Chapter 2

Question 1

When are job-order costing systems used?

Answer 1

1. Many different products are produced each period.
2. Products are manufactured to order.
3. The unique nature of each order requires tracing or
   allocating costs to each job, and maintaining cost
   records for each job.

Question 2

Why do we use an allocation base?

Answer 2

An allocation base, such as direct labor hours, direct
labor dollars, or machine hours, is used to assignlabor dollars, or machine hours, is used to assign
manufacturing overhead to individual jobs.manufacturing overhead to individual jobs.
We use an allocation base because:
a. It is impossible or difficult to trace overhead costs to particular
jobs.
b. Manufacturing overhead consists of many different items
ranging from the grease used in machines to the production
manager’s salary.
c. Many types of manufacturing overhead costs are fixed even
though output fluctuates during the period.

Question 3

Why do we need a POHR?

Answer 3

Predetermined overhead rates that rely upon
estimated data are often used because:
1. Actual overhead for the period is not
known until the end of the period, thus
inhibiting the ability to estimate job costs
during the period.
2. Actual overhead costs can fluctuate seasonally,
thus misleading decision makers.

Question 4

What is activity-based costing?

Answer 4

when a company creates overhead rates based on the activities that it performs.

Question 5

What is underapplied overhead?

Answer 5

When a company applies less overhead to production that it actually incurs.
- increases cost of goods sold and decreases net operating income

Question 6

What is over applied overhead?

Answer 6

When it applies more overhead to production than it actually incurs.
- decreases cost of goods sold and increases net operating income