Chapter 3: Systems Design: Job-Order Costing

Question 1

The purpose of costing systems is to:

Answer 1

Accumulate and record the incurrence of costs and to assign the costs to the cost object

Question 2

Examples of cost objects

Answer 2

Products, customers, divisions, and market territories

Question 3

Every cost system must accomplish two things:

Answer 3

1) It should tell you which costs are traceable to the cost object, including how much has been incurred (These are direct costs)
2) For those costs that cannot be traced directly to a product or activity - such as the costs of using physical facilities, utility and power costs, shop supplies costs - the costing system or approach must tell you how to allocate those costs to the product or activity whose cost you are trying to compute (These are indirect costs)

Question 4

Production

Answer 4

Refer to the production of tangible goods as well as the provision of services

Question 5

Two types of production systems are common:

Answer 5

1) Job shops

2) Flow shops

Question 6

The two types of costing systems that correspond to the job shop and the flow shop are the:

Answer 6

1) Job-ordering costing system

2) Process costing system

Question 7

1) Job-ordering costing system

1) Job ordering costing system

Answer 7

A costing system used in situations where many different products, jobs, or services are produced each period.

Question 8

2) Process costing system

Answer 8

A costing system used in those manufacturing situations where a single, homogeneous product (such as cement or flour) is produced for long periods.

Question 9

Job shops typically make a large variety of products in small quantities known as __________

Answer 9

Batches (each order or batch is known as a job)

Question 10

Flow shops produce a much smaller variety of products in large volumes,

Answer 10

using a standardized and fixed sequence of operations

Question 11

Which shop kind produce to order?

Answer 11

Job shops produce to order (meaning they can do custom, one of a kind orders

Example: Small metal fabrication companies
MacGregor golf clubs
Bombardier

Question 12

Which shop kind produce to stock?

Answer 12

Flow shops (and the products made by these systems are sold from inventory)

Examples: Any soft drink bottler, television and appliance makers, cement manufactures, flour mills, oil refiners

Concept of a batch is not meaningful, rather take the costs of production over a period and divide it by the volume of production to compute costs

Question 13

What is the difference between an appliance maker and an oil refiner?

Answer 13

Oil refining is a continuous process, meaning the output is one continuous stream

You cannot distinguish between the first and last liter

Question 14

Appliance production is a ______ process

Answer 14

Discrete, meaning it is possible to distinguish from the first unit from its last (discrete prcoess)

Question 15

When management wishes to determine the profitability of a certain product, it must include both _____ and ____ costs when computing product costs

Answer 15

Variable and fixed

Question 16

Absorption costing (full costing)

Answer 16

A costing method that includes all manufacturing costs—direct materials, direct labour, and both variable and fixed overhead—as part of the cost of a finished unit of product.

Question 17

Variable costing

Answer 17

A costing method that includes only variable manufacturing costs—direct materials, direct labour, and variable overhead—as part of the finished unit of product. NO FIXED COSTS

Question 18

The absorption costing approach is common to many businesses for 2 reasons:

Answer 18

1) External financial reporting and tax reporting requirements dictate the use of this approach
2) Many companies have found this approach useful for managerial accounting purposes

Question 19

Actual costing system

Answer 19

A costing system in which actual overhead costs are applied to jobs by multiplying the actual overhead rate by the actual amount of the allocation base incurred by the job.

If managers allocate actual overhead costs to jobs they are said to use this method

Question 20

Normal costing system

Answer 20

A costing system in which overhead costs are applied to jobs by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job.

Guess what the rate is to know ahead of time

Question 21

Materials requisition form

Answer 21

A detailed source document that specifies:

1) the type and quantity of materials that are to be drawn from the storeroom,
2) and identifies the job to which the costs of materials are to be charged.

Question 22

Bill of materials

Answer 22

A document that shows the type and quantity of each major item of materials required to make a product

Determined initially from blueprints and engineering specifications and may undergo revisions as the work s carried out

Question 23

Job cost sheet

Answer 23

A form prepared for each job that records the materials, labour, and overhead costs charged to the job.

Asides from charging costs to jobs, this form also serves a key part for the accounting records

Question 24

Time sheet

Answer 24

A detailed source document used to record an employee’s activities during a day along with the time consumed for those activities.

Basically how they punch in and out

Question 25

Three reasons why determining the amount of overhead to a specific job may be a difficult task

Answer 25

1) Overhead is an indirect cost, meaning that it is either impossible or difficult to trace to a particular product or job
2) Overhead consists of many different items, such as supplies (nails, screws, glue), maintenance, utilities, and the annual salary of the department manager
3) Even though output may fluctuate due to seasonal or other factors, overhead costs tend to remain relatively constant due to the presence of fixed costs

Question 26

Allocation base

Answer 26

A measure of activity, such as direct labour-hours or machine-hours, that is used to assign costs to cost objects.

