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CHAPTER 4: When the COGS is adjusted for underapplied

overhead, the cost will increase. Because the


1. What are job-order costing and process costing? cost appears lower than it really is.
What type of firms use job-order costing? Process 7. What is overapplied overhead? When COGS is
costing?
adjusted for overapplied overhead, will the cost
- Job order costing is a costing system in which increase or decrease? Why?
costs are accumulated by job, while process - The overapplied overhead is when the actual
costing is a costing system that is used in overhead is less than applied overhead. When
situations where a homogeneous product is the COGS is adjusted for overapplied overhead,
produced on a continuous basis. the cost will decrease. Because the cost appears
- The firms that use job order costing are firms higher than it really is.
that do customized and built-to-order products. 8. Suppose that you and a friend decide to set up a
- The firms that use process costing are those lawn mowing service next summer. Describe the
firms in process industry. (cement and source documents that you would need to account
petroleum) for your activities.
2. Give some examples of service firms that might - We will need job-order cost sheets for each
use job-order costing, explain why it is used in customer; labor time tickets to record the
those firms. amount of time spent on each job, both to cost
- Examples: beautician, construction, medical and the job and to pay the individual doing the
dental services. It is used in those firms because work; materials requisition form may be
a job is associated with a particular customer needed if fertilizer or weed control products are
order. used.
3. What is normal costing? How does it differ from 9. Why might a company decide to use departmental
actual costing?
overhead rates instead of a plantwide overhead
- Normal costing is used to value manufactured rate?
products with the actual materials costs, the - Because departmental overhead rates allow
actual direct labor costs, and manufacturing
companies to recognize the different producing
overhead based on a predetermined departments have different overhead costs.
manufacturing overhead rate. It differs from These rates allow more precise application of
actual costing which uses the actual cost of overhead as units pass through one or more
materials and labor to calculate production departments.
costs. 10. What is the role of materials requisition forms in a
4. Why are actual overhead rates seldom used in job-order costing system? Time tickets?
practice? Predetermined overhead rates?
- Actual overhead rate is rarely used because of - Materials requisition forms serve as the source
problems with accuracy and timeliness. documents for posting materials usage and
(Waiting until the year to ensure accuracy is costs to individual jobs. Time or work tickets
rejected because of the need to have timely serve a similar function for la-bor.
information.) Predetermined overhead rates are used to
5. Explain how overhead is assigned to production
allocate overhead to jobs.
when a predetermined overhead rate is used. 11. Carver Company uses a plantwide overhead rate
- Applied overhead based on direct labor cost. Suppose that during the
6. What is underapplied overhead? When COGS is year, Carver raises its wage rate for direct labor.
adjusted for underapplied overhead, will the cost How would that affect overhead applied? The total
increase or decrease? Why? cost of jobs?
- The underapplied overhead is when the actual -
overhead is greater than applied overhead.
12. What is an overhead variance? How is it accounted b. Custodial services – square footage
for typically? c. Laundry – pound of laundry
- Overhead variance is the difference between d. Receiving, shipping, and storage – orders
applied and actual overhead. It is recognized processed
and closed to the cost of goods sold account to e. Maintenance – maintenance hours worked
reflect actual overhead spending. f. Personnel – number of employees
13. Is the cost of a job related to the price charged? g. Accounting – number of transactions
Explain. processed
- Yes, because the higher the cost of the job, the 20. Explain the difference between the direct method
higher the price charged to the customer. and the sequential method.
(By comparing the cost of the individual job - The direct method assigns support department
with the price charged, the firm can determine costs only to the producing departments, while
the profit attributable to each job. Then, the recognizes that interactions among support
firm can decide whether the profit is sufficient departments occur, but does not fully account
to continue offering the product or service for support department interaction.
under the current terms.)
14. If a company decides to increase advertising
expense by $25,00, how will that affect the
predetermined overhead rate? Eventual cost of
goods sold?
-
15. How can a departmental overhead system be
converted to a plantwide overhead system?
-
16. Describe the difference between producing and
support departments.
- Producing departments make the product or
service that is sold to customers, while support
departments provide essential services for
producing departments, but do not make the
product/service being sold.
17. Assume that a company has decided not to
allocate any support department costs to
producing departments. Describe the likely
behavior of the managers of the producing
departments. Would this be good or bad? Explain
why allocation would correct this type of behavior.
-
18. Why is it important to identify and use causal
factors to allocate support department costs?
- The identification and use of causal factors
ensures that service costs are accurately
assigned. It enhances product costing accuracy.
19. Identify some possible causal factors for the
following support departments:
a. Cafeteria – number of employees