MULTIPLE CHOICE QUESTIONS

1. Product costing in a manufacturing firm is the process of:

A. accumulating the company's period costs.
B. allocating costs among the firm's departments.
C. placing a value on the company's fixed assets.
D. assigning costs to the firm's inventory.
E. assigning costs to the company's managers.
Anser: D !": 1 #ype: $C
%. &hich of the folloing statements is true'
A. (ervice firms have little need for determining the cost of their services.
B. #he concept of product costing is relevant only for manufacturing firms.
C. #he cost of year)end inventory appears on the *alance sheet as an expense.
D. (ervice companies use cost information for planning and control purposes.
E. +ining and petroleum companies have no inventoria*le costs.
Anser: D !": 1 #ype: $C
,. &hich of the folloing manufacturers ould most li-ely use .o*)order costing'
A. Chemical manufacturers.
B. +icrochip processors.
C. Custom)furniture manufacturers.
D. /asoline refiners.
E. 0ertili1er manufacturers.
Anser: C !": , #ype: $C
2. A custom)home *uilder ould li-ely utili1e:
A. .o*)order costing.
B. process costing.
C. mass customi1ation.
D. process *udgeting.
E. .oint costing.
Anser: A !": , #ype: $C
3. &hich of the folloing types of companies ould most li-ely use process costing'
A. Aircraft manufacturers.
B. #extile manufacturers.
C. #ext*oo- pu*lishers.
D. Custom)machining firms.
E. (hip*uilders.
Anser: B !": , #ype: $C
Hilton, Managerial Accounting, Seventh Edition 48
4. A manufacturing firm produces goods in accordance ith customer specifications5 commencing
production upon receipt of a purchase order. #o accumulate the cost of each order5 the company
ould use a:
A. .o*)cost record.
B. cost allocation matrix.
C. production log.
D. overhead sheet.
E. manufacturing cost record.
Anser: A !": , #ype: $C
6. A typical .o*)cost record ould provide information a*out all of the folloing items related to an
order except:
A. the cost of direct materials used.
B. administrative costs.
C. direct la*or costs incurred.
D. applied manufacturing overhead.
E. direct la*or hours or-ed.
Anser: B !": , #ype: $C
7. &hich of the folloing statements a*out material re8uisitions is false'
A. +aterial re8uisitions are often computeri1ed.
B. +aterial re8uisitions are a common example of source documents.
C. +aterial re8uisitions contain information that is useful to the cost accounting department.
D. +aterial re8uisitions authori1e the transfer of materials from the production floor to the ra
materials arehouse.
E. +aterial re8uisitions are routinely lin-ed to a *ill of materials that lists all of the materials
needed to complete a .o*.
Anser: D !": , #ype: $C
9. Pruitt Company has developed an integrated system that coordinates the flo of all goods5
services5 and information into and out of the organi1ation5 or-ing ith ra material vendors as
ell as customers to improve service and reduce costs. #he firm is said to *e using:
A. participative management.
B. top)don management.
C. strategic cost management.
D. supply chain management.
E. management *y o*.ectives :+B";.
Anser: D !": , #ype: $C
Hilton, Managerial Accounting, Seventh Edition 49
1<. #he assignment of direct la*or cost to individual .o*s is *ased on:
A. an estimate of the total time spent on the .o*.
B. actual total payroll cost divided e8ually among all .o*s in process.
C. estimated total payroll cost divided e8ually among all .o*s in process.
D. the actual time spent on each .o* multiplied *y the age rate.
E. the estimated time spent on each .o* multiplied *y the age rate.
Anser: D !": , #ype: =
11. #he total production cost of a .o* is composed of:
A. direct material and direct la*or.
B. direct material5 direct la*or5 manufacturing overhead5 and outlays for selling costs.
C. direct material5 direct la*or5 manufacturing overhead5 and outlays for *oth selling and
administrative costs.
D. direct material5 direct la*or5 and applied manufacturing overhead.
E. direct material5 direct la*or5 and actual manufacturing overhead.
Anser: D !": , #ype: $C
1%. +anufacturing overhead:
A. includes direct materials5 indirect materials5 indirect la*or5 and factory depreciation.
B. is easily traced to .o*s.
C. includes all selling costs.
D. should not *e assigned to individual .o*s *ecause it *ears no o*vious relationship to them.
E. is a pool of indirect production costs that must someho *e attached to each unit
manufactured.
Anser: E !": , #ype: $C
1,. As production ta-es place5 all manufacturing costs are added to the:
A. &or-)in)Process >nventory account.
B. +anufacturing)"verhead >nventory account.
C. Cost)of)/oods)(old account.
D. 0inished)/oods >nventory account.
E. Production !a*or account.
Anser: A !": %5 3 #ype: $C
12. &hich of the folloing statements regarding or- in process is not correct'
A. &or- in process is partially completed inventory.
B. &or- in process consists of direct la*or5 direct material5 and manufacturing overhead.
C. &or-)in)Process >nventory is de*ited to record direct material used and direct la*or incurred.
D. &or-)in)Process >nventory appears on the year)end *alance sheet.
E. &or-)in)Process >nventory is credited hen goods are sold.
Anser: E !": %5 3 #ype: =
Chapter 3 50
13. &hich of the folloing statements a*out manufacturing cost flos is false'
A. Direct materials5 direct la*or5 and manufacturing overhead are entered in the &or-)in)Process
>nventory account.
B. #he 0inished)/oods >nventory account ill contain entries that reflect the cost of goods sold
during the period.
C. #he cost of units sold during the period ill typically appear on the income statement.
D. &hen a company sells goods that cost ?325<<< for ?4<5<<<5 the firm ill enter ?45<<< in an
account entitled Profit on (ale.
E. @nits are normally transferred from &or-)in)Process >nventory to 0inished)/oods >nventory.
Anser: D !": %5 3 #ype: =
14. &hich of the folloing statements a*out materials is false'
A. Ac8uisitions of materials are normally charged to the Purchases account.
B. #he use of direct materials gives rise to a de*it to &or-)in)Process >nventory.
C. #he use of indirect materials gives rise to a de*it to +anufacturing "verhead.
D. #he use of indirect materials gives rise to a credit to +anufacturing (upplies >nventory.
E. Direct materials are accounted for in a different manner than indirect materials.
Anser: A !": 3 #ype: A
16. !ongvie Corporation recently used ?6%5<<< of direct materials and ?,5<<< of indirect materials
in production activities. #he .ournal entries reflecting these transactions ould include:
A. a de*it to $a)+aterial >nventory for ?6%5<<<.
B. a de*it to +anufacturing "verhead for ?,5<<<.
C. a credit to +anufacturing "verhead for ?,5<<<.
D. a de*it to &or-)in)Process >nventory for ?635<<<.
E. a de*it to +anufacturing "verhead for ?635<<<.
Anser: B !": 3 #ype: A
17. A revie of a company's &or-)in)Process >nventory account found a de*it for materials of
?465<<<. >f all procedures ere performed in the correct manner5 this means that the firm:
A. also recorded a credit to $a)+aterial >nventory.
B. also recorded a credit to +anufacturing (upplies >nventory.
C. as accounting for the usage of direct materials.
D. as accounting for the usage of indirect materials.
E. as accounting for the usage of direct materials *y also crediting the $a)+aterial >nventory
account.
