04 Accounting For Factory Overhead PDF

CHAPTER 4—ACCOUNTING FOR FACTORY OVERHEAD
MULTIPLE CHOICE
1. Factory overhead includes:

a. Indirect labor but not indirect materials.
b. All manufacturing costs except direct materials and direct labor.
c. All manufacturing costs.
d. Indirect materials but not indirect labor.
ANS: B
Factory overhead includes all manufacturing costs, except direct materials and direct labor. Because
of the variety and number of items that can be classified as factory overhead, this "except" definition is
often used to define and classify factory overhead costs and expenses.
PTS: 1 DIF: Easy REF: P. OBJ: Introduction

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic
2. Which of the following costs would be included in factory overhead in the manufacture of a student’s
desk?
a. The wages of the operator of the machine that bends the metal legs of the desk into shape.
b. The wages of the forklift operator who moves finished desks to the finished goods
warehouse.
c. The cost of the plastic used to form the writing surface.
d. The wages of the worker who assembles the components.
ANS: B
The plastic used to form the writing surface of the desk is a direct material as it can be traced directly
to the finished product. The wages of the machine operator and the assembly worker are direct labor
costs as they add value to the product. The wages of the forklift operator would be classified as
indirect labor as s/he does not actually work on the products themselves. Indirect labor is included in
factory overhead.
PTS: 1 DIF: Moderate REF: P. OBJ: Introduction

NAT: IMA 2B - Cost Management TOP: AACSB - Reflective
3. Which of the following costs would not be included in factory overhead in the manufacture of a
student’s desk?
a. The oil used to maintain the machinery.
b. The salary of the supervisor of the Assembly department.
c. The metal used to form the legs of the desk.
d. The wages of personnel who perform inspections of incoming materials.
ANS: C
The metal used to form the legs of the desk would be a direct material, and therefore would not be
included as factory overhead.
PTS: 1 DIF: Moderate REF: P. OBJ: Introduction

4. Costs that vary in proportion to direct volume changes are:

a. variable costs.
b. factory overhead costs.
c. semi-variable costs.
d. personnel costs.
ANS: A
Costs that vary in proportion to changes in volume are variable costs.
PTS: 1 DIF: Easy REF: P. OBJ: 1

5. The following cost is an example of a variable factory overhead cost:

a. Plant utilities.
b. Material handling costs.
c. Salary of the plant manager.
d. Factory supplies.
ANS: D
The cost of factory supplies is considered variable because the cost moves in proportion with
production volumes. The salary of the plant manager is a fixed cost as it remains constant despite
changes in plant volumes. Plant utilities are a Type B semi-variable cost because this cost includes
both fixed and variable components. The material handling costs are a Type A semi-variable, or step-
variable, cost because the cost remains constant over a range of production then abruptly changes.

6. Variable overhead costs include all of the following except:

a. Electricity to power machinery.
b. Factory supplies.
c. Rental of factory building.
d. Small tools.
ANS: C
The rent paid for the factory would not vary with production levels. The costs of electricity, indirect
materials and small tools would increase as production levels increased.

7. Fixed factory overhead costs include:

a. Property taxes.
b. Plant manager’s salary.
c. Factory insurance.
d. All of the these are correct.
ANS: D
Fixed factory overhead costs include factory property taxes, plant manager’s salary, insurance on
factory and equipment.

8. Fixed overhead cost includes all of the following except:

a. Electricity to heat and light the factory.
b. Depreciation on machinery computed based on the units of production basis.
c. The plant manager’s salary.
d. The salary of the security guard at the front door.
ANS: B
Depreciation calculated based on the number of hours the equipment is used is a variable cost.
PTS: 1 DIF: Moderate REF: P. OBJ: 1

9. Factory overhead:
a. Can be a variable cost or a fixed cost.
b. Is a prime cost.
c. Can only be a fixed cost.
d. Includes all factory labor.
ANS: A
Factory overhead includes variable costs, such as indirect materials and power expenses, and fixed
costs, such as depreciation, property taxes, and insurance. Prime costs include direct labor and direct
materials. All factory labor is incorrect because this would also include direct labor.

10. Costs that change in relation to volume changes, but not in direct proportion to those changes, are
known as:
a. Variable costs.
b. Semivariable costs.
c. Fixed costs.
d. Curvilinear costs.
ANS: B
One type of semivariable costs change in total as volume changes, but not in direct proportion to such
changes.

11. Consider the following costs:

I. The cost of electricity which is used to power machinery and light the plant.
II. Depreciation on the building which houses both the factory and the sales office.
Which of the following statements is true?

a. Only statement I is an example of a semivariable cost.
b. Only statement II is an example of a semivariable cost.
c. Both statements I and I are examples of semivariable costs.
d. Neither statement I nor II is an example of a semivariable cost.
ANS: A
The electricity cost has both fixed and variable components, making it a semivariable cost. The
building depreciation is a fixed cost which has both manufacturing and selling cost components.

12. Which of the following statements about semivariable costs is not true?
a. They first have to be broken down into their fixed and variable components before they
can be used to predict costs at different levels of volume.
b. They are sometimes called mixed costs.
c. They vary in direct proportion to volume changes.
d. They may remain constant over a range of production, then abruptly change.
ANS: C
Variable costs vary in direct proportion to volume changes.

13. Methods for separating semivariable costs into their fixed and variable components include all of the
following except the:
a. High-low method.
b. Allocation method.
c. Scattergraph method.
d. Observation method.
ANS: B
The high-low, scattergraph and observation methods are all methods used to separate semivariable
costs into their fixed and variable components.

14. The method of analyzing the behavior of semivariable costs that relies heavily on the ability of an
observer to detect a pattern of cost behavior by reviewing past cost and volume data is the:
a. High-low method.
b. Method of least squares.
c. Scattergraph method.
ANS: D
The observation method, also called the account analysis method, is the method of analyzing the
behavior of semivariable costs that relies heavily on the ability of an observer to detect a pattern of
cost behavior by reviewing past cost and volume data.

15. The method of analyzing cost behavior that uses two data points to first determine the variable cost per
unit and then the total fixed cost is the:
a. Method of least squares.
b. Scattergraph method.
c. High-low method.
ANS: C
The high-low method analyzes cost behavior by using two data points to first determine the variable
cost per unit and then the total fixed cost.

