Chapter 4—Product costing systems

Question 1. Product costing is the process of:

A. Accumulating the costs of a production process.
B*. Assigning costs to a firm’s products.
C. Placing value on fixed assets owned by a producer.
D. A and B.
E. B and C.

Question 2. Which of the following statements is false?

A. In financial accounting, product costs are needed to value inventory.
B. In management accounting, product costs are needed for cost control.
C. In financial accounting, product costs are needed to value cost of goods sold.
D. Product cost data provides managers with data for decision making.
E*. Product cost data is never provided to any organisation external to the company.

Question 3. Under Australian Accounting Standards manufactured products are generally:

A. Valued at market value and expended in the period made.
B. Valued at market value and expended in the period sold.
C. Valued at cost and expended in the period made.
D*. Valued at cost and expended in the period sold.
E. None of the above.

Question 4. Consider the following statements regarding product cost information.

1. Product cost information is necessary for planning, cost control and to provide information for decision
making.
2. Product cost information is not necessary to justify rate increases that are subject to the approval of
government authorities.
3. Product cost information is necessary to value inventory on the balance sheet.
Which of the statement(s) is (are) correct?
A. 1, 2 and 3.
B. 1 and 2 only.
C*. 1 and 3 only.
D. 2 and 3 only.
E. 3 only.

Question 5. Manufacturing costs consist of:

A. Direct material.
B. Direct labour.
C. Manufacturing overhead.
D. A and B only.
E*. A, B and C.

Question 6. As production takes place, all manufacturing costs are debited to the:
A*. Work in process inventory account.
B. Manufacturing overhead account.
C. Cost of goods sold account.
D. Finished goods account.
E. Direct labour account.

Question 7. When products are completed, their product costs are transferred from work in process inventory
to the:
A. Manufacturing overhead accounts.

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B*. Finished goods account.
C. Cost of goods sold account.
D. Direct labour account.
E. Indirect labour account.

Question 8. To transfer work in process inventory to finished goods inventory:

A*. Debit finished goods and credit work in process.
B. Debit work in process and credit finished goods.
C. Add direct labour to the work in process inventory.
D. Add direct labour and direct material to the finished goods inventory.
E. Add direct material to the finished goods inventory.

Question 9. Cost of Goods Sold is closed into the income summary account:
A. At the end of the production cycle.
B. When the product is sold.
C*. At the end of the accounting period, along with other expenses and revenues of the period.
D. When Finished Goods are transferred to Cost of Goods Sold.
E. At no time.

Question 10. The following data apply to Stratford Ltd.

Direct Materials Inventory, beginning of the year $ 5,500
Direct Materials Inventory, end of the year $ 3,000
Direct Materials purchased during the year $45,000
Calculate the amount of direct materials used during the year.
A. $36,500
B. $42,500
C*. $47,500 = 5500+45000-3000
D. $48,000
E. $53,500

Question 11. The following data apply to Stratford Ltd.

Direct Materials Inventory, beginning of the year $ 5,500
Direct Materials Inventory, end of the year $ 3,000
Direct Materials purchased during the year $45,000
Work in Process Inventory, beginning of the year $ 9,000
Manufacturing overhead applied during the year $20,000
Work in Process Inventory, end of the year $14,000
Predetermined overhead rate—200% of direct labour cost
Calculate the amount of direct labour cost incurred during the year.
A. $22,000
B. $20,000
C. $18,000
D*. $10,000 = 20000/200%
E. $–0–

Question 12. The following data apply to Stratford Ltd.

