chapter-4

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Management Accounting, 6e (Atkinson et al.)

Chapter 4 Accumulating and Assigning Costs to Products

Objective 1

1) Overhead costs such as factory rent and supervisory salaries are allocated to cost objects in a multi-product facility.

Answer: TRUE Diff: 1

Terms: overhead cost Objective: 1

AACSB: Reflective thinking

2) In job order costing, only direct costs are used to determine the cost of a job. Answer: FALSE

Explanation: In job order costing, direct costs and indirect costs are used to determine the cost of a job.

Diff: 1

Terms: direct cost, indirect cost Objective: 1

AACSB: Reflective thinking 3) Job order costing:

A) can only be used in manufacturing.

B) records the flow of costs for each customer.

C) allocates an equal amount of cost to each unit made during a time period. D) is commonly used when each unit of output is identical.

Answer: B Diff: 1

Terms: job order costing Objective: 1

4) All of the following create problems with accurate product or job costing EXCEPT: A) incorrect job numbers are recorded on source documents.

B) bar coding is used to record materials used on the job.

C) using budgeted overhead costs to determine overhead cost allocation rates.

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5) A job that shows low profitability may be the result of all of the following EXCEPT: A) inefficient use of direct materials.

B) inefficient direct manufacturing labor. C) overpricing the job.

D) over-allocating overhead costs. Answer: C

Diff: 2

Terms: overhead Objective: 1

AACSB: Reflective thinking Objective 2

1) The raw material used in a product that can be easily traced to the product is generally classified as an indirect cost.

Answer: FALSE

Explanation: The raw material used in a product that can be easily traced to the product is generally classified as a direct cost.

Diff: 1

Terms: direct cost Objective: 2

2) An indirect cost will be traced to the cost object. Answer: FALSE

Explanation: A direct cost will be traced to the cost object. Diff: 1

3) An example of a direct cost for a service provided by an accounting firm, such as a tax return, would be:

A) depreciation on computer system.

B) labor of staff accountant who prepared the return. C) labor of file clerk who filed copies of return. D) rent on the office.

Answer: B Diff: 1

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4) An example of a direct cost in a car repair shop would include: A) parts used in repair.

B) supervisory labor. C) depreciation on tools.

D) property taxes on car repair shop. Answer: A

Diff: 1

5) In a manufacturing environment, an indirect cost such as ________ would usually be allocated to a cost object.

A) utilities B) raw materials

C) labor of employees who operate manufacturing equipment D) labor of administrative secretaries

Answer: D Diff: 1

Terms: indirect costs Objective: 2

6) In the manufacture of cans of beans, all of the following would likely be allocated to a cost object EXCEPT:

A) utilities.

B) supervisory labor.

C) depreciation on equipment used to can multiple products. D) beans.

Answer: D Diff: 1

7) A cost that depends on the amount of resource that is used is referred to as a A) fixed cost.

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8) A cost that is uniquely and unequivocally attributable to a single cost object is a: A) capacity related resource.

B) consumable resource. C) indirect cost.

D) direct cost. Answer: A Diff: 2

9) Depreciation on factory equipment is best characterized as A) direct costs.

B) fixed manufacturing overhead. C) variable overhead.

D) period costs. Answer: D Diff: 1

Terms: period cost Objective: 2

10) Depreciation on computers at the corporate headquarters is best characterized as A) direct costs.

B) fixed manufacturing overhead. C) variable overhead.

D) period costs. Answer: D Diff: 1

Terms: period cost Objective: 2

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11) Distinguish between direct and indirect costs. Give examples of each with regard to a specific product.

Answer: Direct costs are those costs that can be easily traced to the product and include direct materials and direct labor. In the manufacture of a baseball bat, the wood would be the direct material and the labor of the employees who cut and shape the wood would be direct labor. Indirect costs are costs that cannot easily be traced to the product because it is not possible or economically feasible to figure out what quantity of the resource was consumed by the

manufacture of the product. Indirect costs must be allocated to products. Indirect costs for the manufacture of a baseball bat would include the depreciation on the machines used in the manufacturing process and the utilities for the manufacturing facility.

Diff: 2

Terms: cost driver rate Objective: 2

MAL: This question is not available in MyAccountingLab. Objective 3

1) The practical capacity of a cost driver is the short-term capacity made available by the amount of resources committed to an overhead activity.

Answer: FALSE

Explanation: The practical capacity of a cost driver is the long-term capacity made available by the amount of resources committed to an overhead activity.

Diff: 2

Terms: practical capacity Objective: 3

2) Determining cost pools and realistic cost driver rates is a relatively complex process. Answer: TRUE

Diff: 1

Terms: cost pools Objective: 3

3) The costs grouped in a cost pool should be driven by the same activity. Answer: TRUE

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4) In a job order costing system, a cost driver rate is used to apply direct manufacturing costs to a specific product.

Answer: FALSE

Explanation: In a job order costing system, a cost driver rate is used to apply indirect manufacturing costs to a specific product

Diff: 1

Terms: job order cost system Objective: 3

5) In a normal job order costing system even though the cost driver rate is based on estimates, overhead costs are applied to products based on actual levels of activity.

