturing companies and process costing is used in service firms.
FALSE

The materials requisition form is a document that specifies the type and quantity of materials to be drawn from the storeroom and identifies the job to which the costs of the materials are to be charged
TRUE

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 05-01 Distinguish between process costing and job-order costing; and identify the production or service processes that fit with each costing method.
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Topic: 05-04 Job-Order Costing
Topic: 05-06 Measuring Direct Materials Cost

In a job-order costing system, costs are traced to departments and then allocated to units of product using an averaging process.
FALSE

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 05-01 Distinguish between process costing and job-order costing; and identify the production or service processes that fit with each costing method.
Topic: 05-03 Process Costing

Normally, a job cost sheet is NOT prepared for a job until after the job has been completed.
FALSE

A job cost sheet is a form prepared for each separate job that records the materials, labour, and overhead costs charged to the job.
TRUE

Job cost sheets supporting a normal job-order costing system contain entries for actual direct material, actual direct labour, and actual manufacturing overhead cost incurred in completing a job.
FALSE

In order to improve the accuracy of unit costs, most companies recalculate the predetermined overhead rate each month.
FALSE

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Topic: 05-10 Using the Predetermined Overhead Rate

The following journal entry would be made to apply overhead cost to jobs in a job-order costing system:

Work in process	XXX
Manufacturing overhead		XXX

TRUE

When the predetermined overhead rate is based on direct labour-hours, the amount of overhead applied to a job is proportional to the amount of actual direct labour-hours incurred on the job.
TRUE

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-22 The Concept of a Clearing Account

The predetermined overhead rate is computed by dividing the total estimated manufacturing overhead cost for the period by the estimated total amount of the allocation base
TRUE

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Topic: 05-10 Using the Predetermined Overhead Rate

Although direct labour may not be an appropriate allocation base in some industries, in others it continues to be a significant driver of manufacturing overhead.
TRUE

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Topic: 05-12 Choice of an Allocation Base for Overhead Cost

When completed goods are sold, the transaction is recorded as a debit to Cost of Goods Sold and a credit to Work in Process.
FALSE

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows

The most common accounting treatment of underapplied manufacturing overhead is to transfer it to the Manufacturing Overhead control account.
FALSE

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-28 Underapplied and Overapplied Overhead
Topic: 05-29 Disposition of Underapplied or Overapplied Overhead Balances

In a normal job-order costing system, the Work in Process inventory account contains the actual costs of direct labour, direct materials, and manufacturing overhead incurred on partially completed jobs.
FALSE

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-07 Job Cost Sheet
Topic: 05-26 Summary of Cost Flows

Non-manufacturing costs are expensed as incurred, rather than going into the Work in Process account.
TRUE

Blooms: Remember
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Topic: 05-23 Non-manufacturing Costs

A credit balance in the Manufacturing Overhead account at the end of the year means that overhead was underapplied.
FALSE

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-28 Underapplied and Overapplied Overhead

Indirect materials are NOT charged to a specific job but rather are included in manufacturing overhead.
TRUE

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Topic: 05-07 Job Cost Sheet
Topic: 05-17 Issue of Direct and Indirect Materials

The labour time ticket contains a detailed summary of the direct and the indirect labour hours of an employee.
TRUE

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Topic: 05-08 Measuring Direct Labour Cost
Topic: 05-14 Summary of Document Flows

(Appendix 5A) Basing predetermined overhead rate on capacity will almost certainly result in overapplied overhead.
FALSE

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-08 Explain the implications of basing the predetermined overhead rate on activity at full capacity rather than on estimated activity for the period.
Topic: 05-37 Appendix 5A: The Predetermined Overhead Rate and Capacity

A public accounting firm would have cost elements involving direct labour and overhead but not raw materials.
TRUE

When a job is completed and transferred to the finished goods warehouse the journal entry to record this is debit Cost of Goods Sold and credit Work in Process Inventory.
FALSE

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows

Raw materials can be direct materials, but NOT all direct materials need to be raw materials.
TRUE

(Appendix 5A) If the predetermined overhead rate is based on the estimated total amount of the allocation base at capacity, it is more likely that overhead will be underapplied than overapplied.
TRUE

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-08 Explain the implications of basing the predetermined overhead rate on activity at full capacity rather than on estimated activity for the period.
Topic: 05-37 Appendix 5A: The Predetermined Overhead Rate and Capacity

