The accountant for Champion Brake, Inc., applies overhead based on machine hours.

The budgeted
overhead and machine hours for the year are $260,000 and 16,000, respectively. The actual overhead
and machine hours incurred were $275,000 and 20,000. The cost of goods sold and inventory data
Answer (B) is correct.
compiled for the year is as follows: The budgeted overhead application rate is $16.25
Direct materials $ 50,000
COGS 450,000
per machine hour ($260,000 budgeted total ÷ 16,000
WIP (units) 100,000
Finished goods (units) 150,000
budgeted hours). The amount of overhead applied
What is the amount of over/underapplied overhead for the year?
was therefore $325,000 (20,000 actual machine hours
× $16.25 budgeted rate). Actual overhead incurred
A. $15,000
B. $50,000
was $275,000. Overhead was thus overapplied by
C. $65,000
D. $67,000
$50,000 ($325,000 applied - $275,000 actual).

Accounting for manufacturing overhead costs Answer (B) is correct.

involves averaging in Overhead consists of costs other than direct materials
and labor that are averaged over the entire period,
-Job-Order Costing
usually a year, based upon an estimated output level.
-Process Costing
The total of the estimated indirect costs is divided by the
base used for cost assignment, e.g., direct labor hours,
A. Yes, No and assigned to the product based upon the actual
B. Yes, Yes output level. Consequently, manufacturing overhead
C. No, Yes costs are averaged in both job-order and process
D. No, No costing systems.

Answer (A) is correct.

Ajax Corporation transferred $72,000 of materials to its production
The total cost incurred in the production process, the sum of
department in February and incurred $37,000 of conversion costs
($22,000 of direct labor and $15,000 of overhead). At the beginning BWIP, direct materials, direct labor, and overhead, minus the
of the period, $14,000 of inventory (direct materials and conversion cost of goods not completed during the period (EWIP), is the
costs) was in process. At the end of the period, $18,000 of inventory cost of goods manufactured.
was in process. What was the cost of goods manufactured?
BWIP $14,000
A. $105,000 Materials $72,000
B. $109,000
Conversion costs $37,000
C. $123,000
D. $141,000 Minus EWIP $(18,000)
COGM $105,000

D. Smooth seasonal variability of both overhead costs

Annual overhead application rates are used to and output levels.
Answer (D) is correct.
Annual overhead application rates smooth seasonal
A. Budget overhead.
variability of overhead costs and output levels. If
B. Smooth seasonal variability of overhead costs. overhead is applied to products or service units as
C. Smooth seasonal variability of output levels. incurred, the overhead rate per unit in most cases varies
D. Smooth seasonal variability of both overhead considerably from week to week or month to month. The
costs and output levels. purpose of an annual overhead application rate is to
simulate constant overhead throughout the year.

Application rates for manufacturing overhead best

reflect anticipated fluctuations in sales over a cycle Answer (B) is correct.
of years when they are computed under the concept Normal capacity is the output level that
of
will approximate demand over a period
A. Maximum capacity. of years that includes seasonal, cyclical,
B. Normal capacity. and trend variations. Deviations in one
C. Practical capacity.
D. Expected actual capacity.
year will be offset in other years.
Assuming two overhead accounts are used, what is the entry to close them and to charge
Answer (D) is correct.
underapplied overhead to cost of goods sold?
Total under- or overapplied overhead often is debited (credited)
A. Cost of goods sold XXX to COGS rather than allocated among COGS, EWIP, and finished
Finished goods XXX
goods. The correct entry to close the overhead accounts and to
B. Manufacturing OH applied XXX charge underapplied overhead to COGS is to debit
Manufacturing OH control XXX
Cost of goods sold XXX
manufacturing overhead applied for the amount of overhead
applied for the period and to credit manufacturing overhead
C. Cost of goods sold XXX control for the amount of overhead actually incurred for the
Manufacturing OH applied XXX
period. The amount actually incurred exceeds the amount of
D. Cost of goods sold XXX overhead applied because overhead is underapplied. The
Manufacturing OH applied XXX
Manufacturing OH control XXX
difference is the amount charged to COGS.

At the beginning of the year, Smith, Inc., budgeted the following:

Answer (D) is correct.
Units 10,000
Sales $100,000
Total variable expenses 60,000
Given actual overhead of $39,500 and underapplied
Total fixed expenses 20,000
overhead of $1,500, overhead applied was $38,000
Manufacturing overhead:
Variable 30,000
Fixed 10,000
($39,500 - $1,500). Overhead is applied at the rate of
There were no beginning inventories. At the end of the year, no work was in process, total manufacturing overhead $4 per unit ($40,000 budgeted overhead ÷ 10,000
incurred was $39,500, and underapplied manufacturing overhead was $1,500. Manufacturing overhead was applied on
the basis of budgeted unit production. How many units were produced this year? budgeted units). Accordingly, 9,500 units were
A. 10,250
B. 10,000 produced ($38,000 applied overhead ÷ $4 per unit
C. 9,875
D. 9,500 application rate).

