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Final Revision Question (1) High Desert Potteryworks makes a variety of pottery products that it sells to retailers such as Home Depot. The company uses a job-order costing system in which predetermined overhead rates are used to apply manufacturing overhead cost to jobs. The predetermined overhead rate in the Molding Department is based on machine-hours, and the rate in the Painting Department is based on direct labor cost. At the beginning of the year, the company’s management made the following estimates:

Department

Molding Painting

Direct labor-hours 12,000 60,000

Machine-hours 70,000 8,000

Direct materials cost $510,000 $650,000

Direct labor cost $130,000 $420,000

Manufacturing overhead cost $602,000 $735,000

The following information pertains to Job 205, which was started on August 1 and completed on August 10.

Department

Molding Painting

Direct labor-hours 30 85

Machine-hours 110 20

Direct materials cost $470 $332

Direct labor cost $290 $680

Required: 1. Compute the predetermined overhead rate used during the year in the Molding

Department Compute the rate used in the Painting Department. 2. Compute the total overhead cost applied to Job 205. 3. What would be the total cost recorded for Job 205? If the job contained 50 units,

what would be the unit product cost? 4. At the end of the year, the records of High Desert Potteryworks revealed the

following actual cost and operating data for all jobs worked on during the year:

Department

Molding Painting

Direct labor-hours 10,000 62,000

Machine-hours 65,000 9,000

Direct materials cost $430,000 $680,000

Direct labor cost $108,000 $436,000

Manufacturing overhead cost $570,000 $750,000

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What the amount was of underapplied or overapplied overhead in each department at the end of the year?

Answer

1. Predetermined overhead rates during the year (POHR)

POHR = Annual estimated manufacturing

overhead / Annual estimated allocation base

Department Molding Painting

=$602,000/70,000 MH

= $8.60 per MH

=$735,000/240,000 DLC

= $1.75 per DLC

2. Applied manufacturing overhead

Applied manufacturing overhead = Actual allocation Base for Job X

POHR

Department Molding Painting

= 110 X 8.6= $946.00

=$680 X 1.13= 768.92

3. Total product cost recorded for Job 205 Department Total Molding Painting Direct labor-hours 30 85 115 Machine-hours 110 20 130 Applied manufacturing overhead $946 $769 1715 Total Product Costs $1,086 $874 $1,960 Product Cost per unit = Total Product Costs/ 50 units $39.20

4. Overapplied or underapplied manufacturing overhead during the year

Overapplied or underapplied = Applied manufacturing

overhead during the year - Actual manufacturing overhead

during the year

Department Molding Painting

= ($8.60 x65,000) - $570,000 = - 11,000

(Underapplied)

= ($1.75 x436,000) - $750,000 = 13,000

(Overapplied)

Note: Applied manufacturing overhead during the year = (Actual allocation base during the year X POHR)

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Question (2)

Hogle Corporation uses job-order costing and applies overhead cost to jobs on the basis of machine-hours worked. For the just completed year, the company estimated that it would work 75,000 machine-hours. The company actually worked 80,000 machine-hours. The company has provided the following financial data concerning its actual operations for the year:

Direct materials $360,000

Indirect materials $20,000

Direct labor $75,000

Indirect labor $110,000

Sales commissions $90,000

Administrative salaries $200,000

General selling expenses $17,000

Factory utility costs $43,000

Advertising costs $180,000

Factory depreciation $280,000

Selling and administrative depreciation $70,000

Factory insurance $7,000

Selling and administrative insurance $3,000

Required: If the overhead overapplied for the year is $20,000? What the amount of Estimated Manufacturing overhead cost for the year?

