Chapter 4

In-Class Discussion Questions and Exercises

Discussion Questions
Question 1. Job costing, process costing. In each of the following situations, determine whether
job costing or process costing would be more appropriate.
a. A CPA firm
b. An oil refinery
c. A custom furniture manufacturer
d. A tire manufacturer
e. A textbook publisher
f. A pharmaceutical company
g. An advertising agency
h. An apparel manufacturing plant
i. A flour mill
j. A paint manufacturer
k. A medical care facility
l. A landscaping company
m. A cola-drink-concentrate producer
n. A movie studio
o. A law firm
p. A commercial aircraft manufacturer
q. A management consulting firm
r. A breakfast-cereal company
s. A catering service
t. A paper mill
u. An auto repair shop

Question 2. Actual costing, normal costing, accounting for manufacturing overhead. Destin
Products uses a job-costing system with two direct-cost categories (direct materials and direct
manufacturing labor) and one manufacturing overhead cost pool. Destin allocates manufacturing
overhead costs using direct manufacturing labor costs. Destin provides the following
information:
Budget for 2011 Actual Results for 2011
Direct material costs $2,000,000 $1,900,000
Direct manufacturing labor costs 1,500,000 1,450,000
Manufacturing overhead costs 2,700,000 2,755,000

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1. Compute the actual and budgeted manufacturing overhead rates for 2011. Required
2. During March, the job-cost record for Job 626 contained the following information:
Direct materials used $40,000
Direct manufacturing labor costs $30,000
Compute the cost of Job 626 using (a) actual costing and (b) normal costing.
3. At the end of 2011, compute the under- or overallocated manufacturing overhead under
normal costing. Why is there no under- or overallocated overhead under actual costing?

Question 3. Job costing, normal and actual costing. Amesbury Construction assembles
residential houses. It uses a job-costing system with two direct-cost categories (direct materials
and direct labor) and one indirect-cost pool (assembly support). Direct labor-hours is the
allocation base for assembly support costs. In December 2010, Amesbury budgets 2011
assembly-support costs to be $8,300,000 and 2011 direct labor-hours to be 166,000.
At the end of 2011, Amesbury is comparing the costs of several jobs that were started and
completed in 2011.
Laguna Model Mission Model
Construction period Feb–June 2011 May–Oct 2011
Direct material costs $106,760 $127,550
Direct labor costs $ 36,950 $ 41,320
Direct labor-hours 960 1,050

Direct materials and direct labor are paid for on a contract basis. The costs of each are known
when direct materials are used or when direct labor-hours are worked. The 2011 actual
assembly-support costs were $6,520,000, and the actual direct labor-hours were 163,000.
1. Compute the (a) budgeted indirect-cost rate and (b) actual indirect-cost rate. Why do they
differ? Required
2. What are the job costs of the Laguna Model and the Mission Model using (a) normal costing
and (b) actual costing?
3. Why might Amesbury Construction prefer normal costing over actual costing?

Question 4 Production Company produces gadgets for the coveted small appliance market. The
following data reflect activity for the year 2011:

Costs incurred:
Purchases of direct materials (net) on credit $124,000
Direct manufacturing labor cost 80,000
Indirect labor 54,500
Depreciation, factory equipment 30,000
Depreciation, office equipment 7,000
Maintenance, factory equipment 20,000
Miscellaneous factory overhead 9,500

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 Rent, factory building 70,000
Advertising expense 90,000
Sales commissions 30,000

Inventories:

January 1, 2011 December 31, 2011

Direct materials $9,000 $11,000
Work in process 6,000 21,000
Finished goods 69,000 24,000

Production Co. uses a normal costing system and allocates overhead to work in process at a rate
of $2.50 per direct manufacturing labor dollar. Indirect materials are insignificant so there is no
inventory account for indirect materials.
1. Prepare journal entries to record the transactions for 2011 including an entry to close out
over- or under-allocated overhead to cost of goods sold. For each journal entry indicate
the source document that would be used to authorize each entry. Also note which
subsidiary ledger, if any, should be referenced as backup for the entry.
2. Post the journal entries to T-accounts for all of the inventories, Cost of Goods Sold, the
Manufacturing Overhead Control Account, and the Manufacturing Overhead Allocated
Account.