Carley Products has no work-in-process or finished goods inventories at year end. The A. $608,000
balances of Carley's accounts include the following: Answer (A) is correct.
The pretax income is equal to sales minus cost of goods sold, general selling
Cost of goods sold $2,040,000 and administrative expenses, and underapplied manufacturing overhead (the
General selling and administrative expenses 900,000 excess of actual overhead over the amount applied).
Sales 3,600,000
Manufacturing overhead control 700,000
Sales $3,600,000
Manufacturing overhead applied 648,000
Cost of goods sold (2,040,000)
Carley's pretax income for the year is
Underapplied overhead (52,000)

A. $608,000 Gross margin $1,508,000

B. $660,000 GS&A expenses (900,000)
C. $712,000
D. $1,508,000 Income before income taxes $ 608,000

Answer (C) is correct.

The Childers Company manufactures widgets. During the fiscal
Prime cost is the sum of direct materials and direct labor costs.
year just ended, the company incurred prime costs of $1.5
Conversion cost is the sum of direct labor and overhead costs.
million and conversion costs of $1.8 million. Overhead is applied
at the rate of 200% of direct labor cost. How much of the above
OH = 200% × DL
costs represent direct materials cost?
DL + OH = $1,800,000
DL + 2DL = $1,800,000
A. $1,500,000
DL =$600,000
B. $300,000
DM + DL = $1,500,000
C. $900,000
DM + $600,000 = $1,500,000
D. $600,000
DM = $900,000

A company experienced a machinery breakdown on one of its production lines. As a

consequence of the breakdown, manufacturing fell behind schedule, and a decision was
made to schedule overtime to return manufacturing to schedule. Which one of the
following methods is the proper way to account for the overtime paid to the direct
laborers?
A. The overtime hours times the sum of the straight-time wages and overtime premium
would be charged entirely to manufacturing overhead.
B. The overtime hours times the sum of the straight-time wages and overtime premium
would be treated as direct labor.
C. The overtime hours times the overtime premium would be charged to repair and
maintenance expense, and the overtime hours times the straight-time wages would be
treated as direct labor.
D. The overtime hours times the overtime premium would be charged to manufacturing
overhead, and the overtime hours times the straight-time wages would be treated as direct
labor.
D. The overtime hours times the overtime premium would be charged
to manufacturing overhead, and the overtime hours times the
straight-time wages would be treated as direct labor.
Answer (D) is correct.
Direct labor costs are wages paid to labor that can feasibly be
specifically identified with the production of finished goods.
Manufacturing overhead consists of all costs, other than direct
materials and direct labor, that are associated with the manufacturing
process. Thus, straight-time wages would be treated as direct labor.
However, because the overtime premium is a cost that is borne by all
production, the overtime hours times the overtime premium should
be charged to manufacturing overhead.
A company manufactures plastic products for the home and restaurant market. The company also does
contract work for other customers and uses a job-order costing system. The flexible budget covering
next year's expected range of output is Answer (B) is correct.
Direct labor hours 50,000 80,000 110,000 The predetermined overhead rate is calculated by
Machine hours 40,000 64,000 88,000
Variable OH costs $100,000 $160,000 $220,000 dividing the total fixed overhead by the activity level
Fixed OH costs 150,000 150,000 150,000
Total OH costs $250,000 $310,000 $370,000 to arrive at a unit fixed overhead cost that is added
A predetermined overhead rate based on direct labor hours is used to apply total overhead. to the unit variable overhead cost. The unit variable
Management has estimated that 100,000 direct labor hours will be used next year. The predetermined
overhead rate per direct labor hour to be used to apply total overhead to the individual jobs next year is overhead rate is the same at each activity level. Thus,
A. $3.36 the predetermined overhead rate is $3.50 [($150,000
B. $3.50
C. $3.70 FOH ÷ 100,000 hrs.) + ($220,000 VOH ÷ 110,000 hrs.)].
D. $3.88

A company services office equipment. Some customers bring A. A job-order costing system.
their equipment to the company's service shop; other customers Answer (A) is correct.
prefer to have the company's service personnel come to their
offices to repair their equipment. The most appropriate costing
Job-order costing systems accumulate costs
method for the company is for tasks or projects that are unique and
nonrepetitive. An entity that services office
A. A job-order costing system.
B. An activity-based costing system. equipment is interested in identifying the
C. A process costing system. costs applicable to each customer each
D. An operation costing system.
service call.

Cox Company found that the differences in product costs

resulting from the application of predetermined overhead rates A. Overhead was composed chiefly of variable costs.
rather than actual overhead rates were immaterial even though Answer (A) is correct.
actual production was substantially less than planned Total variable overhead costs change in proportion to
production. The most likely explanation is that
changes in the activity level. Total fixed costs do not. For
A. Overhead was composed chiefly of variable costs.
the difference between applied and actual overhead to
B. Several products were produced simultaneously. be immaterial when actual production is substantially
C. Fixed manufacturing overhead was a significant cost. less than planned production, overhead costs must be
D. Costs of overhead items were substantially higher than composed chiefly of variable costs.
anticipated.

The debits in work-in-process are BWIP, direct labor, C. EWIP (debit).

direct materials, and manufacturing overhead. The Answer (C) is correct.
account should be credited for production that is
The sum of the debits to WIP equals total production
completed and sent to finished goods inventory. The
costs. Ignoring possible spoilage, production
balance is
consists either of completed goods or of those still in
process. Accordingly, after the account is credited
A. Zero.
B. EWIP (credit). for the cost of goods completed and transferred to
C. EWIP (debit). the FG inventory, the debit balance in the account is
D. Total production costs to be accounted for. EWIP.

