CH 3 Job Order Costing

Chapter 03
Product Costing and Cost Accumulation in a Batch Production Environment

True / False Questions

1. Manufacturing overhead is a pool of indirect production costs that must somehow be attached to each unit
manufactured.

True False

2. Electricity costs that were incurred by a company's production processes should be debited to Utilities
Expense.

True False

3. The final step in recognizing the completion of production requires a company to debit Finished-Goods
Inventory and credit Work-in-Process Inventory.

True False

4. Under- or overapplied manufacturing overhead at year-end is most commonly charged or credited to Work-
in-Process Inventory.

True False

5. The term "normal costing" refers to the use of job-costing systems.

True False

Multiple Choice Questions

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6. Product costing in a manufacturing firm is the process of:

A. accumulating the company's period costs.

B. allocating costs among the firm's departments.
C. placing a value on the company's fixed assets.
D. assigning costs to the firm's inventory.
E. assigning costs to the company's managers.

7. Which of the following statements is true?

A. Service firms have little need for determining the cost of their services.
B. The concept of product costing is relevant only for manufacturing firms.
C. The cost of year-end inventory appears on the balance sheet as an expense.
D. Service companies use cost information for planning and control purposes.
E. Mining and petroleum companies have no inventoriable costs.

8. Which of the following manufacturers would most likely use job-order costing?

A. Chemical manufacturers.
B. Microchip processors.
C. Custom-furniture manufacturers.
D. Gasoline refiners.
E. Fertilizer manufacturers.

9. A custom-home builder would likely utilize:

A. job-order costing.
B. process costing.
C. mass customization.
D. process budgeting.
E. joint costing.

10. Which of the following types of companies would most likely use process costing?

A. Aircraft manufacturers.
B. Textile manufacturers.
C. Textbook publishers.
D. Custom-machining firms.
E. Shipbuilders.

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11. A manufacturing firm produces goods in accordance with customer specifications, commencing production
upon receipt of a purchase order. To accumulate the cost of each order, the company would use a:

A. job-cost record.
B. cost allocation matrix.
C. production log.
D. overhead sheet.
E. manufacturing cost record.

12. A typical job-cost record would provide information about all of the following items related to an order
except:

A. the cost of direct materials used.

B. administrative costs.
C. direct labor costs incurred.
D. applied manufacturing overhead.
E. direct labor hours worked.

13. Which of the following statements about material requisitions is false?

A. Material requisitions are often computerized.

B. Material requisitions are a common example of source documents.
C. Material requisitions contain information that is useful to the cost accounting department.
D. Material requisitions authorize the transfer of materials from the production floor to the raw materials
warehouse.
E. Material requisitions are routinely linked to a bill of materials that lists all of the materials needed to
complete a job.

14. Pruitt Company has developed an integrated system that coordinates the flow of all goods, services, and
information into and out of the organization, working with raw material vendors as well as customers to
improve service and reduce costs. The firm is said to be using:

A. participative management.
B. top-down management.
C. strategic cost management.
D. supply chain management.
E. management by objectives (MBO).

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15. The assignment of direct labor cost to individual jobs is based on:

A. an estimate of the total time spent on the job.

B. actual total payroll cost divided equally among all jobs in process.
C. estimated total payroll cost divided equally among all jobs in process.
D. the actual time spent on each job multiplied by the wage rate.
E. the estimated time spent on each job multiplied by the wage rate.

16. When using normal costing, the total production cost of a job is composed of:

A. direct material and direct labor.

B. direct material, direct labor, manufacturing overhead, and outlays for selling costs.
C. direct material, direct labor, manufacturing overhead, and outlays for both selling and administrative
costs.
D. direct material, direct labor, and applied manufacturing overhead.
E. direct material, direct labor, and actual manufacturing overhead.

17. Manufacturing overhead:

A. includes direct materials, indirect materials, indirect labor, and factory depreciation.
B. is easily traced to jobs.
C. includes all selling costs.
D. should not be assigned to individual jobs because it bears no obvious relationship to them.
E. is a pool of indirect production costs that must somehow be attached to each unit manufactured.

18. As production takes place, all manufacturing costs are added to the:

A. Work-in-Process Inventory account.

B. Manufacturing-Overhead Inventory account.
C. Cost-of-Goods-Sold account.
D. Finished-Goods Inventory account.
E. Production Labor account.

19. Which of the following statements regarding work in process is not correct?

A. Work in process is partially completed inventory.

B. Work in process consists of direct labor, direct material, and manufacturing overhead.
C. Work-in-Process Inventory is debited to record direct material used and direct labor incurred.
D. Work-in-Process Inventory appears on the year-end balance sheet.
E. Work-in-Process Inventory is credited when goods are sold.

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20. Which of the following statements about manufacturing cost flows is false?

A. Direct materials, direct labor, and manufacturing overhead are entered in the Work-in-Process Inventory
account.
B. The Finished-Goods Inventory account will contain entries that reflect the cost of goods sold during the
period.
C. The cost of units sold during the period will typically appear on the income statement.
D. When a company sells goods that cost $54,000 for $60,000, the firm will enter $6,000 in an account
entitled Profit on Sale.
E. Units are normally transferred from Work-in-Process Inventory to Finished-Goods Inventory.

21. Which of the following statements about materials is false?

A. Acquisitions of materials are normally charged to the Purchases account.

B. The use of direct materials gives rise to a debit to Work-in-Process Inventory.
C. The use of indirect materials gives rise to a debit to Manufacturing Overhead.
D. The use of indirect materials gives rise to a credit to Manufacturing Supplies Inventory.
E. Direct materials are accounted for in a different manner than indirect materials.

22. Summers Corporation recently used $75,000 of direct materials and $9,000 of indirect materials in
production activities. The journal entries reflecting these transactions would include:

A. a debit to Manufacturing Overhead for $9,000.

B. a debit to Manufacturing Overhead for $84,000.
C. a debit to Raw-Material Inventory for $75,000.
D. a debit to Work-in-Process Inventory for $84,000.
E. a credit to Manufacturing Overhead for $9,000.

23. A review of a company's Work-in-Process Inventory account found a debit for materials of $67,000. If all
procedures were performed in the correct manner, this means that the firm:

A. also recorded a credit to Raw-Material Inventory.

B. also recorded a credit to Manufacturing Supplies Inventory.
C. was accounting for the usage of direct materials.
D. was accounting for the usage of indirect materials.
E. also recorded a credit to Raw-Material Inventory and was accounting for the usage of direct materials.

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24. Othello Manufacturing incurred $106,000 of direct labor and $11,000 of indirect labor. The proper journal
entry to record these events would include a debit to Work in Process for:

A. $0 because Work in Process should be credited.

B. $0 because Work in Process is not affected.
C. $11,000.
D. $106,000.
E. $117,000.

25. The following information relates to October:
Production supervisor's salary: $3,500

Factory maintenance wages: 250 hours at $10 per hour
The journal entry to record the preceding information is:

A.
B.
C.
D.
E.
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26. Electricity costs that were incurred by a company's production processes should be debited to:

A. Utilities Expense.
B. Accounts Payable.
C. Cash.
D. Manufacturing Overhead.
E. Work-in-Process Inventory.

27. The journal entry needed to record $5,000 of advertising for Westwood Manufacturing would include:

A. a debit to Advertising Expense.

B. a credit to Advertising Expense.
C. a debit to Manufacturing Overhead.
D. a credit to Manufacturing Overhead.
E. a debit to Projects-in-Process.

28. Reynardo Company incurred $90,000 of depreciation for the year. Eighty percent relates to the firm's
production facilities, and 20% relates to sales and administrative offices. If all items are handled in the
proper manner, a review of the company's accounting records should reveal a:

A. debit to Depreciation Expense for $90,000.

B. debit to Manufacturing Overhead for $90,000.
C. debit to Manufacturing Overhead for $72,000.
D. debit to Work-in-Process Inventory for $18,000.
E. credit to Cash for $90,000.

29. The process of assigning overhead costs to the jobs that are worked on is commonly called:

A. service department cost allocation.

B. overhead cost distribution.
C. overhead application.
D. transfer costing.
E. overhead cost apportionment.

30. Which of the following is the correct method to calculate a predetermined overhead rate?

A. Budgeted total manufacturing cost ÷ budgeted amount of cost driver.

B. Budgeted overhead cost ÷ budgeted amount of cost driver.
C. Budgeted amount of cost driver ÷ budgeted overhead cost.
D. Actual overhead cost ÷ budgeted amount of cost driver.
E. Actual overhead cost ÷ actual amount of cost driver.

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31. Metro Corporation uses a predetermined overhead rate of $20 per machine hour. In deriving this figure, the
company's accountant used:

A. a denominator of budgeted machine hours for the current accounting period.
B. a denominator of actual machine hours for the current accounting period.
C. a denominator of actual machine hours for the previous accounting period.
D. a numerator of budgeted machine hours for the current accounting period.
E. a numerator of actual machine hours for the current accounting period.

32. Strong Company applies overhead based on machine hours. At the beginning of 20x1, the company
estimated that manufacturing overhead would be $500,000, and machine hours would total 20,000. By 20x1
year-end, actual overhead totaled $525,000, and actual machine hours were 25,000. On the basis of this
information, the 20x1 predetermined overhead rate was:

A. $0.04 per machine hour.

B. $0.05 per machine hour.
C. $20 per machine hour.
D. $21 per machine hour.
E. $25 per machine hour.

33. Dixie Company, which applies overhead at the rate of 190% of direct material cost, began work on job no.
101 during June. The job was completed in July and sold during August, having accumulated direct material
and labor charges of $27,000 and $15,000, respectively. On the basis of this information, the total overhead
applied to job no. 101 amounted to:

A. $0.
B. $28,500.
C. $51,300.
D. $70,500.
E. $79,800.

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34. Huxtable charges manufacturing overhead to products by using a predetermined application rate, computed
on the basis of machine hours. The following data pertain to the current year:
Budgeted manufacturing overhead: $480,000

Actual manufacturing overhead: $440,000
Budgeted machine hours: 20,000
Actual machine hours: 16,000
Overhead applied to production totaled:

A. $352,000.
B. $384,000.
C. $550,000.
D. $600,000.
E. some other amount.

35. Simone uses a predetermined overhead application rate of $8 per direct labor hour. A review of the
company's accounting records for the year just ended discovered the following:
Underapplied manufacturing overhead: $7,200

Budgeted labor hours: 50,000
Simone's actual labor hours worked totaled:

A. 48,100.
B. 49,100.
C. 49,900.
D. 50,900.
E. cannot be determined based on the information presented.

36. Trenton worked on four jobs during its first year of operation: nos. 401, 402, 403, and 404. A review of job
no. 403's cost record revealed direct material charges of $40,000 and total manufacturing costs of $50,000.
If Trenton applies overhead at 150% of direct labor cost, the overhead applied to job no. 403 must have
been:

A. $0.
B. $6,000.
C. $4,000.
D. $3,333.
E. $5,000.

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37. The left side of the Manufacturing Overhead account is used to accumulate:

A. actual manufacturing overhead costs incurred throughout the accounting period.

B. overhead applied to Work-in-Process Inventory.
C. underapplied overhead.
D. predetermined overhead.
E. overapplied overhead.