Multiple-Choice Questions
1) Job costing information is used:
A) to develop strategies
B) to make pricing decisions
C) for external financial reporting
D) All of these answers are correct.

2) Product costing information is used by managers:

A) to make decisions and strategy
B) for planning and control
C) for cost management
D) All of these answers are correct.

3) A ________ is a grouping of individual indirect cost items.

A) cost allocation base
B) cost assignment
C) cost pool
D) job-costing system

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4) In a costing system:
A) cost tracing allocates indirect costs
B) cost allocation assigns direct costs
C) a cost-allocation base can be either financial or nonfinancial
D) a cost object should be a product and not a department or a geographic territory

5) Assigning direct costs to a cost object is called:

A) cost allocation
B) cost assignment
C) cost pooling
D) cost tracing

6) A ________ links an indirect cost to a cost object.

A) cost-allocation base
B) cost pool
C) cost assignment
D) cost tracing

7) The cost allocation base

A) is a grouping of individual indirect cost items.
B) are costs related to a particular cost object that cannot be traced to that cost object in an
economically feasible way.
C) is anything for which a measurement of costs is desired.
D) is a systematic way to link an indirect cost or group of indirect costs to cost objects.

8) Process costing:
A) allocates all product costs, including materials and labor
B) results in different costs for different units produced
C) is commonly used by general contractors who construct custom-built homes
D) is used exclusively in manufacturing

9) Job-costing may only be used by:

A) service companies
B) merchandising companies
C) manufacturing companies
D) All of these may use job-costing.

10) Many large companies which have multiple production methods and processes have hybrid
costing systems that are:
A) job-costing
B) actual costing
C) process costing
D) a mix of job-costing and process costing
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11) A job that shows low profitability may be the result of:
A) wasting direct materials
B) inefficient direct manufacturing labor
C) underpricing the job
D) All of these answers are correct.

12) For a given job the direct costs associated with the job are:
A) actual overhead
B) direct material
C) direct manufacturing labor
D) Both b and c are correct.

13) The actual indirect-cost rate is calculated by

A) dividing actual total indirect costs by the actual total quantity of the cost-allocation base.
B) multiplying actual total indirect costs by the actual total quantity of the cost-allocation base.
C) dividing the actual total quantity of the cost allocation base by actual total indirect costs.
D) multiplying the actual total quantity of the cost allocation base by actual total indirect costs.

14) Actual costing is a costing system that traces direct costs to a cost object by
A) using the budgeted direct cost rates times the budgeted quantities of direct-cost inputs.
B) using the actual direct costs rates times the budgeted quantities of the direct-cost inputs.
C) using the actual direct cost rates times the actual quantities of the direct-cost inputs.
D) using the budgeted direct cost rates times the actual quantities of the direct cost inputs.

15) An example of a denominator reason for calculating annual indirect-cost rates includes:
A) higher heating bills in the winter
B) semi-annual insurance payments in March and September
C) higher levels of output demanded during the fall months
D) All of these answers are correct.

16) The basic source document for direct manufacturing labor is the:
A) job-cost record
B) materials-requisition record
C) labor-time record
D) All of these answers are correct.

17) The budgeted indirect-cost rate for each cost pool is computed as
A) budgeted annual indirect costs divided by budgeted annual quantity of cost allocation base.
B) budgeted annual quantity of cost allocation base divided by budgeted annual indirect costs.
C) actual annual indirect costs divided by budgeted annual quantity of cost allocation base.
D) budgeted annual indirect costs divided by budgeted actual quantity of cost allocation base.

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18) Stewart Company's actual manufacturing overhead is $2,800,000. Overhead is allocated on
the basis of direct labor hours. The direct labor hours were 50,000 for the period. What is the
manufacturing overhead rate?
A) $47.00
B) $56.00
C) $75.00
D) None of the above are correct.