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Answer

Total Actual manufacturing during 2014

Indirect materials $20,000

Indirect labor $110,000

Factory utility costs $43,000

Factory depreciation $280,000

Factory insurance $7,000

Total Actual manufacturing during 2014 $460,000

1. Overapplied or underapplied = Applied manufacturing overhead during the year

- Actual manufacturing overhead during the year

x +20,000 (overapplied, Given) = Applied manufacturing overhead during the year - $460,000

x Then: Applied manufacturing overhead during the year = $460,000 + 20,000 = $480,000

2. Applied manufacturing overhead during the year = Actual allocation base during the year X POHR)

x $480,000 = 80,000 machine-hours x POHR x Then: POHR = $480,000 / 80,000 = $6 per machine-hour.

3. POHR =Estimated manufacturing overhead during the year / Annual estimated allocation base

x 6 = Estimated manufacturing overhead during the year / 75, 000 hours x Then: Estimated manufacturing overhead during the year = 75,000 x 6 =

$450,000.

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Question (3) Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:

Variable costs per unit:

Manufacturing:

Direct materials $6

Direct labor $9

Variable manufacturing overhead $3

Variable selling and administrative $4

Fixed costs per year: Fixed manufacturing overhead $300,000

Fixed selling and administrative $190,000

During the year, the company produced 25,000 units and sold 20,000 units. The selling price of the company’s product is $50 per unit. Required: 1. Assume that the company uses absorption costing:

a. Compute the unit product cost. b. Prepare an income statement for the year.

2. Assume that the company uses variable costing: a. Compute the unit product cost. b. Prepare an income statement for the year.

3. Reconcile the absorption costing and the variable costing net operating income.

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Answer

1. Absorption costing: a. The unit product cost:

The unit product cost. Direct materials $6

Direct labor $9

Variable manufacturing overhead $3

Fixed manufacturing overhead =( 300,000/25000) $12

The total unit product cost. $30

b. Income statement for the yea:

The unit product cost. Sales Revenue (20,000*50) $1,000,000

Less: Cost of goods sold

(-) Beginning inventory $0

Add: Cost of manufacturing (25,000*$30) $750,000

Less: Ending inventory (25000-20000)*30 $150,000

Cost of goods sold $600,000

Gross Margin $400,000

(-) Variable selling and administrative : (-)

(1) Variable selling and administrative (20,000*4) $80,000

(2) Fixed selling and administrative $190,000

Net Income $130,000

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2. Variable costing: a. The unit product cost:

The unit product cost. Direct materials $6

Direct labor $9

Variable manufacturing overhead $3

The total unit product variable cost. $18

b. Income statement for the yea:

The unit product cost. Sales Revenue (20,000*50) $1,000,000

Less: Variable Expenses:

(-) Beginning inventory $0

Add: Variable Cost of manufacturing (25,000*$18) $450,000

Less: Ending inventory (25000-20000)*18 $90,000

Variable selling and administrative (20,000*4) $80,0000

Total Variable Expenses: 440,000

Contribution Margin $560,000

(-) Fixed Costs: : (-)

(1) manufacturing overhead) $300,000

(2) selling and administrative $190,000

Net Income $70,000

3. Reconcile the absorption costing and the variable costing net operating income.

Net Income according variable costing $70,000

Add: Ending Inventory (25000-2000)x(30-18) 60,000

Net Income according absorption costing $130,000

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Question (4)

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Answer

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Question (5)

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Question (5)

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True False Statements

1. The use of a predetermined overhead rate in a job-order cost system makes it possible to compute the total cost of a job before production is begun. FALSE.

2. If direct labor-hours is used as the allocation base in a job-order costing system,

but overhead costs are not caused by direct-labor hours, then jobs with high direct labor requirements will tend to be undercosted relative to jobs with low direct labor requirements. FALSE

3. The formula for computing the predetermined overhead rate is: Predetermined

overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base. TRUE

4. When the predetermined overhead rate is based on direct labor-hours, the

amount of overhead applied to a job is proportional to the estimated amount of direct labor-hours for the job. FALSE

5. The cost of a completed job in a job-order costing system typically consists of

the actual direct materials cost of the job, the actual direct labor cost of the job, and the manufacturing overhead cost applied to the job. TRUE

6. The cost categories that appear on a job cost sheet include selling expense,

manufacturing expense, and administrative expense. FALSE 7. Indirect materials are charged to specific jobs. FALSE 8. Manufacturing overhead is overapplied if actual manufacturing overhead costs

for a period are greater than the amount of manufacturing overhead cost that was charged to Work in Process. FALSE

9. If the actual manufacturing overhead cost for a period exceeds the

manufacturing overhead cost applied, then manufacturing overhead would be considered to be underapplied. TRUE.