38. Throughout the accounting period, the credit side of the Manufacturing Overhead account is used to
accumulate:

A. actual manufacturing overhead costs.

C. overapplied overhead.
D. underapplied overhead.
E. predetermined overhead.

39. An accountant recently debited Work-in-Process Inventory and credited Manufacturing Overhead at a
company that uses normal costing. The accountant was:

A. applying a predetermined overhead amount to production.

B. recognizing receipt of the factory utilities bill.
C. recording a year-end adjustment for an insignificant amount of underapplied overhead.
D. recognizing actual overhead incurred during the period.
E. recognizing the completion of production.

40. The final step in recognizing the completion of production requires a company to:

A. debit Finished-Goods Inventory and credit Work-in-Process Inventory.

B. debit Work-in-Process Inventory and credit Finished-Goods Inventory.
C. add direct labor to Work-in-Process Inventory.
D. add direct materials, direct labor, and manufacturing overhead to Work-in-Process Inventory.
E. add direct materials to Finished-Goods Inventory.

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41. Job no. C12 was completed in November at a cost of $28,500, subdivided as follows: direct material,
$13,500; direct labor, $6,000; and manufacturing overhead, $9,000. The journal entry to record the
completion of the job is:

A.
B.
C.
D.
E.

42. If a company sells goods that cost $80,000 for $92,000, the firm will:

A. reduce Finished-Goods Inventory by $80,000.

B. reduce Finished-Goods Inventory by $92,000.
C. report sales revenue on the balance sheet of $92,000.
D. reduce Cost of Goods Sold by $80,000.
E. follow more than one of the other procedures.

43. Serina Manufacturing recently sold goods that cost $35,000 for $45,000 cash. The journal entries to record
this transaction would include:

A. a credit to Work-in-Process Inventory for $35,000.

B. a debit to Sales Revenue for $45,000.
C. a credit to Profit on Sale for $10,000.
D. a debit to Finished-Goods Inventory for $35,000.
E. a credit to Sales Revenue for $45,000.

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44. A computer manufacturer recently shipped several laptops to a customer (cost: $25,000) and billed the
customer $30,000. Which of the following options correctly expresses the accounts that are debited and
credited to record this transaction?

A. Debits: Accounts Receivable, Finished-Goods Inventory; credits: Sales Revenue, Cost of Goods Sold.
B. Debits: Accounts Receivable, Cost of Goods Sold; credits: Sales Revenue, Finished-Goods Inventory.
C. Debits: Sales Revenue, Cost of Goods Sold; credits: Accounts Receivable, Finished-Goods Inventory.
D. Debits: Sales Revenue, Finished-Goods Inventory; credits: Accounts Receivable, Cost of Goods Sold.
E. Debits: Accounts Receivable; credits: Finished-Goods Inventory, Profit on Sale.

45. Blarney Company applies manufacturing overhead by using a predetermined rate of 50% of direct labor
cost. The data that follow pertain to job no. 764:

If Blarney adds a 40% markup on total cost to generate a profit, which of the following choices depicts a
portion of the accounting needed to record the sale of job no. 764?

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

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46. Armada Company applies manufacturing overhead by using a predetermined rate of 150% of direct labor

If Armada adds a 30% markup on total cost to generate a profit, which of the following choices depicts a
portion of the accounting needed to record the credit sale of job no. 831?

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

47. Media, Inc., an advertising agency, applies overhead to jobs on the basis of direct professional labor hours.
Overhead was estimated to be $150,000, direct professional labor hours were estimated to be 15,000, and
direct professional labor cost was projected to be $225,000. During the year, Media incurred actual overhead
costs of $146,000, actual direct professional labor hours of 14,500, and actual direct labor cost of $222,000.
By year-end, the firm's overhead was:

A. $1,000 underapplied.
B. $1,000 overapplied.
C. $4,000 underapplied.
D. $4,000 overapplied.
E. $5,000 underapplied.

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48. Mahler, Inc., applies manufacturing overhead at the rate of $40 per machine hour. Budgeted machine hours
for the current period were anticipated to be 120,000; however, a lengthy strike resulted in actual machine
hours being worked of only 90,000. Budgeted and actual manufacturing overhead figures for the year were
$4,800,000 and $4,180,000, respectively. On the basis of this information, the company's year-end overhead
was:

A. overapplied by $580,000.
B. underapplied by $580,000.
C. overapplied by $1,200,000.
D. underapplied by $1,200,000.
E. underapplied by $900,000.

49. Tiffany charges manufacturing overhead to products by using a predetermined application rate, computed on
the basis of labor hours. The following data pertain to the current year:

Which of the following choices is the correct status of manufacturing overhead at year-end?

A. Overapplied by $10,000.
B. Underapplied by $10,000.
C. Overapplied by $35,000.
D. Underapplied by $35,000.
E. Overapplied by $45,000.

50. Sting Corporation debited Cost of Goods Sold and credited Manufacturing Overhead at year-end. On the
basis of this information, one can conclude that:

A. budgeted overhead exceeded actual overhead.

B. budgeted overhead exceeded applied overhead.
C. budgeted overhead was less than applied overhead.
D. actual overhead exceeded applied overhead.
E. actual overhead was less than applied overhead.

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51. Howard Manufacturing's overhead at year-end was underapplied by $5,800, a small amount given the firm's
size. The year-end journal entry to record this amount would include:

A. a debit to Cost of Goods Sold.

B. a debit to Manufacturing Overhead.
C. a debit to Work-in-Process Inventory.
D. a credit to Cost of Goods Sold.
E. a credit to Work-in-Process Inventory.

52. Fogg Company, which uses labor hours to apply overhead to manufacturing, may have increased amounts of
underapplied overhead at month-end if:

A. suppliers of direct materials have an across-the-board price increase.

B. an accountant failed to record the period's charges for plant maintenance and security.
C. employees are hit hard with a widespread outbreak of the flu.
D. direct laborers are granted a wage increase.
E. outlays for advertising expenditures are increased.

53. The estimates used to calculate the predetermined overhead rate will virtually always:

A. prove to be correct.
B. result in a year-end balance of zero in the Manufacturing Overhead account.
C. result in overapplied overhead that is closed to Cost of Goods Sold if it is immaterial in amount.
D. result in underapplied overhead that is closed to Cost of Goods Sold if it is immaterial in amount.
E. result in either underapplied or overapplied overhead that is closed to Cost of Goods Sold if it is
immaterial in amount.

54. Under- or overapplied manufacturing overhead at year-end is most commonly:

A. charged or credited to Work-in-Process Inventory.

B. charged or credited to Cost of Goods Sold.
C. charged or credited to a special loss account.
D. prorated among Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold.
E. ignored because there is no effect on the Cash account.

55. When underapplied or overapplied manufacturing overhead is prorated, amounts can be assigned to which
of the following accounts?

A. Raw-Material Inventory, Manufacturing Overhead, and Direct Labor.

B. Cost of Goods Sold, Work-in-Process Inventory, and Finished-Goods Inventory.
C. Work-in-Process Inventory, Raw-Material Inventory, and Cost of Goods Sold.
D. Raw-Material Inventory, Finished-Goods Inventory, and Cost of Goods Sold.
E. Raw-Material Inventory, Work-in-Process Inventory, and Finished-Goods Inventory.

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56. Fletcher, Inc. disposes of under- or overapplied overhead at year-end as an adjustment to cost of goods sold.
Prior to disposal, the firm reported cost of goods sold of $590,000 in a year when manufacturing overhead
was underapplied by $15,000. If sales revenue totaled $1,400,000, determine (1) Fletcher's adjusted cost of
goods sold and (2) gross margin.

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

57. The term "normal costing" refers to the use of:

A. job-costing systems.
B. computerized accounting systems.
C. targeted overhead rates.
D. predetermined overhead rates.
E. actual overhead rates.

58. The primary difference between normalized and actual costing methods lies in the determination of a job's:

A. direct material costs.

B. direct labor costs.
C. manufacturing overhead costs.
D. selling costs.
E. administrative costs.

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59. Which of the following statements about the use of direct labor as a cost driver is false?

A. Direct labor is the most commonly used cost driver when calculating a predetermined overhead rate.
B. Direct labor is gaining importance in many manufacturing applications with respect to being a significant
cost driver.
C. Direct labor is an inappropriate cost driver to use if a company is highly automated.
D. If direct labor is a good cost driver, increases in direct labor are matched with increases in manufacturing
overhead.
E. Companies can use either direct labor cost or direct labor hours as a cost driver.

60. If the amount of effort and attention to products varies substantially throughout a company's various
manufacturing operations, the company might consider the use of:

A. a plant wide overhead rate.

B. departmental overhead rates.
C. actual overhead rates instead of predetermined overhead rates.
D. direct labor hours to determine the overhead rate.
E. machine hours to determine the overhead rate.

61. In the two-stage cost allocation process, costs are assigned:

A. from jobs, to service departments, to production departments.

B. from service departments, to jobs, to production departments.
C. from service departments, to production departments, to jobs.
D. from production departments, to jobs, to service departments.
E. from the balance sheet (when goods are produced), to the income statement (when goods are sold).