Terms: job order cost system Objective: 3

6) When demand for a product is low, a higher markup should be used since a larger share of the fixed costs needs to be allocated to each product.

Answer: FALSE

Explanation: When demand for a product is low, a lower markup should be used since a larger share of the fixed costs needs to be allocated to each product.

Diff: 1

Terms: fixed cost Objective: 3

7) Labor hours are always an appropriate cost driver in a manufacturing environment. Answer: FALSE

Explanation: Machine hours is always an appropriate cost driver in a manufacturing environment.

Diff: 1

Terms: cost driver Objective: 3

8) The over-allocation of overhead to a product distorts the product's cost and therefore the evaluation of the product's profitability.

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9) In job order costing, individual jobs and products will be allocated different amounts of overhead costs depending on whether a single cost pool or multiple cost pools is used. Answer: TRUE

Diff: 2

10) In a job order costing system, a manufacturing firm typically uses a cost driver rate to estimate the ________ used for a job.

A) direct materials B) direct labor C) variable overhead D) total costs Answer: C Diff: 1

Terms: variable overhead Objective: 3

11) The normal cost of overhead activities includes: A) costs of resources committed to the particular activity. B) amounts for additional overtime payments.

C) allowances for idle time. D) All of the above are correct. Answer: A

Diff: 2

Terms: overhead Objective: 3

12) For each cost pool, a(n) ________ is identified that is the primary factor causing overhead costs to increase during the accounting period.

A) activity B) job C) level D) process Answer: A

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13) For the activity cost driver rate, overhead costs ________ should be used in the calculation. A) actually consumed

B) made available

C) based on a seasonal average D) None of the above is correct. Answer: D

Diff: 2

14) The predetermined overhead cost driver rate is calculated using ________ overhead costs. A) actual B) allocated C) direct D) estimated Answer: D Diff: 2

Rupe Company has two departments: Machining and Assembly. The following estimates are for the coming year:

Machining Assembly

Direct labor hours 30,000 40,000 Machine hours 150,000 200,000 Manufacturing overhead

costs $600,000 $800,000

15) A single predetermined manufacturing cost driver rate based on total plant direct labor hours is:

A) $ 4 per direct labor hour. B) $10 per direct labor hour. C) $20 per direct labor hour. D) $40 per direct labor hour.. Answer: C

Diff: 2

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16) A predetermined manufacturing cost driver rate for the Machining Department based on the number of machine hours in that department is:

A) $ 4 per machine hour. B) $10 per machine hour. C) $20 per machine hour. D) $40 per direct labor hour. Answer: A

Explanation: A) $4 per machine hour = $600,000/150,000 mh Diff: 2

AACSB: Analytical skills

For 2011, Steve's Plastics Manufacturing uses a normal job order costing system. The accounting records contain the following information:

Estimated manufacturing overhead (overhead)

costs $100,000

Actual manufacturing overhead costs $120,000

Estimated machine hours 20,000

Actual machine hours 25,000

The only cost driver is machine hours.

17) Using normal job order costing, the 2011 predetermined manufacturing overhead cost driver rate is:

A) $4.00 per machine hour. B) $4.80 per machine hour. C) $5.00 per machine hour. D) $6.00 per machine hour. Answer: C

Explanation: C) $5.00 per machine hour = $100,000 / 20,000 estimated mh Diff: 2

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18) Using normal job order costing, the amount of manufacturing overhead costs allocated to jobs during 2011 is:

A) $150,000. B) $125,000. C) $120,000. D) $100,000. Answer: B

Explanation: B) $125,000 = $5.00 per machine hour × 25,000 actual mh Diff: 2

Terms: cost driver rate, job order costing Objective: 3

Ocean Technical Services applies manufacturing overhead costs to products at a predetermined rate of $70 per direct labor hour. One customer has requested a bid on a special order of a product. Estimates for this order include: direct materials $50,000; direct labor 900 direct labor hours @ $30 per hour; and a markup rate of 25%.

19) Manufacturing overhead cost estimates for this special order total: A) $7,000.

B) $36,000. C) $45,990. D) $63,000. Answer: D

Explanation: D) $63,000 = 900 dlh × $70 predetermined rate Diff: 2

20) Estimated total product costs for this special order equal: A) $77,000. B) $97,000. C) $140,000. D) $175,000. Answer: C Explanation: C) $140,000 = DM $50,000 + DL $27,000 + MOH $63,000 Diff: 2

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21) The bid price for this special order is: A) $77,000. B) $97,000. C) $121,250. D) $175,000. Answer: D Explanation: D) $175,000 = $140,000 × 1.25 Diff: 3

LCR Company manufactures paint and applies manufacturing overhead costs to production at a predetermined rate of $20 per direct labor hour. The following data are obtained from the accounting records for October 2011:

Direct materials $1,320,000

Direct labor (20,000 hours @ $31/hour) $620,000

Plant facility rent $ 140,000

Plant facility insurance $ 80,000 Other miscellaneous plant costs $ 20,000 Depreciation on machinery and

equipment $ 180,000

Sales commissions $ 60,000

Administrative expenses $ 100,000

22) The actual amount of manufacturing overhead costs incurred in October 2011 total: A) $2,180,000 B) $ 480,000 C) $ 420,000 D) $ 160,000 Answer: C Explanation: C) $420,000 = $140,000 + $80,000 + $20,000 + $180,000 Diff: 2

