Unit 2: Job Order Costing

Question 1

Define common cost

Answer 1

A cost that is incurred to support a number of cost objects but cannot be traced to them individually.

A common cost is a type of indirect cost.

Question 2

Define direct materials

Answer 2

Direct materials refers to raw materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product.

Question 3

Define direct labor

Answer 3

Direct labor consists of labor costs that can be easily traced to individual units of products.

Sometimes called touch labor

ex. assembly-line workers, carpenters, electricians

Question 4

Define manufacturing overhead

Answer 4

Manufacturing overhead includes all manufacturing costs except direct materials and direct labor.

Indirect costs because they cannot be readily traced to specific products

Includes a portion of raw materials known as indirect materials and indirect labor. Also includes depreciation of manufacturing equipment, rent of the factory building, utility costs, property taxes, and insurance premiums incurred to operate a manufacturing facility (but not nonmanufacturing operations).

Question 5

Define conversion cost

Answer 5

Direct labor plus manufacturing overhead

The costs incurred to convert direct materials into finished products

Question 6

What are the two categories of nonmanufacturing costs?

Answer 6

Selling costs

Administrative costs

Question 7

Define selling costs

Answer 7

All costs that are incurred to secure customer orders and get the finished product to the customer.

ex. advertising, shipping, sales travel, sales commissions, sales salaries, costs of finished goods warehouses

Can be direct or indirect

Question 8

For manufacturing companies, what makes up product costs?

What accounts do product costs flow through?

Answer 8

Direct materials, direct labor, and manufacturing overhead

Raw materials -> Work in Progress -> Finished Goods -> Cost of Goods Sold

Question 9

Define period costs

Answer 9

All costs that are not product costs

Reported as an expense in the period in which they occur

Ex. administrative salaries

Question 10

Define cost behavior.

Answer 10

The way in which a cost reacts to changes in the level of activity.

Question 11

Define job order costing.

Answer 11

Tracking the cost of a product or service

A company will accumulate all of the costs associated with a job. Those costs are then used to determine profit margins, etc.

Question 12

What does it mean when a company is a price-taker?

Answer 12

The market sets the price and the company must track the costs of the product being produced or the service being provided to be able to compare the cost of the product or service with the price the market is offering.

Question 13

What does it mean when a company is a price-maker?

Answer 13

The company’s product is customized and unique, so the maker of the product can charge a price based on costs and markup.

The company still needs to track costs to ensure an adequate return is generated.

Question 14

When should a company use job order costing?

Answer 14

When they have individual, discrete products or services

ex. when producing F-150s, if each truck has different features, different size engines, tires, and other specifications that make it unique, it is appropriate to use job order costing

If every F-150 were exactly the same and the manufacturing process was the same, job order costing wouldn’t be appropriate.

Question 15

When should a company not use job order costing?

Answer 15

When products or services are similar

Benefits of tracking costs exceed the costs of tracking costs

Some manufacturing companies cannot use job order costing because they cannot specifically identify each job (product) being produced. Ex. manufacturers of paint, soft drinks, newspapers. Because these products or services are difficult to separate into discrete units, the company should employ process costing instead.

Question 16

What costs should be assigned to each product under a job order costing system?

Answer 16

Direct materials, direct labor, and manufacturing overhead

Question 17

Define Product Costs.

Answer 17

Direct Materials

Direct Labor

Manufacturing Overhead

Question 18

What are the two types of ins and outs for Raw Materials Inventory?

Answer 18

When purchases of raw material are made, a DEBIT increases RMI

When raw material is moved to WIP inventory, a CREDIT decreases RMI

Question 19

What are the two types of ins and outs for Work-in-Process Inventory?

Answer 19

When direct materials, direct labor, and manufacturing overhead moves into WIP inventory, a DEBIT increases WIP Inventory

When goods are completed and needs to go into Finished Goods Inventory, a CREDIT decreases WIP Inventory

Question 20

What are the two types of ins and outs for Finished Goods Inventory?

Answer 20

When finished goods are moved out of WIP Inventory, a DEBIT increases Finished Goods Inventory

When finished goods are sold and moved to COGS, a CREDIT decreases Finished Goods Inventory

Question 21

What determines how much overhead costs are applied to each project or product?

Answer 21

Allocated on the basis of machine hours and direct labor hours

Question 22

What are the four steps of estimating, recording, and applying Manufacturing Overhead and Predetermined Overhead Rate?

Answer 22

Step 1: Before the year begins - estimate
manufacturing overhead for the year
allocation activity level of the year (labor or machine hours) and
compute the predetermined overhead rate

Step 2: During the year, record actual manufacturing overhead as DEBITS to the manufacturing overhead account

Step 3: During the year, record applied manufacturing overhead as CREDITS to the manufacturing overhead account and debits to the work-in-process account

Step 4: At the end of the year, compare actual and applied overhead balances; close out the difference

Question 23

How is the predetermined overhead rate created?