16. Nutt Industries electricity costs and machine hours over a six-month period follow:
Machine Electricity
Hours Cost
January 2,000 $4,800
February 2,500 5,200
March 3,000 5,400
April 2,400 5,000
May 2,800 5,600
June 2,200 5,000
Using the high-low method, what is the estimated electricity cost per machine hour?
a. $.60
b. $1.67
c. $1.00
d. $.80
ANS: A
Variable cost:
Machine Hours Electricity Costs
High volume 3,000 $5,400
Low volume 2,000 4,800
Difference 1,000 $ 600
Variable cost per labor hour = $600 / 1,000 hours = $.60/machine hour

17. Nutt Industries electricity costs and machine hours over a six-month period follow:
Machine Electricity
Hours Cost
January 2,000 $4,800
February 2,500 5,200
March 3,000 5,400
April 2,400 5,000
May 2,800 5,600
June 2,200 5,000
Using the high-low method, what is the formula that can be used to estimate electricity costs at
different levels of volume?
a. Electricity costs = $2,800 + ($1.00 x number of machine hours)

b. Electricity costs = $2,600 + ($1.00 x number of machine hours)
c. Electricity costs = $400 + ($1.67 x number of machine hours)
d. Electricity costs = $3,600 + ($.60 x number of machine hours)
ANS: D
Variable cost:
Machine Hours Electricity Costs
High volume 3,000 $5,400
Low volume 2,000 4,800
Difference 1,000 $ 600
Variable cost per labor hour = $600 / 1,000 hours = $.60/machine hour
Fixed cost:
2,000 Hours 3,000 Hours
Cost $4,800 $5,400
Variable @ $.60/hour 1,200 1,800
Difference $3,600 $3,600
Electricity costs = $3,600 + ($.60 x number of machine hours)
PTS: 1 DIF: Hard REF: P. OBJ: 2

18. After the observations of cost and production data are plotted on graph paper, a line is drawn by visual
inspection representing the trend shown by most of the data points using the:
a. Observation method.
b. High-low method.
c. Method of least squares.
d. Scattergraph method.
ANS: D
Using the scattergraph method, the observations of cost and production data are plotted on graph
paper, and then a line is drawn by visual inspection representing the trend of most of the data points.

19. A major disadvantage of the scattergraph method of analyzing cost behavior is:
a. It bases its solution on only two observations.
b. It results in its analyzed cost being treated as either fixed or variable, based on which type
of behavior it more closely resembles.
c. Two persons could draw different lines through the data points.
d. It enables non-representative points, called outliers, to be identified.
ANS: C
(a) is a disadvantage of the high-low method.
(b) is a disadvantage of the observation method.
(d) is an advantage of the scattergraph method.

20. Victoria is a budget analyst at Young Industries. She used the least squares regression method to
separate the plant’s monthly utilities cost into its fixed and variable components. The results were as
follows:
Y = 3,250 + .054 X
X = the number of units produced
R2 = .892
Which of the following statements is not true about Victoria’s cost model?
a. Y represents the total semi-variable cost.
b. The total monthly fixed utilities costs are $3,250.
c. X is referred to as the dependent variable.
d. The equation Y = 3,250 + .054 X would be represented as a straight line on a graph.
ANS: C
X is referred to as the independent variable. Y is the dependent variable because its value depends on
X.

follows:
Y = 3,250 + .054 X
R2 = .892
How should Victoria interpret the R2 of .892?

a. The equation is a better predictor of fixed costs than of variable costs 89.2% of the time.
b. The equation will accurately predict utility costs 89.2% of the time.
c. Fixed costs make up 89.2% of the total semi-variable cost in any given month.
d. The number of units produced explains 89.2% of the variation in the plant utilities cost.
ANS: D
R2 refers to how much of the variability in the dependent variable, in this case the utilities cost, is
explained by changes in the dependent variable, which is the number of units produced.

NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective
22. Flexible budgeting is a reporting system wherein the:

a. Budget shows estimated costs at different levels of production volume.
b. Budget standards may be adjusted at will.
c. Reporting dates vary according to the levels of activity reported upon.
d. Statements included in the budget report vary from period to period.
ANS: A
Flexible budgeting separates costs into fixed and variable elements and shows estimated costs at
different levels of production volume.

NAT: IMA 2A- Budget Preparation TOP: AACSB - Analytic
23. Stanforth Company’s flexible budget for 50,000 units shows $100,000 and $150,000 in variable and
fixed costs, respectively. At 60,000 units, the flexible budget would show:
a. Variable costs of $150,000 and fixed costs of $150,000.
b. Variable costs of $120,000 and fixed costs of $180,000.
c. Variable costs of $100,000 and fixed costs of $180,000.
d. Variable costs of $120,000 and fixed costs of $150,000.
ANS: D
Variable costs per unit = $100,000/50,000 = $2 per unit.
60,000 units x $2 = $120,000. Fixed costs of $150,000 remain constant.

NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic
24. Venus Company has developed the following flexible budget formula for annual indirect labor cost:
Total annual cost = $12,000 + $.25 / unit
Operating budgets for the current month are based on 5,000 units. Indirect labor costs included in this
monthly planning budget are:
a. $13,250.
b. $1,250.
c. $3,200.
d. $2,250.
ANS: D
Indirect labor cost for month:
Fixed costs ($12,000 / 12) $1,000
Variable costs (5,000 units  $.25) 1,250
Total $2,250

follows:
Y = 3,250 + .054 X
R2 = .892
Based on these results, the December budget for plant utilities cost if Young Industries plans to
produce 100,000 units in that month would be:
a. $5,400
b. $8,650
c. $3,250
d. $8,920
ANS: B
If the plant plans to produce 100,000 units:
Y = 3,250 + .054 (100,000)

Y = 3,250 + 5,400
Y = 8,650

26. When preparing a flexible budget for factory overhead costs, what will occur to fixed costs (on a per-
unit basis) as production increases?
a. Fixed costs per unit will increase.
b. Fixed costs are not considered in flexible budgeting.
c. Fixed costs per unit will decrease.
d. Fixed costs per unit will remain unchanged.
ANS: C
As production increases, the fixed cost per unit decreases because the total fixed cost is spread over a
larger number of units.

NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective
27. If a company uses a factory overhead ledger, at the end of the month, an accountant should:
a. close the accounts in the factory overhead ledger to Work in Process.
b. total the accounts in the factory overhead ledger and compare the total to the balance in
the Factory Overhead control account.
c. prepare a schedule of fixed costs.
d. All of the above are true.
ANS: B
At the end of the month, the accounts in the factory overhead ledger should be added up and the total
compared to the balance in the Factory Overhead control account.

28. Which of the following statements is true?
I. An expense-type factory overhead analysis spreadsheet makes it possible to distribute expenses on

a departmental basis as they are incurred.
II. A department-type factory overhead analysis worksheet makes it possible to distribute expenses on
a departmental basis as they are incurred.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
ANS: C
Both the expense-type and the department-type factory overhead analysis spreadsheets make it
possible to distribute expenses on a departmental basis as they are incurred because they contain the
same information.

29. The most appropriate basis for allocating the factory building rent to specific departments would be
the:
a. Number of machines in each department.
b. Number of employees in each department.
c. Square footage of each department.
d. Amount of time the plant manager spends in the department.
ANS: C
Factory rent should be allocated to departments based on the amount of space each department
occupies within the factory.
30. The report that is prepared after the posting is completed at the end of the accounting period that
shows the items of expense by department and in total, and is used to prove the balance of the Factory
Overhead Control account is the:
a. Schedule of Fixed Cost.
b. Summary of Factory Overhead.
c. Flexible Budget.
d. Subsidiary Ledger.
ANS: B
The Summary of Factory Overhead shows the items of expense by department and in total and is used
to prove the balance of the Factory Overhead Control account.

31. Which of the following is most likely to be considered a service department in a manufacturing plant?
a. Assembly
b. Maintenance
c. Finishing
d. Fabrication
ANS: B
A maintenance department is a service provided to direct production departments, such as those listed
in answers a, c, and d.

32. In a factory, all of the following would be considered service departments except:
a. Inspection and Packing
b. Assembly
c. Power
d. Human Resources
ANS: B
Inspection and Packing, Power and Human Resources all represent service departments. Assembly is
a production department.

33. Which of the following statements about service departments and their costs is not true?
a. Service departments rarely provide services to other service departments.
b. Some service departments may be able to precisely measure the services it provides to
other departments.
c. Service department costs should be included in total product costs.
d. Allocation of service department costs should be made on an equitable basis.
ANS: A
It is common for service departments such as Plant Maintenance, Human Resources or Power to
provide services to other service departments.
34. The number of workers in the departments served would most likely be the basis for distributing the
cost of which service department?
a. Human Resources
b. Tool Room
c. Building Maintenance
d. Machine Shop
ANS: A
The number of workers in the departments served would be an appropriate basis to distribute the costs
of the Human Resource Department to other departments.

35. Kilowatt hours would be an appropriate basis for distributing the cost of which of the following
service departments to production departments?
a. Power
b. Machine Maintenance
c. Human Resources
d. Building Maintenance
ANS: A
Kilowatt hours is a measure of the power used, so this would be an appropriate basis with which to
distribute the costs of the Power Department.

36. The method of distributing service department costs to production departments which makes no
attempt to determine the extent to which one service department renders its services to another
department is the:
a. Direct distribution method.
b. Sequential distribution method.
c. Service department distribution method.
d. Algebraic distribution method.
ANS: A
The direct distribution method distributes service department costs to production departments without
regard to any services the service departments render to each other.

37. The method of distributing service department costs to production departments which distributes
service department costs regressively to other service departments, and then to production departments
is the:
a. Direct distribution method.
b. Sequential distribution method.
c. Service department distribution method.
d. Algebraic distribution method.
ANS: B
The sequential distribution method distributes service department costs regressively to other service
departments and then to production departments.

38. The method of distributing service department costs to production departments that takes into
consideration that service departments not only may provide service to but also may receive service
from other service departments is the:
a. direct distribution method.
b. sequential distribution method.
c. service department distribution method.
d. algebraic distribution method.
ANS: D
The method of distributing service department costs that takes into account the services that service
departments both provide to and receive from other service departments is the algebraic method.

39. The preferred sequence for distributing the cost of service departments to production departments
when using the sequential distribution method is:
a. to distribute the cost of the service department with the largest total overhead cost first.
b. to always distribute the cost of the Human Resources Department first.
c. to distribute the costs of the service departments to the production department having the
largest amount of overhead cost first.
d. to distribute the costs of the service department that services the greatest number of
departments first.
ANS: D
The preferred sequence for distributing the cost of service departments when using the sequential
distribution method is to distribute the cost of the service department that services the greatest number
of departments first. If there is uncertainty as to which department’s costs should be distributed to the
other service departments first, then the service department with the largest total overhead cost should
be distributed first.

40. The Lucas Manufacturing Company has two production departments (fabrication and assembly) and
three service departments (general factory administration, factory maintenance, and factory cafeteria).
A summary of costs and other data for each department, prior to allocation of service department costs
for the year ended June 30, appears below:
The costs of the general factory administration department, factory maintenance department, and
factory cafeteria are allocated on the basis of direct labor hours, square footage occupied, and number
of employees, respectively.
General
Factory Factory Factory
Fabrication Assembly Admin. Maint. Cafeteria
Direct labor costs: $1,950,000 $2,050,000
Direct material costs: $3,130,000 $ 950,000
Factory overhead costs: $1,650,000 $1,850,000 $80,000 $67,500 $58,000
Direct labor hours: 237,690 387,810
Number of employees: 160 128 20 42 25
Sq. footage occupied: 20,000 30,000 2,400 2,000 4,800
Assuming that Lucas elects to distribute service department costs to production departments using the
direct distribution method, the amount of general factory administration department costs that would
be allocated to the assembly department would be (round all final calculations to the nearest dollar):
a. $30,400.
b. $25,650.
c. $0.
d. $49,600.
ANS: D
General Factory Administration allocates its costs based on direct labor hours.
General Factory Administration Costs

Direct labor hours:
Fabrication 237,690
Assembly 387,810
Total 625,500
Allocation to Assembly Department:

387,810 / 625,500  $80,000 = $49,600

for the year ended June 30, appears below.
General
Assuming that Lucas elects to distribute service department costs to production departments using the
direct distribution method, the amount of factory maintenance department costs that would be
allocated to the fabrication department would be (round all final calculations to the nearest dollar):
a. $22,804.
b. $15,000.
c. $27,000.
d. $14,674.
ANS: C
Factory Maintenance allocates its total costs based on square footage.
Factory Maintenance Costs