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23) The amount of manufacturing overhead costs applied to all jobs during October 2011 total: A) $ 102,000. B) $400,000. C) $620,000. D) $1,240,000. Answer: B

Explanation: B) $400,000 = 20,000 dlh × $20 predetermined overhead rate Diff: 3

Terms: cost driver rate, job order costing, overhead Objective: 3

Wisconsin Electronics has received an order for 1,000 specially designed TV/VCR combinations. The following standards were compiled for this order:

Direct materials:

Part #123 $25 per TV/VCR

Part #456 $50 per TV/VCR

Direct labor:

2.0 hours per TV/VCR at $15 per hour Manufacturing

overhead: $40 per direct labor hour 24) The estimated direct labor cost for this order is:

A) $30,000. B) $40,000. C) $80,000. D) $115,000. Answer: A

Explanation: A) $30,000 = 1,000 unit order × 2.0 dlh × $15 per hour Diff: 2

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25) The estimated manufacturing overhead cost assigned to this order totals: A) $30,000. B) $40,000. C) $80,000. D) $115,000. Answer: C

Explanation: C) $80,000 = 1,000 unit order × 2.0 dlh × $40 per hour Diff: 2

26) Assume the company adds a 10% markup to arrive at a selling price. The bid price for this order totals: A) $203,500. B) $185,000. C) $115,500. D) $80,000. Answer: A Explanation: A) $203,500 = (DM $75,000 + DL $30,000 + MOH $80,000) × 1.10 Diff: 3

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Wood Manufacturing is a small textile manufacturer using machine-hours as the single, plant-wide predetermined cost driver rate to allocate manufacturing overhead costs to the various jobs contracted during the year. The following estimates are provided for the coming year for the company and for the Winfield High School band jacket job:

Company

Winfield High School Job Direct materials $40,000 $1,000 Direct labor $10,000 $ 200 Manufacturing overhead costs $30,000 Machine-hours 100,000 900

27) For Wood Manufacturing, what is the annual manufacturing overhead cost driver rate? A) $0.50 per machine hour

B) $0.80 per machine hour C) $0.30 per machine hour D) $33.33 per machine hour Answer: C

Explanation: C) $0.30 per mh = $30,000 / 100,000mh Diff: 2

28) What amount of manufacturing overhead costs will be allocated to the Winfield job? A) $270 B) $720 C) $450 D) $30,000 Answer: C Explanation: C) $270 = 900 mh × $0.30 per mh Diff: 2

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29) What are the total manufacturing costs of this job? A) $1,200 B) $1,470 C) $1,650 D) $1,920 Answer: B Explanation: B) $1,470 = DM $1,000 + DL $200 + MOH $270 Diff: 2

30) What is the bid price for the Winfield High School Job if the company uses a 40% markup of total manufacturing costs?

A) $2,310 B) $588 C) $1,680 D) $2,058 Answer: D Explanation: D) $2,058 = $1,470 × 1.40 Diff: 2

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Apple Valley Corporation uses a job order cost system and has two production departments, A and B. Budgeted manufacturing costs for the year are:

Department A Department B

Direct materials $700,000 $100,000 Direct labor $200,000 $800,000 Manufacturing overhead $600,000 $400,000

The actual material and labor costs charged to Job #432 are as follows:

Job #432 Direct materials: $25,000 Direct labor: Department A $ 8,000 Department B $12,000 $20,000

Apple Valley applies manufacturing overhead costs to jobs on the basis of direct labor cost using departmental rates determined at the beginning of the year.

31) For Department A, the manufacturing overhead cost driver rate is: A) 33% of direct labor costs.

B) 66% of direct labor costs. C) 300% of direct labor costs. D) None of the above is correct. Answer: C

Explanation: C) 300% = $600,000 / $200,000 Diff: 2

32) For Department B, the manufacturing overhead cost driver rate is: A) 50% of direct labor costs.

B) 80% of direct labor costs. C) 100% of direct labor costs. D) 200% of direct labor costs. Answer: A

Explanation: A) 50% = $400,000 / $800,000 Diff: 2

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33) Manufacturing overhead costs applied to Job #432 total: A) $12,000.

B) $24,000. C) $36,000.

D) None of the above is correct. Answer: D

Explanation: D) $30,000 = ($8,000 × 300%) + ($12,000 × 50%) Diff: 2

34) Total manufacturing costs associated with Job #432 equal: A) $55,000. B) $65,000. C) $70,000. D) $75,000. Answer: D Explanation: D) $75,000 = DM $25,000 + DL $20,000 + MOH $30,000 Diff: 2

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Sheppard Manufacturing uses departmental cost driver rates to allocate manufacturing overhead costs to products. Manufacturing overhead costs are allocated on the basis of machine hours in the Machining Department and on the basis of direct labor hours in the Assembly Department. At the beginning of 2011, the following estimates were provided for the coming year:

Direct labor cost $500,000 $900,000 Manufacturing overhead

costs $420,000 $240,000

Direct labor-hours 30,000 60,000 Machine-hours 80,000 20,000

The accounting records of the company show the following data for Job #316:

Direct labor-hours 120 70

Machine-hours 60 5

Direct material cost $300 $200 Direct labor cost $100 $400

35) For the Machining Department, what is the annual manufacturing overhead cost driver rate? A) $4.00 per machine hour

B) $4.20 per machine hour C) $4.67 per machine hour D) $5.25 per machine hour Answer: D

Explanation: D) $5.25 per mh = $420,000 / 80,000mh Diff: 2

36) What amount of manufacturing overhead costs will be allocated to Job #316? A) $439 B) $502 C) $595 D) $532 Answer: C Explanation: C) $595 = ($5.25 × 60 mh) + [($240,000 / 60,000) × 70dlh] Diff: 2

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37) What are the total manufacturing costs of Job #316? A) $715 B) $880 C) $1,595 D) $1,000 Answer: C Explanation: C) $1,595 = DM $500 + DL $500 + MOH $595 Diff: 2

AACSB: Analytical skills 38) Each cost pool:

A) utilizes a separate cost driver rate. B) is a subset of total labor costs.

C) can be associated with several normal levels of activity. D) All of the above are correct.

Answer: A Diff: 1

39) In job order costing, the optimum number of cost pools is ________. A) one

B) more than one C) 1,000

D) none Answer: A Diff: 1

Terms: cost pool, job order costing Objective: 3

AACSB: Reflective thinking 40) More cost pools:

A) always result in better estimates of overhead costs. B) seldom result in better estimates of overhead costs.

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41) Different products consume different proportions of manufacturing overhead costs because of differences in all of the following EXCEPT:

A) product design. B) product size. C) setup time. D) sales prices. Answer: D Diff: 1 Terms: overhead Objective: 3

42) Lois Manufacturing is a small clothing manufacturer using machine hours as the single cost driver to allocate manufacturing overhead costs to the various jobs contracted during the year. The following estimates are provided for the coming year for the company and for the Harford County School Uniform job.

Company Harford County Job

Direct materials $1,000,000 $2,000 Direct labor $120,000 $3,200 Manufacturing Overhead costs $320,000 Markup 32% Machine hours 80,000 1,200 Required:

a. For Lois Manufacturing, determine the annual manufacturing overhead cost driver rate. b. Determine the amount of manufacturing overhead costs estimated for the Harford County job. c. Determine the bid price for the Harford County's job.

Answer:

a. Overhead cost driver rate = $4 per mh = $320,000/80,000mh

b. $4,800 estimated overhead costs = 1,200 mh × $4 per mh cost driver rate c. Harford County Job price = $6,600 computed as follows:

Direct materials $2,000

Direct labor 3,200

Overhead costs 4,800

Estimated total manufacturing costs 10,000

Markup (32%) 3,200

Bid price $13,200

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43) Tangipahoa Manufacturing uses departmental cost driver rates to apply manufacturing overhead costs to products. Manufacturing overhead costs are applied on the basis of machine hours in the Machining Department and on the basis of direct labor dollars in the Assembly Department. At the beginning of 2007, the following estimates were provided for the coming year:

Direct labor hours 20,000 40,000

Machine hours 40,000 20,000

Direct labor cost $400,000 $920,000

Manufacturing Overhead costs $440,000 $460,000

The accounting records of the company show the following data for Product #A273:

Direct labor hours 50 100

Machine hours 200 50

Direct material cost $2,100 $1,200

Direct labor cost $1,000 $2,300

Required:

a. Compute the predetermined manufacturing overhead cost driver rate for each department. b. Compute the total cost of Product #A273.

c. Provide possible reasons why Tangipahoa Manufacturing uses two different cost drivers. Answer:

a. Machining Department cost driver rate: $11.00 / mh = $440,000/40,000 mh Assembly Department cost driver rate: $.50 / dl$ = $460,000/$920,000 dl$

b. Total cost of Product #A273 is $9,950 = Direct materials $3,300 + Direct labor $3,300 + Overhead costs $3,350 (Machining $2,200 + Assembly $1,150).

c. Ideally, cost driver(s) should reflect the factor(s) that cause manufacturing overhead costs to increase. Apparently, Tangipahoa regards the use of machines as the principal cause of

manufacturing overhead costs (such as depreciation and repairs) in the Machining Department. In contrast, Tangipahoa regards direct labor dollars as the principal cause of manufacturing overhead costs (such as indirect labor) in the Assembly Department. This suggests that the

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44) Elfie Enterprises uses three cost pools to allocate manufacturing overhead costs. The following estimates were provided for the coming year.

Manufacturing

Cost Pool Overhead Costs Cost driver Activity level

Supervision of direct labor $320,000 Direct labor hours 800,000 Machine maintenance $120,000 Machine hours 960,000 Facility rent $200,000 Square feet of area 100,000 Total overhead costs $640,000

The accounting records show the Lacio Job consumed the following resources.