Work in Process Inventory, beginning of the year $ 9,000
Manufacturing overhead applied during the year $20,000
Work in Process Inventory, end of the year $14,000
Under-applied Manufacturing overhead $ 2,000
What was the actual manufacturing overhead incurred during the year?
A. $24,000
B*. $22,000 = 200000+2000
C. $20,000
D. $18,000

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E. $16,000
Question 13. The following data apply to Stratford Ltd.
Work in Process Inventory, beginning of the year $ 9,000
Manufacturing overhead applied during the year $20,000
Work in Process Inventory, end of the year $14,000
Finished Goods Inventory, beginning of the year $ 7,500
Finished Goods Inventory, end of the year $ 5,000
Cost of Goods Sold during the year $75,000
Calculate the cost of goods manufactured during the year.
A. $62,500
B. $67,500
C. $70,500
D*. $72,500 =75000-(7500-5000)
E. $74,500

Question 14. Manufacturing overhead:

A. Consists of direct material and direct labour costs.
B. Is easily traced to jobs.
C. Includes all selling costs.
D. Should not be assigned to individual jobs because it bears no obvious relationship to them.
E*. Is a heterogeneous pool of indirect production costs that can include gas and electricity costs and
depreciation.

Question 15. A predetermined overhead rate is calculated as follows:

A*. Budgeted manufacturing overhead/budgeted amount of cost driver.
B. Budgeted amount of cost driver/budgeted manufacturing overhead.
C. Budgeted manufacturing overhead/budgeted amount of non-manufacturing overhead.
D. Budgeted manufacturing overhead/ budgeted total expenses.
E. Budgeted manufacturing/ budgeted cost driver.

Question 16. Which of the following statements is not correct regarding work in process?
A. Work in Process is partially completed inventory.
B. Work in Process consists of direct labour, direct material and manufacturing overhead.
C. Work in Process is debited as product costs are incurred.
D. Work in Process will increase the cost-based valuation of the asset represented by the unfinished products
when debited.
E*. Work in Process is credited when goods are sold.

Question 17. The debit side of the manufacturing overhead account is used to accumulate:
A*. Actual manufacturing overhead costs as they are incurred throughout the accounting period.
B. Overhead applied, to work in process inventory.
C. Credits to the account.
D. Predetermined overhead.
E. Over-applied overhead.

Question 18. Gratis Company Ltd applies overhead based on direct labour hours in their Printing Department.
At the beginning of the year, the company estimated that manufacturing overhead would be $550,000, direct
labour hours would be 100,000, and direct labour cost would be $1,100,000 in the Printing Department. What
is the Printing Department’s predetermined overhead rate for the year?
A. $ 0.18 per direct labour hour.
B. $ 0.50 per direct labour hour.
C. $ 2.00 per direct labour hour.
D*. $ 5.50 per direct labour hour. =550,000/100,000
E. $11.00 per direct labour hour.

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Question 19. Dayflight applies overhead based on direct labour dollars in their Assembly Division. The
company has budgeted 50,000 direct labour hours at a cost of $10 per hour and manufacturing overhead of
$750,000 in the Assembly Division for the year. What is the Assembly Division’s predetermined overhead
rate for the year?
A. $15.00 per direct labour dollar.
B. $10.00 per direct labour dollar.
C*. $ 1.50 per direct labour dollar. = 750,000/(50,000*10)
D. $ 0.67 per direct labour dollar.
E. $ 0.07 per direct labour dollar.

Question 20. Brainpower Pty Ltd is an Advertising Agency that uses a job costing system. Brainpower
applies overhead to jobs based on direct professional labour hours. At the beginning of the year, overhead
was estimated to be $75,000, direct professional labour hours were estimated to be 15,000, and direct
professional labour cost was projected to be $225,000. During the year, Brainpower incurred actual overhead
of $80,000, actual direct labour hours of 14,500, and actual direct labour cost of $222,000. What was
Brainpower’s over- or under-applied overhead during the year?
A. $5,000 under-applied.
B. $5,000 over-applied.
C*. $7,500 under-applied.
D. $7,500 over-applied.
E. $3,000 over-applied.

Question 21. The costs of heating a factory would be distributed among all of the departments in the factory.
This is called:
A*. Cost distribution.
B. Overhead application.
C. Overhead absorption.
D. Constant containment.
E. B and C.

