Chapter 4 Product Costs And Job Order Costing Test Bank Docx

Chapter 4

Product Costs and Job Order Costing

CHAPTER LEARNING OBJECTIVES

1. Distinguish between product and period costs. (Unit 4.1)

All costs can be classified as either product or period costs. Product costs are the costs incurred to acquire raw materials and convert them into finished products; they are accumulated in inventory accounts and expensed when the finished units are sold. Period costs are the costs associated with the sale of the finished product and the administration of the business. These costs, commonly referred to as selling, general, and administrative costs, are expensed as they are incurred.

1. Describe the three major components of product costs: direct materials, direct labor, and manufacturing overhead. (Unit 4.1)

Direct materials is the cost of the raw materials that can be traced directly to, or easily identified with, the final product. Direct labor is the cost of the wages and salaries paid to workers who have their “hands on” the product as it is made and transform it into a finished product. Manufacturing overhead includes all manufacturing costs not classified as direct materials or direct labor. They are indirect product costs that arise in the manufacturing process that cannot feasibly be traced to a unit of product.

1. Trace the flow of product costs through the inventory accounts. (Unit 4.2)

The three inventory accounts are Raw Materials, Work in Process, and Finished Goods. Purchases of raw materials are debited to the Raw Materials Inventory account. When raw materials are issued to the production floor, their cost is credited to the Raw Materials Inventory account. The cost of direct materials issued to the production floor, along with the costs of direct labor and manufacturing overhead, are debited to the Work in Process Inventory account. The cost of goods manufactured is credited to the Work in Process Inventory account and debited to the Finished Goods Inventory account once the goods are complete. Finally, Cost of Goods Sold is credited to Finished Goods Inventory account.

1. Compute a predetermined overhead rate and apply manufacturing overhead to production. (Unit 4.3)

The predetermined overhead rate is calculated using the total estimated overhead cost and the total estimated application base. Some common application bases are machine hours, direct labor hours, and direct labor cost. The chosen application base should have a causal relationship to, or be highly correlated with, overhead costs. To apply overhead cost to production, multiply the predetermined overhead rate by the actual application base.

1. Compute product costs using a job order costing system. (Unit 4.3)

In a job order costing system, product costs are accumulated on a job cost sheet using materials requisition slips, job time tickets, and applied overhead, either on paper forms or in a computerized system. Once all the costs have been accumulated, the total cost of the job is divided by the number of good units actually produced to determine the average unit cost.

1. Dispose of under- and overapplied manufacturing overhead. (Unit 4.4)

If actual manufacturing overhead costs for the period exceed the applied manufacturing overhead, overhead has been underapplied. Conversely, if actual manufacturing overhead costs for the period fall short of the applied manufacturing overhead, overhead has been overapplied. The easiest way to dispose of under- or overapplied overhead is to adjust the Cost of Goods Sold account. The more “accurate” method is to prorate it to the three accounts that contain overhead costs: Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold. The amount that is prorated to each account is based on the size of the account balance relative to the total balance in the three accounts.

TRUE-FALSE STATEMENTS

1. The costs of acquiring inventory are reported on the balance sheet as an asset labeled “inventory” and are expensed only when products are sold.
2. The costs of selling goods and administrative costs are reported on the income statement as expenses when inventory is sold.
3. Product costs are the costs related to inventory and period costs are the costs related to the selling and administrative functions.
4. Product costs are any costs that a company incurs to acquire raw materials and convert them to finished goods ready for sale.
5. The fabric used to manufacture a tote bag is an example of indirect material.
6. For labor to be considered direct, the worker must actually have his or her hands on the product or on the machine as the product is being made.
7. If a cost is incurred to support the administrative functions and is not classified as direct labor or direct material, it is part of overhead.
8. If a cost is related to running the manufacturing facility but does not qualify as direct materials or direct labor, it is classified as overhead.
9. Period costs are associated with manufacturing overhead incurred during production.
10. Total manufacturing cost is also referred to as cost of goods manufactured.
11. The Work in Process Inventory account contains the costs of all products that have been started but are not yet complete.
12. The production costs of completed products are recorded in the Finished Goods Inventory account.
13. When inventory is sold to customers, its cost is removed from Work in Process Inventory and transferred to Cost of Goods Sold.
14. The cost of goods manufactured includes the cost of everything that is finished during the period, whether or not it was started during the period.
15. The Schedule of Cost of Goods Manufactured is nothing more than a restatement of the Work in Process Inventory account.
16. In a job order costing system, products are manufactured in batches and costs are accumulated in the departments where the work is done.
17. Job order costing systems are not used exclusively by manufacturers; many service organizations use job order costing.
18. The job order sheets are the subsidiary ledger that supports the Finished Goods Inventory account on the balance sheet.
19. When a direct labor worker performs indirect labor activities, the worker will charge the time to a particular activity, not to a particular job.
20. Dividing overhead among various jobs is called overhead manipulation.
21. An application base is the amount of overhead to be allocated to various jobs.
22. The predetermined overhead rate is calculated by dividing budgeted total manufacturing overhead by budgeted activity level of the application base.
23. Applied overhead is calculated by dividing the actual activity level of application base by the predetermined overhead rate.
24. The journal entry to charge overhead cost to Work in Process Inventory is to debit Work in Process Inventory and credit Manufacturing Overhead Control.
25. Overapplied overhead means that not enough overhead cost was charged to products during the production process.
26. After the entry is made to record the overhead applied, if the balance in the overhead account is a debit, more overhead was actually incurred than was debited to the Work in Process account during the period.
27. After the entry is made to record the overhead applied, if the balance in the overhead account is a credit, more overhead was actually incurred than was recorded in the Work in Process account during the period.
28. If the amount of underapplied or overapplied manufacturing overhead is small, most companies will make the entry to close the Manufacturing Overhead account by charging the entire amount to Work in Process.
29. To adjust for underapplied overhead, the journal entry includes a debit to Cost of Goods Sold and a credit to Manufacturing Overhead Control.
30. A zero balance in the manufacturing overhead account prior to adjusting the Manufacturing Overhead account indicates that actual overhead and applied overhead cost are equal, so that all inventory is reflected at actual cost.

Answers to True-False Statements

MULTIPLE-CHOICE QUESTIONS

1. Which of the following items would least likely be classified as part of direct materials for an automobile manufacturer?
   1. Steel
   2. Paint
   3. Tires
   4. Screws
2. Which of the following items would least likely be classified as part of direct materials for Dole Food Company?
   1. Pineapple
   2. Sugar
   3. Stainless steel pots
   4. Glass jars
3. Which of the following would most likely be classified as a direct material for a furniture manufacturer?
   1. Wood
   2. Glue
   3. Screws
   4. Wood cleaner
4. Which of the following is an example of direct labor for Dole Food Company?
   1. Truck driver who transports fruit to customers
   2. Truck driver who transports laborers to the field
   3. Plant supervisor
   4. Canning machine operator
5. Which of the following is an example of direct labor for Toyota Motor Company?
   1. Assembly line worker
   2. Fork-lift driver
   3. Line foreman
   4. Company president
6. The supply of coffee beans at Starbucks is an example of

1. Oil to keep a factory machinery lubricated is an example of

1. Aluminum used in the manufacturing of bicycles is an example of

1. Fabric used in the manufacture of baseball jerseys is an example of

1. Wages of sewing machine operators making baseball jerseys is an example of

1. Janitorial supplies used in a factory’s restrooms is an example of

1. Which of the following is not associated with period costs?
   1. Selling of a product
   2. Incurring overhead
   3. The passage of time
   4. Administration of the business
2. The salary of the president of the company is an example of

