8.1 Job-Order Costing Flashcards
During the production of its single product, a company discovers that an unusual overnight power failure ruined an entire day’s in-process production. How should the cost of these spoiled units be charged?
A. Added to the cost of the next day’s production.
B. Written off as a loss
C. Added to the cost of future good units produced
D. Added to general factory overhead
B. Written off as a loss
Abnormal spoilage is not expected to occur under normal, efficient operating conditions. The cost of abnormal spoilage should be separately identified and reported to management. Abnormal spoilage is typically treated as a period cost and written off as a loss because of its unusual nature.
Farber Company employs a normal cost system. The following information is from the financial records of the company for the year.
- Total manufacturing costs were $2,500,000.
- Cost of goods manufactured was $2,425,000.
- Applied factory overhead was 30% of total manufacturing costs.
- Factory overhead was applied to production at a rate of 80% of direct labor cost.
- Work-in-process inventory at January 1 was 75% of work-in-process inventory at December 31.
The carrying value of Farber Company’s work-in-process inventory at December 31 is
A. $225,000.
B. $100,000.
C. $300,000.
D. $75,000.
C. $300,000.
Cost of goods manufactured ($2,425,000) equals total manufacturing costs ($2,500,000) plus beginning work-in-process (75% of EWIP) minus ending work-in-process. The ending work-in-process is $300,000.
$2,500,000 + .75 EWIP – EWIP = $2,425,000
$2,500,000 – .25 EWIP = $2,425,000
EWIP = $75,000 ÷ .25
EWIP = $300,000
A company manufactures a specialty line of T-shirts using a job-order costing system. During March, the following costs were incurred in completing job ICU2: direct materials, $13,700; direct labor, $4,800; administrative, $1,400; and selling, $5,600. Overhead was applied at the rate of $25 per machine hour, and job ICU2 required 800 machine hours. If job ICU2 resulted in 7,000 good shirts, the cost of goods sold per unit would be
A. $6.50
B. $5.70
C. $5.50
D. $6.30
C. $5.50
Cost of goods sold is based on the manufacturing costs incurred in production but does not include selling or general and administrative expenses. Manufacturing costs equal $38,500 [$13,700 DM + $4,800 DL + (800 hours × $25) OH]. Thus, per-unit cost is $5.50 ($38,500 ÷ 7,000 units).
A corporation manufactures a specialty line of dresses using a job-order costing system. During January, the following costs were incurred in completing job J-1:
Direct materials $27,400
Direct labor 9,600
Administrative costs 2,800
Selling costs 11,200
Factory overhead was applied at the rate of $50 per direct labor hour, and job J-1 required 400 direct labor hours. If job J-1 resulted in 4,000 good dresses, the cost of goods sold per unit is
A. $14.25
B. $17.75
C. $9.25
D. $14.95
A. $14.25
Cost of goods sold is based on the manufacturing costs incurred in production. It does not include selling or general and administrative expenses. Manufacturing costs consist of direct materials, $27,400; direct labor, $9,600; and overhead, $20,000 (400 direct labor hours × $50 per hour). The total of these three cost elements is $57,000. Dividing the $57,000 of total manufacturing costs by the 4,000 units produced results in a per-unit cost of $14.25.
Job-order costs are most useful for
A. Estimating the overhead costs included in transfer prices.
B. Determining inventory valuation using LIFO.
C. Controlling indirect costs of future production.
D. Determining the cost of a specific project.
D. Determining the cost of a specific project.
Job-order costs are used in determining the costs of a specific, clearly identifiable job or project. In contrast, process costing averages the costs of all production.
A manufacturing company uses machine hours as the only overhead cost allocation base. The accounting records contain the following information.
Estimated /Actual
Manufacturing overhead costs $200,000 / $240,000
Machine hours 40,000 / 50,000
Using actual costing, the amount of manufacturing overhead costs allocated to jobs is
A. $200,000
B. $300,000
C. $240,000
D. $250,000
C. $240,000
Actual costing is the recording of product costs based on the actual (1) cost of materials, (2) cost of labor, and (3) overhead incurred. Actual overhead costs incurred were given as $240,000. Thus, the amount of manufacturing overhead costs allocated to jobs under actual costing is $240,000.
A calendar-year corporation had $17,000 of spoilage during April that production management characterized as abnormal. The spoilage was incurred on Job No. 532, which was sold 3 months later for $459,000. Which of the following correctly describes the impact of the spoilage on the corporation’s unit manufacturing cost for Job No. 532 and on the year’s operating income?
Unit Manufacturing Cost: Increase/No effect/Decrease
Operating Income: Increase/No effect/Decrease
Unit Manufacturing Cost: No effect
Operating Income: Decrease
Under job-order costing, abnormal spoilage is not treated as a manufacturing cost, therefore unit manufacturing cost is unaffected. Abnormal spoilage is a period cost. The difference between the disposal value of the spoiled goods and the value of the goods in work-in-process control must be recognized as a loss, which will decrease operating income.
The amount of raw materials left over from a production process or production cycle for which there is no further use is
A. Abnormal spoilage.
B. Normal spoilage.
C. Scrap.
D. Waste.
D. Waste.
Waste is the amount of raw materials left over from a production process or production cycle for which there is no further use. Waste is usually not salable at any price and must be discarded.