Square Footage of:
Fabrication 20,000
Assembly 30,000
Total 50,000
Allocation to Fabrication Department:

20,000 / 50,000  $67,500 = $27,000

42. The Jason Manufacturing Company has two production departments (millwright and assembly) and
three service departments (general factory administration, factory maintenance, and factory
development). A summary of costs and other data for each department, prior to allocation of service
department costs for the year ended March 30, appears below.
factory development department are allocated on the basis of direct labor hours, square footage
occupied, and number of employees, respectively.
General
Millwright Assembly Admin. Maint. Devel.
Assuming that Jason elects to use the sequential method to distribute service department costs
(starting with factory development), what would be the amount of factory development that would be
allocated to the factory maintenance department?
a. $ 9,100.
b. $ 4,350.
c. $29,640.
d. $0.
ANS: A
Factory Development allocates its costs based on the number of employees.
Factory Development Costs

Number of Employees:
Millwright 210
Assembly 255
General Factory Adm. 51
Factory Maintenance 84
Total 600
Allocation to Factory Maintenance Department:
84 / 600  $65,000 = $9,100

for the year ended June 30, appears below:
General
Assuming that Lucas elects to use the sequential method to distribute service department costs
(starting with the factory cafeteria), what would be the amount of factory cafeteria costs that would be
allocated to the factory maintenance department?
a. $3,314
b. $6,960
c. $5,800
d. $0
ANS: B
Factory Cafeteria allocates its costs based on the number of employees.
Factory Cafeteria Costs

Number of Employees:
Fabrication 160
Assembly 128
General Factory Adm. 20
Factory Maintenance 42
Total 350
Allocation to Factory Maintenance Department:

42 / 350  $58,000 = $6,960

44. Once the amounts of the service department allocations have been determined, a journal entry should
be prepared to record the distributions, the result of which is:
a. debit balances in the Factory Overhead accounts of the production departments for which
the total agrees to the total amount of factory overhead incurred.
b. credit balances in the Factory Overhead accounts of the production departments for which
the total agrees to the total amount of factory overhead incurred.
c. debit balances in the Factory Overhead accounts of the service departments for which the
total agrees to the total amount of factory overhead incurred.
d. credit balances in the Factory Overhead accounts of the service departments for which the
total agrees to the total amount of factory overhead incurred.
ANS: A
Once the allocations have been determined, journal entries are made to either close the Factory
Overhead control account or the Factory Overhead accounts for the service departments to Factory
Overhead accounts for each of the production departments. This enables the application of factory
overhead to Work in Process using predetermined rates for each department.

45. A predetermined factory overhead rate is computed by dividing

a. Actual overhead cost by actual activity.
b. Actual overhead cost by budgeted activity.
c. Budgeted overhead by actual activity.
d. Budgeted overhead by budgeted activity.
ANS: D
Overhead needs to be allocated through a period of time. Actual costs and activity per period are not
known until the period is done.

46. Meger Manufacturing uses the direct labor cost method for applying factory overhead to production.
The budgeted direct labor cost and factory overhead for the previous fiscal year were $1,000,000 and
$800,000, respectively. Actual direct labor cost and factory overhead were $1,100,000 and $825,000,
respectively.
What was Meger’s predetermined factory overhead rate?

a. 80%
b. 125%
c. 75%
d. 133%
ANS: A
Predetermined factory overhead rate = Budgeted factory overhead
Budgeted direct labor cost
$800,000/$1,000,000 = 80%

$800,000, respectively.
During the year, the company started and completed Job 352A, which had direct material and labor
costs of $32,000 and $45,000, respectively. What was the cost of Job 352A?
a. $77,000
b. $81,000
c. $102,600
d. $113,000
ANS: D
$800,000/$1,000,000 = 80%
Direct material $ 32,000

Direct labor 45,000
Applied factory overhead - $45,000 x 80% 36,000
Total job cost $113,000

48. The Owens Company uses the direct labor hour method of applying factory overhead to production.
The budgeted factory overhead last year was $200,000, and there were 40,000 machine hours and
50,000 direct labor hours budgeted. Job 84 was started and completed during the period. Direct
materials costing $900 were incurred. Twenty-five direct labor hours were worked at a cost of $350,
and 40 machine hours were incurred. What is the amount of factory overhead applied to Job 84?
a. $200
b. $100
c. $160
d. $125
ANS: B
Predetermined overhead rate = Budgeted factory overhead
Budgeted direct labor hours
$200,000/ 50,000 hours = $4/ direct labor hour x 25 hours = $100

49. The Mason Corporation budgeted overhead at $240,000 for the period for Department A based on a
budgeted volume of 60,000 direct labor hours. During the period, Mason started and completed Job
B25, which incurred 200 labor hours at a cost of $2,200, and $5,000 of direct materials. What was the
cost of Job B25?
a. $7,400
b. $8,000
c. $7,250
d. $13,800
ANS: B
Budgeted direct labor hours
$240,000/ 60,000 hours = $4/ direct labor hour
Direct material $5,000

Direct labor 2,200
Applied factory overhead - 200 hours x $4 800

50. Which of the following statements about using the direct labor hour method of applying factory
overhead to production is false?
a. It may not be as accurate as the direct labor cost method if factory overhead primarily
consists of items more closely tied to employee wages, such as benefits.
b. The application base could be substantially smaller than when direct labor cost is used.
c. It is the most appropriate method for a highly automated department.
d. The amount of factory overhead applied is not affected by the mix of labor rates.
ANS: C
It would be more appropriate to use the machine hour method of applying factory overhead in a highly
automated environment.

51. When a manufacturing company has a highly automated manufacturing plant, what is probably the
most appropriate basis of applying factory overhead costs to work in process?
a. Machine hours
b. Cost of materials used
c. Direct labor hours
d. Direct labor dollars
ANS: A
In a highly automated plant, the actual factory costs assigned to products through a predetermined rate
would be more accurately allocated by a machine-hour application method.