Cost driver Actual level

Direct labor hours 200

Machine hours 1,600

Square feet of area 50

Required:

a. If direct labor hours are considered the only manufacturing overhead cost driver, compute: 1. the single cost driver rate for Elfie Enterprises; and

2. the amount of manufacturing overhead costs allocated to the Lacio job.

b. If Elfie Enterprises uses the three cost pools to allocate manufacturing overhead costs, compute:

1. the cost driver rate for each of the three overhead activities above; and 2. the amount of manufacturing overhead costs allocated to the Lacio job.

c. Review the amount of manufacturing overhead costs allocated in (a2) and (b2). Why do the two estimates differ? Which method of allocation probably best estimates the actual

manufacturing overhead costs used? Why?. Answer:

a. 1. Single cost driver rate is $0.80 per dlh = $640,000 / 800,000 dlh 2. $160 = 200 dlh × $0.80 per dlh

b. 1. Supervision cost driver rate is $0.40 per dlh = $320,000 / 800,000 dlh

Machine maintenance cost driver rate is $0.125 per mh = $120,000 / 960,000 mh Facility rent cost driver rate is $2 per sq ft = $200,000 / 100,000 sq ft

2. $380 = (200 × $0.40 per dlh) + (1,600 × $0.125 per mh) + (50 × $2 per sq ft)

c. The two estimates calculated for overhead costs differ because the $160 was calculated using a single cost driver rate and the $380 was calculated using multiple cost driver rates. The best estimate of actual overhead costs used is probably the $380 since total overhead costs are affected by each of the three cost drivers.

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45) Poseidon Company produces customized sailboats. The company uses a job order costing system. Its plant has three production departments: cutting, machining, and assembly. The estimated manufacturing overhead cost and direct labor cost for each department for 2011 follow:

Cutting Machining Assembly

Manufacturing Overhead cost $600,000 $800,000 $100,000

Direct labor cost $300,000 $200,000 $500,000

In May 2011, the company received an invitation from Duluth Sailing Company to bid on an order of five luxury sailboats that must be delivered by the end of September 2011. This Duluth Job would require direct manufacturing costs in the three departments as follows:

Cutting Machining Assembly

Direct material cost $12,000 $ 800 $ 4,600

Direct labor cost $ 7,000 $2,000 $15,000

Required:

a. Assume that a single, plantwide predetermined manufacturing cost driver rate based on direct labor cost is used. Determine the manufacturing cost driver rate and manufacturing overhead costs applied to the Duluth Job.

b. Assume that separate, departmental predetermined manufacturing cost driver rates based on direct labor cost are used in each department. Determine the departmental manufacturing cost driver rates and manufacturing overhead costs applied to the Duluth job.

c. Assume that Poseidon has a policy to add a 60% markup to estimated job costs to arrive at the bid price. Determine the bid price for the Duluth job using:

1. a plantwide manufacturing overhead cost driver rate; and 2. departmental manufacturing overhead cost driver rates. d. Review the bid prices computed in (c). Why do the two bids differ?

e. What are the possible consequences of overbidding a job? Underbidding a job? Answer:

a. Plantwide overhead cost rate is 150% of direct labor cost

= $(600,000 + 800,000 + 100,000) / $(300,000 + 200,000 + 500,000)

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c. Bid price using plantwide cost driver rate is $123,840 = [DM $17,400 + DL $24,000 + SC $36,000 = $77,400 × 160%]

Bid price using departmental cost driver rates is $106,240 = [DM $17,400 + DL $24,000 + SC $25,000 = $66,400 × 160%]

d. The two bids differ because the plantwide rate assumes that overhead resources are used uniformly in all three departments, whereas the departmental rates assume overhead resources are not uniformly used within the three departments.

e. Overbidding a job can result in lost business to competitors, while underbidding can result in too little profit per job.

Diff: 3

Terms: cost driver rate, overhead Objective: 3

46) In a job order costing system, explain why it is necessary to apply overhead costs to production through the use of a predetermined activity cost driver rate.

Answer: First, actual overhead costs are not known until the end of year. In order to price and invoice jobs in a timely manner, annual overhead costs need to be estimated and allocated to specific jobs during the accounting period.

Secondly, overhead costs are usually not incurred evenly throughout the year. The use of a predetermined activity cost driver rate evenly distributes overhead costs over the entire year. Diff: 2

Terms: job-order costing Objective: 3

MAL: This question is not available in MyAccountingLab. 47) Explain how an activity cost driver rate is determined.

Answer: Overhead activity cost driver rates are determined by dividing the cost of the resources committed to the overhead activity by the capacity made available by the resources committed to the overhead activity.

Diff: 2

Terms: cost driver rates Objective: 3

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48) Why is an accurate product cost important?

Answer: Accurate product costing is important for a number of reasons including 1) allocation of resources

2) evaluation of profitability, and 3) competitive pricing.

Diff: 2

Terms: job-order costing, process costing Objective: 3

MAL: This question is not available in MyAccountingLab.

49) Does adding more cost pools always result in better overhead costs estimates? Why or why not?

Answer: No, adding more cost pools does not always result in better cost estimates. The cost of the additional cost pools may be more than the benefit of the information. However, more cost pools are usually beneficial if:

1) the cost or productivity of resources are different; and 2) the pattern of demand varies across resources.

Diff: 2

Terms: cost pools, overhead Objective: 3

1) If cost driver rates were based on actual short-term usage, periods of lower demand would result in lower cost driver rates.

