The McGraw-Hill Companies, Inc., 2018. All rights reserved.

© The McGraw-Hill Companies, Inc., 2018. All rights reserved.Solutions Manual, Chapter 2 1 Chapter 2

Job-Order Costing: Calculating Unit Product

Costs Questions 2-1 Job-order costingis used in situations where many different products, each with individ- ual and unique features, are produced each pe- riod.2-2 In absorption costing,all manufacturing costs, both fixed and variable, are assigned to units of product—units are said to fully absorb manufacturing costs. Conversely, all nonmanufac- turing costs are treated as period costs and they are not assigned to units of product.2-3 Normal costing systems apply overhead costs to jobs by multiplying a predetermined overhead rate by the actual amount of the alloca- tion incurred by the job.2-4 Unit product cost is computed by taking the total manufacturing costs assigned to a job and dividing it by the number of units contained in the job.2-5 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 esti- mate the total fixed manufacturing overhead cost for the coming period and the variable manufac- turing 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 pe- riod. The fourth step is to compute the predeter- mined overhead rate.2-6 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 man- ufacturing overhead costs applied to the job.When a job is completed, the job cost sheet is used to compute the unit product cost.2-7 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.2-8 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 over- head rates to apply manufacturing overhead costs to jobs.2-9 The measure of activity used as the allo- cation 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 at- tributed to products and jobs and product costs will be distorted.2-10 Assigning manufacturing overhead costs to jobs does not ensure a profit. The units pro- duced 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 prod- ucts or jobs ensures that those costs will be re- covered. Costs are recovered only by selling to customers—not by allocating costs.Managerial Accounting 16th Edition Garrison Solutions Manual Visit TestBankDeal.com to get complete for all chapters

© The McGraw-Hill Companies, Inc., 2018. All rights reserved.

• Managerial Accounting, 16th edition

2-11 No, you would not expect the total ap- plied overhead for a period to equal the actual overhead for that period. This is because the ap- plied overhead relies on a predetermined over- head rate that is based on estimates in the nu- merator and denominator.2-12 When a company applied less overhead to production than it actually incurs, it creates what is known as underapplied overhead. When it applies more overhead to production than it actu- ally incurs, it results in overapplied overhead.2-13 A plantwide overhead rate is a single overhead rate used throughout a plant. In a mul- tiple overhead rate system, each production de- partment may have its own predetermined over- head rate and its own allocation base. Some com- panies use multiple overhead rates rather than plantwide rates to more appropriately allocate overhead costs among products. Multiple over- head rates should be used, for example, in situa- tions where one department is machine intensive and another department is labor intensive.

© The McGraw-Hill Companies, Inc., 2018. All rights reserved.Solutions Manual, Chapter 2 3

Chapter 2: Applying Excel

The completed worksheet is shown below.

© The McGraw-Hill Companies, Inc., 2018. All rights reserved.

• Managerial Accounting, 16th edition

Chapter 2: Applying Excel (continued)

The completed worksheet, with formulas displayed, is shown below.