NAT: IMA 2B- Cost Management TOP: AACSB - Reflective
52. The Owens Company uses the machine hour method of applying factory overhead to production. The
budgeted factory overhead last year was $200,000, and there were 40,000 machine hours budgeted.
Job 84 was started and completed during the period. Direct materials costing $900 were incurred.
Twenty-five direct labor hours were worked at a cost of $350, and 40 machine hours were incurred.
What was the cost of Job 84?
a. $1,450
b. $1,375
c. $1,250
d. $1,290
ANS: A
Budgeted machine hours
$200,000/ 40,000 hours = $5/ machine hour
Direct material $ 900

Direct labor 350
Applied factory overhead - 40 hours x $5 200

53. Activity-based costing considers non-volume-related activities that create costs such as:
a. Direct labor usage.
b. Machine operations.
c. Consumption of indirect materials and energy usage.
d. Machine setups and product design changes.
ANS: D
(D) Activity-based costing considers non-volume related activities that create costs such as machine
setups and product design changes.

54. To successfully employ an ABC system, a company must first identify:

a. Non-volume related activities in the factory that create costs.
b. Cost drivers.
c. Cost pools.
d. Overhead allocation rates.
ANS: A
To successfully employ an activity-based costing system, a company must first identify non-volume
related activities in the factory that create costs. Once these have been identified, cost drivers and cost
pools can be identified in order to calculate overhead calculation rates.

55. A cost driver is:

a. An overhead or activity rate.
b. A basis used to allocate each of the activity cost pools.
c. The estimated cost of each activity pool.
d. Used only to allocate non-volume-related costs.
ANS: B
A cost driver is a basis used to allocate each of the activity cost pools.

56. The Mason Corporation budgeted overhead at $240,000 for the period for Department A based on a
budgeted volume of 60,000 direct labor hours. At the end of the period, the factory overhead control
account for Department A had a debit balance of $260,000; actual direct labor hours were 63,000.
What was the under- or over applied factory overhead for the period?
a. $12,000 overapplied
b. $ 8,000 overapplied
c. $ 8,000 underapplied
d. $12,000 underapplied
ANS: C
Predetermined rate: $240,000/60,000 (DLH) = $4.00
Actually applied: 63,000 (DLH)  $4.00 = $252,000
Applied factory overhead $252,000

Actual factory overhead 260,000
Underapplied overhead $ (8,000)

NAT: IMA 2B- Cost Management TOP: AACSB - Analytic
$800,000, respectively. Actual direct labor cost and factory overhead were $1,100,000 and $825,000,
respectively.
What is the amount of under- or overapplied factory overhead?

a. $25,000 overapplied
b. $55,000 overapplied
c. $80,000 overapplied
d. $50,000 underapplied
ANS: B
$800,000/$1,000,000 = 80%
Applied factory overhead = $1,100,000 x 80% $880,000

Actual factory overhead incurred 825,000
Overapplied factory overhead $ 55,000

58. The Owens Company uses the machine hour method of applying factory overhead to production. The
budgeted factory overhead last year was $200,000, and there were 40,000 machine hours budgeted.
Actual machine hours incurred during the period were 38,000, and actual factory overhead was
$215,000. What was the amount of under- or overapplied factory overhead?
a. $10,000 underapplied
b. $15,000 underapplied
c. $25,000 underapplied
d. $10,000 overapplied
ANS: C
Budgeted machine hours
$200,000/ 40,000 hours = $5/ machine hour
Applied factory overhead = 38,000 x $5 $190,000

Actual factory overhead incurred 215,000
Underapplied factory overhead $(25,000)

59. Overapplied overhead will always result when a predetermined factory overhead rate is employed and:
a. Overhead incurred is more than overhead applied.
b. Overhead incurred is less than overhead applied.
c. Production is greater than sales.
d. Actual overhead costs are more than expected.
ANS: B
Whenever the overhead incurred (charges to factory overhead) is less than the overhead credited to
factory overhead through the application rate, the result will be overapplied overhead.

60. Spencer Company had overapplied factory overhead of $5,000 last year. Which of the following
statements is not true?
a. A higher level of production may have been achieved than budgeted for.
b. The Work in Process account was overcharged for the costs of factory overhead incurred
during the period.
c. The actual factory overhead expenses may have been less than budgeted for the operating
level achieved.
d. Assuming the amount is not material enough to distort net income, Cost of Goods Sold
should be increased by this amount.
ANS: D
If factory overhead is overapplied, Work in Process was overcharged for the costs of Factory Overhead
incurred during the period. This may have been due to higher production levels or lower than
budgeted expenses. Overcharging Work in Process for overhead results in higher total product costs;
therefor, Cost of Goods sold should be decreased to offset those higher costs.

61. If over- or underapplied factory overhead would materially distort net income if the entire amount was
charged to Cost of Goods Sold, it should be:
a. Carried forward in the overhead control account from year to year.
b. Eliminated by changing the predetermined factory overhead rate in subsequent years.
c. Apportioned among the work in process inventory, the finished goods inventory, and the
cost of goods sold.
d. Treated as a special gain or loss occurring during the year.
ANS: C
When the amount of over- or underapplied overhead would distort net income if the entire amount was
charged to Cost of Goods Sold, it should be allocated to work in process, finished goods, and costs of
goods sold exclusively.

62. Cooper Company had overapplied factory overhead of $2,000 last year. Assuming the amount was
considered small enough not to materially distort net income, the entries needed to close factory
overhead are:
a. Factory Overhead 2,000
Applied Factory Overhead 2,000

Cost of Goods Sold 2,000
b. Factory Overhead 2,000

Under- and Overapplied
Factory Overhead 2,000

c. Factory Overhead 2,000

Under- and Overapplied Factory

Overhead 2,000
d. Factory Overhead 2,000


ANS: C
After closing the Applied Factory Overhead account into the Factory Overhead Account, the Factory
Overhead Account will have a credit balance of $2,000. A debit for $2,000 will be needed to close the
Factory Overhead Account into the Under- and Overapplied Factory Overhead Account, which will be
credited for $2,000. A debit of $2,000 will then be needed to close the Under- and Overapplied
Factory Overhead account to Cost of Goods Sold, which will be credited for $2,000.