1. The cost of storing finished goods inventory is an example of

1. The wages of the security guards who protect the factory building are an example of

1. Which of the following expenses are reported on the income statement when they are incurred?
   1. Product costs
   2. Period costs
   3. Indirect material
   4. Direct material
2. Which one of the following types of costs is not related to inventory?
   1. Direct material
   2. Indirect labor
   3. Product costs
   4. Period costs
3. Any costs that a company incurs to acquire raw materials and convert them to finished goods ready for sale are referred to as
   1. direct costs.
   2. period costs.
   3. manufacturing costs.
4. Manufacturing costs are first recognized as an asset on the balance sheet and then expensed on the income statement at the time they are
   1. purchased.
   2. put into production.
   3. completed.
   4. sold.
5. At what point are manufacturing costs expensed?
   1. When the finished goods are sold
   2. When the costs are transferred out of Work in Process
   3. When the production process begins
   4. At the end of the accounting period
6. Direct materials are sometimes referred to as
   1. overhead.
   2. raw materials.
   3. period costs.
   4. administrative expenses.
7. Direct labor costs include all of the following except
   1. wages of workers who transform direct materials into the finished product.
   2. salaries of supervisors who oversee the production process.
   3. wages of workers who run the machines as the product is being made.
   4. benefits paid to the workers who transform direct materials into finished products.
8. Direct labor is considered a
   1. period cost.
   2. part of manufacturing overhead.
   3. variable cost.
   4. mixed cost.
9. Which of the following is not classified as a direct labor cost?
   1. Wages of the store manager at Starbucks
   2. Wages of the assemblers who assemble planes at Boeing
   3. Wages of computer animators at Pixar
   4. Ring engravers at Josten’s Jewelry
10. Which of the following is not classified as overhead?
    1. Electricity to run factory machines
    2. Insurance to protect the factory contents
    3. Security guards that protect the factory building
    4. Advertising cost to promote the finished goods
11. Which of the following is not another term that companies use to refer to manufacturing overhead?
    1. Facility cost
    2. Manufacturing support
    3. Factory support
    4. Manufacturing burden
12. Which of the following is not another term companies use to refer to manufacturing overhead?
    1. Factory overhead
    2. Manufacturing administration
    3. Factory burden
    4. Manufacturing burden
13. Which of the following is not an indirect material?
    1. Supplies used in supporting the production process which may not be part of the final product
    2. Direct material that is not a significant part of the product
    3. Material used that is inexpensive, making it not cost effective to trace its cost back to the product
    4. Office supplies used by the human resources department
14. Costs a company incurs that are not product costs are referred to as
    1. period costs.
    2. contribution costs.
    3. accrued costs.
    4. incurred costs.
15. A cost that a company incurs that is not a product cost is referred to as
    1. contribution cost.
    2. nonmanufacturing cost.
    3. manufacturing overhead.
    4. burden.
16. Period costs are associated with
    1. the ordering materials for production.
    2. producing products.
    3. the administration of the business.
    4. general factory overhead.
17. Period costs are expensed when they are
    1. incurred.
    2. paid.
    3. entered into production.
    4. sold.
18. A category of costs that includes all the costs associated with the general management of the company is referred to as
    1. indirect costs.
    2. general and administrative costs.
    3. selling costs.
    4. product costs.
19. The three components of product costs are:
    1. Direct material, indirect material, and labor.
    2. Material, direct labor, and indirect labor.
    3. Direct material, direct labor, and overhead.
    4. Indirect material, indirect labor, and overhead.
20. Finished Goods Inventory consists of which of the following costs?
    1. Direct material, direct labor, and nonmanufacturing overhead
    2. Direct labor and manufacturing overhead costs
    3. Manufacturing overhead and direct material
    4. Direct material, direct labor, and manufacturing overhead.
21. Which of the following is not classified as a variable product cost?
    1. Direct materials
    2. Insurance
    3. Sales commissions
    4. Indirect materials
22. Which of the following is not classified as a fixed product cost?
    1. Machine depreciation
    2. Electricity to run machinery
    3. Factory rent
    4. Production manager’s salary
23. Which of the following is not classified as a variable period cost?
    1. Sales commissions
    2. Packaging for delivery
    3. Depreciation on delivery trucks
    4. Utilities cost per kilowatt hour above the base amount allowed
24. Which of the following is not classified as a fixed period cost?
    1. Packaging for delivery
    2. Depreciation on delivery trucks
    3. Marketing Vice President’s salary
    4. Insurance on the administration building
25. Which of the following is not classified as a period cost?
    1. The cost of toner for the sales department laser printer
    2. The salary for the president of the company
    3. The cost of utilities for the factory building
    4. the cost of the annual company holiday party.
26. Which of the following accounts is not reported on the Balance Sheet?
    1. Cost of Goods Sold
    2. Raw Materials
    3. Work in Process
    4. Finished Goods
27. Which of the following items is not classified as direct materials for Family Home-Made Ice Cream Parlor?
    1. The cost of empty ice cream cones
    2. The cost of milk used in the manufacturing of ice cream
    3. The cost of hairnets worn by production line workers
    4. The cost of strawberries used in the manufacturing of ice cream
28. Which of the following items is not classified as indirect materials for a furniture manufacturing company?
    1. Sanded and finished wood used to make bed frames
    2. Decorative brads used on the arms of chairs
    3. Glue used to strengthen joints on drawers
    4. Paint used to touch up the final product
29. Which of the following items is not classified as direct labor for Family Ice Cream Parlor?
    1. Salary of workers making banana splits
    2. Salary of workers adding toppings to sundaes
    3. Salary of store manager
    4. Wages of employees processing ice cream
30. Which of the following items is not classified as indirect labor for a furniture manufacturing company?
    1. The production foreman’s salary
    2. Wages paid to the workers on the assembly line
    3. The wages of the forklift driver who delivers raw materials to the production floor
    4. The wages of the factory janitorial staff
31. Which of the following is not classified as manufacturing overhead?
    1. The cost of depreciation on office equipment
    2. The cost of wages paid to the forklift operator in the factory
    3. The cost of wages for the plant manager
    4. The production foreman’s salary
32. When a company purchases materials for use in the production process, the cost of those materials is recorded in which of the following accounts?
    1. Finished Goods Inventory
    2. Work in Process Inventory
    3. Raw Materials Inventory
    4. Supplies Expense
33. The Work in Process Inventory account contains the costs of all products that have been
    1. started but not yet completed.
    2. completed.
    3. completed and sold.
    4. sold.
34. The Finished Goods inventory account contains the costs of all products that have been
    1. started but not yet complete.
    2. completed but not sold.
    3. completed and sold.
    4. sold.
35. When a product is sold to a customer, which of the following inventory accounts is increased or decreased?
    1. Work in Process Inventory is decreased and Finished Goods Inventory is increased
    2. Finished Goods Inventory is increased and Cost of Goods Sold is decreased
    3. Finished Goods Inventory is decreased and Cost of Goods Sold is increased
    4. Raw Materials Inventory is decreased and Cost of Goods Sold is increased.
36. Raw Materials Inventory increases when
    1. materials are purchased.
    2. materials are used.
    3. materials are transferred to Work in Process Inventory.
    4. goods are sold.
37. Raw Materials Inventory decreases when
    1. materials are purchased.
    2. materials are used.
    3. materials are transferred to Finished Goods Inventory.
    4. goods are sold.
38. When direct materials are used, which of the following accounts increases?
    1. Raw Materials Inventory
    2. Work in Process Inventory
    3. Finished Goods Inventory
    4. Manufacturing Overhead
39. When indirect materials are used, which of the following accounts increases?
    1. Raw Materials Inventory
    2. Work in Process Inventory
    3. Finished Goods Inventory
    4. Manufacturing Overhead
40. Work in Process Inventory increases when
    1. raw materials are purchased.
    2. raw materials are used.
    3. products are finished.
    4. products are sold.
41. Work in Process Inventory decreases when
    1. raw materials are purchased.
    2. raw materials are used.
    3. products are finished.
    4. products are sold.
42. When products are completed, which of the following accounts is increased?
    1. Raw Materials Inventory
    2. Work in Process Inventory
    3. Finished Goods Inventory
    4. Cost of Goods Sold
43. When products are completed, which of the following accounts is decreased?
    1. Raw Materials Inventory
    2. Work in Process Inventory
    3. Finished Goods Inventory
    4. Cost of Goods Sold
44. Finished Goods Inventory represents products that are
    1. in the process of being completed.
    2. ready to be sold.
    3. sold.
    4. completed and sold.
45. Finished Goods Inventory increases by
    1. the cost of goods manufactured.
    2. overhead applied.
    3. the cost of selling the product.
    4. the cost of goods sold amount.
46. Finished Goods Inventory decreases by
    1. cost of goods manufactured.
    2. overhead applied.
    3. the cost of selling the product.
    4. the cost of goods sold.
47. Which of the following accounts is similar to the Inventory account of a merchandising company?
    1. Raw Materials Inventory
    2. Work in Process Inventory
    3. Finished Goods Inventory
    4. Manufacturing Overhead
48. Which of the following is the correct journal entry to record the purchase of indirect materials on account?

1. Which of the following is the correct journal entry to record direct materials put into production?

1. Which of the following is the correct journal entry to record manufacturing overhead incurred?

1. Which of the following is the correct journal entry to record the application of manufacturing overhead?

1. Which of the following is the correct journal entry to record the cost of goods manufactured when goods are completed?

