Practice Exams Chapter 3

1. (LO 1,2) When is job-order costing typically used by a company? How does it differ
from process costing? What documents are typically used in a job-order system?

Solution:

Job-order systems are typically used by companies producing non-similar (i.e. different)
items every period. In a process cost system, on the other hand, the company typically
produces the same items, and thus can spread the costs of the entire production process
over the units very easily. If using a job-order system, the costs for each job (or
production order) must be captured separately, and the documents often used to record
each jobs costs typically include a bill of materials, production order, materials
requisition form, job cost sheets, and time tickets (or other source of information on the
direct and indirect labor related to the job). Manufacturing overhead is allocated to the
job using predetermined overhead rates which are entered on the job cost sheet.

2. (LO3) Simmons Company has the following estimated costs for next year:

Direct materials $ 60,000

Direct labor 220,000
Sales commissions 300,000
Salary of production supervisor 140,000
Indirect materials 20,000
Advertising expense 44,000
Rent on factory equipment 64,000

Simmons estimates that 40,000 direct labor and 64,000 machine hours will be worked
during the year. If overhead is applied on the basis of machine hours, what will be the
overhead rate per hour?

Solution:
Salary of production supervisor $140,000
Indirect materials 20,000
Rent on factory equipment 64,000
Estimated manufacturing overhead costs 224,000
Estimated machine hours 64,000
Predetermined overhead rate $3.50 per MH

(NOTE: Direct materials and direct labor are product costs but are not a part of
manufacturing overhead costs, which only include indirect factory costs. Sales
commissions and advertising expenses would be considered a part of selling and
administrative expenses, and are thus period rather than product costs.)
 3. (LO 3, 5, 8) Houghton Company uses a predetermined overhead rate based on direct labor
hours to apply manufacturing overhead to jobs. At the beginning of the year, the company
estimated manufacturing overhead would be $200,000 and direct labor hours would be
20,000. The actual figures for the year were $220,000 for manufacturing overhead and
21,000 direct labor hours. What will the cost records for the year show for assigned
overhead, and the amount of over- or under-applied overhead?

Solution:

First, calculate the predetermined overhead rate (based on direct labor hours here):
Estimated overhead costs Estimated direct labor hours = Predetermined rate
$200,000 20,000 direct labor hours = $10.00/direct labor hour
Then, determine the amount of manufacturing overhead assigned during the period:
Predetermined overhead rate x Actual direct labor hours = Overhead assigned
$10.00/direct labor hour x 21,000 direct labor hours = $210,000

Finally, compare the actual manufacturing overhead costs to the amount assigned, and decide whether it is
over- or underapplied:
Actual $220,000
Assigned 210,000
Balance (underapplied) $ 10,000

4. (LO 5, 8) Kasper Companys predetermined overhead rate is based on direct labor

hours. At the beginning of the current year, the company estimated that its manufacturing
overhead would total $440,000 during the year. During the year, the company incurred
$400,000 in actual manufacturing overhead costs. The Manufacturing Overhead account
showed that overhead was overapplied by $16,000 during the year. If the predetermined
overhead rate was $20.00 per direct labor hour, how many hours were worked during the
year?

Solution:

First, determine the amount of overhead applied to production by reference to the

information about the Manufacturing Overhead account:
Actual overhead Amount applied to production = Amount over- (under)applied
$400,000 Amount applied to production = $16,000
Amount assigned to production = $384,000

Then, solve for the direct labor hours here (the activity base for the overhead rate):
Predetermined overhead rate x Direct labor hours = Manufacturing overhead applied
$20.00/direct labor hour x Actual direct labor hours = $384,000 (from above)
Actual direct labor hours = 19,200

5. (LO 6) Under Horton Company's job-order costing system, manufacturing overhead is

 applied to Work in Process inventory using a predetermined overhead rate. During July,
Hortons transactions included the following:

Direct labor cost incurred $428,000

Direct materials issued to production 360,000
Indirect materials issued to production 32,000
Manufacturing overhead cost applied 452,000
Manufacturing overhead cost incurred 500,000

a.) Horton Company had no beginning or ending inventories in July. What was the cost of
goods manufactured for July? b.) What was the amount of cost of goods sold for July?

Solution:

a.)
Work in process, beginning of period (0)
Direct materials issued to production $ 360,000
Direct labor cost incurred 428,000
Manufacturing overhead cost applied 452,000
Total manufacturing costs $1,240,000
Less: work in process, end of period (0)
Cost of goods manufactured $1,240,000

b.) Since there are no beginning or ending inventories, the cost of goods sold would
be the cost of goods manufactured $1,240,000, plus the underapplied overhead costs of
$48,000, for a total of $1,288,000.

6. (LO 4,7) Taking the information from question number 5 above, prepare the necessary
journal entries to record the flow of costs for the month of July. Show the flow of costs in
T-accounts after preparing the journal entries.

Solution:

a. Work in Process 360,000

Manufacturing Overhead. 32,000
Raw Materials. 392,000
To issue direct and indirect materials to production.

b. Work in Process.428,000
Salaries and Wages Payable.. 428,000
To record direct labor incurred in production.
 c. Work in Process452,000
Manufacturing Overhead..452,000
To record application of manufacturing overhead to production during July.

d. Cost of goods sold (CGS).. 48,000

Manufacturing Overhead. 48,000
To record underapplied manufacturing overhead to cost of goods sold for July.
($500,000 - $452,000)

T-Accounts:

Raw Materials Work-in-Process Manufacturing Overhead

a. 392,000 a. 360,000 a. 32,000 c. 452,000
b. 428,000 d. 48,000
c. 452,000

Salaries/Wages Payable CGS

b.428,000 d. 48,000

7. (LO 9 Appendix) If the Houghton Company in question #3 above uses their capacity
for 25,000 direct labor hours versus the estimated direct labor hours to compute the
predetermined overhead rate, what would the rate be? Amount of over- or under-applied
overhead?

Solution:

$200,000 25,000 direct labor hours = $8.00/direct labor hour

Overhead applied:
Predetermined overhead rate x Actual direct labor hours = Overhead assigned
$8.00/direct labor hour x 21,000 direct labor hours = $168,000
Actual overhead $220,000 minus applied overhead $168,000 = $52,000 underapplied
overhead for the year.