63. The entry to apply factory overhead to jobs includes:

a. a debit to Applied Factory Overhead.
b. a debit to Work in Process.
c. a credit to Work in Process.
d. a debit to Cost of Goods Sold.
ANS: B
The entry to apply factory overhead to jobs is:
Debit - Work in Process
Credit - Applied Factory Overhead

PROBLEM
1. Kater Company manufactures shelving units. The company receives pre-cut wood, drills holes in the
wood so that movable shelves may be installed, then assembles and paint the units. Classify each of
the following items of factory overhead as either fixed or variable cost.
a. Janitorial service (an outside service, not company employees)

b. Supervisor of the Drilling Department
c. Oil used to lubricate drill press machines
d. Propane for forklift trucks used to move the material from the Drilling Department to the
Assembly Department
e. Natural gas used to heat the plant
f. Security guard
g. Drill bits used in the drilling department
h. Insurance on factory building
i. Electricity to power drill press machines
j. Rent of factory building
ANS:
a. Fixed. A janitorial service is most likely hired for a nightly cleaning, regardless of production
volume.
b. Fixed. The cost of supervisors is likely to remain constant unless production volumes increase
significantly.
c. Variable. The higher the production volume, the more the presses will run and more oil will
be required to lubricate them.
d. Variable. The higher the production volume, the more the forklifts will be needed to move
materials to the Assembly Department.
e. Fixed. Heating costs will not vary in proportion to production volumes.
f. Fixed. Increased production volumes will not necessitate additional security, which is dictated
more by plant size, location and type of business.
g. Variable. Drill bits wear out as they are being used. Increased production volumes will call
for an increased number of drill bits.
h. Fixed. Insurance premium based on value of building, not on production volumes.
i. Variable. Increased production volumes will necessitate increased electricity usage.
j. Fixed. Building rental determined by contract, not production volumes.

2. Santorini Ltd. has accumulated the following data over a six-month period:
Indirect Labor Indirect Labor

Hours Cost
January 500 $ 9,500
February 400 9,000
March 600 10,000
April 800 12,000
May 700 11,000
June 650 10,500
Determine the formula that could be used to determine Santorini’s indirect labor cost at various levels
of production using the high-low method.
ANS:
Variable cost:
Labor Hours Labor Costs
High volume 800 $12,000
Low volume 400 9,000
Difference 400 $ 3,000
Variable cost per labor hour = $3,000 / 400 hours = $7.50/labor hour
Fixed cost:
400 Hours 800 Hours
Cost $9,000 $12,000
Variable @ $7.50/hour 3,000 6,000
Difference $6,000 $ 6,000
Santorini’s cost formula:

Indirect labor costs = $6,000 + ($7.50 x number of indirect labor hours)

3. The following are the results of the least squares regression method which was run to separate the
fixed and variable components of the Zulli Corporation’s monthly factory utility costs using the
number of products produced:
y = 49,222.2992 + 5.09 x
R2 = .97765
a) Assume Zulli budgets production of 5,400 units in June, what should budgeted utility costs be?
b) Explain what R2 means. Is this equation a good predictor of utility costs?
ANS:
a) Budgeted utility costs at 5,400 units of production (rounded to the nearest dollar):
y = 49,222 + 5.09 (5,400)

y = 49,222 + 27,486
y = 76,708
b) R2 = .97765 means that 97.8% of the variation in the utility cost is explained by the variation in the
number of units produced. This is very high and it is an indication that units of production are a good
variable to use in explaining changes in utilities cost.

4. Domino Bakery has the following budget at 1,000,000 dozen donuts baked:
Direct materials $300,000

Direct labor 250,000
Variable factory overhead 200,000
Fixed factory overhead 180,000
$930,000
(1) Compute the cost per dozen donuts at 1,000,000 dozen.
(2) Develop the budget for 1,200,000 dozen donuts.
(3) Compute the cost per dozen donuts at 1,200,000 dozen.
(4) Explain why the difference in the cost per dozen occurs at the different levels of volume.
ANS:
(1) Cost per dozen = $930,000/1,000,000 dozen = $.93/dozen donuts
(2)
Budget @
Cost per dozen 1,200,000 dozen
Direct materials 300,000/1,000,000 = .30/dozen $ 360,000
Direct labor 250,000/1,000,000 = .25/dozen 300,000
Variable factory overhead 200,000/1,000,000 = .20/dozen 240,000
Fixed factory overhead 180,000
$1,080,000
(3) Cost per dozen = $1,080,000/1,200,000 dozen = $.90/dozen donuts
(4) The cost per dozen decreases as volume increases because fixed costs are spread over a larger
number of units.

5. Dean Corporation has two service departments, Power and Maintenance, and two production
departments, Painting and Polishing. The following data have been estimated for next year’s
operations:
Department: Direct Charges Kilowatt Hours Used Square Footage
Power $450,000 20,000 10,000
Maintenance 120,000 50,000 5,000
Painting 235,000 100,000 30,000
Polishing 265,000 150,000 20,000
Requirements:
(1) a) For which service department would you use kilowatt hours to allocate service costs.
b) For which service department would you use square footage to allocate service costs.
(2) Distribute the service department costs using the direct distribution method.
(3) Prepare the journal entries to distribute the costs of the service departments to the production
departments given the results of your calculations.
ANS:
(1) It would be more appropriate to distribute Power department costs using kilowatt hours and
distribute maintenance costs using square footage.
(2) Direct Distribution Method:
Power Maintenance Painting Polishing Total

Total direct charges 450,000 120,000 235,000 265,000 1,070,000
Power distribution
(kilowatt hrs.)
Painting
180,000
100,000 x $1.80*
Polishing
150,000 x 1.80 270,000
Maintenance
distribution (sq. ft.)
Painting
72,000
30,000 x $2.40**
Polishing
20,000 x 2.40 _______ 48,000
487,000 583,000 1,070,000
* $450,000/(100,000 + 150,000) labor hours = $1.80/kilowatt hour
** $120,000/(30,000 + 20,000) square feet = $2.40/square foot
(3)
Factory Overhead - Painting 180,000
Factory Overhead - Polishing 270,000
Factory Overhead - Power 450,000

Factory Overhead - Maintenance 120,000

6. Dean Corporation has two service departments, Power and Maintenance, and two production
departments, Painting and Polishing. The following data have been estimated for next year’s
operations:
Department: Direct Charges Kilowatt Hours Used Square Footage
Power $450,000 20,000 10,000
Maintenance 120,000 50,000 5,000
Painting 235,000 100,000 30,000
Polishing 265,000 150,000 20,000
Requirements:
(1) Distribute the service department costs using the sequential distribution method.
Distribute the Power Department first.
(2) Prepare the journal entries to distribute the costs of the service departments to the production
departments given the results of your calculations.
ANS:
(1) Sequential Distribution Method:
Power Maintenance Painting Polishing Total