1. Which of the following is not included in the schedule of cost of goods manufactured?
   1. Direct materials in inventory
   2. Direct materials used in production
   3. Direct labor
   4. Overhead
2. If the beginning balance in the Raw Materials Inventory account for the month was $25,000, the ending balance of $22,000 and material used during the month was $130,000, what is the amount of materials purchased during the month?
   1. $177,000
   2. $130,000
   3. $127,000
   4. $133,000
3. Randy’s Garden Supply Manufacturing Company had $105,000 in Raw Materials Inventory at the beginning of the month. During the month Randy used $920,000 and had $120,000 remaining in inventory at the end of the month. How much inventory did Randy purchase during the month?
   1. $815,000
   2. $905,000
   3. $920,000
   4. $935,000
4. Mounce’s Chocolate Delight’s bakery had $2,000 of raw materials in inventory at the beginning of the month. During the month Mounce used $45,000 of materials and had $1,500 in ending inventory. How much inventory did the bakery purchase during the month?
   1. $44,500
   2. $45,000
   3. $45,500
   4. $48,500
5. Cost of goods manufactured is
   1. always the same amount as the total direct costs.
   2. recorded as a debit to the Cash or Accounts Receivable account.
   3. recorded as a debit to the Finished Goods Inventory account.
   4. also referred to as the Cost of Goods Sold.
6. If the Cost of Goods Sold is less than the cost of goods manufactured, then
   1. Finished Goods Inventory increases during the period.
   2. Finished Goods Inventory decreases during the period.
   3. overhead was overapplied.
   4. overhead was underapplied.
7. Micker Boots produces cowboy boots, its Raw Materials Inventory account contains only direct materials. If the beginning balance in Raw Materials Inventory is $5,000, the ending balance is $3,500, and $60,000 was the amount transferred to Work in Process Inventory, what is the amount of materials purchased during the period?
   1. $58,500
   2. $60,000
   3. $61,500
   4. $68,500
8. Micker Boots produces cowboy boots, its Raw Materials account contains only direct materials. If the beginning balance in Raw Materials Inventory is $5,000, the ending balance is $3,500, and $60,000 was purchased, what is the amount of materials transferred to Work in Process Inventory during the period?
   1. $58,500
   2. $60,000
   3. $61,500
   4. $68,500
9. Micker Boots produces cowboy boots, Its Raw Materials account contains only direct materials. If the ending balance in Raw Materials Inventory is $3,500, $60,000 was purchased, and $61,500 was transferred to Work in Process Inventory during the period, what was the amount in beginning inventory?
   1. $1,500
   2. $2,000
   3. $3,500
   4. $5,000

107. SW Industries has the following information for a particular month regarding its Raw Materials Inventory account:

What is the cost of materials purchased by SW Industries during the month?

a. $255,300

b. $260,300

c. $370,300

d. $145,300

108. Cottonwood, Inc. has the following information regarding its Raw Materials Inventory account:

The company uses the Raw Materials Inventory account only for direct materials. What is the beginning balance of Cottonwood’s Raw Materials Inventory account?

a. $31,750

b. $10,750

c. $693,950

d. $661,950

109. Basil Industries reported the following information for December:

What was the cost of the direct materials used by Basil in production during December?

a. $406,250

b. $362,500

c. $450,000

d. $381,250

110. Basil Industries reported the following information for December:

How much manufacturing overhead was incurred by Basil during December?

a. $481,250

b. $525,000

c. $462,000

d. $475,000

111. Basil Industries reported the following information for December:

What was the total manufacturing cost for Basil for December?

a. $1,062,500

b. $1,087,500

c. $1,131,250

d. $1,250,000

112. Basil Industries reported the following information for December:

What was the ending balance in Basil’s Raw Materials Inventory account at December 31?

a. $75,000

b. $118,750

c. $162,500

d. $206,250

113. Basil Industries reported the following information for December:

What was the ending balance in Basil’s Work in Process Inventory account at December 31?

a. $181,250

b. $137,500

c. $75,000

d. $262,500

114. Basil Industries reported the following information for December:

What was the ending balance in Basil’s Finished Goods Inventory account at December 31?

a. $531,250

b. $43,750

c. $231,250

d. $343,750

1. Which of the following is not a reason to allocate overhead?
   1. Unlike direct materials and direct labor, the amount of overhead actually incurred may not be known at the time a job is being worked on.
   2. Manufacturing overhead is an indirect cost that cannot be physically or economically traced back to a specific item.
   3. Allocation is more accurate than tracing items directly to jobs.
   4. Some overhead costs are seasonal and should be spread over production for the entire year.
2. Which of the following is not a common application base for calculating the predetermined overhead rate?
   1. Administrative costs
   2. Direct labor hours
   3. Machine hours
   4. Direct labor costs
3. An application base should be an activity that
   1. causes overhead to be incurred.
   2. is highly correlated with overhead.
   3. both causes overhead to be incurred and is highly correlated with overhead.
   4. neither causes overhead to be incurred nor is highly correlated with overhead.
4. The predetermined overhead rate is calculated as
   1. budgeted total manufacturing overhead divided by budgeted activity level of application base.
   2. budgeted total manufacturing overhead divided by actual activity level of application base.
   3. actual total manufacturing overhead divided by budgeted activity level of application base.
   4. actual total manufacturing overhead divided by actual activity level of application base.
5. The amount of manufacturing overhead applied to a particular job is calculated as
   1. predetermined overhead rate × budgeted activity level of application base.
   2. predetermined overhead rate × actual activity level of application base.
   3. actual overhead rate × budgeted total manufacturing overhead.
   4. actual overhead rate × actual total manufacturing overhead.
6. The predetermined overhead rate is calculated as
   1. actual overhead divided by estimated activity level.
   2. actual overhead divided by actual activity level.
   3. estimated overhead divided by actual activity level.
   4. estimated overhead divided by estimated activity level.
7. At the beginning of the year, managers at King Industries estimated $420,000 in manufacturing overhead, 20,000 direct labor hours and 50,000 machine hours. Actual manufacturing costs at the end of the year were $425,000 in manufacturing overhead. During the year 22,000 direct labor hours and 47,000 machine hours were incurred. If overhead is applied based on direct labor hours, what is the predetermined overhead rate for the coming year?
   1. $19.09 per direct labor hour
   2. $20.00 per direct labor hour
   3. $21.00 per direct labor hour
   4. $21.25 per direct labor hour
8. At the beginning of the year, managers at King Industries estimated $400,000 in manufacturing overhead, 20,000 direct labor hours and 50,000 machine hours. Actual manufacturing costs at the end of the year were $425,000 in manufacturing overhead. During the year 22,000 direct labor hours and 47,000 machine hours were incurred. If overhead is applied based on direct labor hours, how much overhead was applied during the year?
   1. $399,960
   2. $440,000
   3. $467,500
   4. $425,040
9. Vest Manufacturing Company applies overhead cost based on 120% of direct labor cost. In completing the 250 units in job #220, the company incurred $22,000 in direct materials and direct labor of $17,000. How much overhead should be applied to job #220?
   1. $8,160
   2. $18,720
   3. $20,400
   4. $26,880
10. Watson, Inc. applies overhead cost based on direct labor hours. In completing the 200 units in job #120, the company incurred $12,000 in direct materials and 500 direct labor hours at $18 per hour. The predetermined overhead rate is $6 per direct labor hour. What is the total cost of the units in job #120?
    1. $18,600
    2. $21,000
    3. $22,200
    4. $24,000
11. Which of the following documents is used to release direct materials from the storeroom to the factory floor?
    1. Materials requisition slip
    2. Job cost sheet
    3. Bill of materials
    4. Application sheet
12. During an accounting period, manufacturing overhead is applied to Work in Process using
    1. an application ticket.
    2. a job cost sheet.
    3. a predetermined overhead rate.
    4. A purchase order.