Answer: FALSE

Explanation: If cost driver rates were based on actual short-term usage, periods of lower demand would result in higher cost driver rates

Diff: 2

Terms: cost driver Objective: 4

2) Use of a single cost driver rate will always distort product costs. Answer: FALSE

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3) Costing system distortions relate to the handling of indirect costs. Answer: TRUE

Diff: 2

4) If a business offers both routine and specialized services, a single cost driver rate will overprice:

A) the routine service. B) the specialized service.

C) both the routine and the specialized service. D) neither the routine nor the specialized service. Answer: A

Diff: 1

5) Three types of product costs are estimated on a job bid sheet. List each of these costs and explain how each is estimated.

Answer:

∙ Direct materials: For each item of material, the quantity is based on standard engineering specifications. The current price is obtained from records maintained and updated by the purchasing department.

∙ Direct labor: These estimates are obtained from industrial engineering specifications developed on the basis of work and motion studies, or by analog with comparable standard products. The wage rate is determined from records disclosing wage rates for each grade of

labor needed for this job.

∙ Overhead costs: Activity costs are assigned to jobs in two steps. First, overhead activity cost driver rates are determined by dividing the cost of the resources committed to the overhead activity by the capacity made available by the resources committed to the activity. Next, activity costs are assigned to each job based on the level of cost driver activity using the overhead activity cost driver rate determined in the first step.

Diff: 2

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6) On a job bid sheet, four items are added together to arrive at a bid price. List each of these items and explain why each is necessary to arrive at the bid price.

Answer: Direct materials, direct labor, overhead costs, and margin.

Direct materials, direct labor, and overhead costs together are the estimated costs for production and margin adds an amount for profit.

Diff: 2

7) The markup rate on a job bid sheet includes amounts for certain items. Discuss these items. Answer: The markup rate on a job bid sheet includes amounts for profit, organizational costs, and overhead costs not already estimated on the job bid sheet.

A service organization may use a combined conversion cost driver, and therefore, allow amounts for direct labor, in addition to profit, organizational costs, and overhead costs not already

estimated on the job bid sheet. Diff: 2

8) List at least three factors taken into consideration when determining the markup rate. Answer: Markup rate is the percentage addition to the estimated job cost to calculate the bid price. The markup rate depends on a variety of factors including:

1) amount of indirect costs excluded from the numerator in the computation of the overhead cost driver rate;

2) target rate of return desired by the firm; 3) past bidding strategies of key competitors; 4) demand conditions; and

5) overall product-market strategies. 6) competitive intensity

Diff: 2

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9) In job order costing, explain how comparing actuals to the estimates for direct material and direct labor costs can be helpful to management.

Answer: Conducting cost variance analysis can help managers in several ways. If the managerial actions that led to actual costs being lower than estimated costs are identified, similar cost savings can be realized by repeating those actions in the production of other jobs. If factors resulting in actual costs being higher are identified, then managers may be able to take the necessary actions to eliminate or control those factors. If cost changes are likely to be permanent, however, the revised cost information can be used in bidding for jobs in the future.

Diff: 2

Terms: direct material, direct labor Objective: 4

10) Noble Printers has contracts to complete weekly supplements required by forty-six

customers. For the year 2011, overhead cost estimates total $420,000 for an annual production capacity of 12 million pages.

For 2011 Noble Printers has decided to evaluate the use of additional cost pools. After analyzing overhead costs, it was determined that the number of design changes, setups, and inspections are the primary overhead cost drivers. The following information was gathered during the analysis.

Cost pool Overhead costs Activity level

Design Changes $ 60,000 300 design changes

Setups $320,000 5,000 setups

Inspections $ 40,000 8,000 inspections Total overhead costs $420,000

During 2011, two customers, Wealth Managers and Health Systems, are expected to use the following printing services.

Activity Wealth Managers Health Systems

Pages 60,000 76,000

Design changes 10 0

Setups 20 10

Inspections 30 38

Required:

a. Calculate the cost driver rate if overhead costs are considered one large cost pool and are assigned based on 12 million pages of production capacity.

b. Using the cost driver rate determined in (a), calculate the overhead cost estimate for Wealth Managers during 2011.

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e. Review the overhead costs estimates computed in (b) and (d). Discuss what conclusions can be drawn from this exercise in regard to the use of cost pools.

Answer:

a. Cost driver rate is $0.035 / page = ($420,000 / 12,000,000 pages)

b. Overhead costs applied to Wealth Managers total $2,100 = 60,000 pages × $0.035/page c. Design changes overhead cost rate is $200 per design change = ($60,000/300 design changes)

Setups overhead cost rate is $64 per setup = ($320,000/5,000 setups)

Inspections overhead cost rate is $5 per inspection = ($40,000/8,000 inspections)

d. Wealth Managers overhead cost estimate is $3,430 = (10 × $200 per design change) = (20 × $64 per setup) + (30 × $5 per inspection)

e. The overhead cost estimates for Wealth Mangers differ greatly depending on whether costs are allocated based on printed pages or the three cost overhead pools. By using number of printed pages to allocate overhead costs, the additional costs of design changes, setups, and inspections are allocated uniformly to all jobs, rather than to those jobs that use these special resources. If pages produced continues to be used to allocate overhead costs, some customers, such as Wealth Managers, will be grossly underbilled for the job, while other jobs will be unfairly overbilled.