Answer 23

Dividing estimated manufacturing overhead by the estimate of the expected level of activity (e.g., direct labor hours)

Question 24

What does it mean when the Manufacturing Overhead account has a debit balance at the end of the year?

Answer 24

The manufacturing overhead was under-applied throughout the year. We didn’t apply enough overhead to each job during the year.

Our computed costs were too low; perhaps the prices we charged customers were too low.

The actual manufacturing overhead was higher than what was applied.

Question 25

What is the closing journal entry to eliminate the temp account Manufacturing Overhead

Answer 25

Close to COGS

Cost of Goods Sold
Manufacturing Overhead

Manufacturing Overhead
Cost of Goods Sold

Question 26

What does it mean when the Manufacturing Overhead account has a credit balance at the end of the year?

Answer 26

The manufacturing overhead was over-applied throughout the year.

Our computed costs were too high; perhaps the prices we quoted to our customers were too high.

We have driven away some customers with our high prices.

Question 27

The most common way to eliminate overapplied and underapplied manufacturing overhead is to record the amount to cost of goods sold.

What is an alternative way to eliminate these overapplications or underapplications of manufacturing overhead?

Answer 27

Allocate overapplied and underapplied manufacturing overhead to work-in-process inventory, finished goods inventory, and cost of goods sold on the basis of ending balances in these accounts.

Question 28

Define Cost of Goods Manufactured

Answer 28

The aggregate lifetime cost of the inventory completed this period.

Some of these costs were incurred in prior periods (goods started in December, finished in January)

Cost of Goods Manufactured is NOT the amount of cost occurred in the factory this period. Not concerned with the costs that went into the factory, only with the costs of goods finished and went out in that period.

Question 29

Which amounts are added together to calculate the total manufacturing costs on a cost of goods manufactured schedule?

Answer 29

Raw materials used in production

Direct labor

Applied manufacturing overhead

Question 30

What ends up happening to underapplied or overapplied overhead when the Manufacturing Overhead temp account is closed?

Answer 30

Overapplied or underapplied overhead is usually charged to the COGS account.

Thus, in the COGS calculation, underapplied overhead is added to, and overapplied overhead is subtracted from, the costs transferred from the finished goods inventory account into the cost of goods sold account.

Question 31

What is the difference between Unadjusted COGS and Adjusted COGS

Answer 31

Adding underapplied overhead or subtracting overapplied overhead.

Question 32

Define Gross Margin/Gross Profit

Answer 32

Total Sales - COGS or Cost of Revenues

Question 33

Applied Manufacturing Overhead is directly recorded as a credit to which account?

a) Manufacturing overhead
b) WIP Inventory
c) COGS
d) Finished Goods inventory

Answer 33

a) Manufacturing Overhead

While actual manufacturing overhead costs are recorded as debits to manufacturing overhead, applied manufacturing overhead entries are recorded as credits to manufacturing overhead.

Question 34

How are actual manufacturing overhead costs incurred throughout the year journalized?

a) As credits to the WIP account
b) As debits to the WIP account
c) As credits to the manufacturing overhead account
d) As debits into the manufacturing overhead account

Answer 34

d) As debits into the manufacturing overhead account

Question 35

At the beginning of Year 1, here are the estimated data for Kretsmart Company:
Total Manufacturing Overhead = $650,000
Direct Labor Hours = 130,000 hours

Here are the actual data for Kretsmart Company for Year 1:
Total Manufacturing Overhead = $500,000
Direct Labor Hours = 110,000 hours

What is the amount of overhead for Kretsmart Company for Year 1?

a) $50,000 underapplied
b) $50,000 overapplied
c) $150,000 underapplied
d) $150,000 overapplied

Answer 35

b) $50,000 overapplied

The predetermined overhead rate is $650,000/130,000 = $5.00 per direct labor hour.
Kretsmart Company actually applied overhead of $550,000 ($5.00 x 110,000 actual hours).
Kretsmart Company overapplied overhead by $50,000 ($500,000 - $550,000).

Question 36

When preparing a cost of goods manufactured schedule, how is raw materials used in production calculated?

Answer 36

Adding together beginning raw materials inventory and raw materials purchased then subtracting raw materials inventory

Question 37

Which amounts are added together to calculate the total manufacturing costs on a cost of goods manufactured schedule?

Answer 37

Raw materials used in production

Direct labor

Applied manufacturing overhead

Question 38

In which case is it appropriate to use job costing?

a) When rental costs are allocated among various product lines
b) When a company supports more than one product line
c) When the activities performed in each process center are different for all units produced
d) When the costs of outsourcing exceed the benefits

Answer 38

c) When the activities performed in each process center are different for all units produced

Question 39

Indirect materials costing $1,000 were transferred from a materials warehouse to be used in production. What should be included in the journal entry necessary to record this transaction?

a) Debit to manufacturing overhead for $1,000
b) Debit to cost of goods for $1,000
c) Credit to cost of goods sold for $1,000
d) Debit to raw materials inventory for $1,000

Answer 39

a) Debit to manufacturing overhead for $1,000