CHAPTER 3

JOB-ORDER COST ACCOUNTING

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, BLOOM’S TAXONOMY, LEVEL OF DIFFICULTY, AACSB CODES, AND CPA CODES

Bloom’s: AN = Analysis AP = Application C = Comprehension E = Evaluation

K = Knowledge

LOD: E = Easy M = Medium H = Hard

AACSB: AN = Analytic

CPA: MA = Management Accounting

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, BLOOM’S TAXONOMY, LEVEL OF DIFFICULTY, AACSB CODES, AND CPA CODES (CONT’D)

Bloom’s: AN = Analysis AP = Application C = Comprehension E = Evaluation

K = Knowledge

LOD: E = Easy M = Medium H = Hard

AACSB: AN = Analytic

CPA: MA = Management Accounting

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, BLOOM’S TAXONOMY, LEVEL OF DIFFICULTY, AACSB CODES, AND CPA CODES (CONT’D)

Bloom’s: AN = Analysis AP = Application C = Comprehension E = Evaluation

K = Knowledge

LOD: E = Easy M = Medium H = Hard

AACSB: AN = Analytic

CPA: MA = Management Accounting

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Note: TF = True-False C = Completion BE = Brief Exercise

MC = Multiple Choice Ex = Exercise SAE = Short-Answer Essay

Ma = Matching MP = Multi-Part

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE (CONT’D)

Note: TF = True-False C = Completion BE = Brief Exercise

MC = Multiple Choice Ex = Exercise SAE = Short-Answer Essay

Ma = Matching MP = Multi-Part

CHAPTER LEARNING OBJECTIVES

1. Explain the characteristics and purposes of cost accounting.

Cost accounting focuses on the procedures for measuring, recording, and reporting product costs. From the data accumulated, the total cost and the unit cost of each product are determined. The two basic types of cost accounting systems are job-order cost and process cost.

2. Describe the flow of costs in a job-order cost accounting system.

In job-order cost accounting, manufacturing costs are first accumulated in three accounts: Raw Materials Inventory, Factory Labour, and Manufacturing Overhead. The accumulated costs are then assigned to Work in Process Inventory and eventually to Finished Goods Inventory and Cost of Goods Sold.

3. Use a job cost sheet to assign costs to work in process.

A job cost sheet is a form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job. Job cost sheets make up the subsidiary ledger for the Work in Process Inventory control account.

4. Demonstrate how to determine and use the predetermined overhead rate.

The predetermined overhead rate is based on the relationship between estimated annual overhead costs and estimated annual operating activity.

This is expressed in terms of a common activity base, such as direct labour cost. The rate is used in assigning overhead costs to work in process and to specific jobs.

5. Prepare entries for manufacturing and service jobs completed and sold.

When jobs are completed, the cost is debited to Finished Goods Inventory and credited to Work in Process Inventory. When a job is sold, the entries are as follows: (a) debit Cash or Accounts Receivable and credit Sales for the selling price, and (b) debit Cost of Goods Sold and credit Finished Goods Inventory for the cost of the goods.

6. Distinguish between under- and over-applied manufacturing overhead.

Under-applied manufacturing overhead is overhead assigned to work in process that is less than the actual overhead costs incurred. Over-applied overhead is overhead assigned to work in process that is greater than the actual overhead costs incurred.

TRUE-FALSE STATEMENTS

1. Cost accounting is primarily concerned with allocating overhead.

2. Costs of jobs are recorded in the period in which the costs are paid.

3. Manufacturing costs are generally recorded and incurred in the same accounting period.

4. Fringe benefits and payroll taxes associated with factory workers should be accumulated as a part of manufacturing overhead.

5. Job cost sheets are often used as a subsidiary ledger for job costs.

6. As manufacturing overhead is incurred, it is added to the individual job.

7. To calculate a predetermined overhead rate, you must multiply the actual activity level by the estimated annual overhead costs.

8. Finished Goods Inventory is a control account that captures individual finished goods information in a Finished Goods subsidiary ledger.

9. Total manufacturing costs for a period consist of the cost of direct materials used, the cost of direct labour incurred, and the actual manufacturing overhead cost incurred during the period.

10. On the financial statements at year end, all product costs are found in Raw Materials Inventory, Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.

ANSWERS TO TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

11. A job-order cost system

a) is most appropriate when products that are produced do not have their own distinguishing characteristics.

b) is appropriate for homogeneous products that are continuously mass produced.

c) and a process cost system are two alternative cost accounting systems.

d) identifies costs related to a particular activity within the production process, such as mixing, or cutting.

12. What does cost accounting measure, record, and report?

a) product costs

b) future costs

c) manufacturing processes

d) managerial accounting decisions

13. Which one of the following is a major purpose of cost accounting?

a) to provide gross profit rates to managers

b) to allocate overhead costs to jobs

c) to classify all costs as direct or indirect

d) to measure, record, and report product costs

14. Which of the following represents the two basic types of cost accounting systems?

a) job-order and process cost systems

b) job-order and job accumulation systems

c) job-order and batch systems

d) process cost and batch systems

15. Which one of the following companies would most likely use a process cost system?

a) a company that makes soup

b) a company that creates advertisement campaigns

c) a company that makes custom designed sailboats

d) a company that paints houses

16. Which of the following would be accounted for using a job-order cost system?

a) the production of paper clips

b) the legal representation of a client

c) the production of toothpaste

d) the production of cans of paint

17. For which one of the following is process costing used?

a) production of products that are unique to each customer

b) production of homes

c) production of products that are similar in nature

d) production of in-ground swimming pools for customers

18. Which one of the following correctly describes job-order costing?

a) It has distinguishing characteristics.

b) A series of connected manufacturing processes is necessary.

c) Homogeneous goods are being produced.

d) Large batches are produced.

19. Which one of the following is an important feature of a job-order cost system?

a) Each job must be completed before a new product order is accepted.

b) Each job consists of features that distinguish it from the next.

c) Each job uses similar processes to produce.

d) Each job has characteristics similar to the next.

20. Which one of the following is a component of cost accounting?

a) It requires GAAP to be applied.

b) It requires cost minimizing principles.

c) It involves measuring product costs.

d) It involves the determination of company profits.

21. What are the two types of cost accounting systems?

a) a process cost system and a production cost system

b) a job-order cost system and a process cost system

c) a job-order cost system and a manufacturing cost system

d) a query cost system and a manufacturing cost system

22. In which type of companies is overhead applied to jobs?

a) manufacturing and service companies

b) only companies that have labour costs associated with products

c) only manufacturing companies

d) primarily service companies

23. Which one of the costs below is NOT considered part of direct labour costs?

a) employer payroll taxes on factory workers

b) gross earnings of the general manager of the plant

c) gross earnings of factory workers

d) fringe benefits

24. Which one of the following types of companies would most likely use a job-order cost system?

a) manufacturer of duct tape

b) producer of movies

c) manufacturer of pencils

d) manufacturer of petroleum

25. What is one of the key distinguishing features that differentiates a job-order costing system from a process costing system?

a) Job-order costing is best suited for small jobs.

b) Process costing emphasizes larger business activities.

c) Process costing is time-based, whereas job-order costing is more item-specific.

d) Process costing is more item-specific, whereas job-order costing is more time-based.

26. Which of the following more closely describes job-order and process accounting differences?

a) Job-order costing is best used when there are more material costs than labour costs involved.

b) Process costing assigns costs to departments, while job-order costing assigns costs to jobs.

c) Process costing emphasizes the application of overheads more than job-order costing.

d) Job-order costing emphasizes the application of overheads more than process costing.

27. For which of the following products would a job-order costing system be appropriate?

a) steel plant that makes one type of steel

b) door and window manufacturer making products like individual windows for houses

c) cement plant where a single identical type of cement product is manufactured

d) soft drink bottling plant where each type of soft drink is produced in a separate batch

28. Why do most manufacturers use a perpetual inventory system?

a) It is a requirement of the Canada Revenue Agency for all Canadian companies.

b) It is a generally accepted accounting principle.

c) It is required for all manufacturers.

d) It is a characteristic of a proper cost accounting system.

29. Which one of the following costs might a job-order cost system attempt to calculate?

a) a cost per overhead hour

b) a cost per product produced

c) a cost per job or batch

d) a cost per dollar of revenue

30. Which of the following is true?

a) The acquisition of raw materials causes the Work in Process Inventory account to increase.

b) The Raw Materials Inventory account is used to recognize all raw materials purchases, purchase returns and allowances, and freight costs related to materials.

c) When raw materials are purchased, the Raw Materials Inventory account is credited.

d) The raw materials account only reflects direct materials.

31. When a job or goods are completed,

a) its cost is removed from the Work in Process Inventory account and added to Cost of Goods Sold.

b) the Finished Goods Inventory account is debited, and the Work in Process Inventory account is credited.

c) its costs are removed from the Finished Goods Inventory account and added to Cost of Goods Sold.

d) the Cost of Goods Sold account is debited and the Work in Process Inventory account is credited.

32. If a manufacturing company acquires raw materials, to what account is the cost of raw materials purchased debited?

a) Raw Materials Purchases

b) Raw Materials Inventory

c) Purchases

d) Work in Process Inventory

33. When manufacturing labour costs are incurred, to what account are they debited?

a) Work in Process Inventory

b) Factory Wages Expense

c) Factory Labour

d) Factory Wages Payable

34. What is unique about the flow of costs in a job-order cost system?

a) Each job is costed separately in a Work in Process Inventory subsidiary ledger account.

b) It involves accumulating material, labour, and manufacturing overhead costs as they are incurred in order to determine the job cost.

c) Job costs cannot be measured until all overhead costs are determined.

d) There are no costs remaining in Work in Process Inventory at year end.

35. What are the two major steps in the flow of costs for a job-order cost system?

a) accumulating and assigning

b) allocating and assigning

c) acquiring and accumulating

d) accumulating and allocating

36. Which of the following statements regarding the Raw Materials Inventory account is correct?

a) Freight costs related to acquiring materials are credited.

b) Purchase returns and allowances are debited.

c) The invoice cost of purchasing materials is debited.

d) Any purchase discounts taken are debited.

37. Which one of the following would most likely be a subsidiary account for Manufacturing Overhead?

a) Insurance

b) Raw Materials Inventory

c) Work in Process Inventory

d) Finished Goods Inventory

38. Which one of the following is a procedure that is part of assigning manufacturing costs in a job-order cost system?

a) adding manufacturing overhead costs to Work in Process Inventory as they are incurred

b) transferring the costs of completed goods out of Finished Goods Inventory

c) adding actual manufacturing overhead costs to jobs

d) adding direct materials costs to Work in Process Inventory as the materials are used

39. Which one of the following is an example of an activity associated with job-order cost flow?

a) having a supervisor responsible for specific inventory functions within the manufacturing process

b) using a job cost accountant to verify accounting records

c) assigning costs to cost of goods sold

d) using inventory item descriptions to track inventory costs

40. Which of the following is true?

a) The Work in Process Inventory account is a subsidiary of the job-order cost sheets control account.

b) There should be a Work in Process Inventory ledger account for each job.

c) The transfer of direct materials to the production area causes an increase in Work in Process Inventory.

d) The Work in Process Inventory account includes actual rather than applied manufacturing overhead.

41. Which of the following is true?

a) In a job-order cost system, each entry to the Raw Material Inventory account should be accompanied by a posting to one or more job cost sheets.

b) When direct materials are requisitioned from the storeroom, the cost of the materials should be removed from the Work in Process Inventory account and added to the job cost sheets for the individual jobs on which the material was used.

c) Materials requisition slips indicate the receipt of materials from a supplier.

d) Upon purchase of raw materials there is no attempt to associate the cost of materials with specific jobs or orders.

42. Which one of the following is NEVER part of recording the issuance of raw materials in a job-order cost system?

a) debit Work in Process Inventory

b) debit Finished Goods Inventory

c) debit Manufacturing Overhead

d) credit Raw Materials Inventory

43. What transaction is recorded when direct labour is assigned to jobs?

a) a debit to Work in Process Inventory and a credit to Factory Labour

b) a debit to Manufacturing Overhead and a credit to Factory Labour

c) a debit to Factory Labour and a credit to Manufacturing Overhead

d) a debit to Factory Labour and a credit to Work in Process Inventory

44. In a job-order cost accounting system, the Work in Process Inventory account is

a) closed at year end.

b) a period cost.

c) an expense.

d) a control account.