A universal measurement that can be used

Examples: Direct labor hours and machine hours

Question 27

Predetermined overhead rate definition

Answer 27

A rate used to charge overhead cost to jobs in production; the rate is established in advance for each period by use of estimates of total manufacturing overhead cost and of the total allocation base for the period.

Question 28

Predetermined overhead rate =

equation

Answer 28

Estimated total manufacturing overhead cost / Estimated total activity volume of the allocation base (actual activity)

Question 29

Overhead application

Answer 29

The process of charging manufacturing overhead cost to job cost sheets and to the work-in-process account.

After you have calculated your predetermined rate you apply it and that is the name for this process

Question 30

Overhead applied to a particular job =

(equation) - this is the vague version that does not have a specific base being measured

Answer 30

Predetermined overhead rate x Quantity of the allocation base consumed by the job

Question 31

Overhead applied to a particular job =

equation) (THIS IS FOR WHEN THE BASE IS DIRECT LABOR HOURS (DLH

Answer 31

Predetermined overhead rate per DLH x Actual DLHs charged to the job

Examples: Estimating $18 an hour for a job that took 30 hours = 540

Question 32

Cost Driver

Answer 32

A factor—such as machine-hours, beds occupied, computer time, or flight-hours—that causes overhead costs.

If the base does not drive overhead costs then the result will be inaccurate overhead rates and distorted product costs

Question 33

The purchase and issue of Materials (accounts)

ex: XYZ company has $7000 in raw materials and decides to purchase $60,000 more of finger nails

Answer 33

Raw Materials 60,000

Accounts Payable 60,000

Question 34

Issues of Direct and Indirect Materials (accounts)

Example: In April, $52,000 in raw materials were requisitioned from the storeroom for use in production

Answer 34

Work in Process 50,000
Manufacturing Overhead 2,000
Raw Materials 52000

Question 35

Issue of direct materials only (accounts)

Answer 35

Work in process xxxx

Raw Materials xxxx

Question 36

Labour costs (accounts)

Note: Labour charged to manufacturing overhead represent the indirect labour costs of the period, such as supervision, janitorial work, and maintenance

Answer 36

Work in process 60,000
Manufacturing overhead 15,000
Salaries and wages payable 75,000

Question 37

Manufacturing overhead costs (accounts)

Remember that all costs of operating the factory, asides from direct materials and direct labour, are considered manufacturing overhead costs

This example specifically looks at $21,000 coming from utilities, $16,00 for rent on factory equipment, and $3,000 for miscellaneous factory costs which equal $40,000

Answer 37

Manufacturing Overhead 40,000

Accounts Payable 40,000

Question 38

Manufacturing overhead costs for property taxes (accounts)

This assumes that Custom treasures recognizes $13,000 in accrued property taxes and $7,000 in prepaid insurance

Answer 38

Manufacturing Overhead 20,000
Property taxes payable 13,000
Prepaid insurance 7,000

Question 39

Manufacturing overhead costs for depreciation (accounts)

This assumes the company recognized $18,000 in depreciation on factory equipment (amortization)

Answer 39

Manufacturing Overhead 18,000

Accumulated Depreciation 18,000

Question 40

Manufacturing overhead to work in process (accounts)

Given 15,000 machine-hours were consumer, with a predetermined overhead rate of $6 (90,000)

Answer 40

Work in process 90,000
Manufacturing Overhead 90,000

Question 41

Subtle but important points:

Answer 41

Actual overhead costs are not charged to jobs; actual overhead costs do not appear on the job cost sheet, nor do they appearing the work-in-process account. Only the applied overhead cost, based on the predetermined overhead rate, appears on the job cost sheets and i the work-in-process account

Question 42

Cost of goods manufactured (COGM) (accounts)

Answer 42

Finished goods 158,000

Work in Process 158,000

Question 43

Costs of goods sold (COGS) (accounts)

$158 per unit x 750 units sold = $118,500

Answer 43

Accounts receivable 225,000
Sales 225,000

Costs of goods sold 118,500
Finished goods 118,500

Question 44

Underapplied overhead

Answer 44

A debit balance in the manufacturing overhead account that arises when the amount of overhead cost actually incurred is greater than the amount of overhead cost applied to work in process during a period.