A company produces stereo speakers for automobile manufacturers. The automobile manufacturers reject approximately 3% of the stereo speakers received as being of unacceptable quality. The company inspects the rejected speakers to determine which ones should be reworked and which ones should be discarded. The discarded speakers are classified as
A. Rework costs.
B. Waste.
C. Scrap.
D. Spoilage.
D. Spoilage.
Rejected units that are discarded are classified as spoilage. Spoilage is separated into abnormal or normal spoilage. Normal spoilage is an inherent result of the normal production process. Abnormal spoilage is spoilage that is not expected to occur under normal, efficient operating conditions.
Scrap is input material that has a relatively minor sales value at the end of the production process.
Farber Company employs a normal cost system. The following information is from the financial records of the company for the year.
- Total manufacturing costs were $2,500,000.
- Cost of goods manufactured was $2,425,000.
- Applied factory overhead was 30% of total manufacturing costs.
- Factory overhead was applied to production at a rate of 80% of direct labor cost.
- Work-in-process inventory at January 1 was 75% of work-in-process inventory at December 31.
Farber Company’s total direct labor cost for the year is
A. $937,500
B. $750,000
C. $909,375
D. $600,000
A. $937,500
Total manufacturing cost of $2,500,000 is composed of raw materials, direct labor, and factory overhead. Factory overhead is 30% of total manufacturing costs, or $750,000. If factory overhead is 80% of direct labor cost, direct labor cost is $937,500 ($750,000 ÷ 80%).
A manufacturer produces unique tapestries and bedding for hotel chains and uses a job order costing system. During the current month, the manufacturer purchased $50,000 of direct materials and incurred $22,000 in direct labor. Overhead is applied on the basis of direct labor hours at a rate of 60%. Overapplied or underapplied overhead is closed to cost of goods sold at the end of the period. The actual overhead incurred this month was $10,000. Balances in the manufacturer’s inventory accounts are presented below.
Beginning of month / End of month
Direct materials $2,000 / $3,500
Work-in-process 5,000 / 9,000
Finished goods 2,500 / 1,700
What is the cost of goods manufactured this month?
A. $83,700
B. $79,700
C. $80,500
D. $76,500
B. $79,700
Before cost of goods manufactured this month can be calculated, direct materials used must be determined. The direct materials equation is as follows: Beginning inventory + Materials purchased – Materials used = Ending inventory. The equation can be rearranged to find materials used of $48,500 ($2,000 beginning inventory + $50,000 materials purchased – $3,500 ending inventory). The work-in-process equation is as follows: Beginning inventory + Direct materials used + Direct labor + Manufacturing overhead applied – Cost of goods manufactured = Ending inventory. This equation can be rearranged to find cost of goods manufactured of $79,700 [$5,000 beginning inventory + $48,500 direct materials used + $22,000 direct labor + ($22,000 × 60%) manufacturing overhead applied – $9,000 ending inventory]. The manufacturing overhead is applied on the basis of direct labor hours at a rate of 60%.
When compared with normal spoilage, abnormal spoilage
A. Is not typically influenced by the “tightness” of production standards.
B. Is given the same accounting treatment as normal spoilage.
C. Is generally thought to be more controllable by production management than normal spoilage.
D. Arises more frequently from factors that are inherent in the manufacturing process.
C. Is generally thought to be more controllable by production management than normal spoilage.
Spoiled goods are defective items that cannot be feasibly reworked. Traditional cost accounting systems distinguish between normal and abnormal spoilage because, in some operations, a degree of spoilage is viewed as inevitable. Normal spoilage occurs under normal, efficient operating conditions. It is spoilage that is uncontrollable in the short run and therefore should be expressed as a function of good output (treated as a product cost). Accordingly, normal spoilage is assigned to all good units in process costing systems, that is, all units that have passed the inspection point at which the spoilage was detected. If normal spoilage is attributable to a specific job, only the disposal value of the normally spoiled goods is removed from work-in-process, thereby assigning the cost of normal spoilage to the good units remaining in the specific job. Abnormal spoilage is not expected to occur under normal, efficient operating conditions. The cost of abnormal spoilage should be separately identified and reported. Abnormal spoilage is typically treated as a period cost (a loss) because it is unusual.
A company manufactures a single product. During the manufacturing process, a small number of units do not pass final inspection and are destroyed. What is the appropriate accounting treatment for the cost of these units? The cost should be
A. Added to the cost of warranties.
B. Expensed as incurred.
C. Ignored as immaterial.
D. Added to the cost of good units produced.
D. Added to the cost of good units produced.
Output that does not meet the quality for salability is considered spoilage. The numbers that do not pass final inspection but that are considered acceptable as a part of efficient production are considered normal spoilage. The accounting treatment is to include normal spoilage as a product cost.
A specialty instrument manufacturer is in the process of establishing a cost system. The company produces machines that are unique and distinctive. These machines are produced when purchase requests are received from customers. Although some common parts and sub-assemblies are to be held in inventory, no finished goods inventory is maintained since each purchase request is for a customized specialty instrument. The type of cost accumulation system that would be best suited for this type of environment would be
A. Batch-level costing.
B. Process costing.
C. Job-order costing.
D. Backflush costing.
C. Job-order costing.
Job-order costing applies to accumulating costs by specific job. This method is appropriate when producing products with individual characteristics or when identifiable groupings are possible. Units (jobs) should be dissimilar enough to warrant the special recordkeeping required by job-order costing. Products are usually custom-made for a specific customer.
Spoilage that is not expected to occur under normal, efficient operating conditions is considered
A. Abnormal spoilage.
B. Actual spoilage.
C. Residual spoilage.
D. Normal spoilage.
A. Abnormal spoilage.
Abnormal spoilage is spoilage that is not expected to occur under normal, efficient operation conditions.