Anser: E !": 3 #ype: =
Hilton, Managerial Accounting, Seventh Edition 51
19. "regon +anufacturing incurred ?1<45<<< of direct la*or and ?115<<< of indirect la*or. #he
proper .ournal entry to record these events ould include a de*it to &or- in Process for:
A. ?< *ecause &or- in Process should *e credited.
B. ?< *ecause &or- in Process is not affected.
C. ?115<<<.
D. ?1<45<<<.
E. ?1165<<<.
Anser: D !": 3 #ype: A
%<. #he folloing information relates to "cto*er:
Production supervisor's salary: ?%53<<
0actory maintenance ages: %3< hours at ?7 per hour
#he .ournal entry to record the preceding information is:
A. +anufacturing "verhead 253<<
&ages Paya*le 253<<
B. &ages Paya*le 253<<
+anufacturing "verhead 253<<
C. &or-)in)Process >nventory 253<<
&ages Paya*le 253<<
D. &ages Paya*le 253<<
&or-)in)Process >nventory 253<<
E. &or-)in)Process >nventory %53<<
+anufacturing "verhead %5<<<
&ages Paya*le 253<<
Anser: A !": 3 #ype: A
%1. Electricity costs that ere incurred *y a company's production processes should *e de*ited to:
A. @tilities Expense.
B. Accounts Paya*le.
C. Cash.
D. +anufacturing "verhead.
E. &or-)in)Process >nventory.
Anser: D !": 3 #ype: A
%%. #he .ournal entry needed to record ?35<<< of advertising for &estood +anufacturing ould
include:
A. a de*it to Advertising Expense.
B. a credit to Advertising Expense.
C. a de*it to +anufacturing "verhead.
D. a credit to +anufacturing "verhead.
E. a de*it to Pro.ects)in)Process.
Anser: A !": 3 #ype: A
Chapter 3 52
%,. $egency Company incurred ?9<5<<< of depreciation for the year. Eighty percent relates to the
firm's production facilities5 and %<A relates to sales and administrative offices. >f all items are
handled in the proper manner5 a revie of the company's accounting records should reveal a:
A. de*it to Depreciation Expense for ?9<5<<<.
B. de*it to +anufacturing "verhead for ?9<5<<<.
C. de*it to +anufacturing "verhead for ?6%5<<<.
D. de*it to &or-)in)Process >nventory for ?175<<<.
E. credit to Cash for ?9<5<<<.
Anser: C !": 3 #ype: A
%2. #he process of assigning overhead costs to the .o*s that are or-ed on is commonly called:
A. service department cost allocation.
B. overhead cost distri*ution.
C. overhead application.
D. transfer costing.
E. overhead cost apportionment.
Anser: C !": 25 3 #ype: $C
%3. &hich of the folloing is the correct method to calculate a predetermined overhead rate'
A. Budgeted total manufacturing cost B *udgeted amount of cost driver.
B. Budgeted overhead cost B *udgeted amount of cost driver.
C. Budgeted amount of cost driver B *udgeted overhead cost.
D. Actual overhead cost B *udgeted amount of cost driver.
E. Actual overhead cost B actual amount of cost driver.
Anser: B !": 25 3 #ype: $C
%4. +etro Corporation uses a predetermined overhead rate of ?%< per machine hour. >n deriving this
figure5 the company's accountant used:
A. a denominator of *udgeted machine hours for the current accounting period.
B. a denominator of actual machine hours for the current accounting period.
C. a denominator of actual machine hours for the previous accounting period.
D. a numerator of *udgeted machine hours for the current accounting period.
E. a numerator of actual machine hours for the current accounting period.
Anser: A !": 25 3 #ype: =
%6. Corton Company applies overhead *ased on direct la*or hours. At the *eginning of %<x15 the
company estimated that manufacturing overhead ould *e ?3<<5<<<5 and direct la*or hours
ould *e 1<5<<<. Actual overhead *y the conclusion of %<x1 amounted to ?2<<5<<<. "n the
*asis of this information5 Corton's %<x1 predetermined overhead rate is:
A. ?<.<% per direct la*or hour.
B. ?<.<%3 per direct la*or hour.
C. ?2< per direct la*or hour.
D. ?3< per direct la*or hour.
E. none of the a*ove.
Hilton, Managerial Accounting, Seventh Edition 53
Anser: D !": 25 3 #ype: A
Chapter 3 54
%7. Dale Company5 hich applies overhead at the rate of 19<A of direct la*or cost5 *egan or- on
.o* no. 1<1 during Dune. #he .o* as completed in Duly and sold during August5 having
accumulated direct material and la*or charges of ?%65<<< and ?135<<<5 respectively. "n the *asis
of this information5 the total overhead applied to .o* no. 1<1 amounted to:
A. ?<.
B. ?%753<<.
C. ?315,<<.
D. ?6<53<<.
E. ?6957<<.
Anser: B !": 25 3 #ype: A
%9. Cuxta*le charges manufacturing overhead to products *y using a predetermined application rate5
computed on the *asis of machine hours. #he folloing data pertain to the current year:
Budgeted manufacturing overhead: ?27<5<<<
Actual manufacturing overhead: ?22<5<<<
Budgeted machine hours: %<5<<<
Actual machine hours: 145<<<
"verhead applied to production totaled:
A. ?,3%5<<<.
B. ?,725<<<.
C. ?33<5<<<.
D. ?4<<5<<<.
E. some other amount.
Anser: B !": 25 3 #ype: A
,<. #reetops or-ed on four .o*s during its first year of operation: nos. 2<15 2<%5 2<,5 and 2<2. =os.
2<1 and 2<% ere completed *y year)end5 and no. 2<1 as sold at a profit of 2<A of cost. A
revie of .o* no. 2<,'s cost record revealed direct material charges of ?%<5<<< and total
manufacturing costs of ?%35<<<. >f #reetops applies overhead at 13<A of direct la*or cost5 the
overhead applied to .o* no. 2<, must have *een:
A. ?<.
B. ?%5<<<.
C. ?,5<<<.
D. ?,5,,,.
E. ?35<<<.
Anser: C !": 25 3 #ype: A
,1. #he left side of the +anufacturing "verhead account is used to accumulate:
A. actual manufacturing overhead costs incurred throughout the accounting period.
B. overhead applied to &or-)in)Process >nventory.
C. underapplied overhead.
D. predetermined overhead.
E. overapplied overhead.
Anser: A !": 3 #ype: $C
Hilton, Managerial Accounting, Seventh Edition 55
,%. #hroughout the accounting period5 the credit side of the +anufacturing "verhead account is used
to accumulate:
A. actual manufacturing overhead costs.
B. overhead applied to &or-)in)Process >nventory.
C. overapplied overhead.
D. underapplied overhead.
E. predetermined overhead.
Anser: B !": 3 #ype: $C
,,. An accountant recently de*ited &or-)in)Process >nventory and credited +anufacturing
"verhead. #he accountant as:
A. applying a predetermined overhead amount to production.
B. recogni1ing receipt of the factory utilities *ill.
C. recording a year)end ad.ustment for an insignificant amount of underapplied overhead.
D. recogni1ing actual overhead incurred during the period.
E. recogni1ing the completion of production.
Anser: A !": 3 #ype: =
,2. #he final step in recogni1ing the completion of production re8uires a company to:
A. de*it 0inished)/oods >nventory and credit &or-)in)Process >nventory.
B. de*it &or-)in)Process >nventory and credit 0inished)/oods >nventory.
C. add direct la*or to &or-)in)Process >nventory.
D. add direct materials5 direct la*or5 and manufacturing overhead to &or-)in)Process >nventory.
E. add direct materials to 0inished)/oods >nventory.
Anser: A !": %5 3 #ype: $C
,3. Do* no. C1% as completed in =ovem*er at a cost of ?1753<<5 su*divided as follos: direct
material5 ?,53<<E direct la*or5 ?45<<<E and manufacturing overhead5 ?95<<<. #he .ournal entry to
record this information is:
A. 0inished)/oods >nventory 1753<<
&or-)in)Process >nventory 1753<<
B. &or-)in)Process >nventory 1753<<
0inished)/oods >nventory 1753<<
C. &or-)in)Process >nventory 1753<<
$a)+aterial >nventory ,53<<
&ages Paya*le 45<<<
+anufacturing "verhead 95<<<
D. Cost of /oods (old 1753<<
0inished)/oods >nventory 1753<<
E. 0inished)/oods >nventory 1753<<
Cost of /oods (old 1753<<
Anser: A !": 3 #ype: A
Chapter 3 5
,4. >f a company sells goods that cost ?6<5<<< for ?7%5<<<5 the firm ill:
A. reduce 0inished)/oods >nventory *y ?6<5<<<.
B. reduce 0inished)/oods >nventory *y ?7%5<<<.
C. report sales revenue on the *alance sheet of ?7%5<<<.
D. reduce Cost of /oods (old *y ?6<5<<<.
E. follo more than one of the a*ove procedures.
Anser: A !": %5 3 #ype: A
,6. (elto +anufacturing recently sold goods that cost ?,35<<< for ?235<<< cash. #he .ournal entries
to record this transaction ould include:
A. a credit to &or-)in)Process >nventory for ?,35<<<.
B. a de*it to (ales $evenue for ?235<<<.
C. a credit to Profit on (ale for ?1<5<<<.
D. a de*it to 0inished)/oods >nventory for ?,35<<<.
E. a credit to (ales $evenue for ?235<<<.
Anser: E !": %5 3 #ype: A
,7. A computer manufacturer recently shipped several laptops to a customer :cost: ?%35<<<; and
*illed the customer ?,<5<<<. &hich of the folloing options correctly expresses the accounts
that are de*ited and credited to record this transaction'
A. De*its: Accounts $eceiva*le5 0inished)/oods >nventoryE credits: (ales $evenue5 Cost of
/oods (old.
B. De*its: Accounts $eceiva*le5 Cost of /oods (oldE credits: (ales $evenue5 0inished)/oods
>nventory.
C. De*its: (ales $evenue5 Cost of /oods (oldE credits: Accounts $eceiva*le5 0inished)/oods
>nventory.
D. De*its: (ales $evenue5 0inished)/oods >nventoryE credits: Accounts $eceiva*le5 Cost of
/oods (old.
E. De*its: Accounts $eceiva*leE credits: 0inished)/oods >nventory5 Profit on (ale.
Anser: B !": 3 #ype: A
,9. Barney Company applies manufacturing overhead *y using a predetermined rate of %<<A of
direct la*or cost. #he data that follo pertain to .o* no. 642:
Direct material cost ?335<<<
Direct la*or cost 2<5<<<
>f Barney adds a 2<A mar-up on total cost to generate a profit5 hich of the folloing choices
depicts a portion of the accounting needed to record the sale of .o* no. 642'
Account De*ited Amount
A. Cost of /oods (old ?1635<<<
B. Cost of /oods (old ?%235<<<
C. 0inished)/oods >nventory ?1635<<<
D. 0inished)/oods >nventory ?%235<<<
E. (ales $evenue ?%235<<<
Hilton, Managerial Accounting, Seventh Edition 5!
Anser: A !": 3 #ype: A
Chapter 3 58
2<. Armada Company applies manufacturing overhead *y using a predetermined rate of 13<A of
direct la*or cost. #he data that follo pertain to .o* no. 7,1:
Direct material cost ?6%5<<<
Direct la*or cost ,75<<<
>f Armada adds a ,<A mar-up on total cost to generate a profit5 hich of the folloing choices
depicts a portion of the accounting needed to record the sale of .o* no. 7,1'
Account De*ited Amount
A. Accounts $eceiva*le ?1465<<<
B. Accounts $eceiva*le ?%1651<<
C. 0inished)/oods >nventory ?1465<<<
D. 0inished)/oods >nventory ?%1651<<
E. (ales $evenue ?%1651<<
Anser: B !": 3 #ype: A
21. +edia5 >nc.5 an advertising agency5 applies overhead to .o*s on the *asis of direct professional
la*or hours. "verhead as estimated to *e ?13<5<<<5 direct professional la*or hours ere
estimated to *e 135<<<5 and direct professional la*or cost as pro.ected to *e ?%%35<<<. During
the year5 +edia incurred actual overhead costs of ?1245<<<5 actual direct professional la*or hours
of 1253<<5 and actual direct la*or cost of ?%%%5<<<. By year)end5 the firm's overhead as:
A. ?15<<< underapplied.
B. ?15<<< overapplied.
C. ?25<<< underapplied.
D. ?25<<< overapplied.
E. ?35<<< underapplied.
Anser: A !": 3 #ype: A
2%. +aher5 >nc.5 applies manufacturing overhead at the rate of ?4< per machine hour. Budgeted
machine hours for the current period ere anticipated to *e 7<5<<<E hoever5 a lengthy stri-e
resulted in actual machine hours *eing or-ed of only 435<<<. Budgeted and actual
manufacturing overhead figures for the year ere ?257<<5<<< and ?2517<5<<<5 respectively. "n
the *asis of this information5 the company's year)end overhead as:
A. overapplied *y ?%7<5<<<.
B. underapplied *y ?%7<5<<<.
C. overapplied *y ?4%<5<<<.
D. underapplied *y ?4%<5<<<.
E. underapplied *y ?9<<5<<<.
Anser: B !": 3 #ype: A
Hilton, Managerial Accounting, Seventh Edition 59
2,. Carlson charges manufacturing overhead to products *y using a predetermined application rate5
computed on the *asis of la*or hours. #he folloing data pertain to the current year:
Budgeted manufacturing overhead: ?154<<5<<<
Actual manufacturing overhead: ?154,%5<<<
Budgeted la*or hours: 3<5<<<
Actual la*or hours: 275<<<
&hich of the folloing choices denotes the correct status of manufacturing overhead at year)end'
A. "verapplied *y ?,%5<<<.
B. @nderapplied *y ?,%5<<<.
C. "verapplied *y ?475<<<.
D. "verapplied *y ?945<<<.
E. @nderapplied *y ?945<<<.
Anser: E !": 3 #ype: A
22. (anger Corporation de*ited Cost of /oods (old and credited +anufacturing "verhead at year)
end. "n the *asis of this information5 one can conclude that:
A. *udgeted overhead exceeded actual overhead.
B. *udgeted overhead exceeded applied overhead.
C. *udgeted overhead as less than applied overhead.
D. actual overhead exceeded applied overhead.
E. actual overhead as less than applied overhead.
Anser: D !": 3 #ype: =
23. Coard +anufacturing's overhead at year)end as underapplied *y ?357<<5 a small amount given
the firm's si1e. #he year)end .ournal entry to record this amount ould include:
A. a de*it to Cost of /oods (old.
B. a de*it to +anufacturing "verhead.
C. a de*it to &or-)in)Process >nventory.
D. a credit to Cost of /oods (old.
E. a credit to &or-)in)Process >nventory.
Anser: A !": 3 #ype: A
24. 0og Company5 hich uses la*or hours to apply overhead to manufacturing5 may have increased
amounts of underapplied overhead at month)end if:
A. suppliers of direct materials have an across)the)*oard price increase.
B. an accountant failed to record the period's charges for plant maintenance and security.
C. employees are hit hard ith a idespread out*rea- of the flu.
D. direct la*orers are granted a age increase.
E. outlays for advertising expenditures are increased.
Anser: C !": 3 #ype: =
Chapter 3 0
26. #he estimates used to calculate the predetermined overhead rate ill virtually alays:
A. prove to *e correct.
B. result in a year)end *alance of 1ero in the +anufacturing "verhead account.
C. result in overapplied overhead that is closed to Cost of /oods (old if it is immaterial in
amount.
D. result in underapplied overhead that is closed to Cost of /oods (old if it is immaterial in
amount.
E. result in either underapplied or overapplied overhead that is closed to Cost of /oods (old if it
is immaterial in amount.