45. How does a company most likely maintain its records of individual items of raw materials?

a) using a bar coding system

b) in the Work in Process Inventory control account

c) in the Raw Materials Inventory account in the general ledger

d) in each of the separate job cost records

46. When are costs of raw materials debited to Work in Process Inventory?

a) when the materials are put into production

b) when the bill for the materials is paid

c) when the materials are ordered

d) when the materials are received

47. What is another name for an accounting record of a job?

a) a job cost record

b) a job cost sheet

c) the Work in Process Inventory control account

d) Raw Materials inventory records

48. A company completed all annual postings for its job costs. Which of the following should have the same totals at year end?

a) the cost of materials purchased and the total of the Raw Materials Inventory control account

b) the total of the amount in the Work in Process Inventory subsidiary ledger and the total of the Work in Process Inventory control account l

c) the total of the accounts in the Work in Process Inventory subsidiary ledger and the total of the Raw Materials Inventory control account

d) the cost of materials charged to Work in Process Inventory and the total of the accounts in the Work in Process Inventory subsidiary ledger

49. Factory labour costs

a) omit holiday pay.

b) are equal to the total amounts of the pay cheques the employees receive.

c) are debited to Work in Process Inventory when incurred.

d) include benefits for employees.

50. Which one of the following describes factory labour?

a) It is debited to Manufacturing Overhead when incurred.

b) It is debited to jobs as they are completed.

c) It is an inventory account in a job cost system.

d) It is assigned to Work in Process Inventory or Manufacturing Overhead.

51. Marion Manufacturing has the following labour costs:

Factory—Gross wages $282,000

Factory—Net wages 236,000

Employer Payroll Taxes Payable 46,000

How much should Marion debit to Factory Labour to record these amounts?

a) $518,000

b) $328,000

c) $282,000

d) $564,000

52. Which statement is true with regard to factory labour costs?

a) It represents the net amount paid to factory workers for work on jobs.

b) It is added to the Factory Labour account and later assigned to Work in Process Inventory or Manufacturing Overhead.

c) These costs are accrued before incurred.

d) Amounts incurred during a particular year that have not been allocated to jobs are carried over to the next year.

53. Which transaction is used to recognize the acquisition of raw materials on account?

a) debit to Accounts Payable and credit to Raw Materials Inventory

b) debit to Raw Materials Inventory and credit to Accounts Payable

c) debit to Work in Process Inventory and credit to Accounts Payable

d) debit to Manufacturing Overhead, debit to Raw Materials Inventory, and credit to Accounts Payable

54. To which control account do job cost sheets represent the subsidiary ledger?

a) Cost of Goods Sold

b) Cost of Goods Manufactured

c) Work in Process Inventory

d) Finished Goods Inventory

55. A materials requisition slip showed that total materials requested were $21,250 with $750 of this amount consisting of indirect materials. What entry is made to record the transfer of materials from the storeroom?

a) Work in Process Inventory 20,500

Manufacturing Overhead 750

Raw Materials Inventory 21,250

b) Work in Process Inventory 21,250

Raw Material Inventory 21,250

c) Direct Materials 20,500

Indirect Materials 750

Work in Process Inventory 21,250

d) Manufacturing Overhead 21,250

Raw Materials Inventory 21,250

56. Which one of the following appears on the job cost sheet?

a) the cost to date of all completed jobs

b) the total materials purchased during the year

c) direct materials chargeable to a specific job

d) the total cost of goods sold

57. What does the authorization system for issuing materials include when an effective system of internal control is in place?

a) by utilizing pre-numbered materials requisition slips

b) by acquiring the materials from the delivery driver when the shipment is received from a trucking company

c) by receiving authorization to begin a job from the production supervisor

d) by approval from the accounting department

58. How is the employee time ticket used?

a) It is kept as evidence of payment to employees.

b) It is used only by the production supervisor to track which employees show up for work.

c) It is used as a basis for determining the cost of labour to add to jobs.

d) It is only sent to the accounting department to create pay cheques for employees.

59. Which of the following is true of materials requisition slips?

a) They are prepared after the goods have been sold.

b) They trigger a transaction that increases finished goods inventory.

c) They may indicate indirect materials used in production.

d) They indicate receipt of materials from the supplier.

60. How often are postings to subsidiary accounts in a costing system made?

a) at the end of every accounting period

b) monthly

c) daily

d) weekly

61. Which of the following are found on a labour time ticket?

a) total labour cost to be charged to job for the respective time ticket

b) cost of materials requisitioned for the job

c) estimated labour cost total for a job

d) total labour cost incurred to date for a job

62. Samari Company prepared the entry to assign factory labour to jobs. The costs incurred included direct labour. Which account was debited?

a) Manufacturing Labour

b) Finished Goods Inventory

c) Work in Process Inventory

d) Factory Labour

63. What is the primary role of a job cost sheet?

a) It lists the materials on hand available to be used for jobs.

b) It is the primary accounting record used in assigning costs to jobs.

c) It is used instead of a cost of goods manufactured schedule.

d) It shows the detail of the Manufacturing Overhead Control account.

64. A company incurred indirect labour related to production jobs during 2022. Which account should increase as a result of this cost being incurred?

a) Manufacturing Overhead

b) Operating Expenses

c) The specific jobs recorded on the respective time ticket

d) The Factory Labour account

65. As of December 31, 2022, GloryBe Industries had $1,000 of raw materials inventory. At the beginning of 2022, there was $800 of materials on hand. During the year, the company purchased $122,000 of materials, however paid for only $117,000. How much inventory was requisitioned for use on jobs during 2022?

a) $122,200

b) $117,200

c) $116,800

d) $121,800

66. When determining the cost of jobs, how does a company account for indirect material?

a) It is transferred out of Raw Materials Inventory into Manufacturing Overhead as used.

b) It is transferred out of Raw Materials Inventory into Work in Process Inventory as used.

c) It is added to Work in Process Inventory as used.

d) It remains part of Raw Materials Inventory.

67. Which one of the following best describes a job cost sheet?

a) It is used by management to understand how direct costs affect profitability.

b) It is a daily form that management uses for tracking worker productivity and is used for determining employee raises.

c) It is a form used to record the costs charged to a specific job and to determine the total and unit costs of the completed job.

d) It is used to track manufacturing overhead costs to specific jobs.

68. Which one of the following is a source document that impacts the job cost sheet?

a) labour time tickets

b) finished goods shipping documents

c) raw material receiving slips

d) material purchase orders

69. Which is most often used in a job-order cost system?

a) general ledger accounts only

b) subsidiary accounts only

c) control accounts and subsidiary accounts

d) master accounts and design accounts

70. Which one of the following contains cost information that is added to job cost sheets?

a) invoices, time tickets, and the predetermined overhead rate

b) materials requisition slips, time tickets, and the actual overhead costs

c) materials requisition slips, payroll register, and the predetermined overhead rate

d) materials requisition slips, time tickets, and the predetermined overhead rate

71. Myrna’s Manufacturing calculated its predetermined overhead rate to be 200% of direct materials costs. For the month of July, the company incurred $120,000 of raw material costs, of which $90,000 were direct materials, and $30,000 were indirect materials. Actual overhead incurred was $175,000. What would be the debit entry to the Work in Process Inventory account for July with respect to manufacturing overhead?

a) $175,000

b) $180,000

c) $240,000

d) $0, the account should be credited

72. Which of the following are control accounts?

a) Work in Process Inventory and Manufacturing Overhead

b) Raw Materials Inventory and Wages Payable

c) Factory Labour and Wages Payable

d) Work in Process and Job Revenue

73. In a normal costing system,

a) actual manufacturing overhead costs are recorded in the respective Manufacturing Overhead Expense account as incurred.

b) actual manufacturing overhead costs are recorded as a cost to the specific jobs as incurred.

c) applied manufacturing overhead costs are recorded as debits to the manufacturing overhead account.

d) indirect costs are recorded to jobs based on the predetermined overhead rate times the actual quantity of the activity base.

74. What is the best way to handle manufacturing overhead costs in order to get the most timely job cost information?

a) The company should account for only the direct production costs.

b) The company should apply overhead using an estimated rate throughout the year.

c) The company should add actual manufacturing overhead costs to jobs as soon as the overhead costs are incurred.

d) The company should determine an allocation rate as soon as the actual costs are known, and then apply manufacturing overhead to jobs.

75. When computing the predetermined manufacturing overhead rate, which amount below is most likely used in the numerator?

a) direct labour hours

b) estimated manufacturing overhead costs

c) actual manufacturing overhead costs

d) applied manufacturing overhead costs

76. Which one of the following is a control account?

a) Utilities Expense

b) Payroll Liabilities

c) Manufacturing Overhead

d) Cost of Goods Sold

77. Which of the following statements is correct?

a) Both actual costing and normal costing systems trace direct costs to a cost object by using actual cost data.

b) An actual costing system is timelier than a normal costing system.

c) An actual costing system is less accurate than a normal costing system.

d) Both actual costing and normal costing systems result in the same total cost of production per unit at all points in the production process.

78. What are the two components of a predetermined overhead rate?

a) actual monthly costs and actual annual activity

b) estimated monthly costs and actual monthly activity

c) estimated annual costs and actual activity

d) estimated annual costs and expected annual activity

79. When is the predetermined overhead rate calculated?

a) at the end of the year

b) when each job is completed

c) at the beginning of the year

d) once actual overhead costs are incurred

80. Why do companies choose machine hours as an activity base when calculating a predetermined overhead rate?

a) due to an increase in direct labour costs

b) it is a more reliable source than other activity bases

c) the lack of verifiable hours for direct labour

d) an increasing use of automated manufacturing operations

81. Which one of the following is a common activity base used to calculate the predetermined overhead rate?

a) number of months to complete jobs

b) indirect labour costs

c) direct labour dollars

d) number of jobs completed

82. Why is it necessary to estimate the annual overhead costs and annual operating activity when calculating the predetermined overhead rate?

a) Cost benefit analysis indicates that it is too expensive to gather actual costs.

b) The predetermined overhead rate is only used for internal reporting and does not need to equal the higher standards required for external reporting.

c) In order to obtain timely information, companies cannot wait for actual costs to be determined.

d) all of the above

83. For which one of the following is it not possible to assign costs to jobs as they are incurred?

a) manufacturing overhead

b) direct materials

c) direct labour

d) All of these costs can be assigned based on actual costs.

84. Which one of the following is used to calculate the predetermined overhead rate?

a) applied overhead costs

b) actual overhead costs

c) predetermined overhead costs

d) estimated overhead costs

85. Which one of the following is used in assigning manufacturing costs to work in process inventory?

a) materials purchased invoices

b) finished goods inventory costs

c) actual manufacturing overhead

d) estimated manufacturing overhead

86. Harna, Inc. uses a job-order cost system. During the year, the company decreased Manufacturing Overhead by $300,000. Which of the following is most likely recorded at the same time?

a) a debit to Work in Process Inventory

b) a credit to Raw Materials Inventory

c) a debit to Cost of Goods Manufactured

d) a credit to Finished Goods Inventory

87. Several debits are made to Work in Process Inventory during the year. Which one of the following is NOT likely to be an offsetting credit entry?

a) Manufacturing Overhead

b) Factory Labour

c) Raw Materials Inventory

d) Finished Goods Inventory

88. Which one of the following occurs when assigning manufacturing costs to Work in Process Inventory?

a) The Manufacturing Overhead account is debited.

b) The costs of completed jobs are debited to Work in Process Inventory.

c) No transactions impact the Work in Process Inventory account.

d) The Raw Materials Inventory account is credited as materials are transferred into manufacturing.

89. Which one of the following should be equal to the balance of the Work in Process Inventory account at the end of the period?

a) the total of manufacturing overhead applied to Work in Process Inventory for the period

b) the total manufacturing costs for the period

c) the total of the amounts transferred from raw materials inventory for the current period

d) the sum of the costs shown on the job cost sheets of unfinished jobs

90. Of the three manufacturing costs, which one is the most difficult to assign to a cost object?

a) direct materials

b) direct labour

c) manufacturing overhead

d) They are all equally difficult to assign.

91. Which one of the following describes an activity base?

a) a denominator used by management based on estimated useful lives of the company’s plant assets

b) a measure that is estimated by management based on prior year’s operations

c) a measure that has a correlation with assigning overhead

d) a guess by management on a fair method of applying overhead

92. When a janitor in the production facility incurs labour costs, what occurs?

a) The Work in Process Inventory account increases.

b) Additional Manufacturing Overhead costs are applied.

c) Direct labour is added to Work in Process Inventory.

d) Actual Manufacturing Overhead increases.