Short Answer Questions

A public accounting firm employs 10 full-time professionals who provide services to clients. All professional labour compensation is traced directly to clients on a per professional labour-hour basis. Any other costs are included in a single indirect-cost pool (same as overhead) and allocated to individual clients according to billable professional labour-hours.
Operating costs and data for the year included the following:

	Estimated	Actual
Overhead (indirect) costs	$1,000,000	$1,200,000
Number of billable professional labour-hours	40,000	50,000
Total professional compensation	750,000	750,000

Required:

a. By how much, if any, was the overhead cost underapplied or overapplied?
b. Prepare a summary journal entry to close any underapplied or overapplied overhead cost to a Cost of Services Provided account.
c. Explain qualitatively and quantitatively (in as much detail as possible) the source(s) of any underapplied or overapplied overhead cost.

a). Amount of underapplied or overapplied overhead costs:

Predetermined rate = $1,000,000/40,000
= $25 per professional labour-hour (PLH)

Actual overhead costs	$1,200,000
Applied overhead costs (50,000 * $25)	1,250,000
Overapplied overhead	$50,000

b). Summary journal entry to close underapplied or overapplied overhead costs to Cost of Services Provided account.
In this case, overhead costs were overapplied implying a credit balance in the Overhead Control account. This credit has to be transferred to the Cost of Services Provided account to reduce it.

Overhead control	$50,000
Cost of services provided		$50,000

c). Explain qualitatively and quantitatively (in as much detail as possible) the source(s) of any underapplied or overapplied overhead cost.
Note that the situation is one of overapplied overhead costs.

Qualitative explanations: The predetermined rate ($25 per PLH) was higher than the actual rate of $24 (that is, $1,200,000/50,000). This was caused by the fact that both estimates (costs and professional labour hours) were incorrect. Specifically, number of billable hours increased (25%) more than the overhead costs (20%).
Quantitative explanations: One source is the fact that the estimated costs were less than the actual costs by $200,000 (underapplied) while the actual professional labour hours were 10,000 more than the estimated. The latter is an equivalent of $250,000 overapplied (that is, 10,000 ´ $2.50). The net result is an overapplied of $50,000.

Blooms: Evaluate
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-28 Underapplied and Overapplied Overhead
Topic: 05-30 Close out Underapplied Overhead to Cost of Goods Sold

Gilford, Inc., uses a job-order costing system. Costs going through the company’s work-in-process account during June are listed below. Manufacturing overhead is applied to production using a predetermined overhead rate based on direct labour cost.

Work in process
Balance	0	$95,000 transferred out
Direct materials	$20,000
Direct labour	30,000
Manufacturing overhead	60,000
Balance	$15,000

Only Job 105 was still in process at the end of the month. This job had been charged with $3,000 in direct materials cost.

Required:

a.) Complete the following for Job 105:

Direct materials	$3,000
Direct labour
Manufacturing overhead
Total cost at June 30

b.) Determine the total amount of materials cost charged to completed jobs during the month.

a.) Since only Job 105 was in process at the end of the month, all of the $15,000 balance in the Work in Process account must apply to it.

Total cost in Work in Process (all Job 105)	$15,000
Less materials cost in Job 105	$3,000
Direct labour and manufacturing overhead cost	$12,000

From the Work in Process T-account, it appears that manufacturing overhead is being applied at 200% of direct labour cost (60,000/30,000).
Let X = Direct labour cost

X + 2.00X = $12,000
3X = $12,000
X = $4,000

Thus, direct labour cost in Job 105 is $4,000, and manufacturing overhead cost is 200% ´ $4,000 = $8,000. Therefore,

Direct materials	$3,000
Direct labour	$4,000
Manufacturing overhead	$8,000
Total cost at June 30	$15,000

b.) Since $20,000 in materials cost was charged to Work in Process, and since only $3,000 in materials cost applies to Job 105, the difference of $17,000 represents the cost charged to completed jobs during the month.

Blooms: Evaluate
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-07 Job Cost Sheet
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows

Stan Wilson, a newly hired worker at Superior Moulding, was puzzled by the job cost sheets attached to the jobs he worked on. He understood the materials and labour cost entries; these entries represent the actual costs of materials he requisitioned for the job and the cost of the labour hours he recorded for the job. However, he did not understand the entry for Manufacturing Overhead. This entry was made at the end of the day by the accountants, and he had no idea where this number came from. He asked the company’s controller, Mary Donner, but the only part of the explanation he understood was that the overhead entries do not represent actual overhead costs.
Required:

Explain to Stan what the Manufacturing Overhead entries on the job cost sheet mean.