Anser: E !": 3 #ype: =
27. @nder) or overapplied manufacturing overhead at year)end is most commonly:
A. charged or credited to &or-)in)Process >nventory.
B. charged or credited to Cost of /oods (old.
C. charged or credited to a special loss account.
D. prorated among &or-)in)Process >nventory5 0inished)/oods >nventory5 and Cost of /oods
(old.
E. ignored *ecause there is no effect on the Cash account.
Anser: B !": 3 #ype: $C
29. &hen underapplied or overapplied manufacturing overhead is prorated5 amounts can *e assigned
to hich of the folloing accounts'
A. $a)+aterial >nventory5 +anufacturing "verhead5 and Direct !a*or.
B. Cost of /oods (old5 &or-)in)Process >nventory5 and 0inished)/oods >nventory.
C. &or-)in)Process >nventory5 $a)+aterial >nventory5 and Cost of /oods (old.
D. $a)+aterial >nventory5 0inished)/oods >nventory5 and Cost of /oods (old.
E. $a)+aterial >nventory5 &or-)in)Process >nventory5 and 0inished)/oods >nventory
Anser: B !": 3 #ype: $C
3<. 0letcher5 >nc.5 disposes of under) or overapplied overhead at year)end as an ad.ustment to cost of
goods sold. Prior to disposal5 the firm reported cost of goods sold of ?39<5<<< in a year hen
manufacturing overhead as underapplied *y ?135<<<. >f sales revenue totaled ?152<<5<<<5
determine :1; 0letcher's ad.usted cost of goods sold and :%; gross margin.
Ad.usted Cost
of /oods (old /ross +argin
A. ?3635<<< ?71<5<<<
B. ?3635<<< ?7%35<<<
C. ?39<5<<< ?71<5<<<
D. ?4<35<<< ?6935<<<
E. ?4<35<<< ?71<5<<<
Anser: D !": 4 #ype: A
Hilton, Managerial Accounting, Seventh Edition 1
31. &hich of the folloing statement:s; is :are; correct regarding overhead application'
>.Actual overhead rates result in more accurate *ut less timely information.
>>.Predetermined overhead rates result in less accurate *ut more timely information.
>>>.Predetermined overhead rates tend to smooth product costs over time.
A. >>> only.
B. > and >>.
C. > and >>>.
D. >> and >>>.
E. >5 >>5 and >>>.
Anser: E !": 4 #ype: $C
3%. #he term Fnormal costingF refers to the use of:
A. .o*)costing systems.
B. computeri1ed accounting systems.
C. targeted overhead rates.
D. predetermined overhead rates.
E. actual overhead rates.
Anser: D !": 4 #ype: $C
3,. &hich of the folloing statements a*out the use of direct la*or as a cost driver is false'
A. Direct la*or is the most commonly used cost driver hen calculating a predetermined
overhead rate.
B. Direct la*or is gaining in importance in many manufacturing applications ith respect to
*eing a significant cost driver.
C. Direct la*or is an inappropriate cost driver to use if a company is highly automated.
D. >f direct la*or is a good cost driver5 increases in direct la*or are matched ith increases in
manufacturing overhead.
E. Companies can use either direct la*or cost or direct la*or hours as a cost driver.
Anser: B !": 4 #ype: $C
32. >f the amount of effort and attention to products varies su*stantially throughout a firm's various
manufacturing operations5 the firm might consider the use of:
A. a plant)ide overhead rate.
B. departmental overhead rates.
C. actual overhead rates instead of predetermined overhead rates.
D. direct la*or hours to determine the overhead rate.
E. machine hours to determine the overhead rate.
Anser: B !": 4 #ype: =
Chapter 3 2
33. >n the to)stage cost allocation process5 costs are assigned:
A. from .o*s5 to service departments5 to production departments.
B. from service departments5 to .o*s5 to production departments.
C. from service departments5 to production departments5 to .o*s.
D. from production departments5 to .o*s5 to service departments.
E. from the *alance sheet :hen goods are produced;5 to the income statement :hen goods are
sold;.
Anser: C !": 6 #ype: $C
34. &hich of the folloing entities ould not li-ely *e a user of .o*)costing systems'
A. Custom)furniture manufacturers.
B. $epair shops.
C. Cospitals.
D. Accounting firms.
E. =one of the a*ove5 as all are li-ely users.
Anser: E !": 7 #ype: =
36. &hich of the folloing ould not li-ely *e used *y service providers to accumulate .o* costs'
A. Pro.ects.
B. Contracts.
C. Clients.
D. Processes.
E. All of the a*ove5 as service providers cannot use .o*)costing systems.
Anser: D !": 7 #ype: $C
37. At the =assau Advertising Agency5 partner and staff compensation cost is a -ey driver of agency
overhead. >n light of this fact5 hich of the folloing is the correct expression to determine the
amount of overhead applied to a particular client .o*'
A. :Budgeted overhead B *udgeted compensation; x *udgeted compensation cost on the .o*.
B. :Budgeted overhead B *udgeted compensation; x actual compensation cost on the .o*.
C. :Budgeted compensation B *udgeted overhead; x *udgeted compensation cost on the .o*.
D. :Budgeted compensation B *udgeted overhead; x actual compensation cost on the .o*.
E. =one of the a*ove5 *ecause service providers do not apply overhead to .o*s.
Anser: B !": 7 #ype: $C
39. >n comparison ith firms that use plantide overhead rates and departmental overhead rates5
companies that have adopted activity)*ased costing ill typically use:
A. more cost pools and more cost drivers.
B. more cost pools and feer cost drivers.
C. feer cost pools and more cost drivers.
D. feer cost pools and feer cost drivers.
E. only one cost pool and one cost driver.
Anser: A !": 9 #ype: $C
Hilton, Managerial Accounting, Seventh Edition 3
EXERCISES
Manufacturing Cost Flows, ournal Entri!s
4<. #he selected data that follo relate to the Berger 0urniture Company.
Direct material purchased ?14<5<<<
Direct material used 695<<<
Direct la*or 16<5<<<
+anufacturing overhead incurred 1<<5<<<
+anufacturing overhead applied 9<5<<<
During the year5 products costing ?,1<5<<< ere completed5 and products costing ?,145<<< ere
sold for ?2335<<<.
$e8uired:
Prepare .ournal entries to record the preceding transactions and events.
!": %5 3 #ype: A
Anser:
$a)+aterial >nventory 14<5<<<
Accounts Paya*le 14<5<<<
&or-)in)Process >nventory 695<<<
$a)+aterial >nventory 695<<<
&or-)in)Process >nventory 16<5<<<
&ages Paya*le 16<5<<<
+anufacturing "verhead 1<<5<<<
+iscellaneous Accounts 1<<5<<<
&or-)in)Process >nventory 9<5<<<
+anufacturing "verhead 9<5<<<
0inished)/oods >nventory ,1<5<<<
&or-)in)Process >nventory ,1<5<<<
Cost of /oods (old ,145<<<
0inished)/oods >nventory ,145<<<
Accounts $eceiva*le 2335<<<
(ales $evenue 2335<<<
Chapter 3 4
"asic ournal Entri!s, o#$Or%!r Costing
41. Guart1 Products started and finished .o* no. C19 during Dune. #he .o* re8uired ?135<<< of direct
material and 63 hours of direct la*or at ?1% per hour. #he predetermined overhead rate is ?14 per
direct la*or hour.
During Dune5 direct materials re8uisitions for all .o*s totaled ?1295<<<E the total direct la*or hours
and cost ere 45%<< hours at ?1% per hourE and the total cost of .o*s completed as ?,,653<<.
All of these figures include data that pertain to .o* no. C19.