93. Which of the following is the best way to handle manufacturing overhead costs in order to obtain the most timely job cost information?

a) The company should apply overhead using an estimated rate throughout the year.

b) The company should determine an allocation rate as soon as the actual costs are known, and then apply manufacturing overhead to jobs.

c) The company should add actual manufacturing overhead costs to jobs as soon as the overhead costs are incurred.

d) The company should account for only the direct production costs.

94. Spice Simmers provided the following information from its accounting records for 2022:

Expected production 30,000 labour hours

Actual production 28,000 labour hours

Budgeted overhead $1,500,000

Actual overhead $1,450,000

How much is the overhead application rate if Spice Simmers bases the rate on direct labour hours?

a) $51.79 per direct labour hour

b) $48.33 per direct labour hour

c) $50 per direct labour hour

d) $46.67 per direct labour hour

95. The numerator in a predetermined overhead rate is usually

a) actual overhead costs.

b) estimated overhead costs.

c) actual activity level.

d) estimated activity level.

96. The denominator in a predetermined overhead rate is usually

a) actual overhead costs.

b) estimated overhead costs.

c) actual activity level.

d) estimated activity level.

97. In applying costs using a predetermined overhead rate, the most common allocation base is generally

a) direct labour hours.

b) direct materials used.

c) indirect labour hours.

d) indirect materials used.

98. Why is factory overhead ‘applied’ to products and jobs by manufacturing companies?

a) Total actual overhead costs can never be accurately determined for production.

b) Indirect costs are easy to trace to products and jobs.

c) It provides managers more timely information regarding product costs during the manufacturing process.

d) It provides a more accurate cost of the job or products being processed.

99. When a job is completed, what happens to the cost of the job?

a) It is removed from Work in Process Inventory and included in Cost of Goods Sold.

b) It is removed from Finished Goods Inventory and included in Cost of Goods Sold.

c) It is removed from Materials Inventory and included in Work in Process Inventory.

d) It is removed from Work in Process Inventory and included in Finished Goods Inventory.

100. Halitosis Company completed job 45 at a cost of $43,765 and later sold it for $90,000 cash. Which partial entry is made when the sale takes place?

a) debit Finished Goods Inventory $90,000

b) credit Finished Goods Inventory $43,765

c) credit Finished Goods Inventory $90,000

d) debit Finished Goods Inventory $43,750

101. What journal entry should be made when a job is completed and all costs have been accumulated on a job cost sheet?

a) a debit to Finished Goods Inventory, and a credit to Work in Process Inventory

b) a debit to Work in Process Inventory, and a credit to Direct Materials, Direct Labour, and Manufacturing Overhead

c) a debit to Finished Goods Inventory and a credit to Direct Materials, Direct Labour, and Manufacturing Overhead

d) a debit to Cost of Goods Sold Inventory, and a credit to Work in Process Inventory

102. The following information is available for completed Job No. 402: Direct materials, $80,000; direct labour, $120,000; manufacturing overhead applied, $60,000; units produced, 5,000 units; units sold, 4,000 units. The cost of the finished goods on hand from this job is

a) $52,000.

b) $260,000.

c) $40,000.

d) $208,000.

103. Sportly, Inc. finished Job B14 during 2022. The job cost sheet listed the following:

Direct materials $66,000

Direct labour $36,000

Manufacturing overhead applied $24,000

Units produced 3,000 units

Units sold 1,800 units

How much is the cost of the finished goods on hand from this job?

a) $126,000

b) $75,600

c) $50,400

d) $61,200

104. Which one of the following is the same amount as cost of goods manufactured on the cost of goods manufactured schedule?

a) the amount transferred from Work in Process Inventory to Finished Goods Inventory during the period

b) the total of direct material, direct labour, and manufacturing overhead which are added to Work in Process Inventory during the year

c) the amount transferred out of Finished Goods Inventory during the year

d) the total added to the Work in Process Inventory during the year

105. You want to determine the amount of cost of goods sold. Where is the best place to find the information you need?

a) From the Raw Materials Inventory control account

b) From an analysis of all the control accounts in the cost system

c) From the work in process inventory records

d) From the finished goods inventory records

106. Which of the following is NOT viewed as part of accumulating manufacturing costs in a job-order cost system?

a) factory labour is incurred

b) manufacturing overhead is incurred

c) cost of goods sold is recognized

d) raw materials are purchased

107. Which of the following is credited when a job is completed?

a) Cost of Goods Sold

b) Work in Process Inventory

c) Manufacturing Overhead

d) Finished Goods Inventory

108. Tool Time Inc. uses job-order costing for its brand new line of homework machines. The cost incurred for production during 2022 totalled $7,000 of materials, $2,500 of direct labour costs, and $1,000 of manufacturing overhead applied. The company ships all goods as soon as they are completed, which results in no Finished Goods Inventory on hand at the end of any year. Beginning Work in Process Inventory totalled $5,500, and the ending balance is $2,500. During the year, the company completed 20 machines. How much is the cost per machine?

a) $525

b) $675

c) $800

d) Not enough information is given.

109. Cost of goods manufactured equals $88,000 for 2022. Finished goods inventory is $4,000 at the beginning of the year and $11,000 at the end of the year. Beginning and ending work in process inventory for 2022 are $8,000 and $10,000 respectively. How much is cost of goods sold for the year?

a) $93,000

b) $84,000

c) $81,000

d) $95,000

110. Manufacturing overhead applied is added to direct labour incurred and what other item in order to determine the total manufacturing costs for the period?

a) work in process inventory

b) direct materials used

c) goods available for sale

d) raw materials purchased

111. During 2022 Caruba Manufacturing expected Job 25 to cost $75,000 of overhead, $130,000 of material, and $25,000 in labour. Caruba applied overhead based on direct labour cost. Actual production required an overhead cost of $80,000, $140,000 in materials used; and $20,000 in labour. All of the goods were completed. What amount was transferred to Finished Goods Inventory?

a) $240,000

b) $230,000

c) $220,000

d) $210,000

112. Over-applied overhead

a) means that actual manufacturing overhead costs were less than the manufacturing overhead costs allocated to jobs.

b) is shown as an operating expense on the Income Statement when monthly financial statements are prepared.

c) that is considered material is subtracted from Work in Process Inventory upon disposal.

d) is the difference between estimated overhead and applied overhead.

113. Where is overhead applied in the monthly financial statements?

a) an operating expense

b) assigned to a product account

c) a deduction of raw materials inventory

d) a liability

Use the following information to answer questions 114–116.

A company expected its annual overhead costs to be $750,000 and machine hours to equal 100,000 hours. Actual overhead was $745,000, and actual machine hours totalled 97,000 hours.

114. How much is the company’s predetermined overhead rate to the nearest cent, assuming overhead is applied based on machine hours?

a) $7.45

b) $7.50

c) $7.68

d) $7.73

115. How much overhead was applied?

a) $722,650

b) $727,500

c) $749,810

d) $768,000

116. How much overhead was over or under applied?

a) $17,500 under applied

b) $22,500 under applied

c) $23,000 over-applied

d) $4,810 under applied

117. At the end of each month, a company must total up the costs shown on the job cost sheets. What amount should this equal?

a) the total of the Work in Process Inventory account in the general ledger

b) the total of the Job Cost Expense account in the general ledger

c) the cost of all job costs incurred during the year

d) the total cost of manufacturing overhead applied during the year

118. Which one of the following statements is true in determining total manufacturing costs on the cost of goods manufactured schedule?

a) Actual manufacturing overhead is added to direct materials and direct labour.

b) The schedule calculates the balance in the work in process inventory account.

c) Beginning work in process inventory will be less than ending work in process inventory.

d) Applied manufacturing overhead costs are listed for the amount of manufacturing overhead.

Use the following information for questions 119–120.

Payne Company developed the following data for the current year:

Beginning work in process inventory $ 68,000

Direct materials used 104,000

Actual overhead 88,000

Overhead applied 92,000

Cost of goods manufactured 450,000

Total manufacturing costs 428,000

119. How much is Payne Company's direct labour cost for the year?

a) $254,000

b) $300,000

c) $232,000

d) $164,000

120. How much is Payne Company's ending work in process inventory for the year?

a) $46,000

b) $242,000

c) $42,000

d) $186,000

121. Chmelar Manufacturing Company developed the following data:

Beginning work in process inventory $ 60,000

Direct materials used 360,000

Actual overhead 420,000

Overhead applied 405,000

Cost of goods manufactured 960,000

Ending work in process inventory 45,000

How much are total manufacturing costs for the period?

a) $1,185,000

b) $945,000

c) $825,000

d) $915,000

122. Barger-Volvov Company had the following information at December 31, 2022:

Finished goods inventory, January 1, 2022 $15,000

Finished goods inventory, December 31, 2022 $21,000

If the cost of goods manufactured during the year amounted to $332,500 and annual sales were $499,000, how much is the amount of gross profit for the year?

a) $166,500

b) $151,500

c) $326,500

d) $172,500

123. Chin Company incurred direct materials costs of $75,000 during the year. Manufacturing overhead applied was $70,000 and is applied based on direct labour costs. The predetermined overhead rate is 70%. How much are Chin Company’s total manufacturing costs for the year?

a) $194,000

b) $175,000

c) $145,000

d) $245,000

124. Which one of the following is part of ‘total manufacturing costs’?

a) estimated overhead costs

b) actual overhead costs

c) incurred overhead costs

d) applied overhead costs

125. Order Online considers machine hours to be the best activity base for its manufacturing overhead. The estimate of overhead costs for the year for its jobs was $205,000. The company used 1,000 hours of processing on its Job B12 during the period and incurred overhead costs totalling $210,000. The budgeted machine hours for the year totalled 20,000. How much overhead should be applied to Job B12?

a) $210

b) $10,250

c) $10,500

d) $205

126. If a company has under-applied overhead at the end of the accounting period, how is it accounted for?

a) No entry occurs.

b) It is transferred to Finished Goods Inventory with the other job costs.

c) It is debited to Cost of Goods Sold.

d) It is credited to Cost of Goods Sold.

127. Assume that variable overhead is over applied by $100 and fixed overhead is under applied by $50. The effect on cost of goods sold is

a) $150 increase.

b) $150 decrease.

c) $50 increase.

d) $50 decrease.

128. Luca Company over applied manufacturing overhead during 2022. Which one of the following is part of the year-end entry to dispose of the over-applied amount assuming the amount is material?

a) an increase to Finished Goods Inventory

b) a decrease to Applied Overhead

c) a decrease to Work in Process Inventory

d) an increase to Cost of Goods Sold

129. At the end of the year, Manufacturing Overhead has been over-applied. What happened to create this situation?

a) The company incurred more total job costs than the amount budgeted for the job.

b) The actual manufacturing overhead costs were less than the manufacturing overhead assigned to jobs.

c) The company incurred more manufacturing overhead costs than the manufacturing overhead assigned to jobs.

d) Estimated manufacturing overhead was less than actual manufacturing overhead costs.

130. Where might you find under-applied overhead on the monthly financial statements?

a) As part of Manufacturing Overhead Expense in the operating expenses section on the Income Statement

b) As part of "Other Revenues and Gains" on the Income Statement

c) Included with Cost of Goods Sold on the Income Statement

d) As a prepaid expense in the current asset section of the Balance Sheet

131. Tan Company over-applied manufacturing overhead during 2022. Which one of the following is part of the year-end entry to adjust the over-applied amount assuming the amount is material?

a) a debit to Work in Process Inventory

b) a debit to Cost of Goods Sold

c) a debit to Manufacturing Overhead

d) a credit to Deferred Revenue

132. A company incurred more manufacturing overhead costs than it applied to its jobs during the year. What entry must be made at the end of the year to allocate the remaining overhead if NOT material in amount?

a) debit Cost of Goods Sold and credit Manufacturing Overhead

b) credit Work in Process Inventory and debit Cost of Goods Sold

c) debit Manufacturing Overhead and credit Work in Process Inventory

d) debit Work in Process Inventory and credit Manufacturing Overhead

133. Which one of the following is true about under- or over-applied overhead at the end of a particular year?

a) It requires a correction to the cost of all jobs completed.

b) It is combined with cost of goods sold.

c) The company can offset it during future months.

d) Its existence implies the company has made an error.

134. Crowl, Inc. determined that $200,000 of manufacturing overhead was over-applied at the end of the year. If the amount is material, to which account(s) should this amount be allocated at the end of the year?

a) Raw Materials Inventory, Work in Process Inventory, and Cost of Goods Sold

b) Finished Goods Inventory, Work in Process Inventory, and Cost of Goods Sold

c) Cost of Goods Sold only

d) Work in Process Inventory only

135. In order to adjust for the over-/under-applied manufacturing overhead, Abe Company increased its balance in the Cost of Goods Sold account only. This implies that

a) the company incurred more overhead costs than the overhead assigned to jobs, and the amount was not material.

b) the company incurred less overhead costs than the overhead assigned to jobs, and the amount was material.

c) the company incurred more overhead costs than the overhead assigned to the jobs, and the amount was material.

d) the company incurred less overhead costs than the overhead assigned to jobs, and the amount was not material.