The Manufacturing Overhead entries on the job cost sheet are arrived at by applying a predetermined overhead rate to the base, which most likely is direct labour hours. This number does not represent actual overhead costs. By definition, it is difficult or impossible to trace overhead costs to particular jobs. Therefore, actual overhead costs cannot really be traced to the jobs Stan works on. Even so, an “actual” rate could be used instead of a predetermined rate for spreading overhead costs among jobs. However, most companies choose to use a predetermined rate since actual rates tend to fluctuate and cannot be determined until the close of the accounting period.

Blooms: Evaluate
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-02 Recognize the flow of costs through a job-order costing system.
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Topic: 05-07 Job Cost Sheet
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-11 The Need for a Predetermined Rate
Topic: 05-22 The Concept of a Clearing Account

Bakerston Company is a manufacturing firm that uses job-order costing. The company’s inventory balances at the beginning and end of the year were as follows:

Balance	Beginning Balance	Ending Balance
Raw materials	$14,000	$22,000
Work in process	27,000	9,000
Finished goods	62,000	77,000

The company applies overhead to jobs using a predetermined overhead rate based on machine hours. At the beginning of the year, the company estimated that it would work 33,000 machine hours and incur $231,000 in manufacturing overhead cost. The following transactions were recorded for the year:

a.) Raw materials purchased: $315,000.
b.) Raw materials requisitioned for use in production: $307,000 ($281,000 direct and $26,000 indirect).
c.) The following employee costs were incurred:

Direct labour: $377,000
Indirect labour: $96,000
Administrative salaries: $172,000

d.) Selling costs: $147,000.
e.) Factory utility costs: $10,000.
f.) Depreciation for the year: $127,000, of which $120,000 is related to factory operations and $7,000 is related to selling and administrative activities.
g.) Manufacturing overhead was applied to jobs. The actual level of activity for the year was 34,000 machine hours.
h.) Sales for the year: $1,253,000.

Required:

a. Prepare a schedule of cost of goods manufactured in good form.
b. Was the manufacturing overhead under- or overapplied? By how much?
c. Prepare an income statement for the year in good form. The company closes out any under- or overapplied overhead to Cost of Goods Sold.

a.) Schedule of cost of goods manufactured

Estimated total manufacturing overhead (a)	$231,000
Estimated total machine-hours (b)	33,000
Predetermined overhead rate (a) / (b)	$7.00
Actual total machine-hours (a)	34,000
Predetermined overhead rate (b)	$7.00
Overhead applied (a) * (b)	$238,000

Direct materials:
Raw materials inventory, beginning	$14,000
Add: purchases of raw materials	315,000
Total raw materials available	329,000
Deduct: raw materials inventory, ending	22,000
Raw materials used in production	307,000
Less: indirect materials	26,000
Direct materials	281,000
Direct labour	377,000
Manufacturing overhead applied	238,000
Total manufacturing costs	896,000
Add: Beginning work in process inventory	27,000
	923,000
Deduct: Ending work in process inventory	9,000
Cost of goods manufactured	$914,000

b.) Under- or overapplied overhead

Actual manufacturing overhead cost incurred:
Indirect materials	$26,000
Indirect labour	96,000
Factory utilities	10,000
Factory depreciation	120,000
Manufacturing overhead cost incurred	252,000
Manufacturing overhead applied	238,000
Underapplied overhead	$14,000

c.) Income Statement

Beginning finished goods inventory		$62,000
Cost of goods manufactured		914,000
Goods available for sale		976,000
Ending finished goods inventory		77,000
Unadjusted cost of goods sold		899,000
Add: underapplied overhead		14,000
Adjusted cost of goods sold		$913,000

Sales		$1,253,000
Cost of goods sold (adjusted)		913,000
Gross margin		340,000
Less selling and administrative expenses:
Administrative salaries	$172,000
Selling costs	147,000
Depreciation	7,000	326,000
Net income		$14,000

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-23 Non-manufacturing Costs
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows

Allenton Company is a manufacturing firm that uses job-order costing. At the beginning of the year, the company’s inventory balances were as follows:
Raw materials: $26,000
Work in process: $47,000
Finished goods: $133,000

The company applies overhead to jobs using a predetermined overhead rate based on machine hours. At the beginning of the year, the company estimated that it would work 31,000 machine hours and incur $248,000 in manufacturing overhead cost. The following transactions were recorded for the year:

a.) Raw materials purchased: $411,000.
b.) Raw materials requisitioned for use in production: $409,000 ($388,000 direct and $21,000 indirect).
c.) The following employee costs were incurred:

Direct labour: $145,000
Indirect labour: $61,000
Administrative salaries: $190,000

d.) Selling costs: $148,000.
e.) Factory utility costs: $12,000.
f.) Depreciation for the year: $121,000, of which $114,000 is related to factory operations and $7,000 is related to selling and administrative activities.
g.) Manufacturing overhead was applied to jobs. The actual level of activity for the year was 29,000 machine hours.
h.) Cost of goods manufactured for the year: $783,000.
i.) Sales for the year: $1,107,000; the costs on the job cost sheets of the goods that were sold: $768,000.
j.) The balance in the Manufacturing Overhead account was closed out to Cost of Goods Sold.