$e8uired:
A. Prepare .ournal entries that summari1e Dune's total activity.
B. Determine the cost of .o* no. C19.
!": 3 #ype: A
Anser:
A. &or-)in)Process >nventory 1295<<<
$a)+aterial >nventory 1295<<<
&or-)in)Process >nventory 6252<<
&ages Paya*le 6252<<
&or-)in)Process >nventory 995%<<
+anufacturing "verhead 995%<<
0inished)/oods >nventory ,,653<<
&or-)in)Process >nventory ,,653<<
B. Direct material ?135<<<
Direct la*or :63 x ?1%; 9<<
+anufacturing overhead applied :63 x ?14; 15%<<
#otal cost of .o* no. C19 ?1651<<
o# Costing& ournal$Entr' E()*asis
4%. Dexter Corporation5 hich uses a .o* costing system5 had to .o*s in process at the start of %<x1:
.o* no. 39 :?935<<<; and .o* no. 4< :?,953<<;. #he folloing information is availa*le:
#he company applies manufacturing overhead on the *asis of machine hours. Budgeted
overhead and machine activity for the year ere anticipated to *e ?6%<5<<< and %<5<<< hours5
respectively.
#he company or-ed on three .o*s during the first 8uarter. Direct materials used5 direct la*or
incurred5 and machine hours consumed ere:
Do* =o. Direct +aterial Direct !a*or +achine Cours
39 ?175<<< ?235<<< 9<<
4< )))) %35<<< 4<<
41 ,65<<< ,35<<< 15%<<
Hilton, Managerial Accounting, Seventh Edition 5
+anufacturing overhead during the first 8uarter included charges for depreciation :?%<5<<<;5
indirect la*or :?3<5<<<;5 indirect materials used :?25<<<;5 and other factory costs :?1<756<<;.
Dexter completed .o* no. 39 and .o* no. 4<. Do* no. 39 as sold for cash5 producing a profit
of ?%254<< for the firm.
$e8uired:
A. Determine the company's predetermined overhead application rate.
B. Prepare .ournal entries as of +arch ,1 to record the folloing. "#ote$ @se
summary entries here appropriate *y com*ining individual .o* data.;
1. #he issuance of direct material to production5 and the direct la*or incurred.
%. #he manufacturing overhead incurred during the 8uarter.
,. #he application of manufacturing overhead to production.
2. #he completion of .o* no. 39 and no. 4<.
3. #he sale of .o* no. 39.
!": 25 3 #ype: A
Anser:
A. Predetermined overhead rate: ?6%<5<<< B %<5<<< hours H ?,4 per machine hour
B. 1. &or-)in)Process >nventory 335<<<I
$a)+aterial >nventory 55,000
&or-)in)Process >nventory 1<35<<<II
&ages Paya*le 105,00
0
I $18,000 + $37,000 = $55,000
II$45,000 + $25,000 + $35,000 = $105,000
%. +anufacturing "verhead 17%56<<
Accumulated Depreciation 20,000
&ages Paya*le 50,000
+anufacturing (upplies >nventory 4,000
+iscellaneous Accounts 108,70
0
,. &or-)in)Process >nventory 965%<<I
+anufacturing "verhead 97,200
I(900 + 600 + 1,200) x $36 = $97,200
2. 0inished)/oods >nventory 276,500
*
&or-)in)Process >nventory 276,50
0
I=o. 59: $95,000 + $18,000 + $45,000 +
(900 x $36) = $190,400
No. 60: $39,500 + $25,000 + (600 x $36) = $86,100
Chapter 3
3. Cash 215,000
*
(ales $evenue 215,00
0
I$190,400 + $24,600 = $215,000
Cost of /oods (old 190,400
0inished)/oods >nventory 190,40
0
Hilton, Managerial Accounting, Seventh Edition !
Fun%a(!ntals of Manufacturing +ccounting
4,. Bric-man Corporation5 hich *egan operations on Danuary 1 of the current year5 reported the
folloing information:
Estimated manufacturing overhead ? 4<<5<<<
Actual manufacturing overhead 4,95<<<
Estimated direct la*or cost 27<5<<<
Actual direct la*or cost 3<<5<<<
#otal de*its in the &or-)in)Process account 1577<5<<<
#otal credits in the 0inished)/oods account 9%<5<<<
Bric-man applies manufacturing overhead to .o*s on the *asis of direct la*or cost and adds a
4<A mar-up to the cost of completed production hen finished goods are sold. "n Decem*er
,15 .o* no. 17 as the only .o* that remained in production. #hat .o* had direct)material and
direct)la*or charges of ?1453<< and ?,45<<<5 respectively.
$e8uired:
A. Determine the companyJs predetermined overhead rate.
B. Determine the amount of under) or overapplied overhead. Be sure to la*el your anser.
C. Compute the amount of direct materials used in production.
D. Calculate the *alance the company ould report as ending or-)in)process inventory.
E. Prepare the .ournal entry:ies; needed to record Bric-manJs sales5 hich are all made on
account.
!": %5 25 3 #ype: A
Anser:
A. Predetermined overhead rate: ?4<<5<<< B ?27<5<<< H 1%3A of direct la*or cost
B. Actual manufacturing overhead :?4,95<<<; ) applied overhead :?3<<5<<< x 1%3A H
?4%35<<<; H ?125<<< underapplied
C. #otal de*its to &or-)in)Process :?1577<5<<<; ) direct la*or :?3<<5<<<; ) applied overhead
:?4%35<<<; H direct materials used :?6335<<<;
D. #he only .o* in production is .o* no. 175 hich has direct material of ?1453<< and direct la*or
of ?,45<<<. Applied overhead amounts to ?235<<< :?,45<<< x 1%3A;5 yielding a total .o*
cost of ?9653<< :?1453<< K ?,45<<< K ?235<<<;.
E. #he companyJs cost of goods sold e8uals ?9%<5<<<5 resulting in sales revenues of ?1526%5<<<
:?9%<5<<< x 14<A;. #hus:
Accounts $eceiva*le 1,472,0
00
(ales $evenue 1,472,0
00
Cost of /oods (old 920,000
Chapter 3 8
0inished)/oods >nventory 920,000
Hilton, Managerial Accounting, Seventh Edition 9
o#$Costing Co()utations, O,!r*!a% +))lication
42. +ontgomery5 >nc.5 hich uses a .o*)costing system5 is a la*or)intensive firm5 ith many s-illed
craftspeople on the payroll. Do* no. 679 as the only .o* in process on Danuary 15 having costs of
?%%53<< as of that date. Direct materials used and direct la*or incurred during Danuary ere:
Do* =o. Direct +aterials Direct !a*or
679 ? %5<<< ? 45<<<
69< 95<<< 1<5<<<
691 125<<< 75<<<
Do* no. 691 as the only .o* in production as of Danuary ,1.
$e8uired:
A. (hould +ontgomery use direct la*or or machine hours as a cost driver. &hy'
B. Assume that the company decided to use direct la*or as its cost driver. >f the *udgeted
amounts of direct la*or and manufacturing overhead are anticipated to *e ?%<<5<<< and
?,<<5<<<5 respectively5 hat is the firm's predetermined overhead rate'
C. Compute the cost of or-)in)process inventory as of Danuary ,1.
D. Compute the cost of .o*s completed during Danuary.
E. (uppose that the company sold all of its completed .o*s5 adding a 2<A mar-up to cost. Co
much ould the firm report as sales revenue'
!": 25 3 #ype: A
Anser:
A. #he company should use direct la*or *ecause it is a la*or)intensive firm5 ith many
s-illed craftspeople on the payroll. +ore than li-ely5 a ma.ority of overhead is
FdrivenF *y people rather than machine operation.