136. Globe Manufacturing Company’s Manufacturing Overhead account has a credit balance at the end of a period. What does this imply?

a) Actual overhead costs were less than overhead costs applied to jobs.

b) Actual overhead costs were greater than overhead costs applied to jobs.

c) Actual overhead costs were equal to overhead costs applied to jobs.

d) No overhead has been applied during the year.

137. A company incurred more manufacturing overhead costs than the amount of overhead allocated to these jobs during the year. Which statement is true?

a) The company spent more money on overhead costs during the year than it should have.

b) The company should defer some of the overhead costs to the next accounting period.

c) Overhead is under-applied.

d) Overhead is over-applied.

138. How does a company eliminate any immaterial balance in the Manufacturing Overhead account at the end of the year?

a) The amount is moved to Cost of Goods Sold.

b) The amount remains in the Manufacturing Overhead Expense account and appears on the Income Statement.

c) The amount is closed to Retained Earnings.

d) The amount is moved to Finished Goods Inventory.

139. What is the reason for a debit balance remaining in the Manufacturing Overhead account at the end of the accounting period?

a) Overhead has been over-applied.

b) More overhead cost was incurred than the amount applied during the year.

c) Not all costs have been posted to the jobs.

d) The overhead assigned to Work in Process Inventory is more than the overhead incurred.

140. Cal, Inc. showed the following amounts in its manufacturing overhead account at the end of 2022:

Based on this information, which statement is true?

a) No manufacturing overhead has been applied.

b) Manufacturing overhead expense will be reported in the operating section of the Income Statement in the amount of $3,000.

c) Manufacturing overhead has been over applied.

d) Manufacturing overhead has been under applied.

141. When monthly financial statements are prepared, where is the under or over applied manufacturing overhead captured?

a) on the Statement of Shareholders' Equity

b) on the Income Statement

c) in cost of Goods Manufactured Schedule

d) in none of the above

142. When monthly financial statements are prepared, where is the under-applied overhead captured if it is immaterial?

a) included with Cost of Goods Sold on the Income Statement

b) as a current liability on the Balance Sheet

c) as part of Work in Process Inventory

d) as a Prepaid Expense account on the Balance Sheet

143. A company assigns overhead to Work in Process. At year end, what does it mean if the amount is over-applied?

a) The overhead assigned to Work in Process Inventory is less than the actual overhead.

b) The overhead assigned to Work in Process Inventory is greater than the overhead incurred.

c) The overhead assigned to Work in Process Inventory is greater than estimated overhead costs.

d) The overhead assigned to Work in Process Inventory is less than the estimated overhead costs.

144. What does a debit balance in the Manufacturing Overhead account at the end of the period tell management?

a) that overhead costs need to be controlled

b) that not enough overhead costs were incurred

c) that actual overhead was less than estimated overhead costs

d) that overhead was under applied

145. Which one of the following is true concerning immaterial under-applied overhead at year end?

a) It is subtracted from Cost of Goods Sold.

b) It is debited to Cost of Goods Sold.

c) It is reported as an inventory account in the Balance Sheet.

d) It is added to the Manufacturing Overhead account.

146. If the financial statements of Sushi Show, Inc. reflect $500 of over-applied overhead for the current year, where will that balance be shown in the financial statements if not material?

a) in the current assets section as a prepaid amount

b) No amount should be shown in the financial statements for over-applied overhead.

c) in the current liabilities section as Deferred Revenue

d) as part of Cost of Goods Sold

147. Tra Corporation is analyzing its account balances for 2022. As of the end of 2022, a debit balance of $4,000 remains in the Manufacturing Overhead account. What impact does this have on the financial statements?

a) It will increase assets by $4,000 and have no effect on income.

b) It will increase income by $4,000.

c) It will reduce income by $4,000.

d) It will decrease gross profit but have no effect on income.

148. During 2022, Crema Manufacturing expected Job 59 to cost $300,000 of overhead, $500,000 of material, and $200,000 in labour. Crema applied overhead based on direct labour cost. Actual production required an overhead cost of $280,000, $550,000 in materials used; and $220,000 in labour. All of the goods were completed. How much is the amount of over-/under-applied overhead?

a) $50,000 under applied

b) $50,000 over-applied

c) $20,000 under applied

d) $20,000 over-applied

149. Before a company eliminates the manufacturing overhead balance using the proration method, the under applied amount will reflect

a) overstated Cost of Goods Sold only.

b) overstated Finished Goods Inventory and Work in Process inventory, while Cost of Goods Sold will be understated.

c) understated Cost of Goods Sold only.

d) understated Finished Goods Inventory, Work in Process Inventory and Cost of Goods Sold.

150. What is the rationale behind applying overhead at an estimated rate rather than an actual rate such as direct labour or materials?

a) Accounting rules permit this approach.

b) Waiting to the end of an accounting period to allocate costs is inefficient.

c) Overhead costs fluctuate widely month to month and these fluctuations can distort profitability.

d) Overhead costs are incurred evenly month to month since they include mostly fixed costs.

151. A significant advantage of applying any under- or over-applied overhead balances at the end of a year to Cost of Goods Sold is

a) managers are happy to know the actual amount of their costs at the end of a year.

b) overhead incurred in one year does not impact overhead costs in the next year.

c) inventory amounts remain low and can be carried over to the following year.

d) inventory amounts remain high and can be carried over to the following year.

ANSWERS TO MULTIPLE CHOICE QUESTIONS

BRIEF Exercises

Brief Exercise 152

For the following companies, which accounting system would be more appropriate: job-order or process costing:

a) A soft drink manufacturer

b) Custom jewellery maker

c) Cell phone manufacturer that makes one phone model

d) Cell phone manufacturer that makes many models of phone

e) A custom chopper shop

f) An architectural firm

g) A skate board manufacturer

h) Legal and accounting offices

i) A refinery

j) A manufacturer that makes drywall

Solution 152

a) p

b) j

c) p

d) j

e) j

f) j

g) j or p depending on the products made

h) j

i) p

j) p

Brief Exercise 153

How do companies use product cost information produced by a cost accounting system?

Solution 153

Companies use product cost information to determine which products to produce, what price to charge, and the amounts to produce. Accurate product cost information is also vital for effective evaluation of employee performance.

Brief Exercise 154

During the first year of operations, Shapiro Tool accumulated the following manufacturing costs:

Raw materials purchased, on account $ 10,000

Factory labour accrued 7,000

Raw materials purchased, paid cash 90,000

Factory labour paid 53,000

Prepare separate journal entries for each manufacturing cost.

Solution 154

Debit Credit

Raw Materials Inventory 10,000

Accounts Payable 10,000

Factory Labour 7,000

Payroll Liabilities 7,000

Raw Materials Inventory 90,000

Cash 90,000

Factory Labour 53,000

Cash 53,000

Brief Exercise 155

What does the SAAS model by Autodesk offer/allow?

Solution 155

The SAAS model allows Autodesk to maintain a continuous customer relationship and provides immediate access to tremendous amounts of data. The SAAS model also allows for continuous customer revenues; in fact, one use of the data is to compute an “expected lifetime value of a customer.” With that long-range strategy in mind, the data helps the company to focus on developing features that are most likely to attract big spenders, all while minimizing costs

Brief Exercise 156

In January, Harlan, Inc.’s production supervisor requisitioned raw materials for production as follows: Job 1 $500, Job 2 $200, Job 3 $700, and general factory use, $300. Prepare a summary journal entry to record raw materials used.

Solution 156

Debit Credit

Work in Process Inventory 1,400

Manufacturing Overhead 300

Raw Materials Inventory 1,700

Brief Exercise 157

Lando Company reported the following amounts for 2022:

Raw materials purchased $72,000

Beginning raw materials inventory 6,300

Ending raw materials inventory 7,460

Beginning finished goods inventory 13,890

Direct labour used $37,000

Manufacturing overhead costs applied 37,865

Beginning work in process inventory 8,645

Ending work in process inventory 9,785

Ending finished goods inventory 15,755

Calculate the cost of materials used in production.

Solution 157

$6,300 + $72,000 – $7,460 = $70,840

Brief Exercise 158

K&N Ltd. manufactures custom designed wooden furniture. It allocates overhead costs at $3 per labour hour. Job 157 required 7 metres of wood at $5 per metre and took 5 hours to complete. Employees earn $12.50 per hour. How much is the total cost of Job 157?

Solution 158

Direct materials (7 x $5) $35.00

Direct labour (5 hours x $12.50) 62.50

Overhead (5 hours x $3) 15.00

Total job cost $112.50

Brief Exercise 159

Martin Company applies manufacturing overhead based on direct labour hours. Information concerning manufacturing overhead and labour for the 2022 year follows:

Actual manufacturing overhead $150,000

Estimated manufacturing overhead $140,000

Direct labour hours incurred 4,800

Direct labour hours estimated 5,000

How much is the predetermined overhead rate and how much overhead is applied for 2022?

Solution 159

$140,000 ÷ 5,000 = $28.00 per direct labour hour

$28.00 x 4800 = $134,400 applied

Brief Exercise 160

The Townsend Company makes pine tables, chairs, and dressers and computes its predetermined overhead rate each year on the basis of its direct labour hours. At the end of 2021 its actual overhead incurred was $2,504,000 and the actual direct labour hours were 124,322. It estimates that in 2022 it will have 118,000 of direct labour hours and incur $2,388,000 in manufacturing overhead.

Instructions

Calculate the company’s predetermined overhead rate for 2022.

Solution 160

Estimated manufacturing overhead $2,388,000

÷ Estimated direct labour hours 118,000

= Predetermined overhead rate $20.237 per DLH

Brief Exercise 161

The manufacturing operations of Reason, Inc. had the following balances for the month of January:

Inventories January 1 January 31

Raw Materials 12,000 13,000

Work in process 21,000 23,000

Finished goods 14,000 16,000

Reason transferred $220,000 of completed goods out of Work in Process Inventory during January. How much is cost of goods sold?

Solution 161

$14,000 + $220,000 – $16,000 = $218,000

Brief Exercise 162

Samli Company estimates that annual manufacturing overhead costs will be $450,000. Estimated annual operating activity bases are: direct labour cost $720,000, direct labour hours 90,000, and machine hours 65,000. The actual manufacturing overhead cost for the year was $463,250 and the actual direct labour cost for the year was $735,000. Actual direct labour hours totalled 93,000 and machine hours totalled 66,000. Samli applies overhead based on direct labour hours. Calculate the predetermined overhead rate and determine the amount of manufacturing overhead applied. Determine if overhead is over or under applied and the amount.

Solution 162

Overhead Rate = $450,000/90,000 = $5.00 per direct labour hour

Applied = $5 x 93,000 = $465,000

Over-applied = $465,000 – $463,250 = $1,750

Brief Exercise 163

Fill in the missing values in the following table:

Solution 163

Brief Exercise 164

During 2022, Mix Company incurred the following direct labour costs: January $10,000, February $20,000, and March $14,000. Mix uses a predetermined overhead rate of 120% of direct labour cost. Estimated overhead for the 3 months totalled $13,000, $23,800, and $17,000 respectively. Actual overhead for the 3 months totalled $12,300, $21,800, and $16,500 respectively. Determine if overhead is over or under applied for each of the three months and the respective amounts.

Solution 164

Overhead applied:

January: 120% x $10,000 = $12,000

February: 120% x $20,000 = $24,000

March: 120% x $14,000 = $16,800

Over or under applied:

January: $12,000 – $12,300 = $300 under applied

February: $24,000 – $21,800 = $2,200 over-applied

March: $16,800 – $16,500 = $300 over-applied

Brief Exercise 165

At December 31, Ding Company reported the following balances in its accounts:

Raw materials Inventory $ 7,000

Work in process Inventory 15,000

Finished goods Inventory 5,000

Cost of goods sold 175,000

The company’s balance in its Manufacturing Overhead account at the same date was a debit of $7,950, Prepare the entries to adjust the over- or under-applied amount at December 31,

a) assuming the amount is material, and

b) assuming the amount is immaterial.