Question 22. The accounting entries made to add manufacturing overhead to work in process inventory may
be made:
A. Daily.
B. Weekly.
C. Monthly.
D. Depending on the length of time required to process production jobs.
E*. All of the above.

Question 23. Process costing is normally used when:

A. Small numbers of distinctly different products are manufactured.
B. Large numbers of different products are manufactured.
C*. Large numbers of nearly identical products are manufactured.
D. Small numbers of nearly identical products are manufactured.
E. The fixed costs of manufacturing exceed the variable cost of manufacturing.

Question 24. The total manufacturing overhead applied to work in process inventory during November is
calculated below:
Machine x Predetermined = Manufacturer’s
Hours
Overhead Rate Overhead
Applied
Job # C5 1,000 x $15.00 $15,000
Job # F1 500 x $15.00 $ 7,500

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What journal entry is made to add applied manufacturing overhead to work in process inventory?
A*. Work in process inventory 22,500
Manufacturing overhead 22,500
B. Manufacturing overhead 7,500
Work in process inventory 7,500
C. Manufacturing overhead 22,500
Work in process inventory 22,500
D. Work in process inventory 7,500
Manufacturing overhead 22,500
E. Manufacturing Overhead 15,000
Work in Process Inventory 15,000

Question 25. At the end of October, the labour time sheets filed during the month indicate Direct Labour
costs of $6,000. The journal entry to record this cost is:
A. Direct Labour 6,000
Wages Payable 6,000
B. Wages Payable 6,000
Direct Labour 6,000
C*. Work in Process Inventory 6,000
Wages payable 6,000
D. Wages Payable 6,000
Work in Process Inventory 6,000
E. Manufacturing Overhead 6,000
Wages Payable 6,000

Question 26. The cost of the production supervisor’s salary and the wages of various employees who spent
some of their time on maintenance and general clean-up duties in October amounted to $4,500. The journal
entry to record this is:
A*. Manufacturing Overhead 4,500
Wages Payable 4,500
B. Wages Payable 4,500
Manufacturing Overhead 4,500
C. Indirect Labour 4,500
Wages Payable 4,500
D. Wages Payable 4,500
Indirect Labour 4,500
E. Work in Process 4,500
Wages Payable 4,500

Question 27. If a manufacturer underestimated the manufacturing overhead budget and underestimates the
activity base for the year, what is the result?
A. Over-applied factory overhead.
B. Under-applied factory overhead.
C. Overstated finished goods inventory.
D. Understated work in process inventory.
E*. Cannot be determined by the information given.

Question 28. If a manufacturer underestimated the manufacturing overhead budget and overestimates the
activity base for the year, what is the result?
A. Over-applied factory overhead.
B*. Under-applied factory overhead.
C. Overstated finished goods inventory.
D. Understated work in process inventory.
E. Cannot be determined by the information given.

Question 29. If manufacturing overhead is over-applied for the period, a method to bring the balance of the

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manufacturing overhead account to zero would be:
A. Debit cost of goods sold, credit manufacturing overhead.
B. Debit finished goods inventory, credit manufacturing overhead.
C. Debit work in process inventory, credit manufacturing overhead.
D. Debit manufacturing overhead, credit raw materials inventory.
E*. Debit manufacturing overhead, credit cost of goods sold.

Question 30. The estimates used to calculate the predetermined overhead rate:
A. Will generally prove to be incorrect to some degree.
B. Will usually result in a non-zero balance left in the manufacturing overhead account at the end of the year.
C. Will result in either over-applied or under-applied overhead.
D. Can be closed to cost of goods sold if there is under- or over-applied overhead.
E*. All of the above.

Question 31. When under-applied or over-applied overhead is allocated among the three accounts work in
process, finished goods and cost of goods sold, this process is called:
A. Applied cost of goods sold.
B*. Proration.
C. Just-in-time costing.
D. Zero-based costing.
E. Overhead application.