You guessed too low of an amount before the real results became apparent

Question 45

Overapplied overhead

Answer 45

A credit balance in the manufacturing overhead account that arises when the amount of overhead cost applied to work in process is greater than the amount of overhead cost actually incurred during a period.

You guessed too high of an amount before the real results became apparent

Question 46

The difference between the applied and the actual amounts can have several causes:

The cause of under and overappliec overhead

Answer 46

1) The estimated and actual prices of the individual overhead items are different
2) The estimated and actual amounts of the allocation base are different
3) The allocation based used to apply overhead may not be representative of the various factors that potentially drive the different overhead cost items
4) The rate computed and used effectively treats overhead as a variable cost, whereas many individual overhead items may be fixed in nature

Question 47

Two common methods exist for dealing with over or under applied overhead balance

Answer 47

1) Prorate the under or overapplied overhead to cost of goods sold and the two inventory accounts (finished goods and work in process) based on the amounts in these accounts at the end of year
2) A simpler method that only uses COGS and Manufacturing Overhead to close

Question 48

Entry to close the underapplied account using method 1 (aka prorate the account to close the underapplied overhead)

AFFECTS BOTH BALANCE SHEET AND INCOME STATEMENT

Answer 48

Cost of goods sold 2,469
Finished goods inventory 1,031
work-in-process inventory 1,500
Manufacturing overhead 5,000

Question 49

Entry to close the underapplied account using method 2 (simpler method) Close the underapplied overhead to cost of goods sold

ONLY AFFECTS INCOME STATMENT

Answer 49

Simpler method
Cost of goods sold 5,000
Manufacturing Overhead 5,000

Question 50

Plantwide overhead rate

Answer 50

A single predetermined overhead rate used throughout a plant.

Question 51

Multiple predetermined overhead rate

More accurate

Answer 51

A costing system in which there are multiple overhead cost pools with different predetermined rates for each cost pool, rather than a single predetermined overhead rate for the entire company. Frequently, each production department is treated as a separate overhead cost pool.

Question 52

Marketing and selling costs should be treated as what?

Answer 52

Treated as period expenses and charged directly to the income statement

Question 53

Nonmanufacturing costs should not go into where?

Answer 53

The manufacturing overhead account

Question 54

Accounting salaries (accounts)
Nonmanufacturing costs

Answer 54

Salaries expense 30,000

Salaries and wages payable 30,000

Question 55

Depreciation on office equipment (accounts)

Nonmanufacturing costs

Answer 55

Depreciation Expense 7,000

accumulated Depreciation 7,000

Question 56

Advertising and Selling and Administrative expenses (accounts)
Nonmanufacturing costs

Answer 56

Advertising Expense 42,000
Other selling and administrative expense 80,000
Accounts Payable 50,000

Question 57

What statement will you find manufacture overhead

What type of account is manufacture overhead

Answer 57

Phantom Account
Phantom statement (exam answer)

Question 58

job definition

Answer 58

Each order batch is known as a job

Can bein service companies too, such as a movie by Columbia pictures is known as a job.

Question 59

Regardless of the method of adjustment chosen, product cost are never

Answer 59

adjusted in a normal costing system in the reconciliation process

Question 60

Why is predetermined overhead better than actual overhead?

Answer 60

1) Companies like to quote people ahead of time for the charges
2) Manager want to know the accounting valuation of completed jobs before the end of the accounting period
3) If actual costs are computed the may fluctuate on seasons and managers see no reason for these fluctuations and find them misleading

Question 61

The cost of a completed job consists of

Answer 61

1) The actual materials cost of the job
2) the actual labour of the job
3) The overhead cost applied to the job

Question 62

When products are transferred from work in process to finished goods, it results in a debit to finished goods and a credit to work in process

Answer 62

True - Manufacturing overhead account is credited when manufacturing overhead is applied to work in process

Question 63

The predetermined overhead rate is calculated using the following formula:

Answer 63

estimated total manufacturing overhead cost divided by estimated total units

Question 64

Suppose a total of $30,000 of overhead is applied to jobs. What account will be debited?

Answer 64

Work in Process $30,000

Question 65

Last year, a company reported estimated overhead, $100,000; actual overhead, $90,000; and applied overhead, $92,000. The company’s overhead cost for the year would be:

Answer 65

overapplied, $2,000

Question 66

To calculate costs of goods sold on bullshit exam question

Answer 66

Opening finished goods + COGM (add direct materials + Direct labour + Applied overhead + beginning work in process - ending work in process) - Ending finished goods = COGS

Question 67

Non-manufacturing costs are shown in the income statement below the gross margin line.

Answer 67

True