The denominator of the overhead application rate B. Expected capacity.

can be based on one of several production Answer (B) is correct.
capacities. Which results in the lowest expected If actual output differs from the predetermined
over- or underapplied overhead? capacity level, a volume variance occurs. This
variance equals the over- or underapplied
A. Theoretical capacity. overhead. The expected volume is that predicted for
B. Expected capacity. the period. Thus, the use of expected capacity as a
C. Normal capacity. denominator should result in the lowest expected
D. Practical capacity. over- or underapplied overhead.
A direct labor overtime premium should be charged to a
specific job when the overtime is caused by the
A. Increased overall level of activity.
B. Customer's requirement for early completion of the
job.
C. Management's failure to include the job in the
production schedule.
D. Management's requirement that the job be completed
before the annual manufacturing vacation closure.
B. Customer's requirement for early completion of the job.
Answer (B) is correct.
A direct labor overtime premium ordinarily is an indirect cost,
charged to overhead, and allocated to all jobs. The association
of overtime with a specific job may be attributable solely to
random scheduling and an abnormally large production volume,
a condition affecting all jobs. However, if overtime directly
results from the demands of a specific job, it is a direct cost of
that job.

During an accounting period, which

D. Neither.
production account is debited and credited
Answer (D) is correct.
many times?
When both manufacturing overhead control
and manufacturing overhead applied are
A. Manufacturing overhead applied.
used, all overhead incurred is debited to the
B. Manufacturing overhead control.
control account. All overhead applied is
C. Both.
credited to manufacturing overhead applied.
D. Neither.

B. $30,000
During the current accounting period, a manufacturing company purchased Answer (B) is correct.
$70,000 of raw materials, of which $50,000 of direct materials and $5,000 of
indirect materials were used in production. The company also incurred
Manufacturing overhead consists of all costs, other than direct
$45,000 of total labor costs and $20,000 of other manufacturing overhead materials and direct labor, associated with the manufacturing process.
costs. An analysis of the work-in-process control account revealed $40,000 It includes both fixed and variable costs. The overhead control
of direct labor costs. Based upon the above information, what is the total account should have the following costs:
amount accumulated in the manufacturing overhead control account?
Indirect materials $ 5,000
A. $25,000
Indirect labor ($45,000 - $40,000) 5,000
B. $30,000
C. $45,000 Other overhead 20,000
D. $50,000
Total overhead $30,000

Effective cost capacity management C. Matches the firm's resources with market opportunities.
Answer (C) is correct.
Maximizing the value created within an organization starts with
A. Minimizes the value delivered to understanding the nature and capabilities of all of the entity's
customers. resources (capacity), which may be defined from different
perspectives. Managing capacity cost starts when a product or
B. Maximizes required future investments.
process is first envisioned. It continues through the subsequent
C. Matches the firm's resources with market disposal of resources downstream. Effective capacity cost
opportunities. management requires supporting effective matching of a firm's
resources with current and future market opportunities.
D. Is limited to eliminating short-term worth.

Fact Pattern: Farber Company employs a normal (nonstandard) absorption cost system.
The following information is from the financial records of the company for the year. D. $937,500
• Total manufacturing costs were $2,500,000.
• Cost of goods manufactured was $2,425,000. Answer (D) is correct.
• Applied factory overhead was 30% of total manufacturing costs.
• Factory overhead was applied to production at a rate of 80% of direct labor cost.
Total manufacturing cost of $2,500,000 is
• Work-in-process inventory at January 1 was 75% of work-in-process inventory at
December 31.
composed of raw materials, direct labor, and
factory overhead. Factory overhead is 30% of
Farber Company's total direct labor cost for the year is
total manufacturing costs, or $750,000. If factory
A. $750,000
B. $600,000 overhead is 80% of direct labor cost, direct
C. $909,375
D. $937,500 labor cost is $937,500 ($750,000 ÷ 80%).
Fact Pattern: Farber Company employs a normal (nonstandard) absorption cost system.
A. $300,000.
The following information is from the financial records of the company for the year.
Answer (A) is correct.
• Total manufacturing costs were $2,500,000.
• Cost of goods manufactured was $2,425,000.
Cost of goods manufactured ($2,425,000) equals total manufacturing costs
• Applied factory overhead was 30% of total manufacturing costs. ($2,500,000) plus beginning work-in-process (75% of EWIP) minus ending
• Factory overhead was applied to production at a rate of 80% of direct labor cost. work-in-process. The ending work-in-process is $300,000.
• Work-in-process inventory at January 1 was 75% of work-in-process inventory at
December 31. $2,500,000 + .75 EWIP - EWIP = $2,425,000

The carrying value of Farber Company's work-in-process inventory at December 31 is $2,500,000 - .25 EWIP = $2,425,000

A. $300,000. EWIP = $75,000 ÷ .25

B. $225,000.
C. $100,000.
EWIP = $300,000
D. $75,000.

Fact Pattern: Farber Company employs a normal (nonstandard) absorption cost system.
The following information is from the financial records of the company for the year.
• Total manufacturing costs were $2,500,000.
B. $812,500
• Cost of goods manufactured was $2,425,000.
• Applied factory overhead was 30% of total manufacturing costs.
Answer (B) is correct.
• Factory overhead was applied to production at a rate of 80% of direct labor cost.
• Work-in-process inventory at January 1 was 75% of work-in-process inventory at
Factory overhead is 30% of total
December 31. manufacturing costs, or $750,000. Direct
Total cost of direct material used by Farber Company for the year is labor is $937,500 (750,000 ÷ 0.8). Thus, raw
A. $750,000
B. $812,500
materials must account for the remaining
C. $937,500
D. $1,150,000
$812,500 ($2,500,000 - $750,000 - $937,500).