62. Which of the following entities would not likely be a user of job-costing systems?

A. Custom-furniture manufacturers.
B. Repair shops.
C. Hospitals.
D. Accounting firms.
E. None of these, because all are likely users.

63. Which of the following would not likely be used by service providers to accumulate job costs?

A. Projects.
B. Contracts.
C. Clients.
D. Processes.
E. All of these, because service providers cannot use job-costing systems.

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64. At the Nassau Advertising Agency, partner and staff compensation cost is a key driver of agency overhead.
In light of this fact, which of the following is the correct expression to determine the amount of overhead
applied to a particular client job?

A. (Budgeted overhead ÷ budgeted compensation) × budgeted compensation cost on the job.

B. (Budgeted overhead ÷ budgeted compensation) × actual compensation cost on the job.
C. (Budgeted compensation ÷ budgeted overhead) × budgeted compensation cost on the job.
D. (Budgeted compensation ÷ budgeted overhead) × actual compensation cost on the job.
E. None of these, because service providers do not apply overhead to jobs.

Essay Questions

65. Taffy Corporation sells a number of products to groups that provide educational workshops and seminars.
One of the products involves a combination leather case and note pad. The company purchases the case and
pad combination from a supplier and encloses a $3 pen that contains the educational groups' name and logo.
Taffy began to carry this product at the start of 20x3, acquiring 12,500 cases from Executive Supply for
$87,500 along with an identical number of pens from Accent Goods. During 20x3, 9,500 of the cases and
pens were issued to Taffy's assembly operation where the pen is added. Eighty percent of these cases were
completed as of December 31, and a review of the December 31 finished-goods inventory found 2,600
completed cases in the warehouse. Conversations with salespeople revealed that 70 finished sets were used
in various company marketing activities throughout the year.
Required:
A. Determine the cost of the cases and pens that would appear in Taffy's raw materials, work in process, and
finished-goods inventory as of December 31.
B. Determine the cost of the cases and pens that would appear in the company's cost of goods sold for 20x3.

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66. The selected data that follow relate to the Bargeron Furniture Company.

During the year, products costing $310,000 were completed, and products costing $316,000 were sold on
account for $455,000.
Required:
Prepare journal entries to record the preceding transactions and events.

67. Quatro Products started and finished job no. C19 during June. The job required $15,000 of direct material
and 75 hours of direct labor at $12 per hour. The predetermined overhead rate is $16 per direct labor hour.
During June, direct materials requisitions for all jobs totaled $149,000; the total direct labor hours and cost
were 6,200 hours at $12 per hour; and the total cost of jobs completed was $337,500. All of these figures
include data that pertain to job no. C19.
Required:
A. Prepare journal entries that summarize June's total activity.

B. Determine the cost of job no. C19.

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68. Dancer Corporation, which uses a job-costing system, had two jobs in process at the start of 20x1: job no. 59
($95,000) and job no. 60 ($39,500). The following information is available:
• The company applies manufacturing overhead on the basis of machine hours. Budgeted overhead and
machine activity for the year were anticipated to be $720,000 and 20,000 hours, respectively.
• The company worked on three jobs during the first quarter. Direct materials used, direct labor incurred,
and machine hours consumed were:

• Manufacturing overhead during the first quarter included charges for depreciation ($20,000), indirect labor
($50,000), indirect materials used ($4,000), and other factory costs ($108,700).
• Dancer completed job no. 59 and job no. 60. Job no. 59 was sold for cash, producing a gross profit of
$24,600 for the firm.
Required:
A. Determine the company's predetermined overhead application rate.

B. Prepare journal entries as of March 31 to record the following. (Note: Use summary entries where
appropriate by combining individual job data.)
1. The issuance of direct material to production, and the direct labor incurred.
2. The manufacturing overhead incurred during the quarter.
3. The application of manufacturing overhead to production.
4. The completion of job no. 59 and no. 60.
5. The sale of job no. 59.

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69. Buckman Corporation, which began operations on January 1 of the current year, reported the following
information:

Buckman uses a normal cost system and applies manufacturing overhead to jobs on the basis of direct labor
cost. A 60% markup is added to the cost of completed production when finished goods are sold. On
December 31, job no. 18 was the only job that remained in production. That job had direct-material and
direct-labor charges of $16,500 and $36,000, respectively.
Required:
A. Determine the company's predetermined overhead rate.

B. Determine the amount of under- or overapplied overhead. Be sure to label your answer.
C. Compute the amount of direct materials used in production.
D. Calculate the balance the company would report as ending work-in-process inventory.
E. Prepare the journal entry (ies) needed to record Buckman's sales, which are all made on account.

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70. Margery, Inc., which uses a job-costing system, is a labor-intensive firm, with many skilled craftspeople on
the payroll. Job no. 789 was the only job in process on January 1, having costs of $22,500 as of that date.
Direct materials used and direct labor incurred during January were:

Job no. 791 was the only job in production as of January 31.
Required:
A. Should Margery use direct labor or machine hours as a cost driver. Why?
B. Assume that the company decided to use direct labor as its cost driver. If the budgeted amounts of direct
labor and manufacturing overhead are anticipated to be $200,000 and $300,000, respectively, what is the
firm's predetermined overhead rate?
C. Compute the cost of work-in-process inventory as of January 31.
D. Compute the cost of jobs completed during January.
E. Suppose that the company sold all of its completed jobs, adding a 40% markup to cost. How much would
the firm report as sales revenue?

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71. Rock Star, Inc., which uses a job-costing system, began business on January 1, 20x3 and applies
manufacturing overhead on the basis of direct-labor cost. The following information relates to 20x3:
• Budgeted direct labor and manufacturing overhead were anticipated to be $200,000 and $250,000,
respectively.
• Job nos. 1, 2, and 3 were begun during the year and had the following charges for direct material and direct
labor:

• Job nos. 1 and 2 were completed and sold on account to customers at a profit of 60% of cost. Job no. 3
remained in production.
• Actual manufacturing overhead by year-end totaled $233,000. Rock Star adjusts all under- and overapplied
overhead to cost of goods sold.
Required:
A. Compute the company's predetermined overhead application rate.

B. Compute Rock Star's ending work-in-process inventory.
C. Determine Rock Star's sales revenue.
D. Was manufacturing overhead under- or overapplied during 20x3? By how much?
E. Present the necessary journal entry to handle under- or overapplied manufacturing overhead at year-end.
F. Does the presence of under- or overapplied overhead at year-end indicate that Rock Star's accountants
made a serious error? Briefly explain.

3-23
72. Athena Corporation uses a job-cost system and applies manufacturing overhead to products on the basis of
machine hours. The company's accountant estimated that overhead and machine hours would total $800,000
and 50,000, respectively, for 20x1. Actual costs incurred follow.

The manufacturing overhead figure presented above excludes $27,000 of sales commissions incurred by the
firm. An examination of job-cost records revealed that 18 jobs were sold during the year at a total cost of
$2,960,000. These goods were sold to customers for $3,720,000. Actual machine hours worked totaled
51,500, and Athens adjusts under- or overapplied overhead at year-end to Cost of Goods Sold.
Required:

B. Determine the amount of under- or overapplied overhead at year-end. Be sure to indicate whether
overhead was under- or overapplied.
C. Compute the company's adjusted cost of goods sold.
D. What alternative accounting treatment could the company have used at year-end to adjust for under- or
overapplied overhead? Is the alternative that you suggested appropriate in this case? Why?

3-24
73. Dodger Products uses a job-costing system for its units, which pass from the Machining Department, to the
Assembly Department, to finished-goods inventory. The Machining Department is heavily automated; in
contrast, the Assembly Department performs a number of manual-assembly activities. The company uses
machine hours to apply manufacturing overhead to products in the Machining Department, and direct labor
cost to apply manufacturing overhead to products in the Assembly Department.
The following information relates to the Machining Department for the year just ended:

The Machining Department data that follow pertain to job no. 775, the only job in production at year-end.

Required:
A. Assuming the use of normal costing, calculate the predetermined overhead rate that is used in the
Machining Department.
B. Compute the cost of the Machining Department's year-end work-in-process inventory.
C. Determine the amount that overhead was under- or overapplied during the year in the Machining
Department. Indicate whether it is overapplied or underapplied.
D. If Dodger disposes of the Machining Department's under- or overapplied overhead as an adjustment to
Cost of Goods Sold, would the company's Cost-of-Goods-Sold account increase or decrease? Explain.
E. How much overhead would have been charged to the Machining Department's Work-in-Process account
during the year?
F. Comment on the appropriateness of direct labor cost to apply manufacturing overhead in the Assembly
Department.

3-25
74. Kei Products uses a predetermined overhead application rate of $18 per labor hour. A review of the
company's accounting records revealed budgeted manufacturing overhead for the period of $621,000,
applied manufacturing overhead of $590,400, and overapplied overhead of $11,900.
Required:
A. Determine Kei's actual labor hours, budgeted labor hours, and actual manufacturing overhead.
B. Present the necessary year-end journal entry to handle the overapplied overhead, assuming that the firm
allocates over- or underapplied overhead to Cost of Goods Sold.

3-26
75. A review of the records of Pilgrim, Inc., a new company, disclosed the following year-end information:
• Manufacturing Overhead account: Contained debits of $872,000, which included $20,000 of sales
commissions.
• Work-in-Process Inventory account: Contained charges for overhead of $875,000.
• Cost-of-Goods-Sold account: Contained a year-end debit balance of $3,680,000. This amount was
computed prior to any year-end adjustment for under- or overapplied overhead.
Pilgrim applies manufacturing overhead to production by using a predetermined rate of $20 per machine
hour. Budgeted overhead for the period was anticipated to be $900,000.
Required:
A. Determine the actual manufacturing overhead for the year.

B. Determine the amount of manufacturing overhead applied to production.
C. Is overhead under- or overapplied? By how much?
D. Compute the adjusted cost-of-goods-sold figure that should be disclosed on the company's income
statement.
E. How many machine hours did Pilgrim actually work during the year?
F. Compute budgeted machine hours for the year.

3-27
76. Finney & Associates is an interior decorating firm in Tucson. The following costs were incurred in a project
to redecorate the mayor's offices:

The firm's budget for the year included the following estimates:

Overhead is applied to contracts by using a predetermined overhead rate that is based on direct professional
labor cost. Actual professional labor during the year was $655,000 and actual overhead was $793,000.
Required:
A. Determine the total cost to redecorate the mayor's offices.