Diff: 3

Terms: cost driver rate, overhead Objective: 3, 4

11) Explain why more than one cost pool usually results in more realistic overhead cost estimates.

Answer: In today's industrial environment, the production process often involves the employment of multiple overhead activities that require multiple activity cost drivers. If the demand for different activity cost drivers varies in different proportions, a separate cost driver rate must first be determined for each activity cost and then used for estimating product costs. Therefore, a cost system with a single cost driver rate is likely to distort product costs if multiple activity cost drivers are actually required.

Diff: 2

Terms: cost pools Objective: 3, 4

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12) Explain what accounts for the difference between each amount reported on the job bid sheet and the job cost sheet for an individual job.

Answer: The job bid sheet estimates costs for direct material and direct labor while the job cost sheet records the actual costs. The job bid sheet includes overhead cost estimates based on an estimated level of activity while the job cost sheet estimates are based on the actual level of activity. The job bid sheet includes margin but the job cost sheet does not.

Diff: 2

Terms: job-order costing Objective: 3, 4

1) Job order costing would be appropriate for the construction of a cruise liner. Answer: TRUE

Diff: 1

2) Increasing prices in the face of falling demand is never a good strategy and can cause what is called a death spiral.

Terms: death spiral Objective: 5

3) Direct labor and overhead are referred to as conversion costs because they convert direct materials into finished products.

Terms: conversion costs Objective: 5

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4) If overhead cost driver rates are calculated monthly, distortions might occur because of: A) rental costs paid monthly.

B) property tax payments made in July and December.

C) routine, monthly preventive maintenance costs that benefit future months.

D) property tax payments made in July and December, and routine, monthly preventative maintenance costs that benefit future months.

Answer: B Diff: 1

5) Fixed manufacturing overhead costs remain constant at $400,000 per month and are allocated based on a monthly professional labor-hour allocation rate. Professional labor hours are

estimated at 12,000 for high-output months and 3,000 for low-output months. The final customer price includes a markup of 50% of cost. As a result:

A) low-output months will allocate less manufacturing overhead costs to each job. B) low-output months will deter customers due to the higher prices.

C) the high-output months present a more accurate method of pricing.

D) an annual allocation rate would result in lower prices during the high-output months than the monthly allocation rate.

Answer: B Diff: 1

AACSB: Reflective thinking 6) Conversion costs:

A) include all the factors of production. B) include direct materials.

C) in process costing are usually considered to be added evenly throughout the production process.

D) include direct materials, and in process costing are usually considered to be added evenly throughout the production process.

Answer: C Diff: 1

Terms: conversion costs Objective: 5

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JB Juice Company uses a manufacturing process that has two distinct stages: the juicing process (P1) and the straining process (P2). Raw material is consumed in P1 at the beginning of the process. No additional raw material is required in the second stage of the process (in P2). The following information pertains to the production of 5,000 units of output in March 2011:

Assume 5,000 units are 100% complete with respect to raw materials and conversion costs at the end of March.

P1 P2

Direct raw materials $120,000 $ 0 Direct labor $40,000 $60,000 Equipment maintenance $60,000 $80,000 Plant depreciation $80,000 $100,000 7) The conversion costs for P1, the juicing process, total: A) $120,000. B) $160,000. C) $100,000. D) $180,000. Answer: D Explanation: D) $180,000 = $40,000 + $60,000 + $80,000 Diff: 3

Terms: conversion cost, process costing Objective: 5

8) The conversion cost per unit of output for stage PI for the JB Juice Company totals: A) $84 per unit.

B) $36 per unit. C) $64 per unit. D) $20 per unit. Answer: B

Explanation: B) $36 per unit = $180,000/5,000 units Diff: 3

Terms: conversion cost, process costing Objective: 5

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9) Roland Company uses a manufacturing process that has two distinct stages: P1 and P2. Raw material is consumed in P1 at the beginning of the process. No additional material is required in the second stage of the process (in P2). The following information pertains to the production of 10,000 units of output in March 2012:

Assume all units are completed at the end of March. Assume all costs are added in March.

P1 P2 Direct materials $100,000 $ 0 Direct labor $ 80,000 $160,000 Equipment maintenance $ 20,000 $ 40,000 Plant depreciation $ 40,000 $ 60,000 Required:

a. Determine the direct material cost per unit of output.

b. Determine the conversion cost per unit of output for Stage P1 and Stage P2. Answer: a. Direct material cost per unit of output is $10 per unit = $100,000/10,000

b. Conversion cost per unit of output is: $14for P1 :$80,000₁₀_,₀₀₀$20,000$40,000 = $14 per unit 000 , 10 $60,000 $40,000 $160,000 : P2 for $26   = $26 per unit Diff: 3

10) What considerations are important in estimating product costs in continuous processing plants?

Answer: Continuous processing plants are characterized by the fact that production flows continuously, semi-continuously, or in large batches from one process stage to the next. At each successive process stage further progress is made toward converting the raw materials into finished products. Therefore, the product costing system must accumulate conversion costs assigned to individual products for successive process stages. Product costs must also reflect the yield rates--the proportion of the input materials in a process stage that is transferred to the next process stage.

