Solutions to Questions

© The McGraw-Hill Companies, Inc., 2013. All rights reserved.Solutions Manual, Chapter 2 1 Chapter 2 Job-Order Costing Solutions to Questions 2-1 By definition, manufacturing overhead consists of costs that cannot be practically traced to jobs. Therefore, if these costs are to be assigned to jobs, they must be allocated rather than traced.2-2 The first step is to estimate the total amount of the allocation base (the denominator) that will be required for next period’s estimated level of production. The second step is to estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base. The third step is to use the cost formula Y = a + bX to estimate the total manufacturing overhead cost (the numerator) for the coming period. The fourth step is to compute the predetermined overhead rate.2-3 The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials costs traced to the job, direct labor costs traced to the job, and manufacturing overhead costs applied to the job.When a job is completed, the job cost sheet is used to compute the unit product cost.2-4 Some production costs such as a factory manager’s salary cannot be traced to a particular product or job, but rather are incurred as a result of overall production activities. In addition, some production costs such as indirect materials cannot be easily traced to jobs. If these costs are to be assigned to products, they must be allocated to the products.2-5 If actual manufacturing overhead cost is applied to jobs, the company must wait until the end of the accounting period to apply overhead and to cost jobs. If the company computes actual overhead rates more frequently to get around this problem, the rates may fluctuate widely due to seasonal factors or variations in output. For this reason, most companies use predetermined overhead rates to apply manufacturing overhead costs to jobs.2-6 The measure of activity used as the allocation base should drive the overhead cost; that is, the allocation base should cause the overhead cost. If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and product costs will be distorted.2-7 Assigning manufacturing overhead costs to jobs does not ensure a profit. The units produced may not be sold and if they are sold, they may not be sold at prices sufficient to cover all costs. It is a myth that assigning costs to products or jobs ensures that those costs will be recovered. Costs are recovered only by selling to customers—not by allocating costs.2-8 The Manufacturing Overhead account is credited when overhead cost is applied to Work in Process. Generally, the amount of overhead applied will not be the same as the amount of actual cost incurred because the predetermined overhead rate is based on estimates.2-9 Underapplied overhead occurs when the actual overhead cost exceeds the amount of overhead cost applied to Work in Process inventory during the period. Overapplied overhead occurs when the actual overhead cost is less than the amount of overhead cost applied to Work in Process inventory during the period.Underapplied or overapplied overhead is disposed of by closing out the amount to Cost of Goods Sold. The adjustment for underapplied overhead increases Cost of Goods Sold whereas the adjustment for overapplied overhead decreases Cost of Goods Sold.Introduction to Managerial Accounting 6th Edition Brewer Solutions Manual Visit TestBankDeal.com to get complete for all chapters

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• Introduction to Managerial Accounting, 6th edition

2-10 Manufacturing overhead may be underapplied for several reasons. Control over overhead spending may be poor. Or, some of the overhead may be fixed and the actual amount of the allocation base may be less than estimated at the beginning of the period. In this situation, the amount of overhead applied to inventory will be less than the actual overhead cost incurred.2-11 Underapplied overhead implies that not enough overhead was assigned to jobs during the period and therefore cost of goods sold was understated. Therefore, underapplied overhead is added to cost of goods sold. On the other hand, overapplied overhead is deducted from cost of goods sold.2-12 A plantwide overhead rate is a single overhead rate used throughout a plant. In a multiple overhead rate system, each production department may have its own predetermined overhead rate and its own allocation base. Some companies use multiple overhead rates rather than plantwide rates to more appropriately allocate overhead costs among products. Multiple overhead rates should be used, for example, in situations where one department is machine intensive and another department is labor intensive.2-13 When automated equipment replaces direct labor, overhead increases and direct labor decreases. This results in an increase in the predetermined overhead rate—particularly if it is based on direct labor.

© The McGraw-Hill Companies, Inc., 2013. All rights reserved.Solutions Manual, Chapter 2 3 The Foundational 15

• The estimated total manufacturing overhead cost is computed as

follows:

Y = $10,000 + ($1.00 per DLH)(2,000 DLHs)

Estimated fixed manufacturing overhead .................. $10,000

Estimated variable manufacturing overhead:

$1.00 per DLH × 2,000 DLHs ................................ 2,000 Estimated total manufacturing overhead cost ............ $12,000

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead (a) .... $12,000 Estimated total direct labor hours (DLHs) (b) . 2,000 DLHs Predetermined overhead rate (a) ÷ (b) ........... $6.00 per DLH

• The manufacturing overhead applied to Jobs P and Q is computed as

follows:

Job P Job Q Actual direct labor hours worked (a) ............... 1,400 500 Predetermined overhead rate per DLH (b) ....... $6.00 $6.00 Manufacturing overhead applied (a) × (b) ....... $8,400 $3,000

• The direct labor hourly wage rate can be computed by focusing on

either Job P or Job Q as follows:

Job P Job Q Direct labor cost (a) ....................................... $21,000 $7,500 Actual direct labor hours worked (b) ............... 1,400 500 Direct labor hourly wage rate (a) ÷ (b) ........... $15.00 $15.00

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• Introduction to Managerial Accounting, 6th edition

The Foundational 15

• Job P’s unit product cost and Job Q’s assigned manufacturing costs are

computed as follows:

Total manufacturing cost assigned to Job P:

Direct materials ................................ $13,000 Direct labor ...................................... 21,000 Manufacturing overhead applied ($6 per DLH × 1,400 DLHs) ........... 8,400 Total manufacturing cost .................. $42,400

Unit product cost for Job P:

Total manufacturing cost (a) ............. $42,400 Number of units in the job (b) ........... 20 Unit product cost (a) ÷ (b) ................ $2,120

Total manufacturing cost assigned to Job Q:

Direct materials ................................ $ 8,000 Direct labor ...................................... 7,500 Manufacturing overhead applied ($6 per DLH × 500 DLHs) .............. 3,000 Total manufacturing cost .................. $18,500

5. The journal entries are recorded as follows:

Raw Materials ....................... 22,000 Accounts Payable .......... 22,000

Work in Process .................... 21,000 Raw Materials ............... 21,000

6. The journal entry is recorded as follows:

Work in Process .................... 28,500 Wages Payable ............. 28,500