B. Calculate the under- or overapplied overhead for the year. Be sure to label your answer.

3-28
77. Boxworth and Associates designs relatively small sports stadiums and arenas at various sites throughout the
country. The firm's accountant prepared the following budget for the upcoming year:

Eighty percent of professional staff salaries are directly traceable to client projects, a figure that falls to 60%
for the administrative support staff and other operating costs. Traceable costs are charged directly to client
projects; nontraceable costs, on the other hand, are treated as firm overhead and charged to projects by using
a predetermined overhead application rate.
Boxworth had one project in process at year-end: an arena that was being designed for Charlotte County.
Costs directly chargeable to this project were:

Required:
A. Determine Boxworth's overhead for the year and the firm's predetermined overhead application rate. The
rate is based on costs directly chargeable to firm projects.
B. Compute the cost of the Charlotte County arena project as of year-end.
C. Present three examples of "other operating costs" that might be directly traceable to the Charlotte County
project.

3-29
78. ADF provides consulting services and uses a job-order system to accumulate the cost of client projects.
Traceable costs are charged directly to individual clients; in contrast, other costs incurred by ADF, but not
identifiable with specific clients, are charged to jobs by using a predetermined overhead application rate.
Clients are billed for directly chargeable costs, overhead, and a markup.
ADF anticipates the following costs for the upcoming year:

ADF's partners desire to make a $480,000 profit for the firm and plan to add a percentage markup on total
cost to achieve that figure.
On May 14, ADF completed work on a project for Lawrence Manufacturing. The following costs were
incurred: professional staff salaries, $68,000; administrative support staff, $8,900; travel, $10,500; and other
operating costs, $2,600.
Required:
A. Determine ADF's total traceable costs for the upcoming year and the firm's total anticipated overhead.
B. Calculate the predetermined overhead rate. The rate is based on total costs traceable to client jobs.
C. What percentage of total cost will ADF add to each job to achieve its profit target?
D. Determine the total cost of the Lawrence Manufacturing project. How much would Lawrence be billed
for services performed?

3-30
79. Describe the types of manufacturing environments that would best be suited for (1) job-order costing and (2)
process costing. Include two examples of manufacturers that would likely use job-cost systems.

80. Manufacturing overhead is applied to production.
A. Describe several situations that may give rise to underapplied overhead.

B. Assume that underapplied manufacturing overhead is treated as an adjustment to Cost of Goods Sold.
Explain why an underapplication of overhead increases Cost of Goods Sold.

81. Discuss the reason for (1) allocating overhead to the cost of production jobs, and (2) applying overhead
using a predetermined rate instead of an actual overhead rate.

3-31
82. Harris, Inc., has just completed job nos. 78 and 79, which were similar in terms of complexity, production
processes, and units manufactured. Job no. 78 was manufactured by Joe Barton who earns $14 per hour,
whereas job no. 79 was completed by Susan Franklin who earns $20 per hour. If Joe and Susan are equally
efficient, would the company be better off using direct labor cost or direct labor hours as the cost driver in
its predetermined overhead rate? Briefly explain.

83. Briefly describe the stages used in the two-stage allocation process for assigning overhead costs.

3-32
Chapter 03 Product Costing and Cost Accumulation in a Batch Production
Environment Key

True / False Questions

1. Manufacturing overhead is a pool of indirect production costs that must somehow be attached to each
unit manufactured.

TRUE

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-03 Distinguish between job-order costing and process costing.

2. Electricity costs that were incurred by a company's production processes should be debited to Utilities
Expense.

FALSE

AICPA BB: Critical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-05 Prepare journal entries to record the costs of direct material; direct labor; and manufacturing overhead in a job-
order costing system.

3. The final step in recognizing the completion of production requires a company to debit Finished-Goods
Inventory and credit Work-in-Process Inventory.

TRUE

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-02 Diagram and explain the flow of costs through the manufacturing accounts used in product costing.

3-33
4. Under- or overapplied manufacturing overhead at year-end is most commonly charged or credited to
Work-in-Process Inventory.

FALSE

Blooms: Understand
Difficulty: 2 Medium

5. The term "normal costing" refers to the use of job-costing systems.

FALSE

AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-06 Prepare a schedule of cost of goods manufactured; a schedule of cost of goods sold; and an income statement for
a manufacturer.

Multiple Choice Questions

6. Product costing in a manufacturing firm is the process of:

A. accumulating the company's period costs.

B. allocating costs among the firm's departments.
C. placing a value on the company's fixed assets.
D. assigning costs to the firm's inventory.
E. assigning costs to the company's managers.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-01 Discuss the role of product and service costing in manufacturing and nonmanufacturing firms.

3-34
7. Which of the following statements is true?

A. Service firms have little need for determining the cost of their services.
B. The concept of product costing is relevant only for manufacturing firms.
C. The cost of year-end inventory appears on the balance sheet as an expense.
D. Service companies use cost information for planning and control purposes.
E. Mining and petroleum companies have no inventoriable costs.

AICPA BB: Industry
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-01 Discuss the role of product and service costing in manufacturing and nonmanufacturing firms.

8. Which of the following manufacturers would most likely use job-order costing?

A. Chemical manufacturers.

B. Microchip processors.
C. Custom-furniture manufacturers.
D. Gasoline refiners.
E. Fertilizer manufacturers.

AICPA BB: Industry
Blooms: Apply
Difficulty: 3 Hard

9. A custom-home builder would likely utilize:

A. job-order costing.

B. process costing.
C. mass customization.
D. process budgeting.
E. joint costing.

AICPA BB: Industry
Blooms: Apply
Difficulty: 3 Hard

3-35
10. Which of the following types of companies would most likely use process costing?

A. Aircraft manufacturers.

B. Textile manufacturers.
C. Textbook publishers.
D. Custom-machining firms.
E. Shipbuilders.

AICPA BB: Industry
Blooms: Apply
Difficulty: 3 Hard

11. A manufacturing firm produces goods in accordance with customer specifications, commencing
production upon receipt of a purchase order. To accumulate the cost of each order, the company would
use a:

A. job-cost record.

B. cost allocation matrix.
C. production log.
D. overhead sheet.
E. manufacturing cost record.

AICPA BB: Industry
Blooms: Remember
Difficulty: 1 Easy

12. A typical job-cost record would provide information about all of the following items related to an order
except:

A. the cost of direct materials used.

B. administrative costs.
C. direct labor costs incurred.
D. applied manufacturing overhead.
E. direct labor hours worked.

AICPA BB: Industry
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy

3-36
13. Which of the following statements about material requisitions is false?

A. Material requisitions are often computerized.

B. Material requisitions are a common example of source documents.
C. Material requisitions contain information that is useful to the cost accounting department.
D. Material requisitions authorize the transfer of materials from the production floor to the raw
materials warehouse.
E. Material requisitions are routinely linked to a bill of materials that lists all of the materials needed to
complete a job.

AICPA BB: Industry
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy

14. Pruitt Company has developed an integrated system that coordinates the flow of all goods, services, and
information into and out of the organization, working with raw material vendors as well as customers to
improve service and reduce costs. The firm is said to be using:

A. participative management.

B. top-down management.
C. strategic cost management.
D. supply chain management.
E. management by objectives (MBO).

AICPA BB: Resource Management
Blooms: Remember
Difficulty: 1 Easy

15. The assignment of direct labor cost to individual jobs is based on:

A. an estimate of the total time spent on the job.

B. actual total payroll cost divided equally among all jobs in process.
C. estimated total payroll cost divided equally among all jobs in process.
D. the actual time spent on each job multiplied by the wage rate.
E. the estimated time spent on each job multiplied by the wage rate.

AICPA BB: Industry
Blooms: Apply
Difficulty: 3 Hard

3-37
16. When using normal costing, the total production cost of a job is composed of:

A. direct material and direct labor.

B. direct material, direct labor, manufacturing overhead, and outlays for selling costs.
C. direct material, direct labor, manufacturing overhead, and outlays for both selling and administrative
costs.
D. direct material, direct labor, and applied manufacturing overhead.
E. direct material, direct labor, and actual manufacturing overhead.

AICPA BB: Industry
Blooms: Understand

17. Manufacturing overhead:

A. includes direct materials, indirect materials, indirect labor, and factory depreciation.
B. is easily traced to jobs.
C. includes all selling costs.
D. should not be assigned to individual jobs because it bears no obvious relationship to them.
E. is a pool of indirect production costs that must somehow be attached to each unit manufactured.

AICPA BB: Industry
Blooms: Understand

18. As production takes place, all manufacturing costs are added to the:

A. Work-in-Process Inventory account.

B. Manufacturing-Overhead Inventory account.
C. Cost-of-Goods-Sold account.
D. Finished-Goods Inventory account.
E. Production Labor account.

Blooms: Understand

3-38
19. Which of the following statements regarding work in process is not correct?

A. Work in process is partially completed inventory.

B. Work in process consists of direct labor, direct material, and manufacturing overhead.
C. Work-in-Process Inventory is debited to record direct material used and direct labor incurred.
D. Work-in-Process Inventory appears on the year-end balance sheet.
E. Work-in-Process Inventory is credited when goods are sold.

AACSB: Analytic
Blooms: Understand

20. Which of the following statements about manufacturing cost flows is false?

A. Direct materials, direct labor, and manufacturing overhead are entered in the Work-in-Process
Inventory account.
B. The Finished-Goods Inventory account will contain entries that reflect the cost of goods sold during
the period.
C. The cost of units sold during the period will typically appear on the income statement.
D. When a company sells goods that cost $54,000 for $60,000, the firm will enter $6,000 in an account
entitled Profit on Sale.
E. Units are normally transferred from Work-in-Process Inventory to Finished-Goods Inventory.

AACSB: Analytic
AICPA FN: Reporting
Blooms: Understand

21. Which of the following statements about materials is false?

A. Acquisitions of materials are normally charged to the Purchases account.

B. The use of direct materials gives rise to a debit to Work-in-Process Inventory.
C. The use of indirect materials gives rise to a debit to Manufacturing Overhead.
D. The use of indirect materials gives rise to a credit to Manufacturing Supplies Inventory.
E. Direct materials are accounted for in a different manner than indirect materials.