B. $300,000 $200,000 = 150% of direct !"or co#t
C. Direct material $14,000
Direct la*or 8,000
+anufacturing overhead :?75<<< x 13<A; 12,000
#otal cost of .o* no. 691 $34,000
D. Beginning or- in process $22,500
Direct material :?%5<<< K ?95<<<; 11,000
Direct la*or :?45<<< K ?1<5<<<; 16,000
+anufacturing overhead :?145<<< x 13<A; 24,000
#otal cost of .o* nos. 679 and 69< $73,500
E. (ales revenue: ?1<%59<< :?6,53<< x 12<A;
Chapter 3 !0
O,!r,i!w of o#$Costing S'st!(s, O,!r*!a% +ccounting
43. $oc-ville5 >nc.5 hich uses a .o*)costing system5 *egan *usiness on Danuary 15 %<x, and applies
manufacturing overhead on the *asis of direct)la*or cost. #he folloing information relates to
%<x,:
Budgeted direct la*or and manufacturing overhead ere anticipated to *e ?%<<5<<< and
?%3<5<<<5 respectively.
Do* nos. 15 %5 and , ere *egun during the year and had the folloing charges for direct
material and direct la*or:
Do* =o. Direct +aterials Direct !a*or
1 ?1235<<< ?,35<<<
% ,%<5<<< 435<<<
, 335<<< 7<5<<<
Do* nos. 1 and % ere completed and sold on account to customers at a profit of 4<A of cost.
Do* no. , remained in production.
Actual manufacturing overhead *y year)end totaled ?%,,5<<<. $oc-ville ad.usts all under)
and overapplied overhead to cost of goods sold.
$e8uired:
A. Compute the company's predetermined overhead application rate.
B. Compute $oc-ville's ending or-)in)process inventory.
C. Determine $oc-ville's sales revenue.
D. &as manufacturing overhead under) or overapplied during %<x,' By ho much'
E. Present the necessary .ournal entry to handle under) or overapplied manufacturing
overhead at year)end.
0. Does the presence of under) or overapplied overhead at year)end indicate that $oc-ville's
accountants made a serious error' Briefly explain.
!": 25 3 #ype: A5 =
Anser:
A. ?%3<5<<< B ?%<<5<<< H 1%3A of direct la*or cost
B. Do* no. ,:
Direct material ? 335<<<
Direct la*or 7<5<<<
+anufacturing overhead :?7<5<<< x 1%3A; 1<<5<<<
#otal cost of .o* no. , ?%,35<<<
C. Do* nos. 1 and %:
Direct material :?1235<<< K ?,%<5<<<; ?2435<<<
Direct la*or :?,35<<< K ?435<<<; 1<<5<<<
+anufacturing overhead :?1<<5<<< x 1%3A; 1%35<<<
#otal cost of .o* nos. 1 and % ?49<5<<<
Hilton, Managerial Accounting, Seventh Edition !1
(ales revenue: ?151<25<<< :?49<5<<< x 14<A;
Chapter 3 !2
D. Actual overhead ?%,,5<<<
Applied overhead: L:?,35<<< K ?435<<< K
?7<5<<<; x 1%3AM %%35<<<
@nderapplied overhead ? 75<<<
E. Cost of /oods (old 75<<<
+anufacturing "verhead 75<<<
0. =o. Companies use a predetermined application rate for several reasons5 including
the fact that manufacturing overhead is not easily traced to .o*s and products. #he
predetermined rate is *ased on estimates of *oth overhead and an appropriate cost
driver5 and situations here these amounts coincide precisely ith actual
experiences are rare. As a result5 under) or overapplied overhead typically arises at
year)end.
O,!r*!a% Calculations
44. Athens Corporation uses a .o*)cost system and applies manufacturing overhead to products on
the *asis of machine hours. #he company's accountant estimated that overhead and machine
hours ould total ?7<<5<<< and 3<5<<<5 respectively5 for %<x1. Actual costs incurred follo.
Direct material used ?%3<5<<<
Direct la*or ,<<5<<<
+anufacturing overhead 7145<<<
#he manufacturing overhead figure presented a*ove excludes ?%65<<< of sales commissions
incurred *y the firm. An examination of .o*)cost records revealed that 17 .o*s ere sold during
the year at a total cost of ?%594<5<<<. #hese goods ere sold to customers for ?,56%<5<<<.
Actual machine hours or-ed totaled 3153<<5 and Athens ad.usts under) or overapplied overhead
at year)end to Cost of /oods (old.
$e8uired:
A. Determine the company's predetermined overhead application rate.
B. Determine the amount of under) or overapplied overhead at year)end. Be sure to indicate
hether overhead as under) or overapplied.
C. Compute the company's cost of goods sold.
D. &hat alternative accounting treatment could the company have used at year)end to ad.ust for
under) or overapplied overhead' >s the alternative that you suggested appropriate in this
case' &hy'
!": 25 35 4 #ype: A5 =
Anser:
A. ?7<<5<<< B 3<5<<< H ?14 per machine hour
B. Applied overhead :3153<< x ?14; ? 7%25<<<
Actual overhead 7145<<<
"verapplied overhead ? 75<<<
Hilton, Managerial Accounting, Seventh Edition !3
Chapter 3 !4
C. Cost of goods sold5 as reported ?%594<5<<<
!ess: "verapplied overhead 75<<<
Cost of goods sold5 ad.usted ?%593%5<<<
D. #he company could have allocated the overapplication to or- in process5 finished
goods5 and cost of goods sold. Although this method is accepta*le5 it is not
suggested in this case *ecause of the immaterial dollar amount in relation to cost of
goods sold.
o# Costing& Focus on O,!r*!a%
46. Pac-ard Products uses a .o*)costing system for its units5 hich pass from the +achining
Department5 to the Assem*ly Department5 to finished)goods inventory. #he +achining
Department is heavily automatedE in contrast5 the Assem*ly Department performs a num*er of
manual)assem*ly activities. #he folloing information relates to the +achining Department for
the year .ust ended:
Budgeted manufacturing overhead ?75<<<5<<<
Actual manufacturing overhead 659635<<<
Budgeted machine hours 3<<5<<<
Actual machine hours 31<5<<<

#he +achining Department data that follo pertain to .o* no. %2,5 the only .o* in production at
year)end.

Direct materials ?4257<<
Direct la*or cost ,35%<<
+achine hours 23<
$e8uired:
A. Assuming the use of normal costing5 calculate the predetermined overhead rate that is used in
the +achining Department.
B. Compute the cost of the +achining Department's year)end or-)in)process inventory.
C. Determine hether overhead as under) or overapplied during the year in the +achining
Department.
D. >f Pac-ard disposes of the +achining Department's under) or overapplied overhead as an
ad.ustment to Cost of /oods (old5 ould the company's Cost)of)/oods)(old account
increase or decrease' Explain.
E. Co much overhead ould have *een charged to the +achining Department's &or-)in)
Process account during the year'
0. Comment on the appropriateness of direct la*or cost to apply manufacturing overhead in the
Assem*ly Department.
!": 25 35 4 #ype: A
Hilton, Managerial Accounting, Seventh Edition !5
Anser:
$. +achining overhead rate: ?75<<<5<<< B 3<<5<<< hours H ?14 per machine hour
%. #he ending or- in process is carried at a cost of ?1<65%<<5 computed as follos:
Direct materials ? 4257<<
Direct la*or ,35%<<
+anufacturing overhead :23< x ?14; 65%<<
#otal cost ?1<65%<<
&. Actual overhead in the +achining Department amounted to ?659635<<<5 hereas applied
overhead totaled ?7514<5<<< :31<5<<< hours x ?14;. #hus5 overhead as overapplied *y
?1735<<< during the year.
'. #he department's manufacturing overhead as overapplied *y ?1735<<<. As a result of this
situation5 excessive overhead floed from &or- in Process5 to 0inished /oods5 to Cost of
/oods (old5 meaning that the Cost)of)/oods)(old account must *e decreased at year)end.