127. Stone Cliff Company manufactures custom-order furniture. During 2020, actual manufacturing overhead totaled $720,000. Based on the 2020 results, and projected production for 2021, management prepared the 2021 budget and estimated that manufacturing overhead would total $800,000. The estimated number of direct labor hours for 2021 is 50,000, and the estimated amount of direct labor cost is $1,000,000. The company plans to use direct labor hours as the basis to allocate overhead to jobs. During May and June 2021, employees worked on the following four jobs:

What is the predetermined overhead rate that Stone Cliff will use to allocate overhead during 2021?

a. $8.00 per direct labor hour

b. $16.00 per direct labor hour

c. $14.40 per direct labor hour

d. $7.20 per direct labor hour

128. Stone Cliff Company manufactures custom-order furniture. During 2020, actual manufacturing overhead totaled $720,000. Based on the 2020 results, and projected production for 2021, management prepared the 2021 budget and estimated that manufacturing overhead would total $800,000. The estimated number of direct labor hours for 2021 is 50,000, and the estimated amount of direct labor cost is $1,000,000. The company plans to use direct labor hours as the basis to allocate overhead to jobs. During May and June 2021, employees worked on the following four jobs:

Job X87 was started in May and delivered to the customer in late June. What is the cost of Job X87?

a. $256,000

b. $370,400

c. $266,296

d. $256,000

($72,000 + $41,000) + ($91,000 + $52,000) + [(4,550 + 2,600) × $16.00] = $370,400

129. Stone Cliff Company manufactures custom-order furniture. During 2020, actual manufacturing overhead totaled $720,000. Based on the 2020 results, and projected production for 2021, management prepared the 2021 budget and estimated that manufacturing overhead would total $800,000. The estimated number of direct labor hours for 2021 is 50,000, and the estimated amount of direct labor cost is $1,000,000. The company plans to use direct labor hours as the basis to allocate overhead to jobs. During May and June 2021, employees worked on the following four jobs:

All jobs were started in May. Jobs X87 and A33 were completed and delivered to customers during June. What is the balance of the Work in Process Inventory account on June 30?

a. $342,200

b. $673,200

c. $458,000

d. $215,200

($86,000 + $101,000) + ($24,000 + $28,000) + [(5,050 + 1,400) × $16.00] = $342,200

($44,000 + $78,000) + ($35,000 + $62,000) + [(3,900 + 3,100) × $16.00] = $331,000

$331,000 + $342,200 = $673,200

130. Stone Cliff Company manufactures custom-order furniture. During 2020, actual manufacturing overhead totaled $720,000. Based on the 2020 results, and projected production for 2021, management prepared the 2021 budget and estimated that manufacturing overhead would total $800,000. The estimated number of direct labor hours for 2021 is 50,000, and the estimated amount of direct labor cost is $1,000,000. The company plans to use direct labor hours as the basis to allocate overhead to jobs. During May and June 2021, employees worked on the following four jobs:

All jobs were started in May. Jobs X87 and A33 were completed and delivered to customers during June. What is cost of goods sold for June?

a. $370,400

b. $585,040

c. $214,640

d. $402,800

Job X87: ($72,000 + $41,000) + ($91,000 + $52,000) + [(4,550 + 2,600) x $16.00] = $370,400

Job A33: ($38,000 + $24,000) + ($52,000 + $32,800) + [(2,600 + 1,640) x $16.00] =$214,640

$370,400 + $214,640 = $585,040

131. Terra Mesa Manufacturing uses a job order cost system to account for its production of specialty patio furniture. At the beginning of June, Terra Mesa had one job in Work in Process, job A75. Management has chosen direct labor cost as its activity base. The costs incurred to date on job A75 are as follows:

During June, Terra Mesa added the following costs for direct materials and direct labor to job A75:

Job A75 was competed on June 30. What is the cost of job A75?

a. $39,135

b. $44,910

c. $42,831

d. $26,010

132. The managers of Red Heart Draperies are planning for the upcoming year. In years past, the company has applied overhead based on direct labor costs. However, management believes that direct labor hours are a better basis for applying overhead and plans to use direct labor hours to apply overhead for the upcoming year.

What is the predetermined overhead rate for the upcoming year (round all answers to the nearest cent)?

a. $18.60 per DLH

b. $21.82 per DLH

c. $1.17 per DLH

d. $0.85 per DLH

133. Curly Girl Manufacturing manufactures salon-quality hair dryers. Curly Girl applies overhead based on direct labor hours. The company’s predetermined overhead rate was based on an estimated 480,000 direct labor hours and $1,728,000 estimated total overhead. During November, the company manufactured 22,400 hair dryers for Job CG12 and incurred the following costs:

What is the unit cost of the hair dryers produced in Job CG12?

a. $36.10

b. $42.40

c. $24.23

d. $42.75

1. Spikes Sports Manufacturing Company uses a job order costing system to account for its production of specialty golf accessories. On May 31 the company reported the following balances in its inventory accounts: $45,000 in Raw Materials Inventory, $25,000 in Work in Process Inventory, and $15,000 in Finished Goods Inventory. On May 31, the total of all open job order cost sheets is
   1. $45,000.
   2. $25,000.
   3. $70,000.
   4. $85,000.

135. Terra Mesa Manufacturing uses a job order cost system to account for its production of specialty patio furniture. On June 30, the company had the following balances in its accounts:

On June 30, the total of all open job cost sheets would be

a. $755,000

b. $612,320

c. $469,640

d. $601,680

1. At the end of the accounting period after adjusting journal entries have been made, the Manufacturing Overhead Control account balance is generally
2. overapplied.
3. underapplied.
4. zero.
5. equal to overhead incurred.
6. When not enough overhead costs are charged to products during production, the result is

a. overapplied overhead.

b. underapplied overhead.

c. an overstatement of cost of goods sold.

d. an overstatement of inventory cost.

1. When too much overhead cost is charged to products during production, the result is

a. overapplied overhead.

b. underapplied overhead.

c. an understatement of cost of goods sold.

d. an understatement of Inventory cost.

1. If the amount of overapplied or underapplied manufacturing overhead is small, most companies will generally make an adjustment to
   1. Work in Process Inventory.
   2. Finished Goods Inventory.
   3. Cost of Goods Sold.
   4. Loss on the Application of Overhead.
2. If the amount of overapplied or underapplied manufacturing overhead is relatively large, most companies will generally make an adjustment to
3. Work in Process Inventory.
4. Finished Goods Inventory.
5. Cost of Goods Sold.
6. allocate the amount of over- or underapplied overhead to Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.

141. If the amount of overapplied manufacturing overhead is small, most companies will generally make which of the following adjusting entries?

142. If a company chooses to spread overapplied or underapplied overhead to all the accounts that contain applied overhead, the proration should be based on

1. the number of accounts.
2. the relative size of the ending balance in each account.
3. the account that has had the least overhead applied to it during the month.
4. the amount of overhead applied to each account during the period.
5. If a company chooses to allocate overapplied or underapplied overhead to all the accounts that contain applied overhead, which of the following is not a step in the process?
6. Add the ending balances in all the accounts.
7. Calculate the percentage of each to the total.
8. Multiply each percentage by the underapplied or overapplied amount.
9. Divide the amount of overapplied or underapplied by three.
10. A zero balance in the Manufacturing Overhead Control account indicates that

a. actual overhead cost and applied overhead cost are equal.

b. all inventory is reflected at actual cost.

c. estimated and applied overhead cost are equal.

d. estimated and actual overhead are equal.

1. River Girl Fly Fishing Shop applies overhead at a rate of $5 per direct labor hour. At the end of the month, the company had accumulated 7,000 direct labor hours and incurred $38,000 in manufacturing overhead. Manufacturing overhead was
2. $3,000 underapplied.
3. $3,000 overapplied.
4. $600 underapplied.
5. $600 overapplied.
6. Gough’s Manufacturing had underapplied overhead totaling $5,000 during the period. To dispose of this underapplied overhead, Gough should
7. increase the Cost of Goods Sold account by $5,000.
8. decrease the Cost of Goods Sold account by $5,000.
9. increase the Work in Process account by $5,000.
10. decrease the Work in Process account by $5,000.

147. During November, Ironwood Manufacturing used 10,375 direct labor hours and paid direct labor wages of $166,000. The company incurred manufacturing overhead of $368,540 during this same time period. For the entire year, Ironwood estimated total manufacturing overhead would be $4,410,000, direct labor hours would be 126,000, and total direct labor wages would be $1,992,000. Company managers determined that manufacturing overhead would be applied based on direct labor hours. For the month of November, manufacturing overhead was

a. $1,040 overapplied.

b. $5,415 underapplied.

c. $5,415 overapplied.

d. $1,040 underapplied.

148. Christy’s Cup Cakes applies overhead based on direct labor hours. In June, Christy applied overhead of $98,620 and incurred overhead of $97,730. For the year, Christy expected total manufacturing overhead of $1,200,000. To dispose of the difference between applied and incurred overhead, Christy should

a. increase Cost of Goods Sold by $890.

b. decrease Cost of Goods Sold by $890.

c. increase Cost of Goods Sold by $2,270.

d. decrease Cost of Goods Sold by $1,830.

149. Mirada Manufacturing produces pumps for residential swimming pools. For the year, management estimated that total manufacturing overhead would be $1,488,000. Management decided to use direct labor hours to apply manufacturing overhead and budgeted 62,000 direct labor hours. The balance in over- or underapplied overhead is deemed to be small. The following information was compiled before an adjustment had been made to close Manufacturing Overhead Control.