AACSB: Analytic
Blooms: Understand
3-39

22. Summers Corporation recently used $75,000 of direct materials and $9,000 of indirect materials in
production activities. The journal entries reflecting these transactions would include:

A. a debit to Manufacturing Overhead for $9,000.

B. a debit to Manufacturing Overhead for $84,000.
C. a debit to Raw-Material Inventory for $75,000.
D. a debit to Work-in-Process Inventory for $84,000.
E. a credit to Manufacturing Overhead for $9,000.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

23. A review of a company's Work-in-Process Inventory account found a debit for materials of $67,000. If
all procedures were performed in the correct manner, this means that the firm:

A. also recorded a credit to Raw-Material Inventory.

B. also recorded a credit to Manufacturing Supplies Inventory.
C. was accounting for the usage of direct materials.
D. was accounting for the usage of indirect materials.
E. also recorded a credit to Raw-Material Inventory and was accounting for the usage of direct
materials.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

24. Othello Manufacturing incurred $106,000 of direct labor and $11,000 of indirect labor. The proper
journal entry to record these events would include a debit to Work in Process for:

A. $0 because Work in Process should be credited.

B. $0 because Work in Process is not affected.
C. $11,000.
D. $106,000.
E. $117,000.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
3-40

25. The following information relates to October:
Production supervisor's salary: $3,500

Factory maintenance wages: 250 hours at $10 per hour
The journal entry to record the preceding information is:

A.
B.
C.
D.
E.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-41
26. Electricity costs that were incurred by a company's production processes should be debited to:

A. Utilities Expense.

B. Accounts Payable.
C. Cash.
D. Manufacturing Overhead.
E. Work-in-Process Inventory.

Blooms: Remember
Difficulty: 1 Easy

27. The journal entry needed to record $5,000 of advertising for Westwood Manufacturing would include:

A. a debit to Advertising Expense.

B. a credit to Advertising Expense.
C. a debit to Manufacturing Overhead.
D. a credit to Manufacturing Overhead.
E. a debit to Projects-in-Process.

Blooms: Remember
Difficulty: 1 Easy

28. Reynardo Company incurred $90,000 of depreciation for the year. Eighty percent relates to the firm's
production facilities, and 20% relates to sales and administrative offices. If all items are handled in the
proper manner, a review of the company's accounting records should reveal a:

A. debit to Depreciation Expense for $90,000.

B. debit to Manufacturing Overhead for $90,000.
C. debit to Manufacturing Overhead for $72,000.
D. debit to Work-in-Process Inventory for $18,000.
E. credit to Cash for $90,000.

Blooms: Apply
Difficulty: 3 Hard

3-42
29. The process of assigning overhead costs to the jobs that are worked on is commonly called:

A. service department cost allocation.

B. overhead cost distribution.
C. overhead application.
D. transfer costing.
E. overhead cost apportionment.

AICPA BB: Industry
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-04 Compute a predetermined overhead rate and explain its use in job-order costing for job-shop and batch-
production environments.

30. Which of the following is the correct method to calculate a predetermined overhead rate?

A. Budgeted total manufacturing cost ÷ budgeted amount of cost driver.

B. Budgeted overhead cost ÷ budgeted amount of cost driver.
C. Budgeted amount of cost driver ÷ budgeted overhead cost.
D. Actual overhead cost ÷ budgeted amount of cost driver.
E. Actual overhead cost ÷ actual amount of cost driver.

AICPA BB: Industry
Blooms: Remember
Difficulty: 1 Easy

31. Metro Corporation uses a predetermined overhead rate of $20 per machine hour. In deriving this figure,
the company's accountant used:

A. a denominator of budgeted machine hours for the current accounting period.
B. a denominator of actual machine hours for the current accounting period.
C. a denominator of actual machine hours for the previous accounting period.
D. a numerator of budgeted machine hours for the current accounting period.
E. a numerator of actual machine hours for the current accounting period.

AICPA BB: Industry
Blooms: Understand
3-43

32. Strong Company applies overhead based on machine hours. At the beginning of 20x1, the company
estimated that manufacturing overhead would be $500,000, and machine hours would total 20,000. By
20x1 year-end, actual overhead totaled $525,000, and actual machine hours were 25,000. On the basis of
this information, the 20x1 predetermined overhead rate was:

A. $0.04 per machine hour.

B. $0.05 per machine hour.
C. $20 per machine hour.
D. $21 per machine hour.
E. $25 per machine hour.

AACSB: Analytic
AICPA BB: Industry
Blooms: Apply
Difficulty: 3 Hard

33. Dixie Company, which applies overhead at the rate of 190% of direct material cost, began work on job
no. 101 during June. The job was completed in July and sold during August, having accumulated direct
material and labor charges of $27,000 and $15,000, respectively. On the basis of this information, the
total overhead applied to job no. 101 amounted to:

A. $0.
B. $28,500.
C. $51,300.
D. $70,500.
E. $79,800.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-44
34. Huxtable charges manufacturing overhead to products by using a predetermined application rate,
computed on the basis of machine hours. The following data pertain to the current year:
Budgeted manufacturing overhead: $480,000

Budgeted machine hours: 20,000
Actual machine hours: 16,000
Overhead applied to production totaled:

A. $352,000.
B. $384,000.
C. $550,000.
D. $600,000.
E. some other amount.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

35. Simone uses a predetermined overhead application rate of $8 per direct labor hour. A review of the
company's accounting records for the year just ended discovered the following:
Underapplied manufacturing overhead: $7,200

Budgeted labor hours: 50,000
Simone's actual labor hours worked totaled:

A. 48,100.
B. 49,100.
C. 49,900.
D. 50,900.
E. cannot be determined based on the information presented.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-45
36. Trenton worked on four jobs during its first year of operation: nos. 401, 402, 403, and 404. A review of
job no. 403's cost record revealed direct material charges of $40,000 and total manufacturing costs of
$50,000. If Trenton applies overhead at 150% of direct labor cost, the overhead applied to job no. 403
must have been:

A. $0.
B. $6,000.
C. $4,000.
D. $3,333.
E. $5,000.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

37. The left side of the Manufacturing Overhead account is used to accumulate:

A. actual manufacturing overhead costs incurred throughout the accounting period.
C. underapplied overhead.
D. predetermined overhead.
E. overapplied overhead.

Blooms: Remember
Difficulty: 1 Easy

38. Throughout the accounting period, the credit side of the Manufacturing Overhead account is used to
accumulate:

A. actual manufacturing overhead costs.

C. overapplied overhead.
D. underapplied overhead.
E. predetermined overhead.

Blooms: Remember
Difficulty: 1 Easy
3-46

39. An accountant recently debited Work-in-Process Inventory and credited Manufacturing Overhead at a
company that uses normal costing. The accountant was:

A. applying a predetermined overhead amount to production.

B. recognizing receipt of the factory utilities bill.
C. recording a year-end adjustment for an insignificant amount of underapplied overhead.
D. recognizing actual overhead incurred during the period.
E. recognizing the completion of production.

AACSB: Analytic
Blooms: Understand

40. The final step in recognizing the completion of production requires a company to:

A. debit Finished-Goods Inventory and credit Work-in-Process Inventory.

B. debit Work-in-Process Inventory and credit Finished-Goods Inventory.
C. add direct labor to Work-in-Process Inventory.
D. add direct materials, direct labor, and manufacturing overhead to Work-in-Process Inventory.
E. add direct materials to Finished-Goods Inventory.

AACSB: Analytic
Blooms: Understand

3-47
41. Job no. C12 was completed in November at a cost of $28,500, subdivided as follows: direct material,
$13,500; direct labor, $6,000; and manufacturing overhead, $9,000. The journal entry to record the
completion of the job is:

A.
B.
C.
D.
E.

Blooms: Understand

42. If a company sells goods that cost $80,000 for $92,000, the firm will:

A. reduce Finished-Goods Inventory by $80,000.

B. reduce Finished-Goods Inventory by $92,000.
C. report sales revenue on the balance sheet of $92,000.
D. reduce Cost of Goods Sold by $80,000.
E. follow more than one of the other procedures.

Blooms: Remember
Difficulty: 1 Easy
3-48

43. Serina Manufacturing recently sold goods that cost $35,000 for $45,000 cash. The journal entries to
record this transaction would include:

A. a credit to Work-in-Process Inventory for $35,000.

B. a debit to Sales Revenue for $45,000.
C. a credit to Profit on Sale for $10,000.
D. a debit to Finished-Goods Inventory for $35,000.
E. a credit to Sales Revenue for $45,000.

AACSB: Analytic
Blooms: Apply

44. A computer manufacturer recently shipped several laptops to a customer (cost: $25,000) and billed the
customer $30,000. Which of the following options correctly expresses the accounts that are debited and
credited to record this transaction?

A. Debits: Accounts Receivable, Finished-Goods Inventory; credits: Sales Revenue, Cost of Goods
Sold.
B. Debits: Accounts Receivable, Cost of Goods Sold; credits: Sales Revenue, Finished-Goods
Inventory.
C. Debits: Sales Revenue, Cost of Goods Sold; credits: Accounts Receivable, Finished-Goods
Inventory.
D. Debits: Sales Revenue, Finished-Goods Inventory; credits: Accounts Receivable, Cost of Goods
Sold.
E. Debits: Accounts Receivable; credits: Finished-Goods Inventory, Profit on Sale.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-49
45. Blarney Company applies manufacturing overhead by using a predetermined rate of 50% of direct labor

If Blarney adds a 40% markup on total cost to generate a profit, which of the following choices depicts a
portion of the accounting needed to record the sale of job no. 764?

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-50
46. Armada Company applies manufacturing overhead by using a predetermined rate of 150% of direct labor

If Armada adds a 30% markup on total cost to generate a profit, which of the following choices depicts a
portion of the accounting needed to record the credit sale of job no. 831?