Required:

Prepare the appropriate journal entry for each of the items above (a. through j.). You can assume that all transactions with employees, customers, and suppliers were conducted in cash.

a.) Raw materials inventory	41,000
Cash		41,000
b.) Work in process inventory	388,000
Manufacturing overhead	21,000
Raw materials inventory		409,000
c.) Work in process inventory	145,000
Manufacturing overhead	61,000
Administrative salary expense	190,000
Cash		396,000
d.) Selling expenses	148,000
Cash		148,000
e.) Manufacturing overhead	12,000
Cash		12,000
f.) Manufacturing overhead	114,000
Depreciation expense	7,000
Accumulated depreciation		121,000
g.) Work in process	232,000
Manufacturing overhead		232,000
h) Finished goods	783,000
Work in process		783,000
i.) Cash	1,107,000
Sales		1,107,000
Cost of goods sold	768,000
Finished goods		768,000
j.) Manufacturing overhead	24,000
Cost of goods sold		24,000

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-16 The Purchase and Issue of Materials
Topic: 05-19 Labour Cost
Topic: 05-23 Non-manufacturing Costs
Topic: 05-26 Summary of Cost Flows
Topic: 05-30 Close out Underapplied Overhead to Cost of Goods Sold

The Collins Company uses a job-order costing system and applies manufacturing overhead cost to jobs on the basis of the cost of materials used in production. At the beginning of the most recent year, the following estimates were made as a basis for computing the predetermined overhead rate for the year:
Manufacturing overhead cost: $200,000
Direct materials cost: $160,000

The following transactions took place during the year (all purchases and services were acquired on account):

a.) Raw materials purchased: $86,000.
b.) Raw materials requisitioned for use in production (all direct materials): $98,000.
c.) Utility costs incurred in the factory: $15,000.
d.) Salaries and wages incurred as follows:

Direct labour: $175,000
Indirect labour: $70,000
Administrative salaries: $125,000

e.) Maintenance costs incurred in the factory: $15,000.
f.) Advertising costs incurred: $89,000.
g.) Depreciation recorded for the year: $80,000, of which 80% relates to factory assets and the remainder relates to selling and administrative assets.
h.) Rental cost incurred on buildings: $70,000 (75% of the space is occupied by the factory, and 25% is occupied by sales and administration).
i.) Miscellaneous selling and administrative costs incurred: $11,000.
j.) Manufacturing overhead cost was applied to jobs as per company policy.
k.) Cost of goods manufactured for the year: $500,000.
l.) Sales for the year (all on account): $1,000,000. These goods cost $600,000 to manufacture.

Required:

Prepare journal entries to record the information above. Key your entries by the letters a through l.

a.) Raw materials	86,000
Accounts payable		86,000
b.) Work in process	98,000
Raw materials		98,000
c.) Manufacturing overhead	15,000
Accounts payable		15,000
d.) Work in process	175,000
Manufacturing overhead	70,000
Salaries expense	125,000
Salaries and wages payable		370,000
e.) Manufacturing overhead	15,000
Accounts payable		15,000
f.) Advertising expense	89,000
Accounts payable		89,000
g.) Manufacturing overhead	64,000
Depreciation expense	16,000
Accumulated depreciation		80,000
h.) Manufacturing overhead	52,500
Rent expense	17,500
Accounts payable		70,000
i.) Miscellaneous expense	11,000
Accounts payable		11,000
j.) Work in process	122,500
Manufacturing overhead (($200,000/$160,000) x $98,000)		122,500
k.) Finished goods	500,000
Work in process		500,000
l.) Accounts receivable	1,000,000

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-04 Record the journal entries that reflect the flow of costs in a job-order costing system.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-16 The Purchase and Issue of Materials
Topic: 05-19 Labour Cost
Topic: 05-23 Non-manufacturing Costs
Topic: 05-26 Summary of Cost Flows

Carver Test Systems manufactures automated testing equipment. The company uses a job-order costing system and applies overhead on the basis of machine hours (MH). At the beginning of the year, estimated manufacturing overhead was $1,960,000, and the estimated machine hours was 98,000. Data regarding several jobs at Carver are presented below.