1. $20.80 per DLH
2. $24.00 per DLH
3. $21.57 per DLH
4. $23.14 per DLH

150. Mirada Manufacturing produces pumps for residential swimming pools. For the year, management estimated that total manufacturing overhead would be $1,488,000. Management decided to use direct labor hours to apply manufacturing overhead and budgeted 62,000 direct labor hours. The balance in over- or underapplied overhead is deemed to be small. The following information was compiled before an adjustment had been made to close Manufacturing Overhead Control:

1. $1,434,576
2. $1,655,280
3. $1,487,683
4. $1,434,680

151. Mirada Manufacturing produces pumps for residential swimming pools. For the year, management estimated that total manufacturing overhead would be $1,488,000. Management decided to use direct labor hours to apply manufacturing overhead and budgeted 62,000 direct labor hours. The balance in over- or underapplied overhead is deemed to be small. The following information was compiled before an adjustment had been made to close Manufacturing Overhead Control:

For the year, manufacturing overhead was

a. $220,704 underapplied

b. $220,704 overapplied

c. $144,976 overapplied

d. $144,976 underapplied

$1,655,280 − $1,434,576 = $220,704 overapplied

152. Dawn Manufacturing produces industrial light fixtures. For the year, management estimated that total manufacturing overhead would be $1,120,000. Management decided to use direct labor hours to apply manufacturing overhead and budgeted 144,600 direct labor hours. The following information was compiled before an adjustment had been made to close Manufacturing Overhead Control:

For the year, manufacturing overhead was underapplied by $220,000. If Dawn prorates the underapplied overhead, what is the ending balance of the Finished Goods Inventory? Use 4 decimals for the rate.

1. $403,456
2. $462,284
3. $461,184
4. $404,556

0.1337 × $220,000 = $29,414

$432,870 + $29,414 = $462,284

153. Dawn Manufacturing produces industrial light fixtures. For the year, management estimated that total manufacturing overhead would be $1,120,000. Management decided to use direct labor hours to apply manufacturing overhead and budgeted 144,600 direct labor hours. The following information was compiled before an adjustment had been made to close Manufacturing Overhead Control:

For the year, manufacturing overhead was overapplied by $340,000. If Dawn prorates the overapplied overhead, what is the ending balance of Cost of Goods Sold? Use four decimal places for the rate.

1. $2,586,686
2. $2,095,114
3. $2,577,608
4. $2,104,192

0.7229 × $340,000 = $245,786; $2,340,900 − $245,786 = $2,095,114

154. Dusk Industries produces industrial convection ovens. For the year, management estimated that total manufacturing overhead would be $3,079,980. Management decided to use direct labor hours to apply manufacturing overhead and budgeted 144,600 direct labor hours. The following information was compiled before an adjustment had been made to close Manufacturing Overhead Control:

If Dusk closes the entire amount of under- or overapplied overhead to Cost of Goods Sold, what will be the ending balance in that account?

1. $4,846,610
2. $4,830,422
3. $4,897,578
4. $4,864,000

155. Dusk Industries produces industrial convection ovens. For the year, management estimated that total manufacturing overhead would be $2,978,760. Management decided to use direct labor hours to apply manufacturing overhead and budgeted 144,600 direct labor hours. The following information was compiled before an adjustment had been made to close Manufacturing Overhead Control:

If Dusk closes the entire amount of under- or overapplied overhead to Cost of Goods Sold, what was the ending balance in that account?

1. $4,795,826
2. $4,932,174
3. $4,780,170
4. $4,947,830

Answers to Multiple-Choice Questions

MATCHING

156. Match the following terms to the appropriate statement by placing the letter to the left of each statement.

1. c – Factory burden
2. i – Product costs
3. j – Work in Process
4. f – Overhead application
5. b – Cost of Goods Manufactured
6. a – Application base
7. g – Predetermined overhead rate
8. e – Overapplied overhead
9. d – Job order sheet
10. h – Period cost

BRIEF EXERCISES

1. Complete the table below by placing an “X” under each heading that classifies the cost (Items may be under more than one classification).

1. Classify the following costs incurred by a Toyota manufacturing plant as product or period costs by placing an “X” in the appropriate columns. Identify whether the product costs are direct materials, direct labor, or overhead.

1. Identify which of the following items would be classified as direct material or direct labor by Bassett Furniture Company by placing an “X” in the appropriate column.

1. Classify the following costs incurred by a Westwind Boat Company’s manufacturing plant as product or period costs by placing an “X” in the appropriate column.

1. Classify the following costs incurred by Roper Dress Manufacturing Company by both behavior and function by placing an “X” in the appropriate columns.

162. Classify the following costs incurred by Freestone Manufacturing Company by both behavior and function by placing an “X” in the appropriate columns.

1. The following information relates to the 2020 operations of Adler’s Company:

Finished Goods Inventory, beginning $ 90,000

Finished Goods Inventory, ending 83,000

Cost of goods available for sale 230,000

Required:

1. What is Adler’s cost of goods manufactured for the year?
2. What is Adler’s Cost of Goods Sold for the year?
3. $230,000 − $90,000 = $140,000 cost of goods manufactured
4. $90,000 + $140,000 − $83,000 = $147,000 Cost of Goods Sold
5. The following information relates to the 2020 operations of Ace Manufacturing Company.

Finished Goods Inventory , beginning $ 99,000

Finished Goods Inventory , ending 104,000

Cost of goods available for sale 250,000

Required:

1. What is Ace’s cost of goods manufactured for the year?
2. What is Ace’s Cost of Goods Sold for the year?
3. $250,000 − $99,000 = $151,000 cost of goods manufactured
4. $99,000 + $151,000 − $104,000 = $146,000 Cost of Goods Sold
5. Velton Corporation produces toddlers’ plastic slides. In preparing the current budget, Velton’s management chooses to use an overhead base of direct labor hours. Velton estimates a total of $300,000 in manufacturing overhead costs and 5,000 direct labor hours for the coming year. In December, Velton’s controller reported actual manufacturing overhead incurred of $320,000 and 4,900 direct labor hours used during the year.

Required:

1. What is Velton’s predetermined overhead rate for the year?
2. How much manufacturing overhead did Velton apply during the year?
3. $300,000 ÷ 5,000 = $60 per direct labor hour
4. $60 × 4,900 = $294,000
5. Jeffery Hospital Equipment Manufacturing Company produces high-technology equipment used to monitor brain activity. In preparing the current budget, Jeffery’s management chooses to use an overhead base of machine hours. Jeffery estimates a total of $750,000 in manufacturing overhead costs and 15,000 machine hours for the coming year. In December, Jeffery’s controller reported actual manufacturing overhead incurred of $820,000 and 15,300 machine hours used during the year.

Required:

1. What is Jeffery’s predetermined overhead rate for the year?
2. How much manufacturing overhead did Jeffery apply during the period?
3. $750,000 ÷ 15,000 = $50 per machine hour
4. $50 × 15,300 = $765,000

EXERCISES

1. Santa’s Toy Company makes retro wooden toys. The company also maintains retail stores throughout the Southeastern United States. Classify each of the following costs as a product or period cost.
2. Elm wood used in the production of toys
3. Wood glue used to in the production of toys
4. Salaries of the district sales managers
5. Rent on factory building
6. Depreciation on machinery used in production of toys
7. Rent on retail stores
8. Salary of production manager
9. Cost of delivering toys to retail stores
10. Paint used in the production of toys
11. Depreciation on CEO’s mahogany office furniture
12. Product
13. Product
14. Period
15. Product
16. Product
17. Period
18. Product
19. Period
20. Product
21. Period
22. Santa’s Toy Company makes retro wooden toys. The company also maintains retail stores throughout the Southeastern United States. Classify each of the following costs as a product or period cost.
23. Depreciation on delivery truck
24. Rent on factory building
25. Cost of online advertising
26. Cost of sandpaper used to sand wooden parts of toys
27. Depreciation on lathe used in the production of toys
28. Wages for sales staff in retail stores
29. Cost of lease for retail space at the local malls
30. Utility costs for factory building
31. Cost of supplies used in the corporate office
32. Insurance coverage for the corporate office
33. Period
34. Product
35. Period
36. Product
37. Product
38. Period
39. Period
40. Product
41. Period
42. Period
43. Sue’s Lakeside Ice Cream Shop makes and sells frozen treats at a lakeside resort. Sue has two full-time employees who make the treats at a facility rented near the lake. The treats are then delivered to the ice cream shop where Sue sells them. Indicate whether each of the following costs that Sue might incur would be considered a product cost. If the cost is a product cost, classify it as direct materials, direct labor, indirect materials, indirect labor, or manufacturing overhead. If the cost is not a product cost, classify it with N/A.
44. Cost of ice used to freeze ice cream
45. Purchase price of a van to deliver treats to the shop
46. Electricity used to run the ice cream machines
47. Salary of the two employees making the treats
48. Sue’s salary
49. Rent on the ice cream shop
50. Rent on the facility where the treats are made
51. Cost of ice cream cones
52. Cost of flyers distributed to all lakefront cottages to advertise Sue’s Lakeside Ice Cream Shop
53. Cost of napkins available to customers
54. Product, manufacturing overhead
55. N/A
56. Product, manufacturing overhead
57. Product, direct labor
58. N/A
59. N/A
60. Product, manufacturing overhead
61. Product, direct material
62. N/A
63. N/A
64. Classify the following costs as product or period costs by placing an “X” in the appropriate columns.