The following information is available from the records of a manufacturing company that applies manufacturing
overhead based on direct labor hours: Answer (B) is correct.
Estimated overhead cost
$500,000 Applied overhead equals the actual labor hours
Estimated labor hours
200,000
(210,000) times the estimated application rate
Actual overhead cost
$515,000
($500,000 ÷ 200,000 DLH = $2.50 per direct
Actual labor hours
210,000
labor hour), or $525,000. This amount is $10,000
Based on this information, manufacturing overhead is ($525,000 - $515,000 actual cost) higher than the
A. Underapplied by $9,524.
B. Overapplied by $10,000.
actual overhead cost incurred. Thus, overhead
was overapplied by $10,000.
C. Overapplied by $15,000.
D. Overapplied by $40,750.

The following were among Gage Co.'s costs during the month just ended:
Answer (A) is correct.
Normal spoilage $ 5,000 Factory (manufacturing) overhead consists of all costs other
Freight out $10,000
Excess of actual manufacturing costs over standard costs
than direct materials and direct labor that are associated with the
$20,000 manufacturing process. Because the excess of actual
Standard manufacturing costs $100,000
manufacturing costs over standard costs is $20,000, and the
Actual prime manufacturing costs $80,000
standard costs are $100,000, the actual manufacturing costs are
Gage's actual manufacturing overhead was: $120,000. However, because $80,000 of these costs are prime
A. $40,000 costs, the remainder is factory overhead. Thus, actual
B. $45,000 manufacturing overhead is therefore $40,000 ($120,000 -
C. $55,000
D. $120,000
$80,000).

Generally, individual departmental rates rather than a plantwide Answer (D) is correct.
rate for applying manufacturing overhead are used if Overhead is usually assigned to products based on
a predetermined rate or rates. The activity base for
A. A company wants to adopt a standard cost system. overhead allocation should have a high degree of
B. A company's manufacturing operations are all highly
correlation with the incurrence of overhead. Given
automated.
C. Manufacturing overhead is the largest cost component of its only one cost driver, one overhead application rate
product cost. is sufficient. If products differ in the resources
D. The manufactured products differ in the resources consumed consumed in individual departments, multiple rates
from the individual departments in the plant are preferable.

How does a job-order cost accounting system differ from a process
cost accounting system?
A. Subsidiary ledgers for the work-in-process and finished goods
inventories are necessary in job-order costing.
B. The procedures to apply overhead to product cost are different.
C. Both the timing and nature of entries to transfer cost from the
work-in-process account to the finished goods inventory account are
different.
D. Most of the journal entries that require debits and/or credits to the
work-in-process account are different.
A. Subsidiary ledgers for the work-in-process and finished
goods inventories are necessary in job-order costing.
Answer (A) is correct.
Job-order systems account for processes that produce distinctly
different products or groups of products. By contrast, process
costing is suitable to production of a homogeneous product.
Given identifiably different products, costs need to be collected
separately for each product or group of products. Accordingly,
although the same general ledger accounts are used for both
cost systems, subsidiary ledgers are maintained in job-order
costing for the inventory accounts.

In a capital-intensive industry, which is most likely

C. Machine hours.
to be an appropriate basis for applying
overhead? Answer (C) is correct.
In capital-intensive industries, the
A. Direct labor hours. amount of overhead probably is related
B. Direct labor cost.
more to machine hours than to either
C. Machine hours.
D. Sales value of product produced. direct labor hours or direct labor cost.

In a job-cost system, manufacturing Answer (C) is correct.

overhead is: Manufacturing overhead consists of indirect costs
- An Indirect Cost of Jobs that cannot feasibly be traced to specific units but
are necessarily incurred as part of the production
- A Necessary Element of Production process. Examples are depreciation, utilities expense,
A. No, Yes insurance, and supervisors' salaries. Manufacturing
B. No, No overhead, in a traditional system, is usually allocated
C. Yes, Yes to products based upon some indirect measure, e.g.,
D. Yes, No direct labor hours or machine hours.

In a job-order cost system, direct labor

costs usually are recorded initially as an D. Work-in-process control.
increase in Answer (D) is correct.
Direct labor costs are inventoriable
A. Manufacturing overhead applied.
B. Manufacturing overhead control. costs. They are initially debited to
C. Finished goods control. the work-in-process control account.
D. Work-in-process control.