Question 32. When under- or over-applied manufacturing overhead is prorated, amounts can be assigned to
which of the following accounts?
A. Direct materials, manufacturing overhead and direct labour.
B*. Cost of goods sold, work in process and finished goods.
C. Work in process, direct materials and cost of goods sold.
D. Direct materials, finished goods and cost of goods sold.
E. Direct materials, work in process inventory and finished goods inventory.

Question 33. If the manufacturing overhead account has a credit balance then
A*. Manufacturing overhead is over-applied.
B. Manufacturing overhead is under-applied.
C. Cost of goods sold is understated.
D. B and C.
E. Cost of goods sold and work in process inventory are understated.

Question 34. To accumulate costs under job costing:

A. The cost of direct labour is assigned to each production job.
B. The cost of direct material is assigned to each production job.
C. The cost of manufacturing overhead is assigned to each production job.
D. A and B only.
E*. A, B and C.

Question 35. Total manufacturing cost is composed of

A. Direct material and direct labour in a job costing system.
B. Direct labour and manufacturing overhead in a process costing system.
C. Direct material and direct labour in both a job costing and a process costing system.
D*. Direct material, direct labour and manufacturing overhead in both a job costing and a process costing
system.
E. Direct labour and manufacturing overhead in both a job costing and a process costing system.

Question 36. Job #C12 was finished in November at a total cost of $18,500. The journal entry to transfer this

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cost from Work in Process Inventory to Finished Goods is:
A. Work in Process Inventory 18,500
Finished Goods Inventory 18,500
B*. Finished Goods Inventory 18,500
Work in Process Inventory 18,500
C. Cost of Goods Sold 18,500
Finished Goods Inventory 18,500
D. Finished Goods Inventory. 18,500
Cost of Goods Sold 18,500
E. Cost of Goods Sold 18,500
Work in Process Inventory 18,500

Question 37. The assignment of direct labour costs to individual jobs is based
A. An estimate of total time spent on the job.
B. Actual total payroll costs divided equally among all of the jobs in process.
C. Estimated total payroll costs divided equally among all of the jobs in process.
D*. The actual time spent on each job multiplied by the wage rate.
E. The estimated time spent on each job multiplied by the wage rate.

Question 38. Garden Care Pty Ltd manufactures garden equipment. The company incurred the following
costs to produce Job #202 which consisted of 100 self-propelled lawn mowers.
Material requisitions 60–65: $8,400
Direct labour: 420 hours @ $10 per hour
Manufacturing overhead: applied on the basis of direct labour hours at $18 per hour.
Job #202 was completed during the year and the company sold 80 mowers. Determine the proper balances in
each of the accounts.
A. Work in Process Inventory $ 4,032
Finished Goods Inventory $16,128
B. Finished Goods Inventory $20,160
C. Work in Process Inventory $4,032
Cost of Goods Sold $16,128
D*. Finished Goods Inventory $4,032
Cost of Goods Sold $16,128
E. Cost of Goods Sold $20,160

Question 39. Rhythmic Co Ltd applies overhead based on machine hours at $10.00 per machine hour. During
the year, actual machine hours amounted to 9,500, actual overhead amounted to $101,500 and budgeted
overhead was $100,000. The journal entry to close the Manufacturing Overhead account to Cost of Goods
Sold would be:
A. Cost of Goods Sold $1,500
Manufacturing Overhead $1,500
B. Manufacturing Overhead $1,500
Cost of Goods Sold $1,500
C. Manufacturing Overhead $5,000
Cost of Goods Sold $5,000
D. Manufacturing Overhead $6,500
Cost of Goods Sold $6,500
E*. Cost of Goods Sold $6,560
Manufacturing Overhead $6,500

Question 40. The Trudgeon Company Ltd incurred $132,000 of manufacturing overhead during the year.
Manufacturing overhead was budgeted to be $150,000, while manufacturing overhead applied was $145,000.
The company prorates any over- or under-applied overhead to related accounts. Overhead remaining in the
accounts at year en was as follows:

Work in Process Inventory $14,500

Finished Goods Inventory $33,350

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 Cost of Goods Sold $97,150
The journal entry to close the Manufacturing Overhead account would be:
A. Work in Process Inventory $1,300
Finished Goods Inventory $2,990
Cost of Goods Sold $8,710
Manufacturing Overhead $13,000
B*. Manufacturing Overhead $13,000
Work in Process Inventory $1,300
Finished Goods Inventory $2,990
Cost of Goods Sold $8,710
C. Work in Process Inventory $1,800
Finished Goods Inventory $4,140
Cost of Goods Sold $12,060
Manufacturing overhead $18,000
D. Work in Process Inventory $500
Finished Goods Inventory $1,150
Cost of Goods Sold $3,350
Manufacturing Overhead $5,000
E. Manufacturing Overhead $18,000
Work in Process Inventory $1,800
Finished Goods Inventory $4,140
Cost of Goods Sold $12,060

Question 41. Leisure Life manufactures various sporting equipment. During the first year of operations the
company worked on the following four jobs. The predetermined overhead application rate was 150% of direct
labour cost. Job 101 included direct materials of $15,000 and direct labour of $6,000.
The manufacturing overhead applied to Job 101 during the year was:
A. $–0–
B. $4,000
C. $6,000
D. $8,000
E*. $9,000

Question 42. Leisure Life manufactures various sporting equipment. During the first year of operations the
company worked on the following four jobs. The predetermined overhead application rate was 150% of direct
labour cost. Job 104 included direct material of $20,000 and total costs were $25,000. The manufacturing
overhead applied to Job 104 to date is:
A. $5,000
B. $3,000
C*. $2,000
D. $2,500
E. $ –0–

Question 43. Process costing is the method which is used to account for:
A*. Large numbers of identical products that are manufactured.
B. Small numbers of products that are produced in batches.
C. Raw materials that are converted to finished goods.
D. Finished goods that are refined and processed further.
E. Large numbers of products produced in a non-repetitive environment.

Question 44. Which of the following is true regarding job costing?

A*. It is a type of product costing system whereby small numbers of products are produced in distinct
batches.
B. It is used exclusively in manufacturing environments.
C. It is used for continuous mass production of products.
D. It is used exclusively for products of a similar nature.
E. None of the above.

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Question 45. Process costing could be used in which of the following industries?
A. Petroleum refining.
B. Chemicals.
C. Food processing.
D. Paper mills.
E*. All of the above.

Question 46. Job costing could be used in which of the following industries?
A*. Machine shop and specialty manufacturing.
B. Flour dilling.
C. Cement production.
D. Food processing.
E. Chemicals.

Question 47. Which of the following statements regarding similarities between process costing and job
costing are true?
1) Both assign production costs to units of output.
2) Both require extensive knowledge of financial accounting.
3) The flow of costs is the same.
A. 1 only.
B*. 1 and 3 only.
C. 2 and 3 only.
D 3 only.
E 1, 2 and 3.

Question 48. Process costing is used:

A. When small numbers of distinctly different products are manufactured.
B. When large numbers of different products are manufactured.
C*. When large numbers of nearly identical products are manufactured.
D. When small numbers of nearly identical products are manufactured.
E. When the fixed costs of manufacturing exceed the variable cost of manufacturing.

Question 49. Which of the following statements is false?

A. In job costing, costs are accumulated by job order.
B. In process costing, costs are accumulated by department.
C. In process costing, the cost per unit is found by averaging the costs incurred over the units produced.
D*. In process costing, the production costs are assigned to each unit produced.
E. In job costing, the cost of each unit of a particular job is found by dividing the total cost of the job by the
number of units in the job.

Question 50. The allocation of overhead costs requires which of the following steps:
1. Identifying the overhead cost driver.
2. Calculating a predetermined overhead rate per unit of product.
3. Calculating a predetermined overhead rate per unit of cost driver.
4. Applying overhead costs to products.
A. 1, 2 and 3.
B. 2, 3 and 4.
C. 1, 2 and 4.
D*. 1, 3 and 4.
E. All of the above.