Solution 165

Total = $15,000 + $5,000 + $175,000 = $195,000

a)

Material in Amount Debit Credit

Work in Process Inventory ($15,000/$195,000 x $7,950) 611

Finished Goods Inventory ($5,000/$195,000 x $7,950) 204

Cost of Goods Sold Inventory ($175,000/$195,000 x $7,950) 7,135

Manufacturing Overhead 7,950

b)

Immaterial in Amount

Cost of Goods Sold 7,950

Manufacturing Overhead 7,950

Brief Exercise 166

The following amounts were reported by Samli Company before adjusting its immaterial over-applied manufacturing overhead of $8,000.

Raw Materials Inventory $ 40,000

Finished Goods Inventory 60,000

Work in Process Inventory 100,000

Cost of Goods Sold 840,000

How much will Samli report as Cost of Goods Sold after it disposes of its over-applied overhead if it is considered immaterial?

Solution 166

$840,000 – $8,000 = $832,000

Exercises

Exercise 167

Fergusons Inc. is a manufacturer that uses job-order costing. The following transactions were recorded for the year:

1. Raw materials were purchased on account: $615,000.
2. Raw materials inventory were requisitioned for use in production: $475,000 ($450,000 direct materials and $25,000 indirect materials).
3. The following employee costs were incurred: direct factory labour, $100,000; indirect factory labour, $145,000; and administrative salaries, $200,000.
4. Travel costs were incurred: $25,000.
5. Utility costs were incurred in the factory: $55,000.
6. Advertising costs were incurred: $200,000.
7. Depreciation was recorded for the year: $500,000 (80% relates to factory operations, and 20% relates to sales, general and administrative activities).
8. Insurance expired during the year: $20,000 (70% relates to factory operations, and the remaining 30% relates to sales, general and administrative activities).

Instructions

Prepare journal entries to record the preceding transactions.

Solution 167

Raw Materials Inventory 615,000

Accounts Payable 615,000

Work in Process Inventory 450,000

Manufacturing Overhead 25,000

Raw Materials Inventory 475,000

Work in Process Inventory 100,000

Manufacturing Overhead 145,000

Administrative Salaries Expense 250,000

Payroll Liabilities 495,000

Travel Expense 25,000

Accounts Payable 25,000

Manufacturing Overhead 55,000

Accounts Payable 55,000

Advertising Expense 200,000

Accounts Payable 200,000

Manufacturing Overhead 400,000

Depreciation Expense 100,000

Accumulated Depreciation 500,000

Manufacturing Overhead 14,000

Insurance Expense 6,000

Prepaid Insurance 20,000

Exercise 168

Slower Company uses a job-order cost system in each of its two manufacturing departments. Manufacturing overhead is applied to jobs on the basis of direct labour cost in Department A and machine hours in Department B.

In establishing the predetermined overhead rates for 2022, the following estimates were made for the year:

Department

A B

Manufacturing overhead $1,056,000 $840,000

Direct labour cost 264,000 600,000

Direct labour hours 12,000 40,000

Machine hours 75,000 84,000

During January, the job cost sheet showed the following costs and production data:

Jobs

14 15

Direct materials used $34,000 $31,000

Direct labour cost 24,000 25,500

Manufacturing overhead incurred 65,000 35,000

Direct labour hours 2,000 1,700

Machine hours 5,000 4,000

Instructions

a) Calculate the predetermined overhead rate for each department.

b) Calculate the total manufacturing cost assigned to jobs 14 and 15 in January.

c) What is the purpose of job cost accounting?

Solution 168 (8–10 min.)

a) Predetermined overhead rates:

Department A (using direct labour cost): $1,056,000 ÷ $264,000 = 400%

Department B (using machine hours): $840,000 ÷ 84,000 = $10 per machine hour

b) Job 14:

Direct materials $34,000

Direct labour cost 24,000

Manufacturing overhead applied ($24,000 × 400%) 96,000

Total manufacturing costs $154,000

Job 15:

Direct materials $31,000

Direct labour cost 25,500

Manufacturing overhead applied (4,000 hrs. × $10) 40,000

Total manufacturing costs $96,500

c) The purpose of a job cost accounting is determine the cost of jobs in order to determine which products to produce, what price to charge, and the amounts to produce.

Exercise 169

The gross earnings of factory workers for Detox Company during the month of March are $100,000. The employer's payroll taxes for the factory payroll are $15,000. Of the total accumulated cost of factory labour, 75% is related to direct labour and 25% is attributable to indirect labour. Salaried office employees’ monthly pay is based on the skills required and seniority, and averages $7,800 per month, plus the company’s share of the required payroll taxes.

Instructions

a) Prepare the entry to record the factory labour costs for the month of March.

b) Prepare the entry to assign factory labour to production.

c) Prepare the entry to assign manufacturing overhead to production, assuming the predetermined overhead rate is 150% of direct labour cost.

Solution 169 (5–8 min.)

a) Factory Labour 115,000

Payroll Liabilities 115,000

b) Work in Process Inventory 86,250

Manufacturing Overhead 28,750

Factory Labour 115,000

($115,000 × 75% = $86,250)

c) Work in Process Inventory 129,375

Manufacturing Overhead 129,375

($86,250 × 150% = $129,375)

Note: the instructions did not ask for any entries for the salaried office employees. Filtering extraneous information is an important skill for students to learn.

Exercise 170

Busch Manufacturing uses a job-order cost accounting system. On April 1, the company has Work in Process Inventory of $12,000 with two jobs in process: Job No. 323, $7,000, and Job No. 324, $5,000. During April, a summary of source documents reveals the following:

Materials Requisition Slips Labour Time Tickets

Job No. 323 $ 1,200 $ 2,000

324 1,700 3,700

325 7,500 3,000

326 2,400 1,800

General use 900 1,200

Totals $13,700 $11,700

Busch applies manufacturing overhead to jobs at an overhead rate of 50% of direct labour cost. Job No. 323 is complete at the end of April. Job 324 is sold.

Instructions

a) Prepare summary journal entries to record the raw materials requisitioned, factory labour used, the assignment of manufacturing overhead to jobs, and the completion of any jobs.

b) Calculate the balance of the Work in Process Inventory account at April 30.

Solution 170 (10–12 min.)

a) Apr 30 Work in Process Inventory 12,800

Manufacturing Overhead 900

Raw Materials Inventory 13,700

Work in Process Inventory 10,500

Manufacturing Overhead 1,200

Factory Labour 11,700

Work in Process Inventory 5,250

Manufacturing Overhead 5,250

($10,500 × 50% = $5,250)

Finished Goods Inventory 23,450

Work in Process Inventory 23,450

($7,000 + $1,200 + $2,000 + $1,000 + $5,000 + $1,700 + $3,700 + $1,850 = $23,450)

b) Work in Process Inventory, April 30 = $17,100

Job No. 325 $12,000 ($7,500 + $3,000 + $1,500)

Job No. 326 5,100 ($2,400 + $1,800 + $900)

$17,100

Exercise 171

A selected list of accounts used by Hops Manufacturing Company follows:

Code

C Cash

AR Accounts Receivable

RM Raw Materials Inventory

WIP Work In Process Inventory

FG Finished Goods Inventory

AP Accounts Payable

FL Factory Labour

MOH Manufacturing Overhead

CGS Cost of Goods Sold

S Sales

Hops Manufacturing Company uses a job-order system and maintains perpetual inventory records.

Instructions

Place the appropriate code letter in the columns indicating the appropriate account(s) to be debited and credited for the transactions listed below. If a transaction does not include any of the above accounts, indicate N/A in the column.

Account(s) Account(s)

Transactions Debited Credited

——————————————————————————————————————————

1. Raw materials were purchased on account.

——————————————————————————————————————————

2. Issued a cheque to Estes Machine Shop for

repair work on factory equipment.

——————————————————————————————————————————

3. Direct materials were requisitioned for Job 280.

——————————————————————————————————————————

4. Factory labour was paid as incurred.

——————————————————————————————————————————

5. Recognized direct labour and indirect labour used.

——————————————————————————————————————————

6. The production department requisitioned indirect

materials for use in the factory.

——————————————————————————————————————————

7. Overhead was applied to production based on a

predetermined overhead rate of $8 per labour hour.

——————————————————————————————————————————

8. Goods that were completed were transferred to

finished goods.

——————————————————————————————————————————

9. Goods costing $80,000 were sold for $105,000

on account.

——————————————————————————————————————————

10. Paid monthly salary to the senior cost accountant.

——————————————————————————————————————————

Solution 171 (9–11 min.)

Account(s) Account(s)

Transactions Debited Credited

——————————————————————————————————————————

1. Raw materials were purchased on account. RM AP

——————————————————————————————————————————

2. Issued a cheque to Estes Machine Shop for MOH C

repair work on factory equipment.

——————————————————————————————————————————

3. Direct materials were requisitioned for Job 280 WIP RM

——————————————————————————————————————————

4. Factory labour was paid as incurred. FL C

——————————————————————————————————————————

5. Recognized direct labour and indirect labour used MOH, WIP FL

——————————————————————————————————————————

6. The production department requisitioned indirect MOH RM

materials for use in the factory.

——————————————————————————————————————————

7. Overhead was applied to production based on a

predetermined overhead rate of $8 per labour hour WIP MOH

——————————————————————————————————————————

8. Goods that were completed were transferred to FG WIP

finished goods.

——————————————————————————————————————————

9. Goods costing $80,000 were sold for $105,000 AR, CGS S, FG

on account.

——————————————————————————————————————————

10.Paid monthly salary to senior Cost Accountant N/A C

——————————————————————————————————————————

Exercise 172

Malone, Inc. uses a job-order cost accounting system and keeps perpetual inventory records. Prepare journal entries to record the following transactions during the month of July:

Jul 2 Purchased raw materials for $23,000 on account.

4 Purchased office supplies for $750 cash.

9 Raw materials inventory requisitioned by production:

Direct materials $12,300

Indirect materials 1,760

14 Paid factory utilities, $3,100 and repairs for factory equipment, $3,600.

15 Received property tax bill of $9,850 and accrued for payment at month-end. Office area is approximately 750 square feet of the facility’s 7,200 total square footage.

21 Incurred $37,800 of factory labour.

26 Time tickets indicated the following:

Direct Labour (2,700 hrs × $15 per hr) = $40,500

Indirect Labour (950 hrs × $12.50 per hr) = 11,875

$52,375

28 Applied manufacturing overhead to production based on a predetermined overhead rate of $7.50 per direct labour hour worked.

28 Goods costing $63,000 were completed and transferred to finished goods inventory.

30 Goods costing $62,000 were sold for $75,000 on account.

Solution 172 (12–15 min.)

Jul 2 Raw Materials Inventory 23,000

Accounts Payable 23,000

(purchase of raw materials on account)

4 Supplies Expense (Or Prepaid Office Supplies) 750

Cash 750

9 Work In Process Inventory 12,300

Manufacturing Overhead 1,760

Raw Materials Inventory 14,060

(to record materials used)

14 Manufacturing Overhead 6,700

Cash 6,700

(to record payment of factory utilities and repairs)

15 Property Tax Expense (750/7,200 x $9,850) 985

Manufacturing Overhead (6,450/7,200 x $9,850) 8,865

Accounts Payable 9,850

(to record accrual of property tax on office and factory.)

21 Factory Labour 37,800

Payroll Liabilities 37,800

(to record factory labour costs)

26 Work in Process Inventory 40,500

Manufacturing Overhead 11,875

Factory Labour 52,375

(to assign factory labour to production)

28 Work in Process Inventory ($7.50 x 2,700) 20,250

Manufacturing Overhead 20,250

(to apply manufacturing overhead to production)

28 Finished Goods Inventory 63,000

Work in Process Inventory 63,000

(to record completion of production)

30 Accounts Receivable 75,000

Cost of Goods Sold 62,000

Sales 75,000

Finished Goods Inventory 62,000

(to record sales of finished goods and its cost)

Exercise 173

Selected accounts of Gertt Manufacturing Company at year end appear below:

Raw Materials Inventory Work In Process Inventory

a) 25,000 d) 18,000 d) 18,000 g) 66,000

e) 40,000

f) 12,500

Finished Goods Inventory Cost Of Goods Sold

g) 66,000 h) 62,000 h) 62,000

Factory Labour Manufacturing Overhead

b) 45,000 e) 45,000 c) 7,500 f) 12,500

e) 5,000

Instructions

Explain the probable transaction that took place for each of the items identified by letters in the accounts.

Solution 173 (9–14 min.)

a) Raw materials costing $25,000 were purchased.

b) Factory labour costs incurred amounted to $45,000.

c) Actual manufacturing overhead costs incurred were $7,500.

d) Direct materials requisitioned for production amounted to $18,000.

e) Factory labour incurred consisted of:

Direct labour $40,000

Indirect labour $5,000

f) Manufacturing overhead applied to production was $12,500.

g) Completed goods costing $66,000 were transferred to finished goods inventory.

h) Finished goods costing $62,000 were sold.