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

47. Media, Inc., an advertising agency, applies overhead to jobs on the basis of direct professional labor
hours. Overhead was estimated to be $150,000, direct professional labor hours were estimated to be
15,000, and direct professional labor cost was projected to be $225,000. During the year, Media incurred
actual overhead costs of $146,000, actual direct professional labor hours of 14,500, and actual direct
labor cost of $222,000. By year-end, the firm's overhead was:

A. $1,000 underapplied.

B. $1,000 overapplied.
C. $4,000 underapplied.
D. $4,000 overapplied.
E. $5,000 underapplied.

AACSB: Analytic
Blooms: Apply
3-51
Difficulty: 3 Hard

48. Mahler, Inc., applies manufacturing overhead at the rate of $40 per machine hour. Budgeted machine
hours for the current period were anticipated to be 120,000; however, a lengthy strike resulted in actual
machine hours being worked of only 90,000. Budgeted and actual manufacturing overhead figures for
the year were $4,800,000 and $4,180,000, respectively. On the basis of this information, the company's
year-end overhead was:

A. overapplied by $580,000.

B. underapplied by $580,000.
C. overapplied by $1,200,000.
D. underapplied by $1,200,000.
E. underapplied by $900,000.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

49. Tiffany charges manufacturing overhead to products by using a predetermined application rate,
computed on the basis of labor hours. The following data pertain to the current year:

Which of the following choices is the correct status of manufacturing overhead at year-end?

A. Overapplied by $10,000.

B. Underapplied by $10,000.
C. Overapplied by $35,000.
D. Underapplied by $35,000.
E. Overapplied by $45,000.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-52
50. Sting Corporation debited Cost of Goods Sold and credited Manufacturing Overhead at year-end. On the
basis of this information, one can conclude that:

A. budgeted overhead exceeded actual overhead.

B. budgeted overhead exceeded applied overhead.
C. budgeted overhead was less than applied overhead.
D. actual overhead exceeded applied overhead.
E. actual overhead was less than applied overhead.

Blooms: Apply
Difficulty: 3 Hard

51. Howard Manufacturing's overhead at year-end was underapplied by $5,800, a small amount given the
firm's size. The year-end journal entry to record this amount would include:

A. a debit to Cost of Goods Sold.

B. a debit to Manufacturing Overhead.
C. a debit to Work-in-Process Inventory.
D. a credit to Cost of Goods Sold.
E. a credit to Work-in-Process Inventory.

Blooms: Apply
Difficulty: 3 Hard

52. Fogg Company, which uses labor hours to apply overhead to manufacturing, may have increased
amounts of underapplied overhead at month-end if:

A. suppliers of direct materials have an across-the-board price increase.

B. an accountant failed to record the period's charges for plant maintenance and security.
C. employees are hit hard with a widespread outbreak of the flu.
D. direct laborers are granted a wage increase.
E. outlays for advertising expenditures are increased.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-53
53. The estimates used to calculate the predetermined overhead rate will virtually always:

A. prove to be correct.

B. result in a year-end balance of zero in the Manufacturing Overhead account.
C. result in overapplied overhead that is closed to Cost of Goods Sold if it is immaterial in amount.
D. result in underapplied overhead that is closed to Cost of Goods Sold if it is immaterial in amount.
E. result in either underapplied or overapplied overhead that is closed to Cost of Goods Sold if it is
immaterial in amount.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

54. Under- or overapplied manufacturing overhead at year-end is most commonly:

A. charged or credited to Work-in-Process Inventory.

B. charged or credited to Cost of Goods Sold.
C. charged or credited to a special loss account.
D. prorated among Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold.
E. ignored because there is no effect on the Cash account.

Blooms: Apply

55. When underapplied or overapplied manufacturing overhead is prorated, amounts can be assigned to
which of the following accounts?

A. Raw-Material Inventory, Manufacturing Overhead, and Direct Labor.

B. Cost of Goods Sold, Work-in-Process Inventory, and Finished-Goods Inventory.
C. Work-in-Process Inventory, Raw-Material Inventory, and Cost of Goods Sold.
D. Raw-Material Inventory, Finished-Goods Inventory, and Cost of Goods Sold.
E. Raw-Material Inventory, Work-in-Process Inventory, and Finished-Goods Inventory.

Blooms: Apply
Difficulty: 3 Hard

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56. Fletcher, Inc. disposes of under- or overapplied overhead at year-end as an adjustment to cost of goods
sold. Prior to disposal, the firm reported cost of goods sold of $590,000 in a year when manufacturing
overhead was underapplied by $15,000. If sales revenue totaled $1,400,000, determine (1) Fletcher's
adjusted cost of goods sold and (2) gross margin.

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
a manufacturer.

57. The term "normal costing" refers to the use of:

A. job-costing systems.

B. computerized accounting systems.
C. targeted overhead rates.
D. predetermined overhead rates.
E. actual overhead rates.

Blooms: Remember
Difficulty: 1 Easy
a manufacturer.

3-55
58. The primary difference between normalized and actual costing methods lies in the determination of a
job's:

A. direct material costs.

B. direct labor costs.
C. manufacturing overhead costs.
D. selling costs.
E. administrative costs.

Blooms: Understand
a manufacturer.

59. Which of the following statements about the use of direct labor as a cost driver is false?

A. Direct labor is the most commonly used cost driver when calculating a predetermined overhead rate.
B. Direct labor is gaining importance in many manufacturing applications with respect to being a
significant cost driver.
C. Direct labor is an inappropriate cost driver to use if a company is highly automated.
D. If direct labor is a good cost driver, increases in direct labor are matched with increases in
manufacturing overhead.
E. Companies can use either direct labor cost or direct labor hours as a cost driver.

Blooms: Understand
a manufacturer.

60. If the amount of effort and attention to products varies substantially throughout a company's various
manufacturing operations, the company might consider the use of:

A. a plant wide overhead rate.

B. departmental overhead rates.
C. actual overhead rates instead of predetermined overhead rates.
D. direct labor hours to determine the overhead rate.
E. machine hours to determine the overhead rate.

AACSB: Analytic
Blooms: Understand
a manufacturer.
3-56

61. In the two-stage cost allocation process, costs are assigned:

A. from jobs, to service departments, to production departments.

B. from service departments, to jobs, to production departments.
C. from service departments, to production departments, to jobs.
D. from production departments, to jobs, to service departments.
E. from the balance sheet (when goods are produced), to the income statement (when goods are sold).

Blooms: Understand
Learning Objective: 03-07 Describe the two-stage allocation process used to assign manufacturing overhead costs to production jobs.

62. Which of the following entities would not likely be a user of job-costing systems?

A. Custom-furniture manufacturers.

B. Repair shops.
C. Hospitals.
D. Accounting firms.
E. None of these, because all are likely users.

AICPA BB: Industry
AICPA FN: Reporting
Blooms: Understand
Learning Objective: 03-08 Describe the process of project costing used in service industry firms and nonprofit organizations.

63. Which of the following would not likely be used by service providers to accumulate job costs?

A. Projects.
B. Contracts.
C. Clients.
D. Processes.
E. All of these, because service providers cannot use job-costing systems.

AICPA BB: Industry
AICPA FN: Reporting
Blooms: Understand

3-57
64. At the Nassau Advertising Agency, partner and staff compensation cost is a key driver of agency
overhead. In light of this fact, which of the following is the correct expression to determine the amount
of overhead applied to a particular client job?

A. (Budgeted overhead ÷ budgeted compensation) × budgeted compensation cost on the job.
B. (Budgeted overhead ÷ budgeted compensation) × actual compensation cost on the job.
C. (Budgeted compensation ÷ budgeted overhead) × budgeted compensation cost on the job.
D. (Budgeted compensation ÷ budgeted overhead) × actual compensation cost on the job.
E. None of these, because service providers do not apply overhead to jobs.

AACSB: Analytic
Blooms: Understand

Essay Questions
3-58
65. Taffy Corporation sells a number of products to groups that provide educational workshops and
seminars. One of the products involves a combination leather case and note pad. The company purchases
the case and pad combination from a supplier and encloses a $3 pen that contains the educational groups'
name and logo.
Taffy began to carry this product at the start of 20x3, acquiring 12,500 cases from Executive Supply for
$87,500 along with an identical number of pens from Accent Goods. During 20x3, 9,500 of the cases and
pens were issued to Taffy's assembly operation where the pen is added. Eighty percent of these cases
were completed as of December 31, and a review of the December 31 finished-goods inventory found
2,600 completed cases in the warehouse. Conversations with salespeople revealed that 70 finished sets
were used in various company marketing activities throughout the year.
Required:
A. Determine the cost of the cases and pens that would appear in Taffy's raw materials, work in process,
and finished-goods inventory as of December 31.
B. Determine the cost of the cases and pens that would appear in the company's cost of goods sold for
20x3.
A. Cost per case and pad: $87,500 ÷ 12,500 units = $7 per unit
Cost per pen: $3 (given)
Cost per case, pad, and pen: $7 + $3 = $10
Raw materials: (12,500 units - 9,500 units issued to assembly) × $10 = $30,000
Work in process: (9,500 units - (9,500 × 80%) = 1,900 units; 1,900 units × $10 = $19,000
Finished goods: 2,600 units × $10 = $26,000
B. Taffy completed 7,600 units (9,500 units × 80%) during 20x3. Since 2,600 units were found in
finished-goods inventory, the company disposed of 5,000 completed sets (7,600 - 2,600) throughout the
year. Seventy of these sets were used in marketing activities; thus, 4,930 (5,000 - 70) were sold, resulting
in a cost of goods sold of $49,300 (4,930 units × $10).

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-59
66. The selected data that follow relate to the Bargeron Furniture Company.

During the year, products costing $310,000 were completed, and products costing $316,000 were sold on
account for $455,000.
Required:
Prepare journal entries to record the preceding transactions and events.

AACSB: Analytic
3-60
Blooms: Apply
Difficulty: 3 Hard

67. Quatro Products started and finished job no. C19 during June. The job required $15,000 of direct
material and 75 hours of direct labor at $12 per hour. The predetermined overhead rate is $16 per direct
labor hour.
During June, direct materials requisitions for all jobs totaled $149,000; the total direct labor hours and
cost were 6,200 hours at $12 per hour; and the total cost of jobs completed was $337,500. All of these
figures include data that pertain to job no. C19.
Required:
A. Prepare journal entries that summarize June's total activity.