Total direct charges 450,000 120,000 235,000 265,000 1,070,000
Power distribution
(kilowatt hrs.)
Maintenance 75,000
195,000
50,000 x $1.80*
Painting
100,000 x $1.80 150,000
Polishing
150,000 x 1.80 225,000
Maintenance
Painting
30,000 x $3.90** 117,000
Polishing
20,000 x 3.90
_______ 78,000
502,000 568,000 1,070,000
* $450,000/(50,000 + 100,000 + 150,000) labor hours = $1.50/kilowatt hour
(2)
Factory Overhead - Power 450,000


7. Perry Company has two service departments, Maintenance and Human Resources, and two
production departments, Machining and Assembly. The following data have been estimated
for next year’s operations:
Department: Direct Charges Square Footage Labor Hours
Human Resources $135,000 -- --
Maintenance 100,000 -- 5,000
Machining 275,000 2,000 20,000
Assembly 225,000 3,000 25,000
The Human Resources Department services all departments.
Requirements:
(1) Distribute the service department costs using the direct distribution method.
(2) Distribute the service department costs using the sequential distribution method with the
department servicing the greatest number of other departments being distributed first.
(3) Using the results from the direct distribution method, calculate the predetermined factory
overhead rate for the machining department using labor hours as the basis.
ANS:
(1) Direct Distribution Method:
Human
Resources Maintenance Machining Assembly Total
Total direct charges 135,000 100,000 275,000 225,000 735,000
Human resources
distribution (labor
hrs.)
60,000
Machining
20,000 x $3.00*
Assembly 75,000
25,000 x 3.00
Maintenance
Machining
2,000 x $20.00** 40,000
Assembly
3,000 x 20.00
_______ 60,000
375,000 360,000 735,000
* $135,000/(20,000 + 25,000) labor hours = $3.00/labor hour
(2) Sequential Distribution Method

Human
Resources Maintenance Machining Assembly Total
Total direct charges 135,000 100,000 275,000 225,000 735,000
Human resources
distribution (labor
hrs.)
13,500
Maintenance 113,500
5,000 x $2.70* 54,000
Machining
20,000 x 2.70
Assembly 67,500
25,000 x 2.70
Maintenance
Machining
45,400
2,000 x $22.70**
Assembly
3,000 x 22.70 _______ 68,100
374,400 360,600 735,000
* $135,000/(5,000 + 20,000 + 25,000) labor hours = $2.70/labor hour

(3) $375,000/20,000 = $18.75/labor hour
Note to instructor: To reduce the difficulty of the problem, assign requirements 1 and 3 only, or
requirement 2 only.

8. You have been hired by Thompson Waterfall Manufacturing. Your first task is examine different
distribution methods for applying factory overhead to the various production orders that are processed
during a year.
The following information was taken from the annual budget:
Direct labor hours 80,000

Machine hours 160,000
Manufacturing costs:
Direct labor $400,000
Direct materials 190,000
Indirect labor 65,000
Electric power 46,000
Payroll taxes 12,800
Machine maintenance and repair 10,200
Factory supplies 17,000
Factory heat and light 15,000
Depreciation, taxes, and insurance:
Factory buildings 124,000
Machinery 310,000
$1,190,000
Determine the following factory overhead application rates under each of the following
a. methods:
(1) Direct labor cost
(2) Direct labor hours
(3) Machine hours
b. Prepare a schedule showing the prime cost and total cost of Order 329 with the factory
overhead costs applied on each of the three bases; Job Cost Sheet 329 shows the following:
raw materials, $6,200; direct labor, 6,000 hours and $29,000; machine hours, 2,800.
ANS:
(a) Factory overhead costs:
Indirect labor $ 65,000
Machinery 310,000
$600,000
(1) Direct labor cost: $600,000/$400,000 = 150%
(2) Direct labor hours: $600,000/80,000 = $7.50/hour
(3) Machine hours: $600,000/160,000 = $3.75/hour
(b) ORDER 329

Direct Direct
Labor Labor Machine
Cost Hours Hours
Raw materials $ 6,200 $ 6,200 $ 6,200
Direct labor 29,000 29,000 29,000
Factory overhead:
150%  $29,000 43,500
6,000 hours  $7.50 45,000
2,800 hours  $3.75 10,500
$78,700 $80,200 $45,700

9. Factory overhead for the Praeger Company has been estimated as follows:
Fixed overhead $122,500

Variable overhead $90,000
Budgeted direct labor hours 42,500
Production for the month was 90 percent of the budget, and actual factory overhead totaled $175,000.
Calculate:
a. The predetermined factory overhead rate.
b. The under- or overapplied factory overhead.
ANS:
$122,500 + $90,000 $5.00
(a) Predetermined overhead rate = =
42,500 DLH DLH
(b) Applied overhead (38,250 hrs*  $5.00/DL hr) $191,250

Actual overhead 175,000
Overapplied factory overhead $ 16,250
* 42,500 budgeted hours x 90% actual production level = 38,250 hours
PTS: 1 DIF: Moderate REF: P. OBJ: 6, 7

10. The controller has asked you to examine different distribution methods for applying factory overhead
to the various production orders that are processed during a year.
The following information was taken from the annual budget:

Direct labor $525,000
Direct materials 180,000
Indirect labor 75,000
Machinery 320,200
$1,335,000
Actual results for the year follow:

Direct labor $ 540,000
Direct material 200,000
Factory overhead 625,000
$1,365,000
a. Determine the following factory overhead application rates under each of the following
methods:
(3) Machine hours
b. Determine the under- or overapplied factory overhead under each of the following
methods:
(3) Machine hours
ANS:
(a) Factory overhead costs:
Indirect labor $ 75,000
Machinery 320,200
$630,000
Predetermined factory overhead rates:
(1) Direct labor cost: $630,000/$525,000 = 120%
(2) Direct labor hours: $630,000/84,000 hours = $7.50/hour
(3) Machine hours: $630,000/120,000 hours = $5.25/hour
(b) Applied factory overhead:

(1) Direct labor cost: $540,000 x 120% = $648,000
(2) Direct labor hours: 85,000 hours x $7.50/hour = $637,500
(3) Machine hours: 110,000 hours x $5.25/hour = $577,500
Under- or overapplied factory overhead:

Direct labor Direct labor Machine
cost hours hours
Applied factory overhead $648,000 $637,500 $577,500
Actual factory overhead 625,000 625,000 625,000
Over-(Under)applied factory
overhead $ 23,000 $ 12,500 $(47,500)
PTS: 1 DIF: Hard REF: P. OBJ: 6, 7

11. Jarcly Manufacturing Company uses activity-based costing. The factory overhead budget for the
coming period is $1,053,000, consisting of the following:
Cost Pool Budgeted Amount

Supervision $ 320,000
Machine usage 420,000
Machine setups 187,000
Design changes 126,000
Totals $1,053,000
The potential allocation bases and their estimated amounts were as follows:
Allocation Base Budgeted Amount

Number of design changes 35
Number of setups 110
Machine hours 6,000
a. Determine the overhead rate for each cost pool, using the most appropriate allocation
base for each pool.
b. Job 80130 required $45,000 for direct materials, $20,000 for direct labor, 2,000
direct labor hours, 800 machine hours, five setups, and four design changes.
Determine the cost of Job 80130.
ANS:
(a) Supervision: $320,000 / 10,000 = $32 -- direct labor hour

Machine usage: $420,000 / 6,000 = $70 -- machine hour
Machine setups: $187,000 / 110 = $1,700 -- setup
Design changes: $126,000 / 35 = $3,600 -- design change
(b) Direct materials $ 45,000

Direct labor 20,000
Supervision ($32  2,000) 64,000
Machine usage (800  70) 56,000
Machine setups (5  1,700) 8,500
Design changes (4  3,600) 14,400
Total $207,900

12. Estimates made for a production department of the Automate Company for the month of October
show:
Budgeted factory overhead for hours worked $17,360
Estimated direct labor hours 3,100
Factory overhead is applied on the basis of direct labor hours. On October 31, the records show these
actual figures:
Actual overhead incurred $18,625

Direct labor hours worked 3,425
Prepare the entry or entries to 1) apply factory overhead to production; 2) record actual factory
overhead incurred assuming all items were purchased from vendors; 3) close out the two factory
overhead account balances to set up the overapplied or underapplied factory overhead; and 4) to close
the balance in under- or overapplied factory overhead to Cost of Goods Sold.
ANS:
Work in Process 19,180


Accounts Payable 18,625

Factory Overhead 555

Under- and Overapplied Factory Overhead 555
Under- and Overapplied Factory Overhead 555

Cost of Goods Sold 555


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CHAPTER 4—ACCOUNTING FOR FACTORY OVERHEAD

1. Factory overhead includes:

PTS: 1 DIF: Easy REF: P. OBJ: Introduction

PTS: 1 DIF: Moderate REF: P. OBJ: Introduction

PTS: 1 DIF: Moderate REF: P. OBJ: Introduction

4. Costs that vary in proportion to direct volume changes are:

PTS: 1 DIF: Easy REF: P. OBJ: 1

5. The following cost is an example of a variable factory overhead cost:

PTS: 1 DIF: Easy REF: P. OBJ: 1

6. Variable overhead costs include all of the following except:

PTS: 1 DIF: Easy REF: P. OBJ: 1

7. Fixed factory overhead costs include:

PTS: 1 DIF: Easy REF: P. OBJ: 1

8. Fixed overhead cost includes all of the following except:

PTS: 1 DIF: Moderate REF: P. OBJ: 1

PTS: 1 DIF: Moderate REF: P. OBJ: 1

PTS: 1 DIF: Moderate REF: P. OBJ: 1

11. Consider the following costs:

Which of the following statements is true?

PTS: 1 DIF: Moderate REF: P. OBJ: 1

PTS: 1 DIF: Moderate REF: P. OBJ: 1

PTS: 1 DIF: Easy REF: P. OBJ: 2

PTS: 1 DIF: Easy REF: P. OBJ: 2

PTS: 1 DIF: Moderate REF: P. OBJ: 2

PTS: 1 DIF: Moderate REF: P. OBJ: 2

a. Electricity costs = $2,800 + ($1.00 x number of machine hours)

Electricity costs = $3,600 + ($.60 x number of machine hours)

PTS: 1 DIF: Hard REF: P. OBJ: 2

PTS: 1 DIF: Easy REF: P. OBJ: 2

PTS: 1 DIF: Moderate REF: P. OBJ: 2

PTS: 1 DIF: Moderate REF: P. OBJ: 2

How should Victoria interpret the R2 of .892?

PTS: 1 DIF: Moderate REF: P. OBJ: 2

22. Flexible budgeting is a reporting system wherein the:

PTS: 1 DIF: Easy REF: P. OBJ: 3

PTS: 1 DIF: Moderate REF: P. OBJ: 3

Total annual cost = $12,000 + $.25 / unit

PTS: 1 DIF: Moderate REF: P. OBJ: 3

Y = 3,250 + .054 (100,000)

PTS: 1 DIF: Moderate REF: P. OBJ: 3

PTS: 1 DIF: Moderate REF: P. OBJ: 3

PTS: 1 DIF: Moderate REF: P. OBJ: 4

28. Which of the following statements is true?

I. An expense-type factory overhead analysis spreadsheet makes it possible to distribute expenses on

PTS: 1 DIF: Easy REF: P. OBJ: 4

PTS: 1 DIF: Moderate REF: P. OBJ: 4

PTS: 1 DIF: Moderate REF: P. OBJ: 5

PTS: 1 DIF: Easy REF: P. OBJ: 5

PTS: 1 DIF: Easy REF: P. OBJ: 5

PTS: 1 DIF: Easy REF: P. OBJ: 5

PTS: 1 DIF: Easy REF: P. OBJ: 5

PTS: 1 DIF: Easy REF: P. OBJ: 5

PTS: 1 DIF: Easy REF: P. OBJ: 5

PTS: 1 DIF: Moderate REF: P. OBJ: 5

General Factory Administration Costs

Allocation to Assembly Department:

PTS: 1 DIF: Moderate REF: P. OBJ: 5

Factory Maintenance Costs

Allocation to Fabrication Department:

PTS: 1 DIF: Moderate REF: P. OBJ: 5

Factory Development Costs

PTS: 1 DIF: Moderate REF: P. OBJ: 5

Factory Cafeteria Costs