Exercise 174

Manufacturing cost data for Tripod Company, which uses a job-order cost system, are presented below:

Case A Case B

Direct Materials Used a) $125,000

Direct Labour $75,000 200,000

Manufacturing Overhead Applied 60,000 d)

Total Manufacturing Costs 150,000 e)

Work in Process Inventory, 1/1/06 b) 195,000

Total Cost of Work in Process 400,000 f)

Work in Process Inventory, 12/31/06 c) 185,000

Cost of Goods Manufactured 550,000 g)

Tripod Company applies overhead on the basis of direct labour cost. The rate is the same for both cases. Indicate the missing amount for each letter.

Solution 174 (6–8 min.)

Overhead rate: ($60,000 ÷ $75,000)] = 80%

Case A Case B

a) + $75,000 + $60,000 = $150,000 $200,000 × 80% = d)

a) = $15,000 d) = $160,000

$150,000 + b) = $400,000 $125,000 + $200,000 + $160,000 = e)

b) = $250,000 e) = $485,000

$400,000 + c) = $550,000 $485,000 + $195,000 = f)

c) = $150,000 f) = $680,000

$680,000 – $185,000 = g)

g) = $495,000

Exercise 175

Lerry Corporation had the following transactions during its first month of operations:

a) Purchased raw materials on account, $65,000.

b) Raw materials of $25,000 were requisitioned to the factory. An analysis of the materials requisition slips indicated that $1,400 was classified as indirect materials.

c) Factory labour costs incurred were $37,500 of which $32,000 pertained to factory wages and $5,500 pertained to employer payroll taxes.

d) Time tickets indicated that $35,000 was direct labour and $2,500 was indirect labour.

e) Overhead costs incurred on account were $57,000.

f) Manufacturing overhead was applied at the rate of 150% of direct labour cost.

g) Goods costing $17,000 are still incomplete at the end of the month; the other goods were completed and transferred to finished goods.

h) Finished goods costing $54,000 to manufacture were sold on account for $108,000.

i) Factory supplies (latex gloves, disposable breathing masks, paper towels) used during the month totalled $576.

j) Monthly rent for the entire facility was $8,750 and paid in cash. Square footage for the factory was 80% of the building’s total floor space.

Instructions

Journalize the above transactions for Lerry Corporation.

Solution 175 (12–17 min.)

a) Raw Materials Inventory 65,000

Accounts Payable 65,000

b) Work in Process Inventory 23,600

Manufacturing Overhead 1,400

Raw Materials Inventory 25,000

c) Factory Labour 37,500

Payroll Liabilities 37,500

d) Work in Process Inventory 35,000

Manufacturing Overhead 2,500

Factory Labour 37,500

e) Manufacturing Overhead 57,000

Accounts Payable 57,000

f) Work in Process Inventory 52,500

Manufacturing Overhead 52,500

($35,000 × 150% = $52,500)

g) Finished Goods Inventory 94,100

Work in Process Inventory 94,100

($23,600 + $35,000 + $52,500 = $111,100)

($111,100 – $17,000 = $94,100)

h) Accounts Receivable 108,000

Sales 108,000

Cost of Goods Sold 54,000

Finished Goods Inventory 54,000

i) Manufacturing Overhead 576

Prepaid Supplies 576

j) Rent expense—office (20% x $8,750) 1,750

Manufacturing Overhead (factory rent: 80% x $8,750) 7,000

Cash 8,750

Exercise 176

Job cost sheets for Holdly Manufacturing are as follows:

Instructions

a) What is the balance in Work in Process Inventory on June 30 if these were the only unfinished jobs?

b) What is the predetermined overhead rate in June if overhead was applied on the basis of direct labour cost?

c) Assuming Job 218 is complete, what is the total cost for this job, and cost per unit?

d) Assuming Job 220 is the only unfinished job at June 30, what is the balance in Work in Process Inventory on this date?

Solution 176 (8–12 min.)

a) Job 218—$8,500 + $12,800 + $6,400 = $27,700

Job 220—$7,000 + $6,900 + $3,450 = 17,350

$45,050

b) Manufacturing overhead rate = 50% of direct labour cost:

($6,400 ÷ $12,800 or $3,450 ÷ $6,900)

c) Direct materials $ 8,500

Direct labour 12,800

Manufacturing overhead 6,400

Total cost $27,700

Unit cost ($27,700 ÷ 1,000) $27.70

d) Direct materials $7,000

Direct labour 6,900

Manufacturing overhead 3,450

Total cost of work in process inventory $17,350

Exercise 177

The accounting records of Small Manufacturing Company include the following information:

Dec 31 Jan 1

Work in process inventory $ 15,000 $ 12,000

Finished goods inventory 45,000 51,000

Direct materials used 425,000

Direct labour 128,000

Selling expenses 70,000

Manufacturing overhead is applied at a rate of 140% of direct labour cost.

Instructions

a) How much are the total of the debits to Work in Process Inventory during the year?

b) How much is the amount transferred to Finished Goods Inventory during the year?

c) How much is Cost of Goods Sold?

Solution 177 (6–8 min.)

a) Direct Materials $425,000

Direct Labour 128,000

Manufacturing Overhead Applied ($128,000 × 140%) 179,200

Total debits $732,200

b) Work In Process Inventory

Balance 12,000 Transferred to

From a) 732,200 Finished Goods 729,200

Balance 15,000

c) Finished Goods Inventory

Balance 51,000

From WIP 729,200 Cost of Goods Sold 735,200

Balance 45,000

Exercise 178

EKP Inc. started operations in September. At the end of the month, its Work in Process Inventory account showed the following entries:

Work In Process Inventory

Manufacturing overhead is applied based on direct material prices. At the end of September, there was only one job, job number 7, left unfinished. That job had been charged $2,000 in direct materials.

Instructions

Prepare a job-order sheet for the unfinished job.

Solution 178 (8–10 min.)

During the month of September, $10,000 + $15,000 + $25,000 or $50,000 had been applied to work in process inventory. $30,000 of that total had been applied to jobs that had been completed. That left total costs of $20,000 that have been applied to the one remaining job.

The predetermined overhead rate = MOH/Direct Material costs

= $25,000/$10,000

= 250%

EKP INC.

Job-order Sheet

Job 7

———————————————————————————————————————

Direct Material (given) $ 2,000

Direct Labour ($20,000 – $2,000 – $5,000) 13,000

Manufacturing Overhead ($2,000 X 2.5) 5,000

Total $20,000

Exercise 179

Chop Shop Manufacturing Company makes specialty tools. In July, Chop Shop incurred manufacturing costs of $4,000,000 for direct materials, direct labour, and overhead. 30% of the total costs represents overhead applied. The overhead rate is $1 for every $0.50 of direct labour costs incurred. Inventory balances were:

July 1 July 31

Raw materials $100,000 $ 80,000

Work in process 90,000 95,000

Finished goods 120,000 130,000

Instructions

a) Determine the cost of raw materials purchased in July.

b) Prepare a cost of goods manufactured schedule for July 2022.

c) Where does the cost you calculated in part b appear in the financial statements at year end? Explain.

Solution 179 (10–12 min.)

a) Overhead applied ($4,000,000 × 30%) $1,200,000

Direct labour used:

$1.00/$0.50 = $1,200,000/X $600,000

Direct materials used ($4,000,000 – $1,800,000) $2,200,000

Ending raw materials inventory $ 80,000

Direct materials used 2,200,000

2,280,000

Less: Beginning raw materials inventory 100,000

Raw materials purchases $2,180,000

b)

CHOP SHOP MANUFACTURING COMPANY

Cost of Goods Manufactured Schedule

For the Month Ended July 31, 2022

———————————————————————————————————————

Work in process inventory, July 1 $ 90,000

Direct materials used $2,200,000

Direct labour 600,000

Manufacturing overhead applied 1,200,000

Total manufacturing costs 4,000,000

Total cost of work in process inventory 4,090,000

Less: Work in process, July 31 95,000

Cost of goods manufactured $3,995,000

c) The cost of goods manufactured is transferred from Work in Process Inventory into Finished Goods Inventory. The Cost of the Goods Sold is then transferred to the Income Statement as an expense. The amount remaining in Finished Goods Inventory is reported on the Balance Sheet and the amount reported as Cost of Goods Sold is reported as an expense on the Income Statement.

Exercise 180

Global Manufacturing Company incurred the following transactions during March of 2022:

1. Materials purchased cost $102,000. Direct materials requisitioned during March:

Job 24 $43,000

Job 25 26,000

Job 26 21,000

$90,000

2. Indirect materials requisitioned during March totalled $1,500 at $500 per job.

3. Actual factory labour was $31,500. Direct labour charged to jobs during March was:

Job 23 $ 2,000

Job 24 12,000

Job 25 9,000

Job 26 7,000

$30,000

4. Beginning work in process inventory at March 1 consisted of Job 23 with a cost of $12,000. Finished goods inventory consisted of job 22 with a cost of $21,000. Beginning raw materials totalled $5,000.

5. Jobs 23, 24, and 26 were completed during March. Jobs 22 and 24 were sold.

6. Manufacturing overhead was applied to jobs worked on using a predetermined overhead rate based on 60% of direct labour costs.

7. During March the following additional manufacturing costs were incurred: Indirect labour, $1,500; Factory utilities, $4,500, factory supervision, $3,000; factory rent, $2,300; other factory overhead costs, 6,000.

Instructions

Post all amounts to T-accounts and determine the ending account balances at March 31, 2022.

Solution 180 (10–12 min.)

Exercise 181

Stadium Company begins operations on July 1, 2022. Information from job cost sheets shows the following:

Job A23 was completed in July. Job A21 was completed in August, and Jobs A22 and A25 were completed in September. Each job was sold for 40% above its cost in the month following completion.

Instructions

a) Calculate the balance in Work in Process Inventory at the end of July.

b) Calculate the balance in Finished Goods Inventory at the end of August.

c) Calculate the gross profit for September.

d) Explain where the balance of the “40% above its cost” is recorded in the financial statements. Since this 40% is in addition to cost, where is the original cost recorded once sold?

Solution 181 (8–10 min.)

a) Work in Process Inventory

July Job A21 $13,000

Job A22 6,100

Balance, July 31 $19,100

b) Finished Goods Inventory

Job A21 $17,100

c) Gross Profit

Month Job Number Sales COGS Gross Profit

September A21 $23,940 $17,100 $6,840

d) The 40% above cost is captured in Sales and Cash (or Accounts Receivable if credit sales are taken.) The journal entry would be a debit to Cash (or A/R) and a credit to Sales. Once sold, product costs are transferred from Finished Goods to Cost of Goods Sold.

Exercise 182

Welleslay Company begins the month of March with $17,000 of Work in Process costs from job 324. Information from job cost sheets shows the following additional costs assigned during March, April, and May of 2022:

Job 324 was completed in March. Jobs 325 and 327 were completed in May, and Job 326 was completed in April. Jobs are sold during the month after completion. Total revenue for jobs sold during the 3 month period is $145,000.

Instructions

Calculate the cost of the Work in Process and Finished Goods Inventory accounts at the end of May.

Solution 182 (5–6 min.)

Exercise 183

Johnson Company makes stainless steel plates for the refining industries. For Job 123 it put 40,000 units into production and the total cost of producing this job was $200,000. On August 31, Job 123 is sold to the customer for $230,000 in cash.

Instructions

Journalize the entries for the completion and sale of the job.

Solution 183 (5 min.)

Aug 31 Finished Goods Inventory 200,000

Work in Process Inventory 200,000

Aug 31 Cash 230,000

Sales 230,000

Aug 31 Cost of Goods Sold 200,000

Finished Goods Inventory 200,000

Exercise 184

Fred’s Lawncare Service Company employs a job-order cost accounting system and had the following transactions for Job 123:

1. Supplies to the project of $6,000 ($4,000 direct and $2,000 indirect)
2. Salaries and wages of $20,000 ($15,000 direct and $5,000 indirect)
3. Manufacturing overhead was applied to jobs using a predetermined overhead rate based on 50% of direct labour costs.

Instructions

Prepare journal entries to record the above transactions.

Solution (5–7 min.)