B. Determine the cost of job no. C19.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-61
3-62
68. Dancer Corporation, which uses a job-costing system, had two jobs in process at the start of 20x1: job
no. 59 ($95,000) and job no. 60 ($39,500). The following information is available:
• The company applies manufacturing overhead on the basis of machine hours. Budgeted overhead and
machine activity for the year were anticipated to be $720,000 and 20,000 hours, respectively.
• The company worked on three jobs during the first quarter. Direct materials used, direct labor incurred,
and machine hours consumed were:

• Manufacturing overhead during the first quarter included charges for depreciation ($20,000), indirect
labor ($50,000), indirect materials used ($4,000), and other factory costs ($108,700).
• Dancer completed job no. 59 and job no. 60. Job no. 59 was sold for cash, producing a gross profit of
$24,600 for the firm.
Required:

B. Prepare journal entries as of March 31 to record the following. (Note: Use summary entries where
appropriate by combining individual job data.)
1. The issuance of direct material to production, and the direct labor incurred.
2. The manufacturing overhead incurred during the quarter.
3. The application of manufacturing overhead to production.
4. The completion of job no. 59 and no. 60.
5. The sale of job no. 59.

A. Predetermined overhead rate: $720,000 ÷ 20,000 hours = $36 per machine hour
B.
3-63

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-64
69. Buckman Corporation, which began operations on January 1 of the current year, reported the following
information:

Buckman uses a normal cost system and applies manufacturing overhead to jobs on the basis of direct
labor cost. A 60% markup is added to the cost of completed production when finished goods are sold. On
December 31, job no. 18 was the only job that remained in production. That job had direct-material and
direct-labor charges of $16,500 and $36,000, respectively.
Required:
A. Determine the company's predetermined overhead rate.

B. Determine the amount of under- or overapplied overhead. Be sure to label your answer.
C. Compute the amount of direct materials used in production.
D. Calculate the balance the company would report as ending work-in-process inventory.
E. Prepare the journal entry (ies) needed to record Buckman's sales, which are all made on account.

A. Predetermined overhead rate: $600,000 ÷ $480,000 = 125% of direct labor cost

B. Actual manufacturing overhead ($639,000) - applied overhead ($500,000 × 125% = $625,000) =
$14,000 underapplied
C. Total debits to Work-in-Process ($1,880,000) - direct labor ($500,000) - applied overhead ($625,000)
= direct materials used ($755,000)
D. The only job in production is job no. 18, which has direct material of $16,500 and direct labor of
$36,000. Applied overhead amounts to $45,000 ($36,000 × 125%), yielding a total job cost of $97,500
($16,500 + $36,000 + $45,000).
E. The company's cost of goods sold equals $920,000, resulting in sales revenues of $1,472,000
($920,000 × 160%). Thus:

AACSB: Analytic
3-65
Blooms: Apply
Difficulty: 3 Hard

3-66
70. Margery, Inc., which uses a job-costing system, is a labor-intensive firm, with many skilled craftspeople
on the payroll. Job no. 789 was the only job in process on January 1, having costs of $22,500 as of that
date. Direct materials used and direct labor incurred during January were:

Job no. 791 was the only job in production as of January 31.
Required:
A. Should Margery use direct labor or machine hours as a cost driver. Why?
B. Assume that the company decided to use direct labor as its cost driver. If the budgeted amounts of
direct labor and manufacturing overhead are anticipated to be $200,000 and $300,000, respectively, what
is the firm's predetermined overhead rate?
C. Compute the cost of work-in-process inventory as of January 31.
D. Compute the cost of jobs completed during January.
E. Suppose that the company sold all of its completed jobs, adding a 40% markup to cost. How much
would the firm report as sales revenue?

A. The company should use direct labor because it is a labor-intensive firm, with many skilled
craftspeople on the payroll. More than likely, a majority of overhead is "driven" by people rather than
machine operation.
B. $300,000 ÷ $200,000 = 150% of direct labor cost

E. Sales revenue: $102,900 ($73,500 × 140%)
3-67

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-68
3-69
71. Rock Star, Inc., which uses a job-costing system, began business on January 1, 20x3 and applies
manufacturing overhead on the basis of direct-labor cost. The following information relates to 20x3:
• Budgeted direct labor and manufacturing overhead were anticipated to be $200,000 and $250,000,
respectively.
• Job nos. 1, 2, and 3 were begun during the year and had the following charges for direct material and
direct labor:

• Job nos. 1 and 2 were completed and sold on account to customers at a profit of 60% of cost. Job no. 3
remained in production.
• Actual manufacturing overhead by year-end totaled $233,000. Rock Star adjusts all under- and
overapplied overhead to cost of goods sold.
Required:
A. Compute the company's predetermined overhead application rate.

B. Compute Rock Star's ending work-in-process inventory.
C. Determine Rock Star's sales revenue.
D. Was manufacturing overhead under- or overapplied during 20x3? By how much?
E. Present the necessary journal entry to handle under- or overapplied manufacturing overhead at year-
end.
F. Does the presence of under- or overapplied overhead at year-end indicate that Rock Star's accountants
made a serious error? Briefly explain.

A. $250,000 ÷ $200,000 = 125% of direct labor cost
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F. No. Companies use a predetermined application rate for several reasons; including the fact that
manufacturing overhead is not easily traced to jobs and products. The predetermined rate is based on
estimates of both overhead and an appropriate cost driver, and situations where these amounts coincide
precisely with actual experiences are rare. As a result, under- or overapplied overhead typically arises at
year-end.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-71
72. Athena Corporation uses a job-cost system and applies manufacturing overhead to products on the basis
of machine hours. The company's accountant estimated that overhead and machine hours would total
$800,000 and 50,000, respectively, for 20x1. Actual costs incurred follow.

The manufacturing overhead figure presented above excludes $27,000 of sales commissions incurred by
the firm. An examination of job-cost records revealed that 18 jobs were sold during the year at a total
cost of $2,960,000. These goods were sold to customers for $3,720,000. Actual machine hours worked
totaled 51,500, and Athens adjusts under- or overapplied overhead at year-end to Cost of Goods Sold.
Required:

B. Determine the amount of under- or overapplied overhead at year-end. Be sure to indicate whether
overhead was under- or overapplied.
C. Compute the company's adjusted cost of goods sold.
D. What alternative accounting treatment could the company have used at year-end to adjust for under-
or overapplied overhead? Is the alternative that you suggested appropriate in this case? Why?

A. $800,000 ÷ 50,000 = $16 per machine hour

D. The company could have allocated the overapplication to work in process, finished goods, and cost of
goods sold. Although this method is acceptable, it is not suggested in this case because of the immaterial
dollar amount in relation to cost of goods sold.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
3-72
a manufacturer.

3-73
3-74
73. Dodger Products uses a job-costing system for its units, which pass from the Machining Department, to
the Assembly Department, to finished-goods inventory. The Machining Department is heavily
automated; in contrast, the Assembly Department performs a number of manual-assembly activities. The
company uses machine hours to apply manufacturing overhead to products in the Machining
Department, and direct labor cost to apply manufacturing overhead to products in the Assembly
Department.
The following information relates to the Machining Department for the year just ended:

The Machining Department data that follow pertain to job no. 775, the only job in production at year-
end.

Required:
A. Assuming the use of normal costing, calculate the predetermined overhead rate that is used in the
Machining Department.
B. Compute the cost of the Machining Department's year-end work-in-process inventory.
C. Determine the amount that overhead was under- or overapplied during the year in the Machining
Department. Indicate whether it is overapplied or underapplied.
D. If Dodger disposes of the Machining Department's under- or overapplied overhead as an adjustment
to Cost of Goods Sold, would the company's Cost-of-Goods-Sold account increase or decrease? Explain.
E. How much overhead would have been charged to the Machining Department's Work-in-Process
account during the year?
F. Comment on the appropriateness of direct labor cost to apply manufacturing overhead in the
Assembly Department.

A. Machining overhead rate: $12,000,000 ÷ 800,000 hours = $15 per machine hour
B. The ending work in process is carried at a cost of $195,050, computed as follows:
3-75

C. Actual overhead in the Machining Department amounted to $12,142,000, whereas applied overhead
totaled $11,910,000 (794,000 hours × $15). Thus, overhead was underapplied by $232,000 during the
year.
D. The department's manufacturing overhead was underapplied by $232,000. As a result of this situation,
insufficient overhead flowed from Work in Process, to Finished Goods, to Cost of Goods Sold, meaning
that the Cost-of-Goods-Sold account must be increased at year-end.
E. The Work-in-Process account is charged with applied overhead, or $11,910,000.
F. The firm's selection of application bases is likely appropriate. The bases should "drive" the costs,
meaning there should be a strong cause-and-effect relationship between the base that is used and the
amount of overhead incurred. In the Assembly Department, a considerable portion of the overhead
incurred is related to manual-assembly (i.e., labor) operations.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
a manufacturer.

3-76
74. Kei Products uses a predetermined overhead application rate of $18 per labor hour. A review of the
company's accounting records revealed budgeted manufacturing overhead for the period of $621,000,
applied manufacturing overhead of $590,400, and overapplied overhead of $11,900.
Required:
A. Determine Kei's actual labor hours, budgeted labor hours, and actual manufacturing overhead.
B. Present the necessary year-end journal entry to handle the overapplied overhead, assuming that the
firm allocates over- or underapplied overhead to Cost of Goods Sold.

A. Actual labor hours: $590,400 ÷ $18 per hour = 32,800 hours

Budgeted labor hours: $621,000 ÷ $18 per hour = 34,500 hours
Actual manufacturing overhead: $590,400 - $11,900 = $578,500
B.

AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard

3-77
75. A review of the records of Pilgrim, Inc., a new company, disclosed the following year-end information:
• Manufacturing Overhead account: Contained debits of $872,000, which included $20,000 of sales
commissions.
• Work-in-Process Inventory account: Contained charges for overhead of $875,000.
• Cost-of-Goods-Sold account: Contained a year-end debit balance of $3,680,000. This amount was
computed prior to any year-end adjustment for under- or overapplied overhead.
Pilgrim applies manufacturing overhead to production by using a predetermined rate of $20 per machine
hour. Budgeted overhead for the period was anticipated to be $900,000.
Required:
A. Determine the actual manufacturing overhead for the year.