Job Number	Beginning Balance	Direct Materials	Direct Labour	Machine Hours
XJ-107	$118,600	$4,000	$8,400	150
ST-211	121,450	2,500	12,160	300
XD-108	21,800	86,400	36,650	3,100
SL-205	34,350	71,800	32,175	2,700
RX-115		18,990	21,845	1,400

By the end of the first month (January), all jobs but RX-115 were completed, and all completed jobs had been delivered to customers except for SL-205.

Required:

What was the balance in Finished Goods inventory at the end of January?

The Finished Goods inventory consists of job SL-205 only. The balance in the account is computed as follows:

Beginning balance, job SL-205	$34,350
November charges to job SL-205
Direct materials	71,800
Direct labour	32,175
Manufacturing overhead applied*	54,000
Ending balance, job SL-205	$192,325

* Predetermined overhead rate = $1,960,000 ¸ 98,000 MH = $20 per MH
Overhead applied = 2,700 machine-hours ´ $20 per MH = $54,000

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows

Dotsero Technology, Inc., has a job-order costing system. The company uses predetermined overhead rates in applying manufacturing overhead cost to individual jobs. The predetermined overhead rate in Department A is based on machine hours, and the rate in Department B is based on direct materials cost. At the beginning of the most recent year, the company’s management made the following estimates for the year:

	Department
	A	B
Machine-hours	70,000	19,000
Direct labour-hours	30,000	60,000
Direct materials cost	$195,000	$282,000
Direct labour cost	$260,000	$520,000
Manufacturing overhead cost	$420,000	$705,000

Job 243 entered into production on April 1 and was completed on May 12. The company’s cost records show the following information about the job:

	Department
	A	B
Machine-hours	250	60
Direct labour-hours	70	120
Direct materials cost	$840	$1,100
Direct labour cost	$610	$880

At the end of the year, the records of Dotsero showed the following actual cost and operating data for all jobs worked on during the year:

	Department
	A	B
Machine-hours	61,000	20,000
Direct labour-hours	28,000	66,000
Direct materials cost	$156,000	$284,000
Manufacturing overhead cost	$385,000	$705,000

Required:

a.) Compute the predetermined overhead rates for Department A and Department B.
b.) Compute the total overhead cost applied to Job 243.
c.) Compute the amount of underapplied or overapplied overhead in each department at the end of the current year.

a.) Department A predetermined overhead rate:
Estimated overhead cost/Estimated machine hours = $420,000 ¸ 70,000 = $6.00

Department B predetermined overhead rate:

Estimated overhead cost/Estimated direct materials cost = $705,000 ¸ $282,000 = 250% of direct materials cost

b.) Overhead applied to Job 243:

Department A: 250 * $6.00 =	$1,500
Department B: $1,100 * 2.5 =	$2,750
	$4,250

	Department A	Department B
Manufacturing overhead incurred	$385,000	$705,000
Manufacturing overhead applied:
61,000 * $6.00 =	366,000
$284,000 * 250% =		$710,000
Underapplied (overapplied) overhead	$19,000	$(5,000)

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-28 Underapplied and Overapplied Overhead
Topic: 05-34 Multiple Predetermined Overhead Rates

Scanlon Company has a job-order costing system and applies manufacturing overhead cost to products on the basis of machine hours. The following estimates were used in preparing the predetermined overhead rate for the most recent year:
Machine hours: 95,000
Manufacturing overhead cost: $1,710,000

During the most recent year, a severe recession in the company’s industry caused the curtailment of production and a buildup of inventory in the company’s warehouses. The company’s cost records revealed the following actual cost and operating data for the year:

Machine hours: 75,000
Manufacturing overhead cost: $1,687,500

Amount of applied overhead in inventories at year-end:

Work in process: $337,500
Finished goods: 253,125
Amount of applied overhead in cost of goods sold for the year: 759,375

Required:

(a.) Compute the company’s predetermined overhead rate for the year and the amount of under- or overapplied overhead for the year.
(b.) Determine the difference between net income for the year if the under- or overapplied overhead is allocated to the appropriate accounts rather than closed out directly to Cost of Goods Sold.