1. Ethan Allen Interiors, Inc. is a leading manufacturer and retailer of furniture and home decorating accessories. Classify the following costs by placing an “X” in the appropriate columns.

1. Logan’s Enterprises reported the following data for May.

Required:

1. What is the cost of direct materials were used in production?
2. What are the total manufacturing costs for the month of May?
3. What is the ending balance in the Finished Goods Inventory account?
4. $45,000 + $92,000 − $47,000 = $90,000
5. $48,000 + $42,000 + $90,000 = $180,000
6. $62,000 + $200,000 − $220,000 = $42,000
7. The following data has been taken from the accounting records of Curtis Manufacturing Company for the current year:

Required:

1. Compute the cost of direct materials moved into production during the period.
2. Compute the cost transferred to Finished Goods Inventory during the period.
3. Compute the Cost of Goods Sold during the period.
4. $20,000 + $350,000 − $25,000 = $345,000
5. $47,000 + $345,000 + $60,000 + $120,000 − $32,000 = $540,000
6. $75,000 + $540,000 − $82,000 = $533,000
7. Bluegill, Inc. produces spin cast fishing reels. The company’s controller has provided you with the following information.

Required:

Using the above cost information, prepare a cost of goods manufactured schedule.

*$75,000 + $847,000 − $69,000 = $853,000

1. Purple Bear, Inc. produces boat motors. Janice Smyth, the company’s controller has provided you with the following information.

Required:

Using the cost information, prepare a cost of goods manufactured schedule.

*$78,000 + $850,000 − $72,000 = $856,000

176. Adams Corporation manufactures stained glass windows. Since each job is unique in color and design, Adams uses a job-order costing system. Adams has provided you with the following January 1, 2021 account balances.

During 2021, the following transactions occurred:

1. Adams purchased raw materials for $160,000 on account
2. Adams used $150,000 of raw materials in production. Eighty percent were direct materials and 20 percent were indirect materials.
3. $69,000 of direct labor and $27,000 of indirect labor was incurred and paid.
4. Other manufacturing overhead incurred on account totaled $52,000.
5. Adams completed production on goods costing $280,000.
6. Adams sales revenue was $510,000. All goods were sold on account.
7. Adams’ Cost of Goods Sold was $320,000 before adjusting for over-/underapplied overhead.
8. Adams applies overhead at 200% of direct labor cost.
9. Adams collected $530,000 from customers and paid $140,000 to vendors.
10. Adams closes over-/underapplied overhead to Cost of Goods Sold.

Required:

1. Record the transactions in the appropriate T-accounts and calculate the ending balances at December 31, 2021.
2. Calculate total manufacturing costs for 2021.

a.

1. $120,000 + $69,000 + $138,000 = $327,000
2. Brown Company makes copper fire pits. Each job is unique in size and design. Brown has provided you with the following January 1, 2021 account balances.

During 2021, the following transactions occurred:

1. Brown purchased raw materials for $125,000 on account.
2. Brown used $150,000 of raw materials in production. Ninety percent were direct materials and 10 percent were indirect materials.
3. $72,000 of direct labor and $30,000 of indirect labor was incurred and paid.
4. Other manufacturing overhead incurred and paid totaled $55,000.
5. Brown completed production on goods costing $275,000
6. Brown’s sales revenue was $520,000. All goods were sold on account.
7. Brown’s Cost of Goods Sold was $330,000 before adjusting for over- or underapplied overhead.
8. Brown applies overhead at 150% of direct labor cost.
9. Brown collected $530,000 from customers and paid $140,000 to vendors.
10. Brown closes over- or underapplied overhead to Cost of Goods Sold.

Required:

1. Record the transactions in the appropriate T-accounts and calculate the ending balances at the end of 2021.
2. Calculate total manufacturing costs for 2021.

1. $135,000 + $72,000 + $108,000 = $315,000
2. Belhaven Company produces “collapse-proof” rod and reel cases. In preparing the current budget for the year, Belhaven’s controller estimates a total of $400,000 in direct materials cost, $300,000 in direct labor cost, and $300,000 in manufacturing overhead costs. Since the manufacturing process is highly automated, the company uses machine hours as the overhead application base. Estimated machine hours total 12,000. At the end of the period, Belhaven reported actual results as follows: direct materials cost of $410,000, direct labor cost of $250,000, manufacturing overhead cost $310,000, and machine hours used 12,500.

Required:

1. What is Belhaven’s predetermined overhead rate for the year?
2. How much manufacturing overhead did Belhaven apply to jobs during the year?
3. If over- or underapplied overhead is closed to Cost of Goods Sold, what is the balance in the Manufacturing Overhead account after the adjustment?
4. $300,000 ÷ 12,000 = $25 per machine hour
5. $25 × 12,500 = $312,500
6. $0
7. Milsaps Company produces makeup mirrors. In preparing the current year’s budget, Milsaps’ controller estimates a total of $300,000 in direct materials cost, $220,000 in direct labor cost, and $330,000 in manufacturing overhead costs. Since much of the production process requires skilled workers to assemble the mirrors, direct labor cost is used as the overhead application base. At the end of the year, Milsaps reported actual results as follows: direct materials cost of $290,000, direct labor cost of $210,000, and manufacturing overhead cost $310,000.
8. What is Milsaps’ predetermined overhead rate for the year?
9. How much manufacturing overhead did Milsaps apply during the year?
10. What is the journal entry to close overhead if the amount is considered to be insignificant?
11. $330,000 ÷ $220,000 = $1.50 per direct labor cost
12. 150% × $210,000 = $315,000
13. $310,000 – ($1.50 × 210,000)

Manufacturing Overhead 5,000

Cost of Goods Sold 5,000

1. Flat Water Boating Company produces standup paddleboards. The company uses a job order costing system. During the period, the company incurred the following costs to complete job #322: direct materials, $52,000 and direct labor, $37,000. The company also incurred $14,000 of administrative costs and $8,000 of selling costs to complete this job. Job #322 required 1,600 machine hours. Factory overhead was applied to the job at a rate of $25 per machine hour. If job #322 resulted in 150 paddleboards, what was the Cost of Goods Sold per paddleboard?

Direct materials $ 52,000

Direct labor 37,000

Manufacturing overhead ($25 × 1,600) 40,000

Total $129,000

Per unit - $129,000 ÷ 150 = $860 per unit

1. Luxury Bath Company produces Japanese-style soaking bath tubs. The company uses a job order costing system. During the period, the company incurred the following costs to complete job #SIS423: direct materials, $110,000 and direct labor, $128,000. The company also incurred $14,000 of administrative costs and $18,000 of selling costs to complete this job. Job #SIS423 required 10,600 machine hours. Factory overhead was applied to the job at a rate of $20 per machine hour. If job #SIS423 resulted in 1,800 soaking tubs, what was the unit Cost of Goods Sold ?

Direct materials $110,000

Direct labor 128,000

Manufacturing overhead ($20 × 10,600) 212,000

Total $450,000

Cost per unit = $450,000 ÷ 1,800 = $250 per unit

PROBLEMS

182. Asheville Office Equipment, Inc. manufactures custom filing cabinets. Alma Ortiz, president of Asheville Office Equipment, Inc., has gathered the following cost information from the company’s accounting records for the latest month of operations.

Advertising $15,000

Fire insurance premium for the factory equipment    5,000

Sales office depreciation    2,000

Oil for the machines used to produce the cabinets   1,500

Wood used to produce the cabinets 30,000

Property taxes on the factory building   8,000

Freight to ship the cabinets to customers   2,500

Sales department salaries 34,000

Production supervisors’ salaries 18,000

Assembly line workers’ wages 45,000

Required:

1. Calculate the total period costs for the month.
2. Calculate the total product costs for the month.
3. Calculate the amount of manufacturing overhead incurred for the month.