In a job-order cost system, the application of C. Work-in-process control.

manufacturing overhead is usually reflected in Answer (C) is correct.
the general ledger as an increase in The entry to record the application of
manufacturing overhead to specific jobs is to
A. Manufacturing overhead control. charge WIP control and credit manufacturing
B. Finished goods control. overhead applied (or manufacturing overhead
C. Work-in-process control. control) using a predetermined overhead rate.
D. Cost of goods sold. The effect is to increase the WIP control
account.
In a job-order cost system, the use of direct
materials previously purchased usually is
recorded as an increase in
A. Work-in-process control.
B. Manufacturing overhead control.
C. Manufacturing overhead applied.
D. Stores control.
In a labor-intensive industry in which more overhead
(service, support, more expensive equipment, etc.) is
incurred by the more highly skilled and paid employees,
what denominator measure is most likely to be
appropriate for applying overhead?
A. Direct labor hours.
B. Direct labor cost.
C. Machine hours.
D. Sales value of product produced.
In a manufacturing environment, job-order cost accounting
systems and process cost accounting systems differ in the way
A. Costs are assigned to production runs and the number of
units for which costs are averaged.
B. Orders are taken and the number of units in the orders.
C. Product profitability is determined and compared with
planned costs.
D. Processes can be accomplished and the number of
production runs that may be performed in a year.
In a traditional job-order cost system, the
issuance of supplies to a production department
increases
A. Stores control.
B. Work-in-process control.
C. Manufacturing overhead control.
D. Manufacturing overhead applied.
In job-order costing, payroll taxes paid by the
employer for manufacturing employees are
usually accounted for as
A. Direct labor.
B. Manufacturing overhead.
C. Indirect labor.
D. Administrative costs.
A. Work-in-process control.
Answer (A) is correct.
The purchase of direct materials requires a
debit to (an increase in) direct materials
inventory (stores control). This account is
credited and work-in-process control is
debited when direct materials are issued to a
production department.
B. Direct labor cost.
Answer (B) is correct.
In labor-intensive industries, overhead is
traditionally assigned on the basis of labor time.
However, if more overhead is incurred by the
more highly skilled and paid employees, the
overhead rate should be based upon direct
labor cost rather than direct labor hours.
A. Costs are assigned to production runs and the number of units for which
costs are averaged.
Answer (A) is correct.
A cost system determines the manufacturing cost to be expensed (because
output was sold) and the portion to be deferred (because output was still
on hand). Process costing is used for continuous process output of units
that are relatively homogeneous (e.g., oil refining and automobile
production). Job-order costing is used to account for the cost of specific
jobs or projects when output is heterogeneous. The difference is often
overemphasized. Job-order costing simply requires subsidiary ledgers (to
keep track of the specific jobs) for the same work-in-process and finished
goods accounts that are basic to process costing.
C. Manufacturing overhead control.
Answer (C) is correct.
As overhead is incurred, manufacturing overhead
control is debited, and accounts payable, stores, etc.,
are credited. When overhead is applied, work-in-
process is debited, and manufacturing overhead
applied is credited. The difference between the
debited and credited amounts is over- or
underapplied overhead.
A. Direct labor.
Answer (A) is correct.
Employer taxes on manufacturing payroll and fringe
benefits (e.g., pensions and insurance) paid to
manufacturing employees are treated as direct labor
costs. The justification is that payroll taxes and fringe
benefits are necessary to obtain such labor. The IMA in
Statement of Management Accounting 4C, Definition
and Measurement of Direct Labor Cost, supports this
position.
In job-order costing, the basic document to D. Job-cost sheet.
accumulate the cost of each order is the Answer (D) is correct.
The job-cost sheet, or job-order sheet, is
A. Invoice. used to accumulate product costs in a
B. Purchase order. job-order costing system. Direct
C. Requisition sheet. materials, direct labor, and overhead are
D. Job-cost sheet. the costs accumulated.

A job-order cost system uses a predetermined manufacturing Answer (C) is correct.

overhead rate based on expected volume and expected fixed If too little fixed overhead is applied at the predetermined rate
cost. At the end of the year, underapplied overhead might be (expected fixed cost ÷ expected volume), the result is
explained by which of the following situations? underapplied overhead (actual manufacturing overhead exceeds
-Actual Volume overhead applied). If the actual and expected fixed costs are the
-Actual Fixed Costs same, but the actual volume is less than the expected
A. Greater than expected, Greater than expected (denominator) volume, overhead will be underapplied. If the
B. Greater than expected, Less than expected actual volume equals expected volume, but actual fixed costs
C. Less than expected, Greater than expected exceed the expected (numerator) fixed costs, overhead is
D. Less than expected, Less than expected likewise underapplied.

Jonathan Manufacturing adopted a job-costing system. For the current year, budgeted cost driver Answer (C) is correct.
activity levels for direct labor hours and direct labor costs were 20,000 and $100,000, respectively. In
addition, budgeted variable and fixed factory overhead costs were $50,000 and $25,000, respectively.
To apply overhead to the job, both variable and fixed overhead must
Actual costs and hours for the year were as follows: be properly allocated using standard rates and direct-labor hours as
Direct labor hours 21,000
the cost driver. The pertinent information given for this year's budget
Direct labor costs $110,000 includes direct-labor hours of 20,000 and the budgeted variable and
Machine hours 35,000
fixed factory overhead of $50,000 and $25,000, respectively. The
For a particular job, 1,500 direct-labor hours were used. Using direct-labor hours as the cost driver, what variable overhead cost per direct labor hour is $2.50 ($50,000 ÷
amount of overhead should be applied to this job?
20,000 DLH), and the fixed overhead per direct labor hour is $1.25
A. $3,214 ($25,000 ÷ 20,000 DLH). Thus, the total standard overhead cost per
B. $5,357
C. $5,625 direct labor hour is $3.75. The total overhead to be applied is $5,625
D. $7,500 (1,500 DLH × $3.75).