(. #he &or-)in)Process account is charged ith applied overhead5 or ?7514<5<<<.
). #he firm's selection of application *ases is li-ely appropriate. #he *ases should FdriveF the
costs5 meaning there should *e a strong cause)and)effect relationship *eteen the *ase that is
used and the amount of overhead incurred. >n the Assem*ly Department5 a considera*le
portion of the overhead incurred is related to manual)assem*ly :i.e.5 la*or; operations.
O,!r*!a% +ccounting& -or.ing "ac.war%s
47. Nent Products uses a predetermined overhead application rate of ?17 per la*or hour. A revie of
the company's accounting records revealed *udgeted manufacturing overhead for the period of
?4%15<<<5 applied manufacturing overhead of ?39<52<<5 and overapplied overhead of ?1159<<.
$e8uired:
A. Determine Nent's actual la*or hours5 *udgeted la*or hours5 and actual manufacturing
overhead.
B. Present the necessary year)end .ournal entry to handle the overapplied overhead5 assuming
that the firm allocates over) or underapplied overhead to Cost of /oods (old.
!": 25 3 #ype: A
Anser:
A. Actual la*or hours: ?39<52<< B ?17 per hour H ,%57<< hours
Budgeted la*or hours: ?4%15<<< B ?17 per hour H ,253<< hours
Actual manufacturing overhead: ?39<52<< ) ?1159<< H ?36753<<
B. +anufacturing "verhead 1159<<
Cost of /oods (old 1159<<
Chapter 3 !
+nal'sis of +ccounts to /!ri,! O,!r*!a% Figur!s0 -or.ing "ac.war%s
49. A revie of the records of +ilgrim5 >nc.5 a ne company5 disclosed the folloing year)end
information:
Manu%acturing &verhead account$ Contained de*its of ?76%5<<<5 hich included ?%<5<<< of
sales commissions.
'or()in)*roce++ ,nventor- account$ Contained charges for overhead of ?7635<<<.
Co+t)o%).ood+)Sold account$ Contained a year)end de*it *alance of ?,547<5<<<. #his
amount as computed prior to any year)end ad.ustment for under) or overapplied overhead.
+ilgrim applies manufacturing overhead to production *y using a predetermined rate of ?%< per
machine hour. Budgeted overhead for the period as anticipated to *e ?9<<5<<<.
$e8uired:
A. Determine the actual manufacturing overhead for the year.
B. Determine the amount of manufacturing overhead applied to production.
C. >s overhead under) or overapplied' By ho much'
D. Compute the ad.usted cost)of)goods)sold figure that should *e disclosed on the company's
income statement.
E. Co many machine hours did +ilgrim actually or- during the year'
0. Compute *udgeted machine hours for the year.
!": 25 35 4 #ype: A
Anser:
A. ?76%5<<< ) ?%<5<<< sales commissions H ?73%5<<<
B. ?7635<<< :given;
C. +anufacturing overhead is overapplied *y ?%,5<<< :?7635<<< ) ?73%5<<<;.
D. Cost of goods sold ?,547<5<<<
!ess: "verapplied overhead %,5<<<
Cost of goods sold5 ad.usted ?,54365<<<
E. +ilgrim ould have applied overhead to production *y using the actual machine
hours or-ed and the ?%< application rate. #hus5 the actual hours or-ed total
2,563< :?7635<<< B ?%<;.
0. ?9<<5<<< B ?%< H 235<<< hours
Hilton, Managerial Accounting, Seventh Edition !!
Pro1!ct Costing in a S!r,ic! "usin!ss
6<. 0ine O Associates is an interior decorating firm in #ucson. #he folloing costs ere incurred in
a pro.ect to redecorate the mayor's offices:
Direct material ? %95<<<
Direct professional la*or 2%5<<<
#he firm's *udget for the year included the folloing estimates:
Budgeted overhead ?7<<5<<<
Budgeted direct professional la*or 42<5<<<
"verhead is applied to contracts *y using a predetermined overhead rate that is *ased on direct
professional la*or cost. Actual professional la*or during the year as ?4335<<< and actual
overhead as ?69,5<<<.
$e8uired:
A. Determine the total cost to redecorate the mayor's offices.
B. Calculate the under) or overapplied overhead for the year. Be sure to la*el your anser.
!": 7 #ype: A
Anser:
A. Direct material ? %95<<<
Direct professional la*or 2%5<<<
Applied overhead :?2%5<<< x 1%3AI; 3%53<<
#otal cost to redecorate ?1%,53<<
I?7<<5<<< ?42<5<<< H 1%3A
B. Applied overhead :?4335<<< x 1%3A; ?717563<
Actual overhead 69,5<<<
"verapplied overhead ? %3563<
Chapter 3 !8
Pro1!ct Costing, +rc*it!ctur! Fir(
61. Bosell and Associates designs relatively small sports stadiums and arenas at various sites
throughout the country. #he firmJs accountant prepared the folloing *udget for the upcoming
year:
Professional staff salaries ?,5<<<5<<<
Administrative support staff 7<<5<<<
"ther operating costs %<<5<<<
Eighty percent of professional staff salaries are directly tracea*le to client pro.ects5 a figure that
falls to 4<A for the administrative support staff and other operating costs. #racea*le costs are
charged directly to client pro.ectsE nontracea*le costs5 on the other hand5 are treated as firm
overhead and charged to pro.ects *y using a predetermined overhead application rate.
Bosell had one pro.ect in process at year)end: an arena that as *eing designed for Charlotte
County. Costs directly chargea*le to this pro.ect ere:
Professional staff salaries ?9<5<<<
Administrative support staff 165,<<
"ther operating costs 456<<
$e8uired:
A. Determine BosellJs overhead for the year and the firmJs predetermined
overhead application rate. #he rate is *ased on costs directly chargea*le to firm pro.ects.
B. Compute the cost of the Charlotte County arena pro.ect as of year)end.
C. Present three examples of Pother operating costsQ that might *e directly tracea*le to the
Charlotte County pro.ect.
!": 7 #ype: A5 =
Anser:
A. Professional staff salaries ?,5<<<5<<<
Administrative support staff 7<<5<<<
"ther operating costs %<<5<<<
(u*total ?25<<<5<<<
!ess: Direct costs
Professional staff salaries :?,5<<<5<<< x 7<A; ?%52<<5<<<
Administrative support staff and other costs
L:?7<<5<<< K ?%<<5<<<; x 4<AM 4<<5<<< ,5<<<5<<<
=ontracea*le costs :i.e.5 overhead; ?15<<<5<<<
Predetermined application rate: ?15<<<5<<< B ?,5<<<5<<< H ,,.,,A
Hilton, Managerial Accounting, Seventh Edition !9
Professional staff salaries ? 9<5<<<
Administrative support staff 165,<<
"ther operating costs 456<<
(u*total ?1125<<<
"verhead: ?1125<<< x ,,.,,A ,75<<<
#otal ?13%5<<<
Possi*le examples include travel5 overnight delivery fees5 postage5 selected costs
related to conducting focus)group studies5 photocopying5 and supplies related to
model construction.
o# Costing in a Consulting Fir(
6%. N!P provides consulting services and uses a .o*)order system to accumulate the cost of client
pro.ects. #racea*le costs are charged directly to individual clientsE in contrast5 other costs
incurred *y N!P5 *ut not identifia*le ith specific clients5 are charged to .o*s *y using a
predetermined overhead application rate. Clients are *illed for directly chargea*le costs5
overhead5 and a mar-up.