The company’s predetermined overhead rate for the year is:
$1,710,000 ¸ 95,000 = $18 per machine hour

The amount of under-/overapplied overhead is:

Actual overhead	$1,687,500
Applied overhead ($18 * 75,000)	1,350,000
Underapplied overhead	$337,500

Allocation of underapplied overhead:

Overhead applied in work in process	$337,500	25.00%	$84,375
Overhead applied in finished goods	253,125	18.75%	63,281
Overhead applied in cost of goods sold	759,375	56.25%	189,844
Total overhead applied	$1,350,000	100.00%	$337,500

The entire amount of $337,500 underapplied overhead is added to Cost of Goods Sold where no allocation occurs. Allocation results in only $189,844 being added to Cost of Goods Sold. Net income would be higher under allocation by $337,500 – $189,844 = $147,656.

Blooms: Evaluate
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-28 Underapplied and Overapplied Overhead
Topic: 05-31 Allocate Overapplied Overhead among Accounts

The following cost data relate to the manufacturing activities of the Kamas Company during the most recent year:
Manufacturing overhead costs incurred during the year:

Property taxes	$1,600
Utilities, factory	2,600
Indirect labour	5,100
Depreciation, factory	13,000
Insurance, factory	2,500
Total actual costs	$24,800

Other costs incurred during the year:

Purchases of raw materials	$15,000
Direct labour cost	22,000

Inventories:

Raw materials, beginning	$5,000
Raw materials, ending	4,400
Work in process, beginning	3,500
Work in process, ending	4,500

The company uses a predetermined overhead rate to charge overhead cost to production. The rate for the year just completed was $4.00 per machine hour; a total of 6,000 machine hours were recorded for the year.

Required:

a. Compute the amount of under- or overapplied overhead cost for the year just ended.
b. Prepare a schedule of cost of goods manufactured for the year.

a.)

Actual total manufacturing overhead cost	$24,800
Manufacturing overhead applied: 6,000 * $4.00 =	24,000
Underapplied manufacturing overhead	$800

b.) Kamas Company
Schedule of Cost of Goods Manufactured
For the Year Just Ended

Direct materials:
Raw materials, beginning	$5,000
Add purchases of raw materials	15,000
Raw materials available for use	20,000
Deduct raw materials inventory, ending	4,400
Raw materials used in production	15,600
Direct labour	22,000
Manufacturing overhead applied to work in process	24,000
Total manufacturing costs	61,600
Add beginning work in process	3,500
	65,100
Deduct ending work in process	4,500
Cost of goods manufactured	$60,600

Arthur Manufacturing Company produces a single product. The controller has asked for your help in preparing a schedule of cost of goods manufactured for the month just ended. The following information is available:
1.) Eleven thousand units were sold at $22 per unit.
2.) Thirteen thousand units requiring one unit each of raw materials were produced.
3.) Raw materials inventory at the beginning of the month was 1,100 units at $4 each.
4.) During the month, two purchases of raw materials were made:

Purchase #1: 7,000 units at $5.00 each
Purchase #2: 6,000 units at $5.50 each

5.) The company uses the first-in, first-out method of determining raw materials inventories.
6.) The work-in-process inventories were:

Beginning of the month: 1,500 units valued at $17,000
End of the month: 1,500 units valued at $19,000

7.) Direct labour cost was $110,000.
8.) Overhead is applied to production on the basis of 65% of direct labour cost.

Required:

Prepare a schedule of cost of goods manufactured for the month.

Arthur Manufacturing Company
Schedule of Cost of Goods Manufactured
For the Year Just Ended

Raw materials used:
Beginning raw materials inventory	$4,400
Purchases	68,000
Raw materials available	$72,400
Ending raw materials inventory	6,050
Raw materials used	66,350
Direct labour	110,000
Manufacturing overhead applied to work in process	71,500
Total manufacturing costs	$247,850
Add: Work in process, beginning	17,000
	$264,850
Deduct: Work in process, ending	19,000
Cost of goods manufactured	$245,850

Computations:

Units: 1,100 + 7,000 + 6,000 – 13,000 = 1,100 units in ending inventory.

Raw Materials:

Beginning Inventory: 1,100 @ $4	$4,400
Purchases: 7,000 @ $%	35,000
6,000 @ $5.50	33,000
TOTAL	$72,400
Less Ending Inventory
1,100 units @ $5.50	6,050
RM used	$66,350

v
Factory overhead applied to work in process: $110,000 ´ 0.65 = $71,500

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-25 Cost of Goods Sold
Topic: 05-26 Summary of Cost Flows

At the beginning of the year, manufacturing overhead for the year was estimated to be $250,860. At the end of the year, actual direct labor-hours for the year were 20,800 hours, the actual manufacturing overhead for the year was $245,860, and manufacturing overhead for the year was underapplied by $10,820. The predetermined overhead rate is based on direct labour-hours.
Required:

What must have been the estimated direct labor-hours at the beginning of the year used in setting the predetermined overhead rate?