Lucy Sportswear manufactures a specialty line of T-shirts using a job-

order cost system. During March, the following costs were incurred in
Answer (D) is correct.
completing Job ICU2: direct materials, $13,700; direct labor, $4,800; Cost of goods sold is based on the
administrative, $1,400; and selling, $5,600. Manufacturing overhead
was applied at the rate of $25 per machine hour, and Job ICU2
manufacturing costs incurred in production but
required 800 machine hours. If Job ICU2 resulted in 7,000 good shirts, does not include selling or general and
the cost of goods sold per unit would be
administrative expenses. Manufacturing costs
A. $6.50 equal $38,500 [$13,700 DM + $4,800 DL + (800
B. $6.30 hours × $25) FOH]. Thus, per-unit cost is $5.50
C. $5.70
D. $5.50 ($38,500 ÷ 7,000 units).

Many companies recognize three major categories of costs of A. The cost of small tools used in mounting tires
manufacturing a product. These are direct materials, direct labor, on each automobile.
and overhead. Which of the following is an overhead cost in the
production of an automobile? Answer (A) is correct.
The cost of small tools used in mounting tires
A. The cost of small tools used in mounting tires on each cannot be identified solely with the manufacture
automobile.
B. The cost of the tires on each automobile.
of a specific automobile. This cost should be
C. The cost of the laborers who place tires on each automobile. treated as manufacturing overhead because it is
D. The delivery costs for the tires on each automobile. identifiable with production.
Mason Co. uses a job-order cost system and applies manufacturing overhead to jobs using a
predetermined overhead rate based on direct-labor dollars. The rate for the current year is 200% of Answer (C) is correct.
direct-labor dollars. This rate was calculated last December and will be used throughout the current year.
Mason had one job, No. 150, in process on August 1 with raw materials costs of $2,000 and direct-labor
costs of $3,000. During August, raw materials and direct labor added to jobs were as follows:
Mason incurred direct-labor costs in
No. 150 No. 151 No. 152 August of $9,000 ($1,500 Job 150 + $5,000
Raw materials $ -- $4,000 $1,000
Direct labor 1,500 5,000 2,500
Job 151 + $2,500 Job 152). Thus, overhead
applied was $18,000 ($9,000 × 200%). The
Actual manufacturing overhead for the month of August was $20,000. During the month, Mason
completed Job Nos. 150 and 151. For August, manufacturing overhead was

A. Overapplied by $4,000.
B. Underapplied by $7,000. amount underapplied was $2,000
C. Underapplied by $2,000.
D. Underapplied by $1,000. ($20,000 actual OH - $18,000).

A new advertising agency serves a wide range of clients A. Job-order costing.

including manufacturers, restaurants, service businesses, Answer (A) is correct.
department stores, and other retail establishments. The
accounting system the advertising agency has most likely Job-order costing is used by organizations
adopted for its record keeping in accumulating costs is whose products or services are readily
identified by individual units or batches. The
A. Job-order costing.
B. Operation costing.
advertising agency accumulates its costs by
C. Relevant costing. client. Job-order costing is the most appropriate
D. Process costing. system for this type of nonmanufacturing firm.

A nonmanufacturing organization may use C. Either job-order or process costing.

Answer (C) is correct.
A. Job-order costing but not process A nonmanufacturing entity may use either cost
costing. accumulation procedure. For example, banks
B. Process costing but not job-order costing. frequently use process costing for certain
C. Either job-order or process costing. departments and job-order costing for others.
D. Neither job-order costing nor process Public accounting firms ordinarily use job-order
costing.
costing.

Practical capacity as a plant capacity concept B. Does not consider idle time caused by
inadequate sales demand.
A. Assumes all personnel and equipment will operate at peak
efficiency and total plant capacity will be used. Answer (B) is correct.
B. Does not consider idle time caused by inadequate sales Practical capacity is the maximum level at which
demand. output is produced efficiently. It includes
C. Includes consideration of idle time caused by both limited
sales orders and human and equipment inefficiencies.
consideration of idle time resulting from
D. Is the production volume that is necessary to meet sales holidays, downtime, change-over time, etc., not
demand for the next year. from inadequate sales demand.

Regan Company operates its factory on a two-shift basis and pays a late-shift differential of 15%. Regan Answer (A) is correct.
Regan's cost system provides for uniform direct
also pays a premium of 50% for overtime work. Because Regan manufactures only for stock, the cost
system provides for uniform direct-labor hourly charges for production done without regard to shift

hourly charges for production done without regard

worked or work done on an overtime basis. Overtime and late-shift differentials are included in Regan's
manufacturing overhead application rate. The May payroll for production workers is as follows:

Wages at base direct-labor rates $325,000 to shift work or work done on an overtime basis. The
Shift differentials 25,000
Overtime premiums 10,000 shift pay differentials and overtime premiums are
For the month of May, what amount of direct labor should Regan charge to work-in-process? included in manufacturing overhead. Accordingly,
A. $325,000 both the $25,000 and $10,000 amounts should be
charged to overhead, and $325,000 should be
B. $335,000
C. $350,000

charged to the WIP account as direct labor.