1. Service Contracts in Process 4,000

Operating Overhead 2,000

Supplies 6,000

2. Service Contracts in Process 15,000

Operating Overhead 5,000

Factory Labour 20,000

3. Service Contracts in Process 7,500

Operating Overhead 7,500

Exercise 185

Mary’s Cleaning Service Company employs a job-order cost accounting system. The following transactions occurred in the first month of operations:

1. Supplies (85% direct and 15% indirect) requisitioned during the month:

Job 10 $24,000

Job 11 12,000

Job 12 28,000

$64,000

2. Service salaries and wages (85% direct and 15% indirect) incurred and charged to jobs during the month was:

Job 10 $40,000

Job 11 32,000

Job 12 20,000

$92,000

3. Manufacturing overhead was applied to jobs worked on using a predetermined overhead rate based on 80% of direct labour costs.

4. Job 10 and Job 12 were completed during the month.

Instructions

Prepare journal entries to record the above transactions.

Solution 185 (7–10 min.)

a) 1. Service Contracts in Process 54,400

Operating Overhead 9,600

Supplies 64,000

2. Service Contracts in Process 78,200

Operating Overhead 13,800

Service Salaries and Wages 92,000

3. Service Contracts in Process 62,560

Operating Overhead 62,560

4. Cost of Completed Service Contracts 152,800

Service Contracts in Process 152,800

[Job 10 $91,200 [$24,000+$40,000 +(.85 x $40,000 x .80)]; Job 12 $61,600 [$28,000+$20,000 +(.85 x $20,000 x .80)]

Exercise 186

Hooper Manufacturing Company employs a job-order cost accounting system and keeps perpetual inventory records. The following transactions occurred in the first month of operations:

1. Direct materials requisitioned during the month:

Job 56 $12,000

Job 57 6,000

Job 58 14,000

$32,000

2. Direct labour incurred and charged to jobs during the month was:

Job 56 $20,000

Job 57 16,000

Job 58 10,000

$46,000

3. Manufacturing overhead was applied to jobs worked on using a predetermined overhead rate based on 80% of direct labour costs.

4. Actual manufacturing overhead costs incurred during the month amounted to $39,000.

5. Job 56 consisting of 2,000 units and Job 58 consisting of 400 units were completed during the month.

Instructions

a) Prepare journal entries to record the above transactions.

b) Answer the following:

i. How much manufacturing overhead was applied to Job 58 during the month?

ii. Calculate the unit cost of Jobs 56 and 58.

iii. What is the balance in Work in Process Inventory at the end of the month?

iv. Determine if manufacturing overhead was under- or over-applied during the month. By how much?

Solution 186 (10–14 min.)

a) 1. Work in Process Inventory 32,000

Raw Materials Inventory 32,000

2. Work in Process Inventory 46,000

Factory Labour 46,000

3. Work in Process Inventory 36,800

Manufacturing Overhead 36,800

4. Manufacturing Overhead 39,000

Cash, Payables, etc. 39,000

5. Finished Goods Inventory 80,000

Work in Process Inventory 80,000

[Job 56 $48,000; Job 58 $32,000—see b) ii.]

b) i. $10,000 × 80% = $8,000

ii. Unit cost: Job 56, $24.00; Job 58, $80.00.

Job 56 Job 58

Direct materials $12,000 $14,000

Direct labour 20,000 10,000

Overhead applied 16,000 8,000

Total cost 48,000 32,000

Units ÷ 2,000 ÷ 400

Unit cost $24.00 $80.00

iii. Work In Process Inventory is $34,800 and consists of work performed on Job 57.

Job 57

Direct materials $6,000

Direct labour 16,000

Overhead applied 12,800

Total cost $34,800

iv. Manufacturing overhead costs were under applied by $2,200 during the month.

Actual manufacturing overhead $39,000

Manufacturing overhead applied ($46,000 x 80%) 36,800

Under-applied overhead $ 2,200

Exercise 187

The following inventory information is available for Hoobastank Enterprises for the year ended December 31, 2022:

Inventories Beginning Ending

Raw materials $11,000 $ 8,000

Work in process 24,000 21,000

Finished goods 12,000 11,000

Total $47,000 $40,000

In addition, the following transactions occurred in 2022:

1. Raw materials purchased on account, $135,000.

2. Incurred factory direct labour, $52,000; all except $2,000 is paid.

3. Incurred the following costs during the year, all of which are for the factory: Utilities $1,800, Depreciation on manufacturing machinery $12,000, Manufacturing machinery repairs $1,200, Factory insurance $4,300.

4. Assigned $51,000 of direct factory labour to jobs.

5. Incurred $1,000 of indirect labour.

6. Applied $20,500 of overhead to jobs.

Instructions

a) Create T-accounts for the manufacturing costs and inventories and post the transactions to the accounts.

b) From an analysis of the accounts, calculate the following:

i. Raw materials used.

ii. Completed jobs transferred to finished goods.

iii. Cost of goods sold.

iv. Under- or over-applied overhead.

Solution 187 (14–18 min.)

a)

b) i. Raw materials used = $11,000 + $135,000 – $8,000 = $138,000

ii. Completed jobs transferred to finished goods =

$24,000 + $138,000 + $51,000 + $20,500 – $21,000 = $212,500

iii. Cost of goods sold = $12,000 + $212,500 – $11,000 = $213,500

iv. Overhead over-applied = $200 (credit balance in Manufacturing Overhead)

Exercise 188

Twizzle Manufacturing is a small manufacturer that uses machine hours as its activity base for assigning overhead costs to jobs. The company estimated the following amounts for 2022 for the company and for Job 62:

Company Job 62

Direct materials $60,000 $4,000

Direct labour $25,000 2,500

Manufacturing overhead costs $72,000

Machine hours 90,000 mh 1,350 mh

During 2022, the actual machine hours totalled 94,000, and actual overhead costs were $71,000.

Instructions

a) How much is the predetermined overhead rate?

b) How much are total manufacturing costs of job 62?

c) How much overhead is over or under applied for the year for the company? State the amount and whether it’s over or under.

d) If Twizzle Manufacturing sells Job 62 for $16,000, how much is gross profit?

Solution 188 (7–9 min.)

a) $72,000/90,000 = $0.80 per machine hour

b) $4,000 + $2,500 + ($0.80 x 1,350) = $7,580

c) Actual – Applied = Over/Under applied

$71,000 – ($0.80 x 94,000) = $4,200 over-applied

d) $16,000 – $7,580 (from part b)) = $8,420

Exercise 189

Essentials Manufacturing, Inc. uses a job-order costing system. The company uses predetermined overhead rates in applying manufacturing overhead to individual jobs. The predetermined overhead rate in the Shoe Department is based on direct labour hours, the rate in the Sock Department is based on machine hours, and the rate in Boxers Department is based on direct labour cost. At the beginning of the most recent year, members of Essentials’ management team made the following estimates for the year:

Department

Shoe Sock Boxers

Direct labour hours 40,000 26,000 20,000

Machine hours 50,000 18,000 30,000

Security guards’ hours 80 70 60

Direct labour cost $500,000 $250,000 $320,000

Direct materials $65,000 $56,000 $32,000

Indirect materials $20,000 $30,000 $40,000

Total manufacturing overhead $220,000 $234,000 $112,000

Administrative salaries $100,000 $75,000 $80,000

Essential Manufacturing's records show the following information for Job B152, which was entered into production on January 23 and completed on March 18:

Department

Shoe Sock Boxers

Direct labour hours 350 160 100

Machine hours 100 50 95

Direct labour cost $1,600 $1,200 $1,400

Direct materials $600 $1,250 $2,000

On December 31, Essential showed the following actual costs and operating data for all jobs worked on during the year: Department ______

Shoe Sock Boxers

Direct labour hours 41,000 28,000 23,000

Machine hours 52,000 17,600 32,000

Direct labour cost $506,000 $240,000 $310,000

Direct materials $63,400 $54,300 $30,600

Manufacturing overhead $230,000 $235,000 $108,000

Instructions

a) Calculate the predetermined overhead rates for the three departments.

b) Calculate the total manufacturing overhead applied to Job B152.

c) Calculate the amount of under- or over-applied overhead in each department at the end of the year and indicate whether it is under- or over-applied.

Solution 189 (10–12 min.)

a) Predetermined overhead rates:

Shoe Department—$220,000 ÷ 40,000 direct labour hours = $5.50 per direct labour hour

Sock Department—$234,000 ÷ 18,000 machine hours = $13.00 per machine hour

Boxer Department—$112,000 ÷ $320,000 direct labour cost = 35% of direct labour cost

b) Shoe Department—350 direct labour hours × $5.50 per direct labour hour = $1,925

Sock Department—50 machine hours × $13 per machine hour = 650

Boxers Department—$1,400 direct labour cost × 35% = 490

Total overhead applied to Job B 152 $3,065

c) Shoe Department—41,000 DLH × $5.50 = $225,500

compared to actual overhead $230,000 = $4,500 under applied

Sock Department—17,600 MH × $13 = $228,800

compared to actual overhead $235,000 = $6,200 under applied

Boxers Department—$310,000 DLC × 35% = $108,500

compared to actual overhead $108,000 = $500 over-applied

Note: students must be able to exclude the extraneous information not relevant to job costing, which includes the hours worked by security guards and administrative salaries for each department.

Further, students must exclude the amounts given for “Indirect Materials.” Included in management’s given estimates was the term “Total Manufacturing Overhead.” Since this is a total, it would already include indirect materials, so to include indirect materials separately would be double counting.

Exercise 190

Leftwich Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $840,000 for the year, and machine usage is estimated at 120,000 hours.

In the first quarter of the calendar year, $240,000 of overhead costs was incurred and 31,000 machine hours were used. For the remainder of the year, $590,000 of additional overhead costs are incurred. Actual machine hours exceeded expected machine hours by 1/60^th of the original estimate.

Instructions

a) Calculate the manufacturing overhead rate for the year.

b) How much is the amount of over- or under-applied overhead at March 31? How should this amount be reported in the financial statements prepared on March 31?

c) How much is the amount of over- or under-applied overhead at December 31 if over- or under-applied overhead has not been accounted for since March 31?

Solution 190 (7–11 min.)

a) $7.00 per machine hour ($840,000 ÷ 120,000)

b) Incurred $240,000

Applied ($7.00 × 31,000) 217,000

Under-applied overhead $ 23,000

The under-applied overhead will be closed to COGS if deemed immaterial or prorated between WIP, Finished Goods and COGS if deemed material at the end of the accounting period.

c) 1/60^th x 120,000 expected machine hours = 2,000 hours

Actual machine hours = 120,000 expected hours plus 2,000 additional hours = 122,000 hours.

Machine hours from April–December = 122,000 – 31,000 = 91,000

Incurred from April through December $590,000

Applied ($7.00 × 91,000) 637,000

Over-applied overhead $ 47,000

Exercise 191

Trifiletti Company estimates that its annual manufacturing overhead costs will be $600,000 for 2022. The actual overhead costs at the end of 2022 are $605,000. Activity base information for 2022 follows:

Activity Base Estimated Actual

Direct Labour Cost $1,200,000 $1,218,000

Direct Labour Hours 120,000 116,000

Machine Hours 60,000 58,000

Instructions

a Calculate the predetermined overhead rate for each activity base.

b) Calculate the amount of overhead applied in 2022 for each activity base.

c) Calculate the over- or under-applied overhead using each activity base.

d) What is the purpose of applying overhead?

Solution 191 (8–12 min.)

a) Predetermined overhead rate as a % of direct labour cost:

$600,000 ÷ $1,200,000 = 50%

Predetermined overhead rate per hour of direct labour:

$600,000 ÷ 120,000 = $5.00 per hour

Predetermined overhead rate per machine hour used:

$600,000 ÷ 60,000 = $10.00 per machine hour

b) Overhead applied as a % of direct labour cost:

$1,218,000 ×.50 = $609,000

Overhead applied per hour of direct labour:

116,000 × $5.00 = $580,000

Overhead applied per machine hour used:

58,000 × $10.00 = $580,000

c) Overhead applied as a % of direct labour cost:

Over-applied overhead = $609,000 – $605,000 = $4000

Overhead applied per hour of direct labour:

Under-applied overhead = $580,000 – $605,000 = $25,000

Overhead applied per machine hour used:

Under-applied overhead = $580,000 – $605,000 = $25,000

d) Overhead is applied because it is important to know the cost of jobs during the accounting period. If a company uses actual overhead, it must wait until the end of the accounting period to determine the actual cost. At this point, it might be too late to change production or modify costs in order to be profitable.

Exercise 192

The following information is available for Molly of Maple Company at December 31, 2022:

Inventory Balance

Beginning of Year End of Year

Finished Goods $ 25,000 $ 26,000

Work in Process 158,000 153,000

Direct Materials 16,000 14,500

During the year, the following information was recorded:

1. Purchased $56,500 of raw materials, of which $7,000 were indirect materials.

2. Wage expenses equalled $100,250, of which $75,000 was direct labour, and $16,000 was indirect labour. The remainder was sales and administration.