19) O'Reilly Enterprises manufactures digital video equipment. For each unit $2,950 of direct
material is used and there is $2,000 of direct manufacturing labor at $20 per hour.
Manufacturing overhead is applied at $35 per direct manufacturing labor hour. Calculate the
cost of each unit.
A) $4,950
B) $9,950
C) $8,450
D) $11,950

20) In a job-costing system, a manufacturing firm typically uses an indirect-cost rate to estimate
the ________ allocated to a job.
A) direct materials
B) direct labor
C) manufacturing overhead costs
D) total costs

21) A job-cost sheet details the:

A) direct materials purchased and paid
B) direct labor costs incurred
C) indirect labor costs incurred
D) actual indirect overhead costs incurred

22) Annual cost rates are preferred over actual cost rates for all of the following reasons
EXCEPT:
A) budgeted costs allow managers to have cost information on a timely basis
B) budgeted costs may be subject to short-run fluctuations
C) budgeted indirect-cost rates are known prior to the inception of a new job
D) budgeted-cost rates can be used to allocate direct or indirect costs

Answer the question 23 and 24 using the information below:

For 2010, Jake's Dog Supply Manufacturing 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

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 Machine-hours 40,000 50,000
23) Using job costing, the 2010 actual indirect-cost rate is:
A) $4.00 per machine-hour
B) $4.80 per machine-hour
C) $5.00 per machine-hour
D) $6.00 per machine-hour

24) Using actual costing, the amount of manufacturing overhead costs allocated to jobs during
2010 is:
A) $300,000
B) $250,000
C) $240,000.
D) $200,000

25) The budgeted indirect-cost rate is calculated:

A) at the beginning of the year
B) during the year
C) at the end of each quarter
D) at the end of the year

Answer the question 26-28 using the information below:

Apple Valley Corporation uses a job cost system and has two production departments, A and B.
Budgeted manufacturing costs for the year are:

Department A Department B
Direct materials $700,000 $100,000
Direct manufacturing labor $200,000 $800,000
Manufacturing overhead $600,000 $400,000

The actual material and labor costs charged to Job #432 were as follows:
Total
Direct materials: $25,000
Direct labor:
Department A $ 8,000
Department B $12,000
$20,000

Apple Valley applies manufacturing overhead costs to jobs on the basis of direct manufacturing
labor cost using departmental rates determined at the beginning of the year.

26) For Department A, the manufacturing overhead allocation rate is:

A) 33%
B) 66%
C) 300%

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D) 100%

27) For Department B, the manufacturing overhead allocation rate is:

A) 50%
B) 100%
C) 200%
D) 300%

28) Manufacturing overhead costs allocated to Job #432 total:

A) $30,000
B) $12,000
C) $24,000
D) $36,000

29) In a normal costing system, the Manufacturing Overhead Control account:

A) is increased by allocated manufacturing overhead
B) is credited with amounts transferred to Work-in-Process
C) is decreased by allocated manufacturing overhead
D) is debited with actual overhead costs

30) The Materials Control account is increased when:

A) direct materials are purchased
B) indirect materials are purchased
C) materials are requisitioned for production
D) Both A and B are correct.

31) All of the following are true of the Work-in-Process Control account EXCEPT that:
A) it tracks all direct material purchases
B) the balance equals the sum of amounts from all in-process individual job-cost records
C) it is an asset account
D) it tracks job costs from beginning through completion

32) All of the following increase (are debited to) the Work-in-Process Control account EXCEPT:
A) actual plant insurance costs
B) direct materials
C) allocated manufacturing overhead costs
D) direct manufacturing labor

33) Payment of the factory rent increases the:

A) Work-in-Process Control account
B) Manufacturing Overhead Control account
C) Both A and B are correct.
D) None of these answers are correct.

34) Actual (rather than allocated) manufacturing overhead costs are included in the:
A) Work-in-Process Control account

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B) Finished Goods Control account
C) Manufacturing Overhead Control account
D) Both A and B are correct.

35) The ending balance in the Work-in-Process Control account represents the costs of all jobs
that:
A) have not been completed
B) have been completed but not sold
C) have been completed and sold to customers
D) are reported on the income statement

36) What is the appropriate journal entry if $100,000 of materials were purchased on account for
the month of August?
A) Materials Control 100,000
Accounts Payable Control 100,000
B) Work-in-Process Control 100,000
Accounts Payable Control 100,000
C) Manufacturing Overhead Control 100,000
Accounts Receivable Control 100,000
D) Manufacturing Allocated 100,000
Accounts Receivable Control 100,000