D. $360,000
Schneider, Inc., had the following information relating to Year 1:
Budgeted manufacturing overhead $74,800
Actual manufacturing overhead $78,300
Applied manufacturing overhead $76,500
Estimated direct labor hours 44,000
If Schneider decides to use the actual results from Year 1 to determine the
Year 2 overhead rate, what is the Year 2 overhead rate?
A. $1.700
B. $1.738
C. $1.740
D. $1.780
A specialty instrument manufacturer is in the process of establishing a cost
system. The company produces machines that are unique and distinctive.
These machines are produced when purchase requests are received from
customers. Although some common parts and sub-assemblies are to be
held in inventory, no finished goods inventory is maintained since each
purchase request is for a customized specialty instrument. The type of cost
accumulation system that would be best suited for this type of environment
would be
A. Backflush costing.
B. Batch-level costing.
C. Job-order costing.
D. Process costing.
There are several alternative denominator
measures for applying overhead. Which is not
commonly used?
A. Direct labor hours.
B. Direct labor cost.
C. Machine hours.
D. Sales value of product produced.
Two basic costing systems for assigning costs to products or services are
job costing and process costing. These two costing systems are usually
viewed as being on opposite ends of a spectrum. The fundamental criterion
employed to determine whether job costing or process costing should be
employed is
A. Proportion of direct (traceable) costs expended to produce the product
or service.
B. Number of cost pools employed to allocate the indirect costs to the
product or service.
C. Type of bases used in allocating the indirect cost pools to the product or
service.
D. The nature and amount of the product or service brought to the
marketplace for customer consumption.
Under a job-order system of cost accounting, the dollar
amount of the general ledger entry involved in the
transfer of inventory from work-in-process to finished
goods is the sum of the costs charged to all jobs
A. Started in process during the period.
B. In process during the period.
C. Completed and sold during the period.
D. Completed during the period.
Answer (C) is correct.
The Year 1 overhead rate was $1.70 ($74,800
budgeted overhead ÷ 44,000 estimated DLH).
Because applied manufacturing overhead equals
actual DLH times the overhead rate, the actual direct
labor hours for Year 1 were 45,000 ($76,500 ÷ $1.70).
Thus, the overhead rate for Year 2 is $1.74 ($78,300
actual Year 1 overhead ÷ 45,000 actual Year 1 DLH).
C. Job-order costing.
Answer (C) is correct.
Job-order costing is concerned with accumulating costs
by specific job. This method is appropriate when
producing products with individual characteristics or
when identifiable groupings are possible. Units ( jobs)
should be dissimilar enough to warrant the special
recordkeeping required by job-order costing. Products
are usually custom-made for a specific customer.
D. Sales value of product produced.
Answer (D) is correct.
Overhead in traditional systems normally is applied to
production according to an allocation base, such as
direct labor hours, direct labor cost, or machine hours.
An allocation base is an indirect measure, but it should
have a relatively close correlation with the incurrence of
overhead. The sales value of the product produced is
not a variable with a causal relationship to the
incurrence of overhead.
D. The nature and amount of the product or service
brought to the marketplace for customer consumption.
Answer (D) is correct.
Job costing is used if resources are expended to bring a
distinct, identifiable product or service to the market. An
entity is providing heterogeneous products or services
that are often customized for the consumer. Process
costing is used when masses of identical or similar units
of product or services are provided for general
consumer use.
D. Completed during the period.
Answer (D) is correct.
The entry to transfer inventory from WIP to FG is
to debit finished goods and credit work-in-
process. The amount of the entry is the sum of
the costs (irrespective of the period in which
they were incurred) charged to all jobs
completed during the period.
 Answer (B) is correct.
Under Pick Co.'s job-order costing system, manufacturing overhead is applied to work-in-process using
a predetermined annual overhead rate. During January, Pick's transactions included the following: Given no beginning or ending work-in-process, the cost of jobs
Direct materials issued to production $ 90,000 completed equals the sum of direct materials, direct labor, and
Indirect materials issued to production 8,000 manufacturing overhead applied. Indirect materials costs are
Manufacturing overhead incurred 125,000
Manufacturing overhead applied 113,000 charged to overhead control and are not included in the amount
Direct labor costs 107,000
transferred from work-in- process to finished goods except to
Pick had neither beginning nor ending work-in- process inventory. What was the cost of jobs completed
in January?
the extent they are reflected in applied overhead. The difference
between overhead incurred and overhead applied, if material, is
A. $302,000
B. $310,000 assigned to finished goods, cost of goods sold, and ending
C. $322,000
D. $330,000
work-in-process ($0 in this case). Thus, the cost of jobs
completed was $310,000 ($90,000 + $113,000 + $107,000).

Units of production is an appropriate method of C. Only one product is manufactured.

assigning overhead when Answer (C) is correct.
Assigning overhead on the basis of the number of units
produced is usually not appropriate. Costs should be assigned
A. Several well-differentiated products are on the basis of some plausible relationship between the cost
manufactured. object and the incurrence of the cost, preferably cause and
effect. Overhead costs, however, may be incurred regardless of
B. Direct labor costs are low. the level of production. Nevertheless, if a firm manufactures only
C. Only one product is manufactured. one product, this method may be acceptable because all costs
D. The manufacturing process is complex. are to be charged to the single product.

What is the entry to record completion of a particular

product or group of products?
A. Finished goods XXX
Cost of goods sold XXX
B. Work-in-process XXX
Finished goods XXX C
C. Finished goods XXX
Work-in-process XXX
D. Cost of goods sold XXX
Work-in-process XXX

What is the journal entry to record the purchase of materials on A. A. Direct materials inventory XXX
account? Accounts payable XXX

A. Direct materials inventory XXX Answer (A) is correct.

Accounts payable XXX The correct entry to record a purchase of materials on account is
B. Accounts payable XXX to increase the appropriate asset and liability accounts. Materials
Direct materials inventory XXX are charged to an inventory account, e.g., stores control or
C. Accounts receivable XXX supplies, and the corresponding liability is credited to accounts
Accounts payable XXX payable. Also, subsidiary ledgers may be used to account for
D. Cash XXX various individual items (a perpetual inventory system). The term
Accounts receivable XXX control implies that a subsidiary ledger is being used.