3 Manufacturing overhead equalled $160,000, in addition to the overhead costs associated with raw materials and wages.

4. Manufacturing overhead applied equalled $180,000.

Instructions

a) Prepare a cost of goods manufactured schedule for 2022.

b) Calculate the over- or under-applied manufacturing overhead for the year.

Solution 192 (9–12 min.)

a)

MOLLY OF MAPLE COMPANY

Cost of Goods Manufactured Schedule

For the Year Ended December 31, 2022

———————————————————————————————————————

Work in process Inventory, January 1 $ 158,000

Direct material used

Beginning Inventory $16,000

Purchases ($56,500-$7,000) 49,500

Total direct materials available 65,500

Less ending direct materials 14,500

Total direct materials used 51,000

Direct labour 75,000

Manufacturing overhead applied 180,000

Total manufacturing costs 306,000

Total cost of work in process inventory 464,000

Less: Work in process Inventory, December 31 153,000

Cost of goods manufactured $311,000

b)

Actual manufacturing overhead ($7,000+$16,000+$160,000) $183,000

Manufacturing overhead applied 180,000

Manufacturing overhead under applied $ 3,000

COMPLETION STATEMENTS

193. Cost accounting involves the measuring, recording, and reporting of ___ costs.

194. There are two basic types of cost accounting systems: (1) ___ system, and (2) ___ system.

195. A ___ cost system is appropriate when homogeneous products are continuously produced, whereas a ___ cost system would be more appropriate if the product is custom-made.

196. In a job-order system, raw materials purchased are charged to the ___ account.

197. If $30,000 direct materials are requisitioned for a job and $7,000 of indirect materials are requisitioned for general use, the debit to Work In Process Inventory should be for $___.

198. The cost of producing a particular job under a job-order cost system is accumulated on a record called a ___.

199. Of these three accounts; Work in Process Inventory, Factory Labour, and Manufacturing Overhead, ___ is not a control account.

200. Manufacturing overhead is applied to jobs by means of a ___ rate.

201. If actual manufacturing overhead was greater than the amount of manufacturing overhead applied to jobs, the Manufacturing Overhead account will have a ___ balance and overhead is said to be ___.

202. When a job is finished, an entry is made to transfer its total cost to ___.

203. A service company uses an account called ___ rather than inventory accounts.

204. At the end of the year, any immaterial balance in the Manufacturing Overhead account should be eliminated as an adjustment to ___.

ANSWERS TO COMPLETION STATEMENTS

193. product

194. job-order cost, process cost

195. process, job-order

196. Raw Materials Inventory

197. 30,000

198. job cost sheet

199. Factory Labour

200. predetermined overhead

201. debit, under applied

202. finished goods inventory

203. service contracts in process

204. cost of goods sold

MATCHING

205. Match the items in the two columns below by entering the appropriate code letter in the space provided.

A. Cost accounting F. Process cost system

B. Materials requisition slip G. Job cost sheets

C. Time ticket H. Predetermined overhead rate

D. Cost accounting system I. Over-applied overhead

E. Job-order cost system J. Under-applied overhead

___ 1. Used to apply manufacturing overhead to jobs.

___ 2. Measures, records, and reports product costs.

___ 3. When actual manufacturing overhead costs are greater than the overhead applied to products.

___ 4. Manufacturing cost accounts are fully integrated into the general ledger.

___ 5. Source document that authorizes issuance of raw materials to production.

___ 6. Appropriate when products have distinguishing and heterogeneous characteristics.

___ 7. Constitutes a subsidiary ledger for Work in Process Inventory.

___ 8. Indicates number of hours that employees work and the account to be charged.

___ 9. Appropriate when products are homogeneous and are produced continuously.

___ 10. When actual manufacturing overhead costs are less than the overhead applied to products.

ANSWERS TO MATCHING

1. H

2. A

3. J

4. D

5. B

6. E

7. G

8. C

9. F

10. I

SHORT-ANSWER ESSAY QUESTIONS

SAE 206

Explain the difference between a job-order costing system and a process-costing system.

Solution 206

Under a job-order cost system, the company assigns costs to each job or to each batch of goods. Each job (or batch) has its own distinguishing characteristics. The objective is to calculate the cost per job. At each point in the manufacture of a product or the provision of a service, the job and its associated costs can be identified. A job-order cost system measures costs for each completed job, rather than for set time periods.

A company uses a process cost system when it manufactures a large volume of similar products. Production is continuous to ensure that adequate inventories of the finished product(s) are available. Process costing accumulates product-related costs for a period of time (such as a week or a month) instead of assigning costs to specific products or job orders. In process costing, the costs are assigned to departments or processes for a set (predetermined) period of time.

SAE 207

The below illustration shows a detailed presentation of the flow of costs in a manufacturing setting:

Job-order cost accounting system

Instructions

What are the two major steps in the flow of costs indicated in the above illustration? Explain.

Solution 207

The illustration indicates that there are two major steps in the flow of costs: (1) accumulating the manufacturing costs incurred and (2) assigning the accumulated costs to the work done. As shown, manufacturing costs incurred are accumulated in entries 1 to 3 by debits to Raw Materials Inventory, Factory Labour, and Manufacturing Overhead. When these costs are incurred, no attempt is made to associate them with specific jobs. The remaining entries (entries 4 to 8) assign the manufacturing costs incurred.

SAE 208

A job-order cost accounting system is fully integrated into the general ledger of a company. Identify the major general ledger accounts used in a job-order cost system. Explain how manufacturing costs flow through these accounts so that inventories may be costed and income determined when goods are sold.

Solution 208

When a job-order cost accounting system is fully integrated into the general ledger of a company, the major general ledger accounts used are Raw Materials Inventory, Factory Labour, Manufacturing Overhead, Work in Process Inventory, and Finished Goods Inventory. As manufacturing costs are incurred, they are debited to the Raw Materials Inventory, Factory Labour, and Manufacturing Overhead accounts. As materials are used, labour is assigned, or overhead is applied, the costs are taken out of these accounts and debited to Work in Process Inventory. When jobs are finished, the costs flow from the Work in Process Inventory account to the Finished Goods Inventory account, and when jobs are sold, the costs are transferred to Cost of Goods Sold from Finished Goods Inventory.

SAE 209

Explain the full assignment process of direct and indirect factory employee labour, taxes and benefits to job cost sheets and the general ledger.

Solution 209

The payroll department combines the employee’s hourly gross wages from the time tickets with any applicable payroll taxes and associated fringe benefits. This total direct labour cost is posted to the job cost sheets.

In an automated system, after factory employees scan their identification codes, labour costs are automatically calculated and posted to electronic job cost sheets.

After posting to individual job cost sheets, the company completes the assignment process with a journal entry for total labour cost. It debits account Work in Process Inventory for direct labour and debits Manufacturing Overhead for indirect labour.

SAE 210

Manufacturing overhead items are indirect product costs that cannot be traced to individual products. Explain how manufacturing overhead costs are accumulated and how they are assigned to products in a job-order cost system.

Solution 210

As manufacturing overhead costs are incurred, they are debited to the Manufacturing Overhead account. As jobs move through the factory, manufacturing overhead costs are applied to specific jobs using the predetermined overhead rate. This rate is calculated prior to the beginning of the year by dividing estimated annual overhead costs by expected annual operating activity (generally expressed as direct labour hours, direct labour cost, or machine hours). The overhead is applied by determining how much activity was expended on a particular job (for example, direct labour hours), and applying the rate to that activity.

SAE 211

People Carrier Systems, Inc. (PCS) modifies vans that seat 15–20 people by adding additional safety features or wheelchair ramps. Most of its customers are cities and municipalities, who use the vans to transport school children, the elderly, or the handicapped. The company has specialized in a no-frills approach, emphasizing safety, high quality, and low cost. The company's president was quoted as saying, "Let the other guys make a van pretty. We get people where they need to go—faster, better, and cheaper than anybody else."

The company obtains jobs by being the lowest bidder in a sealed bidding process. Recently, the company was solicited to submit a bid for a top-10 college, for a van to be used by its athletic team. Some specialized items were required, such as the school's logo on the outside of the van, and the vinyl seats had to be covered in school colours. The company submitted a bid, and was very surprised to obtain it.

When the job was being prepared, the job manager pointed out that several extra costs could result in this job showing a loss. The boss, an ardent supporter of sports in general and this team in particular, told the manager to just record the standard labour and overhead cost for this job. He says that they could use the present rate for specialized jobs, and increase the overhead application rate (used in submitting bids) by 5% for future routine jobs. "After all," he says, "nobody else comes close to our price anyway. This could start a whole new line of business for us."

Instructions

a) Who are the stakeholders in the decision to increase overhead for routine jobs?

b) Is the decision to subsidize special jobs by increasing the overhead rate on routine jobs ethical? Briefly explain.

Solution 211

a) The stakeholders include:

• the employees and managers of PCS
• customers who purchase standard vans
• customers who purchase sports vans
• shareholders of PCS

b) The decision could be considered ethical, if the company clearly understands that it is allowing the customers of the standard vans to cover some of the costs of the specialty ones. This might not be a bad decision, especially if the specialty business is only a small fraction of the total business.

The company might be compromising its own best interests, however, if it arbitrarily damages relationships with existing customers in order to gain others. It seems undeniable that established customers are preferable to untested ones. Thus, the decision, while probably ethical, may not be a good decision.

SAE 212

Bridal Treasures, Inc. makes customized wedding gowns. The customer selects a pattern for the basic gown, and then selects fabric and trim. Once the design and the materials have been agreed upon, a Statement of Estimated Cost is signed by the company and by the customer.

Overhead is applied based on the number of days a gown is in process. Usually, five gowns are being worked on at a time. Therefore, each gown is charged 1/5 of a daily estimated overhead amount.

Customer Ruth Finney's wedding dress took four days to complete. However, after the first three days had elapsed, Diane Lange, a movie personality, suddenly decided to get married, and ordered a very lavish gown. All other work was suspended, and the work on Ms. Finney's dress was delayed six days. The final day of its construction was on the tenth day after it had been begun.

Instructions

You are the accounting manager for Bridal Treasures. Write a memo to the billing department. Instruct them as to the appropriate number of overhead days to charge to Ms. Finney's account.

Solution 212

TO: Billing Department

FROM: M. Long, Accounting Manager

RE: Overhead billing, Finney account

As you know, our standard procedure in billing overhead is to simply multiply our daily overhead rate by the number of days the gown was in our possession. However, for the Finney gown and any other jobs we suspended for the Diane Lange gown, we should not charge for the days the gowns were in our possession but not being worked on.

We should adjust the billing for the Diane Lange gown, so that it absorbs the full daily cost of overhead, since it actually was the only job worked on during those six days. The Finney job should be charged only four days of overhead. Other suspended jobs should be treated similarly.

Please call if you have questions.

(signed)

MULTI-PART QUESTION

213. Chisholm Industries uses a job-order costing system and does custom work on exhaust manifolds. In November 2022 it had two jobs in its ending Work in Process inventory. The components of each job are as follows:

Job 123 Job 234

Direct labour $5,500 $17,800

Direct materials 7,400 8,400

In December the company worked on the two jobs and added another one. The costs incurred in December are:

Job 123 Job 234 Job 345

Direct labour $6,100 $4,300 $11,200

Direct materials 2,500 1,200 12,000

Chisholm applies overhead at a rate of 65% of its direct labour cost. At the end of November, the manufacturing overhead account showed a debit balance of $10,000. In December, the company incurred manufacturing costs of $12,300.

Instructions

a) Calculate the manufacturing overhead account at the end of December and indicate if it is over or under applied.

b) Indicate the alternatives that the company has to dispose of this amount.

Solution 213

a)

Manufacturing OH balance @ November 30, 2022 $10,000

Manufacturing overhead incurred in December 12,300

Manufacturing overhead applied in December ($21,600 x 65%) (14,040)

Manufacturing OH balance @ December 31, 2022 $8,260 Under applied

(Manufacturing OH incurred: $6,100 + $4,300 + $11,200 = $21,600)

b) The company can allocate the under-applied overhead to its Cost of Goods Sold for the year or allocate it to the various components of its Work in Process Inventory, Finished Goods Inventory and Cost of Goods Sold account on a prorated basis.

In this case it may be best to prorate among the accounts as this places overhead costs in those areas where they were initially incurred. For some reason, the company’s predetermined overhead rate looks like it is well off of the actual amounts being incurred and this should cause management to investigate the reasons why this is happening.

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