N!P anticipates the folloing costs for the upcoming year:
Cost
Percentage of Cost
Directly #racea*le
to Clients
Professional staff salaries ?35<<<5<<< 7<A
Administrative support staff 4<<5<<< 3<
#ravel %<<5<<< 7<
"ther operating costs %<<5<<< %<
#otal ?45<<<5<<<
N!P's partners desire to ma-e a ?27<5<<< profit for the firm and plan to add a percentage mar-up
on total cost to achieve that figure.
"n +ay 125 N!P completed or- on a pro.ect for !ason +anufacturing. #he folloing costs
ere incurred: professional staff salaries5 ?475<<<E administrative support staff5 ?759<<E travel5
?1<53<<E and other operating costs5 ?%54<<.
$e8uired:
A. Determine N!P's total tracea*le costs for the upcoming year and the firm's total anticipated
overhead.
B. Calculate the predetermined overhead rate. #he rate is *ased on total costs tracea*le to client
.o*s.
C. &hat percentage of total cost ill N!P add to each .o* to achieve its profit target'
D. Determine the total cost of the !ason +anufacturing pro.ect. Co much ould !ason *e
*illed for services performed'
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Chapter 3 80
Anser:
A. #racea*le costs total ?253<<5<<<5 computed as follos:
#otal Cost
Percent
#racea*le
#racea*le
Cost
Professional staff salaries ?35<<<5<<< 7<A ?25<<<5<<<
Administrative support staff 4<<5<<< 3< ,<<5<<<
#ravel %<<5<<< 7< 14<5<<<
"ther operating costs %<<5<<< %< 2<5<<<
#otal ?45<<<5<<< ?253<<5<<<
N!P's overhead :i.e.5 the nontracea*le costs; totals ?153<<5<<< :?45<<<5<<< ) ?253<<5<<<;.
B. Predetermined overhead rate: ?153<<5<<< B ?253<<5<<< H ,,.,,A
C. #arget profit percentage: ?27<5<<< B ?45<<<5<<< H 7A
D. #he total cost of the !ason +anufacturing pro.ect is ?1%<5<<<5 and the *illing is ?1%954<<5
as follos:
Professional staff salaries ? 475<<<
Administrative support staff 759<<
#ravel 1<53<<
"ther operating costs %54<<
(u*total ? 9<5<<<
"verhead :?9<5<<< x ,,.,,A; ,<5<<<
#otal cost ?1%<5<<<
+ar-up :?1%<5<<< x 7A; 954<<
Billing to !ason ?1%954<<
DISCUSSION QUESTIONS
Proc!ss Costing 2!rsus o#$Or%!r Costing
6,. Descri*e the types of manufacturing environments that ould *est *e suited for :1; .o*)order
costing and :%; process costing. >nclude to examples of manufacturers that ould li-ely use
.o*)cost systems.
!": , #ype: $C
Anser:
Do*)order costing is typically used in manufacturing environments here goods are produced in
distinct *atches5 called .o*s. #ypically5 there are differences among the various .o*s produced. >n
contrast5 process costing is used in environments here large num*ers of identical product units
are manufactured. #o examples of .o*)costing firms are aircraft and custom)furniture
manufacturers.
Hilton, Managerial Accounting, Seventh Edition 81
Un%!ra))li!% Manufacturing O,!r*!a%
62. +anufacturing overhead is applied to production.
A. Descri*e several situations that may give rise to underapplied overhead.
B. Assume that underapplied manufacturing overhead is treated as an ad.ustment to Cost of
/oods (old. Explain hy an underapplication of overhead increases Cost of /oods (old.
!": 3 #ype: =
Anser:
A. "verhead ill *e underapplied hen total actual overhead costs exceed applied overhead.
#his can occur for a variety of reasons including underestimation of some overhead costs5
incorrect estimation of the application *ase andRor production5 or changes in the mix of
products that affect the level of overhead costs incurred.
B. >n most manufacturing environments5 many products made during the period are also sold
and ending or- in process is modest relative to the amount of goods manufactured.
#herefore the vast ma.ority of the overhead applied to the &or-)in)Process >nventory account
ill flo through 0inished)/oods >nventory and on to Cost of /oods (old. Coever5 if
overhead is underapplied5 Cost of /oods (old has *een increased *y an insufficient amount.
Conse8uently5 the underapplied overhead should *e added to Cost of /oods (old.
+))li!% O,!r*!a% 2!rsus +ctual O,!r*!a%
63. Discuss the reasons for using applied overhead rather than actual overhead to determine the cost
of production .o*s.
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Anser:
#here are several reasons. 0irst5 overhead costs usually *ear no direct relationship to individual
.o*s or products5 *ut must *e incurred for the production process to ta-e place. #herefore5 it is
crucial that overhead *e applied to products in order to have a complete picture of manufacturing
costs. (econd5 actual overhead is not -non until after the end of the accounting period. #he
cost of .o*s ould not *e availa*le in a timely fashion if actual overhead costs ere used.
0inally5 overhead costs often vary due to seasonal factors. #his variation is not relevant :once a
decision has *een made to operate through the seasonal factors; to decisions that involve products
or pricing in the short term. >t is therefore *etter to use applied overhead to eliminate cost
variations from one season to another.
Us! of Pr!%!t!r(in!% O,!r*!a% +))lication Rat!s
64. #he use of predetermined overhead application rates results in a trade)off *eteen accuracy and
timeliness. Explain hat this statement means.
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Chapter 3 82
Anser:
Predetermined rates are computed *y using *udgeted :rather than actual; amounts of *oth
manufacturing overhead and cost drivers. #hus5 the rate is really an estimate of overhead per
FunitF of driver5 a rate that can *e employed to cost products and .o*s as the products and .o*s are
completed. >n addition5 such rates may *e helpful in decision ma-ing. >f one desired to focus on
actual overhead amounts5 the proper rate can *e developed only at the conclusion of the period
hen such amounts *ecome -non.
>n vie of this situation5 a trade)off arises. =amely5 the user is forsa-ing accuracy :estimated
amounts vs. actual amounts; in exchange for the a*ility to generate more timely accounting
information.
S!l!cting t*! Pro)!r Cost /ri,!r
66. Carris5 >nc.5 has .ust completed .o* nos. 67 and 695 hich ere similar in terms of complexity5
production processes5 and units manufactured. Do* no. 67 as manufactured *y Doe Barton ho
earns ?12 per hour5 hereas .o* no. 69 as completed *y (usan 0ran-lin ho earns ?%< per hour.
>f Doe and (usan are e8ually efficient5 ould the company *e *etter off using direct la*or cost or
direct la*or hours as the cost driver in its predetermined overhead rate' Briefly explain.
!": 4 #ype: =
Anser:
#he .o*s produced *y Barton and 0ran-lin are similar in terms of complexity5 production
processes5 and units manufactured5 and *oth or-ers are e8ually efficient. #hus5 the amount of
overhead incurred on .o* no. 67 should *e relatively the same as that incurred on .o* no. 69. >f
direct la*or hours are used in the predetermined overhead rate5 the overhead applied to the to
.o*s ill *e the same5 hich is good accounting in this case. Conversely5 if direct la*or cost ere
used5 (usan's .o* ould a*sor* more overhead *ecause of the higher la*or costSan improper
accounting since *oth .o*s incurred the same amount.
T*! Two$Stag! +llocation Proc!ss for +ssigning O,!r*!a% Costs
67. Briefly descri*e the stages used in the to)stage allocation process for assigning overhead costs.
!": 6 #ype: $C
Anser:
>n (tage "ne :Cost Distri*ution or Allocation;5 all manufacturing costs are assigned to
departmental overhead centers. 0or service departments5 the related costs are reassigned to the
production departments through this process. >n (tage #o :"verhead Application;5 all of the
manufacturing costs accumulated in each production department are then assigned to the
production .o*s that passed through the department.
Hilton, Managerial Accounting, Seventh Edition 83