Actual mfg. overhead – Applied mfg. overhead = Underapplied mfg. overhead
$245,860 – Applied manufacturing overhead = $10,820
Applied manufacturing overhead = $235,040

Applied manufacturing overhead =	Actual direct labour-hours x	(Estimated manufacturing overhead/Estimated direct labour-hours)
$235,040 =	20,800 x	($250,860/Estimated direct labour-hours)
$11.30 =		(Estimated manufacturing overhead/19,700)

Estimated direct labor-hours = 22,200 direct labor-hours (rounded)

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-28 Underapplied and Overapplied Overhead

Brabec Corporation uses direct labor-hours in its predetermined overhead rate. At the beginning of the year, the estimated direct labor-hours were 19,700 hours. At the end of the year, actual direct labor-hours for the year were 17,700 hours, the actual manufacturing overhead for the year was $392,940, and manufacturing overhead for the year was underapplied by $35,400.
Required:

What must have been the estimated manufacturing overhead cost at the beginning of the year used setting the predetermined overhead rate?

Actual mfg. overhead – Applied mfg. overhead = Underapplied mfg. overhead
$392,940 – Applied manufacturing overhead = $35,400
Applied manufacturing overhead = $357,540

Applied manufacturing overhead =	Actual direct labour-hours x	(Estimated manufacturing overhead / Estimated direct labour-hours)
$357,540 =	17,700 x	(Estimated manufacturing overhead / 19,700)
$20.20 =		(Estimated manufacturing overhead / 19,700)

Estimated manufacturing overhead = $397,940

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-28 Underapplied and Overapplied Overhead

Daffe Corporation uses direct labor-hours in setting its predetermined overhead rate. At the beginning of the year, the total estimated manufacturing overhead was $165,600. At the end of the year, actual direct labor-hours for the year were 11,900 hours, manufacturing overhead for the year was overapplied by $10,760, and the actual manufacturing overhead was $160,600.
Required:

What must have been the predetermined overhead rate for the year?

Applied manufacturing overhead –

Actual manufacturing overhead =

Overapplied manufacturing overhead

(Applied manufacturing overhead is greater than actual manufacturing overhead when manufacturing overhead is overapplied.)

Applied manufacturing overhead –

$160,600 =

$10,760

Applied manufacturing overhead = $171,360

Applied manufacturing overhead =	Actual direct labour-hours x	Predetermined overhead rate
$171,360 =	11,900 x	Predetermined overhead rate

Predetermined overhead rate = $14.40

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-28 Underapplied and Overapplied Overhead

X Company reported the following actual cost data for the year:

Purchase of raw materials (all direct)	$266,000
Direct labour cost	160,000
Manufacturing overhead costs	246,000
Change in inventories:
Decrease in raw materials	$10,000
Decrease in work in process	8,000
Decrease in finished goods	16,000

X Company used a 150% predetermined overhead rate based on direct labour cost. The rate was based on annual estimated overhead cost and direct labour cost of $252,000 and $168,000, respectively.

Required:

a. Calculate the cost of goods manufactured.
b. What was the cost of goods sold before adjusting for any under or overapplied overhead?
c. By how much was manufacturing overhead cost under or overapplied?
d. Prepare a summary journal entry to close any under or overapplied manufacturing overhead cost to cost of goods sold. Is such an entry appropriate in this situation? Why or why not?
e. Analyze the under or overapplied manufacturing overhead costs calculated in part c above into two separate components: amount due to incorrect estimate of the annual manufacturing overhead costs and an amount due to incorrect estimate of the annual direct labour cost.