183. Barr Manufacturing produces protective covers for eBookReaders. Since the covers must be customized to each eBookReaders model, Barr uses a job order costing system. On October 1, the company reported the following inventory balances:

Direct Materials Inventory $  30,000

Work in Process Inventory 145,000

Finished Goods Inventory 250,000

During October, the following events occurred:

1. Barr purchased direct materials costing $410,000 on account.
2. Barr used $425,000 in direct materials in production.
3. Barr’s employees clocked 17,000 direct labor hours at an average wage rate of $10.00 per direct labor hour.
4. The company incurred $169,000 in manufacturing overhead, including $20,000 in indirect labor costs.
5. Using direct labor hours as the application base, the company applied $162,000 of manufacturing overhead to jobs worked on in October.
6. The company completed production on jobs costing $860,000.
7. The company delivered jobs costing $1,070,000 to customer.

Required:

1. Calculate the ending October balance of the Direct Materials, Work in Process, and Finished Goods Inventory accounts.
2. Calculate total manufacturing costs for October.

a.

b. $425,000 + $170,000 + $162,000 = $757,000

184. Ignatenko Company manufactures a line of lightweight running shoes. CEO Alona Ignatenko estimated that the company would incur $2,400,000 in manufacturing overhead during the coming year. Additionally, she estimated the company would operate at a level requiring 200,000 direct labor hours and 500,000 machine hours.

Required:

1. Assume that Ignatenko Company uses direct labor hours as its manufacturing overhead application base. Calculate the company’s predetermined overhead rate.
2. Assume that job 3574 required 250 direct labor hours to complete. How much manufacturing overhead should be applied to the job?
3. Assume that Ignatenko Company used machine hours as its manufacturing overhead application base. Calculate the company’s predetermined overhead rate.
4. Assume that job 3574 required 600 machine hours to complete. How much manufacturing overhead should be applied to the job?
5. $2,400,000 ÷ 200,000 DLH = $12.00 per DLH
6. 250 DLH × $12.00 = $3,000
7. $2,400,000 ÷ 500,000 machine hours = $4.00 per machine hour
8. 600 DLH × $4.80 = $2,880

185. Windows of the World (WOW) produces decorative windows in several styles and finishes. The company uses a job order costing system to accumulate product costs. Because much of the production process is automated, WOW has selected machine hours as its overhead application base.

During May, WOW worked on three jobs. Job 69 was started in April and completed and delivered to customers in May. Job 70 was started and finished in May, and at the end of May, the windows from the job were in the warehouse. Job 71 was started but not completed at the end of May.

Required

1. Calculate the total manufacturing cost for May.
2. Calculate the total cost of each of the three jobs as of the end of May.
3. Calculate the balance in the Work in Process Inventory account at the end of May.
4. Calculate the cost of goods manufactured for May.
5. Calculate the Cost of Goods Sold for May.
6. Calculate the Finished Goods Inventory balance at the end of May.
7. Total manufacturing cost for May is $103,675 and consists of all costs added to production for all jobs during the month of May.

^a Overhead is applied using the rate from April. The rate can be calculated using Job 69 as

$450 ÷ 10 MH = $45.00 per machine hour

Applied overhead during May

Job 69: 600 MH × $45 MH = $27,000

Job 70: 500 MH × $45 MH = $22,500

Job 71: 15 MH × $45 MH = $675

b.

c. Since the only job still in process at the end of May is Job 71, Work in Process Inventory at the end of May is $5,175.

d. Cost of goods manufactured includes all costs for the jobs completed during May and transferred to Finished Goods Inventory: Jobs 69 and 70.

$67,450 + $42,500 = $109,950

1. Cost of Goods Sold includes all costs for the job sold during May:

Job 69 = $67,450

1. Finished Goods Inventory is the $42,500 total cost of Job 70, the only job at the end of May that has been completed, but not yet sold.

186. Ignatenko Company estimates it will incur $2,400,000 in manufacturing overhead during the coming year. Additionally, it is estimated the company will operate at a level requiring 200,000 direct labor hours and 500,000 machine hours. At the end of the year Ignatenko had worked 203,000 direct labor hours, used 450,000 machine hours, and incurred $2,510,000 in manufacturing overhead.

Required:

1. If Ignatenko Company used direct labor hours as its manufacturing overhead application base, how much overhead was applied to jobs during the year?
2. Using direct labor hours as the application base, was manufacturing overhead under-or overapplied for the year? By how much?
3. If Ignatenko Company used machine hours as its manufacturing overhead application base, how much overhead was applied to jobs during the year?
4. Using machine hours as the application base, was manufacturing overhead under-or overapplied for the year? By how much?
5. $2,400,000 ÷ 200,000 = $12.00 per DLH

203,000 DLH × $12 per DLH = $2,436,000

1. Applied overhead $2,436,000

Actual overhead 2,510,000

Underapplied overhead $      74,000

c. $2,400,000 ÷ 500,000 = $4.80 per DLH

450,000 MH × $4.80 per MH = $2,160,000

d. Applied overhead $2,160,000

Actual overhead   2,510,000

Underapplied overhead $   350,000

187. Athletic Gen Inc. has determined the following unit costs and selling price for each of its products:

On May 31, Athletic Gen Inc.’s Work in Process Inventory consisted of the following items:

During June, a total of $190,590 in direct materials and $76,200 in direct labor costs were incurred. Units finished and sold during June were as follows:

Required

a. Given that Athletic Gen Inc. uses direct labor dollars as its application base, what is the company’s predetermined overhead rate?

b. Calculate the total manufacturing cost for June.

c. Calculate the cost of goods manufactured for June.

d. Calculate the ending Work in Process Inventory balance on June 30.

e. Calculate Cost of Goods Sold for June.

1. Using cost of shorts:

$2.50 × POR = $3.00

 POR = 120% per direct labor cost

b.

c.

d.

e.

1. Leisure World produces folding padded hammocks. The hammocks are heavy duty and weather resistant. Each hammock comes with steel tubing frame. Give three specific examples (not categories) of products costs that are incurred in the production of the hammocks.

Examples of product cost might include direct materials of fabric, steel tubing, chain connectors to attach hammock to frame; direct labor might include the assembly line workers’ salaries, and overhead items might include indirect materials such as glue, bolts and paint, factory utilities, depreciation on factory equipment, and supervisor salaries.

1. Describe the three major categories of product cost and explain why some raw materials costs and some labor costs are treated as manufacturing overhead.

The three major categories of product costs are direct materials, direct labor, and manufacturing overhead. Direct materials are those materials that can be directly traced to, or easily identified with, the final product. An example is fabric in shirts, wood in furniture, or milk in ice cream. Direct labor costs are the wages (and possibly benefits) paid to the workers who transform direct materials into a finished product. An example of direct labor is the salary of assembly line workers at a Ford Motor Company plant. Manufacturing overhead costs are indirect product costs that arise in the manufacturing process that cannot easily be traced to a unit of product. Within overhead, indirect labor costs are incurred. They are not considered to be direct labor because they cannot be easily traced to a specific product. Examples might be supervisor salaries, security guard salary, utility costs of the factory or insurance on the factory building.

1. What is the nature of cost of goods manufactured? How does it differ from total manufacturing cost? How are the cost of goods manufactured and the total manufacturing cost used in the schedule of cost of goods manufactured?

The cost of goods manufactured is the total cost of all goods completed during the period, whether or not it was started during the period. It differs from total manufacturing costs. Total manufacturing cost is the sum of direct materials used in production, direct labor and manufacturing overhead applied for the period. The first step in the schedule of cost of goods manufactured is to add the current period direct materials used, direct labor incurred, and overhead with the sum being total manufacturing costs. Beginning Work in Process inventory is added to total manufacturing costs and ending Work in Process Inventory is deducted to calculate the cost of goods manufactured.

1. What events increase the following accounts: Raw Materials Inventory, Work in Process Inventory, Finished Goods Inventory, Manufacturing Overhead, and Cost of Goods Sold?

Raw Materials Inventory is increased with the purchase of materials.

Work in Process Inventory is increased as direct material and direct labor is added to the production process and when overhead is applied to products.

Manufacturing overhead is increased as indirect material and indirect labor are added to the production process and when other overhead costs such as those costs related to the factory are incurred.

Finished Goods Inventory is increased as goods are completed and moved out of Work in Process Inventory.

Cost of Goods Sold is increased when finished goods are sold and when the Manufacturing Overhead account is adjusted due to underapplied overhead.