10. Under variable costing, product costs consist of direct materials, direct labor,

and variable manufacturing overhead. TRUE

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11. Under absorption costing, fixed manufacturing overhead is treated as a product cost. TRUE

12. Under variable costing, variable production costs are not treated as product

costs. FALSE 13. Under variable costing, fixed manufacturing overhead cost is not treated as a

product cost. TRUE 14. The costs assigned to units in inventory are typically lower under variable

costing than under absorption costing. TRUE 15. Direct materials are considered to be a product cost under variable costing but

not absorption costing. FALSE 16. Under absorption costing, fixed manufacturing overhead cost is not included in

product cost. FALSE 17. Under variable costing, product cost does not contain any fixed manufacturing

overhead cost. TRUE 18. Under absorption costing, the profit for a period is affected by a change in the

number of units of finished goods in inventory. TRUE 19. When variable costing is used, and if selling prices exceed variable expenses

and if the unit contribution margins, the sales mix, and fixed costs remain the same, profits move in the same direction as sales. TRUE

20. Under absorption costing, it is possible to defer a portion of the fixed

manufacturing overhead costs of the current period to future periods through the inventory account. TRUE

21. When the number of units in work in process and finished goods inventories

decrease, absorption costing net operating income will typically be greater than variable costing net operating income. FALSE

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Multiple Choices Questions

1. If overhead is underapplied, then: A. Actual overhead cost is less than estimated overhead cost. B. The amount of overhead cost applied is less than the actual overhead cost

incurred. C. The predetermine overhead rate is too high. D. The manufacturing overhead account will have a credit balance at the year.

2. Overapplied overhead would result if: A. The plant was operated at less than normal capacity B. Overhead costs incurred were less than estimated overhead costs. C. Overhead costs incurred were less than overhead costs charged to production. D. Overhead costs incurred were greater than overhead costs charged to production.

3. ABC company uses a predetermine overhead rate based on direct labor cost to apply manufacturing overhead to job. The following information applies to the company for the current year:

Direct labor-hours: x Estimated for the year 24000 x Actual for the year 19500

Direct labor cost: x Estimated for the year $300,000 x Actual for the year $210,000

Manufacturing overhead: x Estimated for the year $240,000 x Actual for the year $185,000 The manufacturing overhead for the current year will be:

A. Overapplied by $17,000. B. underapplied by $17,000. C. overapplied by $55,000. D. underapplied. By $55,000

4. Emco Company uses direct labor cost as a basis for computing its

predetermined overhead rate. In computing the predetermined overhead rate for last year, the company misclassified a portion of direct labor cost as indirect labor. The effect of this misclassification will be to: A. understate the predetermined overhead rate. B. overstate the predetermined overhead rate. C. have no effect on the predetermined overhead rate. D. cannot be determined from the information given.

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5. Departmental overhead rates are generally preferred to plant-wide overhead rates when: A. the activities of the various departments in the plant are not homogeneous. B. the activities of the various departments in the plant are homogeneous. C. most of the overhead costs are fixed. D. all departments in the plant are heavily automated.

6. In computing its predetermined overhead rate, Brady Company included its

factory insurance cost twice. This error will result in: A. the ending balance of Finished Goods to be understated. B. the credits to the Manufacturing Overhead account to be understated. C. the Cost of Goods Manufactured to be overstated. D. the Net Operating Income to be overstated.

7. Under absorption costing, fixed manufacturing overhead costs: A. are deferred in inventory when production exceeds sales. B. are always treated as period costs. C. are released from inventory when production exceeds sales. D. are ignored.

Good Luck