When the amount of overapplied manufacturing

D. Credits to cost of goods sold, finished goods inventory, and work-
overhead is significant, the entry to close overapplied in-process inventory.
manufacturing overhead will most likely require Answer (D) is correct.
Under a normal costing system, overhead is applied to all jobs worked
on during the period at a predetermined rate. Because cost of goods
A. A debit to cost of goods sold.
sold, finished goods inventory, and work-in-process inventory all
B. Debits to cost of goods sold, finished goods relate to these jobs, each should be adjusted by its proportionate
inventory, and work-in-process inventory. share of over- or underapplied overhead. This apportionment may be
C. A credit to cost of goods sold. based on either the percentage of total overhead (theoretically
preferable) or the percentage of total cost. The entry to close
D. Credits to cost of goods sold, finished goods overapplied overhead requires credits to these three accounts.
inventory, and work-in-process inventory.
Which measure of capacity applies the least
amount of overhead to units of production?
A. Theoretical capacity.
B. Expected capacity.
C. Normal capacity.
D. Practical capacity.
Which method of measuring the costs to be assigned
to products or services uses budgeted rates for
direct costs but applies those rates to the actual
quantities of the inputs?
A. Actual costing.
B. Normal costing.
C. Extended costing.
D. Standard costing.
Which of the following items is not included
in (charged to) manufacturing overhead?
A. Factory depreciation and supplies.
B. Costs of service departments.
C. Costs of marketing departments.
D. Costs of maintenance departments.
The work-in-process account is
A. Neither a real nor a nominal account.
B. An inventory account indicating the beginning and
ending inventory of goods being processed.
C. A hybrid account (both a real and a nominal account).
D. A nominal account to which overhead costs are
charged as incurred and credited as these costs are
charged to production.
The work-in-process of Parrott Corporation increased $11,500
from the beginning to the end of November. Costs incurred
during November included $12,000 for direct materials, $63,000
for direct labor, and $21,000 for overhead. What was the cost of
goods manufactured during November?
A. $75,000
B. $84,500
C. $96,000
D. $107,500
A. Theoretical capacity.
Answer (A) is correct.
The larger the denominator in the overhead
application rate, the smaller the rate and the lower
the cost assigned to the product. Theoretical
capacity, the absolute capacity during continuous
operations, ignoring holidays, maintenance time, etc.,
provides the largest denominator.
C. Extended costing.
Answer (C) is correct.
Extended costing assigns both direct costs (such as labor and
materials) and overhead to cost objects by using budgeted rates. The
direct cost assigned equals the budgeted rate times the actual amount
of the direct-cost input. The overhead assigned equals the budgeted
rate times the actual amount of whichever driver or other base is used
for cost assignment purposes. The use of budgeted rates for
overhead as well as direct costs may be helpful to avoid fluctuations
during the year. It is also helpful when some direct costs, such as direct
labor, may not be known until year-end.
C. Costs of marketing departments.
Answer (C) is correct.
Marketing costs, for example, salaries of sales
personnel, sales commissions, and advertising,
are period costs and are expensed as incurred.
They cannot be assigned to the product because
these marketing costs are not associated with
the manufacturing process.
B. An inventory account indicating the beginning and ending
inventory of goods being processed.
Answer (B) is correct.
Work-in-process is an inventory account to which direct
materials, direct labor, and manufacturing overhead costs are
charged as they are incurred in the production process. The sum
of these costs plus the cost of BWIP is the total production cost
to be accounted for in any one period. The total is assigned to
goods completed during the period, i.e., to finished goods and
to EWIP. Work-in-process may also be credited for abnormal
spoilage.
Answer (B) is correct.
Because the work-in-process inventory increased
by $11,500 from the beginning to the end of
November, not all of the $96,000 in costs
incurred during the period was transferred out.
Consequently, the cost of goods manufactured
must have been $84,500 ($12,000 DM + $63,000
DL + $21,000 OH - $11,500).
Worley Company has underapplied overhead of $45,000 for the year. Before disposition of the
underapplied overhead, selected year-end balances from Worley's accounting records were: Answer (C) is correct.
The assignment of underapplied overhead increases COGS. The
Sales $1,200,000
Cost of goods sold 720,000 underapplied overhead of $45,000 for the year should be
Direct materials inventory 36,000
Work-in-process inventory 54,000 assigned on a pro rata basis to work-in-process ($54,000),
Finished goods inventory 90,000 finished goods ($90,000), and COGS ($720,000). The sum of
Under Worley's cost accounting system, over- or underapplied overhead is assigned to appropriate these three items is $864,000. Thus, $37,500 should be assigned
inventories and COGS based on year-end balances. In its year-end income statement, Worley should
report COGS of: to COGS [($720,000 ÷ $864,000) × $45,000]. COGS after
A. $682,500
assignment is $757,500 ($37,500 + $720,000). The remaining
B. $684,000 $7,500 should be assigned proportionately to work-in-process
C. $757,500
D. $765,000 and finished goods.