1. What items decrease the following accounts: Raw Materials Inventory, Work in Process Inventory, Finished Goods Inventory, Manufacturing Overhead, and Cost of Goods Sold?

Raw Materials Inventory is decreased when direct materials or indirect materials are used in production.

Work in Process Inventory is decreased as the production process is completed and the cost of goods is moved to Finished Goods Inventory.

Finished Goods Inventory is decreased when goods are sold.

Cost of Goods Sold is decreased when the manufacturing overhead account is adjusted due to overapplied inventory.

1. Why must manufacturing overhead be allocated? What is the predetermined overhead rate and how is it calculated?

Because of the lack of traceability, manufacturing overhead must be divided among the different jobs or products a company produces during the year. This is called overhead application. Overhead is allocated because (1) the actual overhead may not be known at the time a job is being worked on, (2) some overhead costs are seasonal, and (3) overhead includes some fixed costs which are not related to the number of units produced. The predetermined overhead rate is a rate used to assign overhead costs to products and jobs. The rate is calculated by dividing estimated manufacturing overhead by the budgeted activity level of application base.

1. Describe why companies that use job order costing have over- or underapplied overhead. List the two methods used to dispose of any over- or underapplied overhead.

Companies have overapplied overhead when actual overhead costs incurred are less than the amount of overhead applied to jobs using a pre-determined overhead rate. Underapplied overhead results from actual overhead costs incurred being more than applied overhead. There are two common methods of disposing of any over- or underapplied overhead. If the underapplied or overapplied manufacturing overhead is relatively large, the appropriate treatment is to prorate the amount to all the accounts that contain applied overhead – Work in Process, Finished Goods, and Cost of Goods Sold. If the amount is small, it is closed to Cost of Goods Sold.

ESSAY

1. Students who have not taken an accounting class may not understand what is included in the cost of a product. Explain the three product cost classifications, the three manufacturing overhead cost classifications, and the difference in product and period costs.

The three product cost classifications are direct material, direct labor, and manufacturing overhead. Direct materials are those materials that can be directly traced to, or easily identified with, the final product. For example, the fabric in a t-shirt is a direct material. Direct labor costs include the wages and possibly benefits paid to the workers who transform direct materials into finished products. For labor to be considered direct, the worker must actually have his or her hands on the product or on the machine as the product is being made. Direct labor workers can easily trace the time they spend working on a particular product. For example, the wages of assembly-line workers are classified as direct labor.

Manufacturing overhead costs include the indirect product costs that arise in the manufacturing process. Examples of overhead costs include indirect material, indirect labor, and general factory or production-related costs such as electricity, insurance, etc.

A product cost includes direct material, direct labor and manufacturing overhead. Product costs include all costs necessary to produce a product and get it ready to sell. Product costs are included in one of three inventory accounts on the balance sheet – Raw Materials, Work-in-Process, or Finished Goods – until the product is sold. At that time the cost of the product is moved to the income statement as Cost of Goods Sold. A period cost is any cost that is not a product cost. Period costs are expensed as they are incurred (with the passage of time) and are classified as selling or administrative costs.

1. Assume you have recently accepted a position as cost accountant for a large manufacturing company. The sales manager approaches you immediately about a particular product the company sells and expresses his belief that the product is overpriced and impossible to sell unless you do something to make it more marketable. You are not aware of any environmental or technology issues with the product that would inhibit its sales. Discuss four things you would do to investigate the concern expressed by the sales manager. Include more than just cost issues in your discussion.
2. Investigate material costs. Possibly too much material is being used because of poor quality or the quality may be adequate, but the price paid for materials may be too high. Discuss the issue with the purchasing manager to make sure discounts are being negotiated and the best product is being purchased for the lowest price possible. Also look at the material usage. For instance, is the material secure after it is removed from the storeroom (after it has been charged to the job), check for material waste, and discuss the issue with the plant supervisor to seek information about the amount of material used in a product.
3. Too much labor may be charged to the product because labor rates are too high or workers spend too much time on the job. Possibly do some time studies to ensure that products are flowing through the production process efficiently so time is not wasted. In addition, verify that the wage rates are accurate and that no wages are being charged to the product that should be charged to other products.
4. Predetermined overhead rates should be investigated to ensure proper allocation of overhead to products. Make sure the application base is appropriate for the allocation of overhead to products. You might also investigate the use of activity-based costing. Analyze all the overhead costs to ensure that period costs are not being charged to overhead in error.
5. Even if the cost is appropriate, investigate the selling price. Find out if the markup percentage is in line with other products. Determine if competitors are selling the product at a lower price.
6. Consider the possibility that the sales manager has a hidden agenda for his accusations. For example, does he have a reason to want the sales price of the product lowered? Is his major customer his brother?
7. Explain the flow of a product through the production process. In your explanation include the events that increase and decrease each inventory account. In addition, discuss the effect of transactions related to the flow of products on the balance sheet and income statements.

A product begins with raw materials. Raw materials are purchased from suppliers and their cost is added to the Raw Materials Inventory account. As a product is begun, the Raw Materials Inventory account is decreased and Work in Process Inventory is increased for cost of the direct materials used in production, and Manufacturing Overhead is increased for indirect materials used in production. As labor is incurred, direct labor is charged to Work in Process (increased) and indirect labor is charged to Manufacturing Overhead. Manufacturing overhead is added to Work in Process by applying the predetermined overhead rate by the application base (activity). As products are completed, Work in Process Inventory is decreased and Finished Goods Inventory is increased by the cost of the completed products. When products are sold, Finished Goods Inventory is decreased and Cost of Goods Sold is increased by the cost of the completed products. If manufacturing overhead is overapplied or underapplied, the balance is closed at the end of the period by increasing or decreasing Cost of Goods Sold if the amount is insignificant, or prorated among Work in Process, Finished Goods and Cost of Goods Sold if the amount is large. Raw Materials Inventory, Work in Process Inventory, and Finished Goods Inventory are assets, shown on the balance sheet. As goods are sold, Cost of Goods Sold is increased on the Income Statement.

1. Your friend who has just completed the first accounting course understands the items that appear on the balance sheet and income statement. However, when you told her your homework involved preparing a Schedule of Cost of Goods Manufactured she was confused and ask if that was the Cost of Goods Sold that appears on the income statement. Explain to your friend the purpose of the Schedule of Cost of Goods Manufactured, how it is prepared, and its relationship to the balance sheet and income statement.

The Schedule of Cost of Goods Manufactured is helpful in calculating the cost of goods manufactured. The schedule sounds complex and intimidating, but it is nothing more than a restatement of the Work in Process Inventory account. To prepare the schedule, begin with the total manufacturing costs incurred during the period – direct materials used in production, direct labor incurred, and manufacturing overhead applied. To that total, add the beginning balance in the Work in Process Inventory account. Finally, subtract the ending balance in the Work in Process Inventory account. The remaining amount is the cost of goods manufactured. Its relationship to the income statement is that the cost of goods manufactured is used in the calculation of Cost of Goods Sold That is, add cost of goods manufactured to beginning Finished Goods and deduct ending Finished Goods to determine Cost of Goods Sold . The relationship to the balance sheet is that calculating cost of goods manufactured requires adding beginning Work in Process inventory and deducting ending Work in Process inventory. Ending inventories for Raw Materials, Work in Process, and Finished Goods all appear as current assets on the balance sheet.

1. Companies that use job order costing often have under- or overapplied overhead. Discuss three reasons to apply overhead and explain how overhead is applied. Give two reasons why overhead might be under- or overapplied and discuss the two methods companies use to dispose of under- or overapplied overhead.

Because overhead is not easily traceable to a particular job or product, overhead must be divided among the different jobs or products during the year. Dividing or allocating overhead to various jobs is called overhead application.

Three reasons to allocate overhead are (1) the amount of overhead actually incurred may not be known at the time a job is being worked on, (2) some overhead costs are seasonal and should be spread over production for the entire year, and (3) fixed manufacturing overhead costs are not related to the number of units products and should be spread among all units produced.

Overhead is applied using a predetermined overhead rate. The rate is calculated by dividing the estimated overhead costs for the period by the total estimated application base. Reasons why overhead does not equal actual overhead might be that the estimated overhead failed to include some items that would be incurred or included some items that should not be incurred, the application base was not appropriate (did not drive overhead costs), or that unexpected actual overhead occurred. If manufacturing overhead is overapplied or underapplied, the balance is closed at the end of the period by increasing or decreasing Cost of Goods Sold if the amount is insignificant, or prorated among Work in Process, Finished Goods, and Cost of Goods Sold if the amount is large.