Diff: 2

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Objective 6

1) Job order costing is an approach to costing that estimates costs for specific customer orders because the orders vary from customer to customer.

2) An example of a situation in which process costing might be used would be a consulting engagement.

Answer: FALSE

Explanation: An example of a situation in which job order costing might be used would be a consulting engagement.

Diff: 1

3) The goal of both job order costing and process costing is accurate product cost. Answer: TRUE

Diff: 1

Terms: job order costing, process costing Objective: 6

4) Process costing systems are used when products manufactured are relatively homogeneous and there are few and relatively small differences in the production requirements for different products.

Terms: process costing Objective: 6

5) While costs are measured for individual jobs in a job order costing system, they are measured for individual process stages in a process costing system.

Terms: job order costing, process costing Objective: 6

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6) Costing systems that are used for the costing of like or similar units of products in mass production are called:

A) inventory-costing systems. B) job order costing systems. C) process-costing systems. D) conversion costing systems. Answer: C

Diff: 1

AACSB: Reflective thinking 7) Process costing:

A) allocates conversion costs.

B) results in different costs for different jobs.

C) is commonly used by general contractors who construct custom-built homes. D) assigns costs to unique jobs based on a overhead cost driver.

Answer: A Diff: 1

8) Which of the following manufactured products would use process costing? A) polo shirts imprinted with individualized logos

B) picnic packs containing ketchup, mustard, and relish C) customized boats used for racing

D) handmade stained-glass lamps for recreational rooms Answer: B

Diff: 1

9) Process costing should be used to assign costs to products when: A) the units produced are similar.

B) the units produced are dissimilar.

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10) Which one of the following statements is FALSE?

A) In a job order costing system, individual jobs use different quantities of production resources. B) In a process-costing system, each unit uses approximately the same amount of resources. C) An organization that manufactures several types of cereal would use a job order costing system.

D) A corporation whose sole business activity is processing the customer deposits of several banks would use a process-costing system.

Answer: C Diff: 1

Terms: process costing, job-order costing Objective: 6

AACSB: Reflective thinking Objective 7

1) (Appendix) The direct allocation method recognizes possible interactions between service departments when allocating service department's costs to production departments.

Answer: FALSE

Explanation: The reciprocal allocation method recognizes possible interactions between service departments when allocating service department's costs to production departments.

Diff: 3

Terms: reciprocal method Objective: 7

2) (Appendix) The direct method of allocating service department costs assigns indirect costs to products in two stages. In the first stage, production department costs are allocated to the service departments.

Answer: FALSE

Explanation: The reciprocal method assigns indirect costs to products in two stages. In the first stage, the reciprocal cost of each service department is computed. In the second stage these reciprocal costs are used to allocate the service department costs to the production departments. Diff: 3

3) (Appendix) Using the direct method for service department's cost allocations are likely to undercost low-volume products.

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4) Under reciprocal cost allocation method:

A) the first step is to develop a reciprocal cost equation.

B) the first step is to allocate the service department costs to the production departments. C) one service department is chosen to allocate costs first.

D) service department costs are allocated directly to the production departments. Answer: A

Diff: 2

5) Product costs estimated using the sequential method of cost allocation A) the first step is to develop a reciprocal cost equation.

D) service department costs are allocated directly to the production departments. Answer: C

Diff: 2

Terms: sequential method Objective: 7

6) Product costs estimated using the direct method of cost allocation A) the first step is to develop a reciprocal cost equation.

D) service department costs are allocated directly to the production departments. Answer: D

Diff: 2

Terms: direct method Objective: 7

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Long Island Manufacturing Company developed the following information for its service departments, S1 and S2, and its production departments, P1 and P2:

S1 S2 P1 P2 Overhead Cost $8,000 $14.400 $16,000 $20,000 Service Provided by S1 --- 30% 30% 40% Service Provided by S2 25% --- 30% 45%

7) Using the direct method of service department cost allocation, how much is to be allocated from S2 to P2 if calculations are rounded to the nearest dollar?

A) $5,720 B) $6,480 C) $8,640 D) $4,430 Answer: C Explanation: C) $8,640 = $14,400 × 45/(30+45) Diff: 2

Terms: direct method Objective: 7

8) Using the reciprocal method of service department cost allocation, how much is the total overhead cost for P1 for the period if calculations are rounded to the nearest dollar?

A) $25,210 B) $33,188 C) $25,120 D) $25,188 Answer: A Explanation: A) S1 = $8,000+ 0.25 [$14,400 + 0.30 (S1)] S1 = $8,000 + $3,600 + 0.075 (S1) S1 = $12,540 = $11,600 / 0.925 S2 = $18,162 = $14,400 + 0.30 ($12,540) $25,210 = $16,000 + 0.30 ($12,540) + 0.30 ($18,162) Diff: 2

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9) Why do product costing systems using the direct method, sequential method, and reciprocal method allocate service department overhead costs first to the production departments before assigning them to individual jobs?

Answer: Because jobs are worked on only in the production departments, these methods assume that we cannot obtain direct measures of the consumption of service department's resources on individual jobs as conveniently as we can of production department's resources. Therefore, these costing systems allocate service department's overhead costs first to the production departments. Diff: 2

Terms: direct method, sequential method, reciprocal method Objective: 7