Cost of goods manufactured:
Direct materials used
Purchase of raw materials	$266,000
Add: Decrease in raw materials inventory	10,000	$276,000
Direct labour costs		160,000
Applied manufacturing overhead (150% x $160,000)		240,000
Total manufacturing cost added		$676,000
Add: Decrease in work in process inventory		8,000
Cost of goods manufactured		$784,000

Unadjusted cost of goods sold:
Cost of goods manufactured (from Part a)	$784,000
Add: Decrease in finished goods inventory	16,000
Unadjusted cost of goods sold	$800,000

Actual manufacturing overhead costs	$246,000
Less: applied manufacturing overhead costs (150% x $160,000)	240,000
Underapplied manufacturing overhead costs	$6,000

Journal entry:
Cost of goods sold	$6,000
Manufacturing overhead		$6,000

Yes, closing the entire amount to cost of goods sold seems appropriate in this situation because the amount is not material, about 2.44% of actual manufacturing overhead cost or 2.38% of the estimated manufacturing overhead cost.

e. Two components of the $6,000 net underapplied manufacturing overhead cost:
Incorrect estimate of the manufacturing overhead costs alone would have caused over-application of $6,000, that is, $246,000 – $252,000.
Incorrect estimate of the direct labour cost alone would have caused under-application of $12,000, that is, 150% ´ ($168,000 – $160,000).
Net of $6,000 over-application and $12,000 under-application is $6,000 under-application.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-25 Cost of Goods Sold
Topic: 05-30 Close out Underapplied Overhead to Cost of Goods Sold

Y Company reported the following actual costs data for the year:

Purchase of raw materials (all direct)	$200,000
Direct labour (average hourly rate of $20)	320,000
Manufacturing overhead costs	100,000
Change in inventories:
Increase in raw materials	$20,000
Increase in work in process	16,000
Increase in finished goods	32,000

Y Company used a predetermined overhead rate based on direct labour hours. Estimated annual manufacturing overhead cost and direct labour hours were $150,000 and 20,000, respectively.

Required:

a. What was the pre-determined manufacturing overhead rate?
b. Calculate the cost of goods manufactured.
c. What was the cost of goods sold before adjusting for any under or overapplied overhead?
d. By how much was manufacturing overhead cost under or overapplied?
e. Prepare a summary journal entry to close any under or overapplied manufacturing overhead cost to cost of goods sold. Is such an entry appropriate in this situation? Why or why not?
f. Analyze the under or overapplied manufacturing overhead costs calculated in part c above into two separate components: amount due to incorrect estimate of the annual manufacturing overhead costs and an amount due to incorrect estimate of the annual direct labour cost.

Predtermined manufacturing overhead rate = $150,000/20,000
= $7.50 per direct labour hour (DLH)

b.

Cost of goods manufactured:
Direct materials used
Purchase of raw materials	$200,000
Less: Increase in raw materials inventory	20,000	$180,000
Direct labour costs		320,000
Applied manufacturing overhead ($7.50 x 16,000 DLHs*)		120,000
Total manufacturing cost added		$620,000
Less: Increase in work in process inventory		16,000
Cost of goods manufactured		$604,000

*Actual DLHs = $320,000/$20

Unadjusted cost of goods sold:
Cost of goods manufactured (from Part b)	$604,000
Less: Increase in finished goods inventory	32,000
Unadjusted cost of goods sold	$572,000

Actual manufacturing overhead costs	$100,000
Less: applied manufacturing overhead costs ($7.50 x 16,000 DLHs)	120,000
Overapplied manufacturing overhead costs	$20,000

Journal entry:
Manufacturing overhead	$20,000
Cost of goods sold		$20,000

No, closing the entire amount to cost of goods sold does not seem appropriate in this situation because the amount is relatively large and, therefore, material, that is, 20% of actual manufacturing overhead cost or 13.33% of the estimated manufacturing overhead cost.

f. Two components of the $20,000 net overapplied manufacturing overhead cost:

Incorrect estimate of the manufacturing overhead costs alone would have caused over-application of $50,000, that is, $100,000 – $150,000.
Incorrect estimate of direct labour hours alone would have caused under-application of $30,000, that is, $7.50 ´ (16,000 DLHs – 20,000 DLHs).
Net of $50,000 over-application and $30,000 under-application is $20,000 over-application.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 05-03 Compute predetermined overhead rates; and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.
Learning Objective: 05-05 Apply overhead cost to work in process using a predetermined overhead rate.
Learning Objective: 05-06 Prepare schedules of cost of goods manufactured and cost of goods sold.
Learning Objective: 05-07 Compute underapplied and overapplied overhead cost; and prepare the journal entry to close the balance in manufacturing overhead to the appropriate accounts.
Topic: 05-10 Using the Predetermined Overhead Rate
Topic: 05-22 The Concept of a Clearing Account
Topic: 05-25 Cost of Goods Sold
Topic: 05-28 Underapplied and Overapplied Overhead
Topic: 05-30 Close out Underapplied Overhead to Cost of Goods Sold

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Managerial Accounting 11th canadian edition By Garrison - Test Bank

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