B. Determine the amount of manufacturing overhead applied to production.
C. Is overhead under- or overapplied? By how much?
D. Compute the adjusted cost-of-goods-sold figure that should be disclosed on the company's income
statement.
E. How many machine hours did Pilgrim actually work during the year?
F. Compute budgeted machine hours for the year.

A. $872,000 - $20,000 sales commissions = $852,000

B. $875,000 (given)
C. Manufacturing overhead is overapplied by $23,000 ($875,000 - $852,000).
D.

E. Pilgrim would have applied overhead to production by using the actual machine hours worked and the
$20 application rate. Thus, the actual hours worked total 43,750 ($875,000 ÷ $20).
F. $900,000 ÷ $20 = 45,000 hours

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
a manufacturer.

3-78
76. Finney & Associates is an interior decorating firm in Tucson. The following costs were incurred in a
project to redecorate the mayor's offices:

The firm's budget for the year included the following estimates:

Overhead is applied to contracts by using a predetermined overhead rate that is based on direct
professional labor cost. Actual professional labor during the year was $655,000 and actual overhead was
$793,000.
Required:
A. Determine the total cost to redecorate the mayor's offices.

B. Calculate the under- or overapplied overhead for the year. Be sure to label your answer.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-79
3-80
77. Boxworth and Associates designs relatively small sports stadiums and arenas at various sites throughout
the country. The firm's accountant prepared the following budget for the upcoming year:

Eighty percent of professional staff salaries are directly traceable to client projects, a figure that falls to
60% for the administrative support staff and other operating costs. Traceable costs are charged directly to
client projects; nontraceable costs, on the other hand, are treated as firm overhead and charged to
projects by using a predetermined overhead application rate.
Boxworth had one project in process at year-end: an arena that was being designed for Charlotte County.
Costs directly chargeable to this project were:

Required:
A. Determine Boxworth's overhead for the year and the firm's predetermined overhead application rate.
The rate is based on costs directly chargeable to firm projects.
B. Compute the cost of the Charlotte County arena project as of year-end.
C. Present three examples of "other operating costs" that might be directly traceable to the Charlotte
County project.

3-81
C. Possible examples include travel, overnight delivery fees, postage, selected costs related to conducting
focus-group studies, photocopying, and supplies related to model construction.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-82
3-83
78. ADF provides consulting services and uses a job-order system to accumulate the cost of client projects.
Traceable costs are charged directly to individual clients; in contrast, other costs incurred by ADF, but
not identifiable with specific clients, are charged to jobs by using a predetermined overhead application
rate. Clients are billed for directly chargeable costs, overhead, and a markup.
ADF anticipates the following costs for the upcoming year:

ADF's partners desire to make a $480,000 profit for the firm and plan to add a percentage markup on
total cost to achieve that figure.
On May 14, ADF completed work on a project for Lawrence Manufacturing. The following costs were
incurred: professional staff salaries, $68,000; administrative support staff, $8,900; travel, $10,500; and
other operating costs, $2,600.
Required:
A. Determine ADF's total traceable costs for the upcoming year and the firm's total anticipated overhead.
B. Calculate the predetermined overhead rate. The rate is based on total costs traceable to client jobs.
C. What percentage of total cost will ADF add to each job to achieve its profit target?
D. Determine the total cost of the Lawrence Manufacturing project. How much would Lawrence be
billed for services performed?

A. Traceable costs total $4,500,000, computed as follows:

ADF's overhead (i.e., the nontraceable costs) totals $1,500,000 ($6,000,000 - $4,500,000).
3-84
B. Predetermined overhead rate: $1,500,000 ÷ $4,500,000 = 33.33%
C. Target profit percentage: $480,000 ÷ $6,000,000 = 8%
D. The total cost of the Lawrence Manufacturing project is $120,000, and the billing is $129,600, as
follows:

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

79. Describe the types of manufacturing environments that would best be suited for (1) job-order costing and
(2) process costing. Include two examples of manufacturers that would likely use job-cost systems.

Job-order costing is typically used in manufacturing environments where goods are produced in distinct
batches, called jobs. Typically, there are differences among the various jobs produced. In contrast,
process costing is used in environments where large numbers of identical product units are
manufactured. Two examples of job-costing firms are aircraft and custom-furniture manufacturers.

AICPA BB: Industry
Blooms: Apply
Difficulty: 3 Hard

3-85
80. Manufacturing overhead is applied to production.
A. Describe several situations that may give rise to underapplied overhead.

B. Assume that underapplied manufacturing overhead is treated as an adjustment to Cost of Goods Sold.
Explain why an underapplication of overhead increases Cost of Goods Sold.

A. Overhead will be underapplied when total actual overhead costs exceed applied overhead. This can
occur for a variety of reasons including underestimation of some overhead costs, incorrect estimation of
the application base and/or production, selection of an inappropriate cost driver, or changes in the mix of
products that affect the level of overhead costs incurred.
B. In most manufacturing environments, many products made during the period are also sold and ending
work in process is modest relative to the amount of goods manufactured. Therefore the vast majority of
the overhead applied to the Work-in-Process Inventory account will flow through Finished-Goods
Inventory and on to Cost of Goods Sold. However, if overhead is underapplied, Cost of Goods Sold has
been increased by an insufficient amount. Consequently, the underapplied overhead should be added to
Cost of Goods Sold.

AICPA BB: Industry
Blooms: Understand

81. Discuss the reason for (1) allocating overhead to the cost of production jobs, and (2) applying overhead
using a predetermined rate instead of an actual overhead rate.

(1) Overhead costs usually bear no direct relationship to individual jobs or products, but must be incurred
for the production process to take place. Therefore, it is crucial that overhead be allocated to products in
order to have a complete picture of manufacturing costs.
(2) Actual overhead is not known until after the end of the accounting period. The cost of jobs would not
be available in a timely fashion if actual overhead costs were used.

AICPA BB: Industry
Blooms: Evaluate
Difficulty: 3 Hard
a manufacturer.

3-86
82. Harris, Inc., has just completed job nos. 78 and 79, which were similar in terms of complexity,
production processes, and units manufactured. Job no. 78 was manufactured by Joe Barton who earns
$14 per hour, whereas job no. 79 was completed by Susan Franklin who earns $20 per hour. If Joe and
Susan are equally efficient, would the company be better off using direct labor cost or direct labor hours
as the cost driver in its predetermined overhead rate? Briefly explain.

The jobs produced by Barton and Franklin are similar in terms of complexity, production processes, and
units manufactured, and both workers are equally efficient. Thus, the amount of overhead incurred on
job no. 78 should be relatively the same as that incurred on job no. 79. If direct labor hours are used in
the predetermined overhead rate, the overhead applied to the two jobs will be the same, which is good
accounting in this case. Conversely, if direct labor cost were used, Susan's job would absorb more
overhead because of the higher labor cost—an improper accounting since both jobs incurred the same
amount.

AACSB: Analytic
Blooms: Evaluate
Difficulty: 3 Hard
a manufacturer.

83. Briefly describe the stages used in the two-stage allocation process for assigning overhead costs.

In Stage One (Cost Distribution or Allocation), all manufacturing costs are assigned to departmental
overhead centers. For service departments, the related costs are reassigned to the production departments
through this process. In Stage Two (Overhead Application), all of the manufacturing costs accumulated
in each production department are then assigned to the production jobs that passed through the
department.

AACSB: Communication
AICPA FN: Research
Blooms: Understand
Learning Objective: 03-07 Describe the two-stage allocation process used to assign manufacturing overhead costs to production jobs.

3-87

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CH 3 Job Order Costing

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Chapter 03

Product Costing and Cost Accumulation in a Batch Production Environment

True / False Questions

Multiple Choice Questions

A. accumulating the company's period costs.

A. the cost of direct materials used.

A. Material requisitions are often computerized.

A. an estimate of the total time spent on the job.

A. direct material and direct labor.

A. Work-in-Process Inventory account.

A. Work in process is partially completed inventory.

A. Acquisitions of materials are normally charged to the Purchases account.

A. a debit to Manufacturing Overhead for $9,000.

A. also recorded a credit to Raw-Material Inventory.

A. $0 because Work in Process should be credited.

Production supervisor's salary: $3,500

The journal entry to record the preceding information is:

A. a debit to Advertising Expense.

A. debit to Depreciation Expense for $90,000.

A. service department cost allocation.

A. Budgeted total manufacturing cost ÷ budgeted amount of cost driver.

A. $0.04 per machine hour.

Budgeted manufacturing overhead: $480,000

Underapplied manufacturing overhead: $7,200

A. actual manufacturing overhead costs incurred throughout the accounting period.

A. actual manufacturing overhead costs.

A. applying a predetermined overhead amount to production.

A. debit Finished-Goods Inventory and credit Work-in-Process Inventory.

A. reduce Finished-Goods Inventory by $80,000.

A. a credit to Work-in-Process Inventory for $35,000.

A. budgeted overhead exceeded actual overhead.

A. a debit to Cost of Goods Sold.

A. suppliers of direct materials have an across-the-board price increase.

A. charged or credited to Work-in-Process Inventory.

A. Raw-Material Inventory, Manufacturing Overhead, and Direct Labor.

A. direct material costs.

A. a plant wide overhead rate.

A. from jobs, to service departments, to production departments.

A. (Budgeted overhead ÷ budgeted compensation) × budgeted compensation cost on the job.

Prepare journal entries to record the preceding transactions and events.

A. Prepare journal entries that summarize June's total activity.

A. Determine the company's predetermined overhead application rate.

A. Determine the company's predetermined overhead rate.

A. Compute the company's predetermined overhead application rate.

A. Determine the company's predetermined overhead application rate.

A. Determine the actual manufacturing overhead for the year.

A. Determine the total cost to redecorate the mayor's offices.

A. Describe several situations that may give rise to underapplied overhead.

True / False Questions

Multiple Choice Questions

6. Product costing in a manufacturing firm is the process of:

A. accumulating the company's period costs.

A. Chemical manufacturers.

A. job-order costing.

A. Aircraft manufacturers.

A. job-cost record.

A. the cost of direct materials used.

A. Material requisitions are often computerized.

A. participative management.