Question 51. In the valuation of inventory at the end of an accounting period, the following costs are
included:
1. Manufacturing costs only.
2. Manufacturing and upstream costs.
3. Manufacturing and downstream costs.

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4. Manufacturing, upstream and downstream costs.
A*. 1
B. 2
C. 3
D. 4
E. None of the above.

Question 52. . Managers using costing data for decision making will usually use the following data in product
cost information:
1. Manufacturing costs only.
2. Manufacturing and upstream costs.
3. Manufacturing and downstream costs.
4. Manufacturing, upstream and downstream costs.
A. 1
B. 2
C. 3
D*. 4
E. None of the above.

Question 53. Direct material costs flow through several accounts:

1. Cost of goods sold.
2. Finished goods inventory.
3. Profit and loss account.
4. Raw material inventory.
5. Work in process inventory.
What is the correct order of flow.
A. 1, 2, 3, 4, 5
B*. 4, 5, 2, 1, 3
C. 3, 1, 5, 4, 2
D. 2, 4, 3, 1, 5
E. 4, 1, 5, 2, 3

Question 54. Which of the following statements is true:

A. Job costing traces costs to departments and process costing traces costs to products.
B. Job costing develops cost of products and process costing develops costs of processes.
C*. Both job and process costing develop the cost of products.
D. Both job and process costing are concerned with the cost of departments.
E. Work in process is only used in process costing.

Question 55. Which of the following statements is false

1. Job costing accumulates costs by jobs or batches
2. Process costing accumulates costs by departments or processes
3. Process costing accumulates costs for specific time periods
4. Job costing accumulates costs by departments
A. 1 and 2
B. 2
C. 3
D*. 4
E. 3 and 4

Question 56. If a manufacturing firm ends the year with underapplied overhead, one method of treatment is:
A. Debit manufacturing overhead, credit cost of goods sold.
B. Debit manufacturing overhead, credit work in process.
C*. Debit cost of goods sold, credit manufacturing overhead.
D. Debit work in process, credit manufacturing overhead.
E. Debit finished goods inventory, credit manufacturing overhead.

Question 57. on completion of products under a job cost system, costs are transferred:
A*. Debit finished goods inventory, credit work in process.
B. Debit work in process, credit finished goods inventory.

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C. Debit cost of goods sold, credit finished goods inventory.
D. Debit cost of goods sold, credit work in process inventory.
E. Debit work in process inventory, credit cost of goods sold.

Question 58. product costs may be used for which of the following purposes
1. Valuation of inventories.
2. Management decision making.
3. Pricing decisions
4. Cost control.
A. 1 and 2
B. 2 and 3
C. 2, 3 and 4
D. 1, 2 and 3
E*. All of the above.

Question 59. which of the following industries are likely to be using process costing
1. Petroleum.
2. Computer manufacture.
3. Sugar refining.
4. Furniture manufacture.
A. 1 and 2
B. 2 and 3
C*. 1 and 3
D. 1 and 4
E. 2 and 4

Question 60. Which of the following industries are likely to use job or batch costing
1. Paper manufacture.
2. Steel manufacture.
3. Refrigerator manufacture.
4. Printing.
A. 1 and 2
B. 2 and 3
C. 1 and 3
D*. 3 and 4
E. 2 and 4

Question 61. Job cost sheet

Barnes Toy Company incurred the following costs to produce Job Number M42, which consisted of 500
teddy bears that can walk, talk and play cards.

Direct Material:
4/1/x0 Requisition Number 101, 200 metres of fabric at $.75 per metre
4/5/xO Requisition Number 108, 250 cubic metres of stuffing at $.25 per cubic metre

Direct Labour:
4/15/xO Time Card Number 72, 250 hours at $12 per hour

Manufacturing Overhead:
Applied on the basis of direct labour hours at $2.00 per hour

REQUIRED:
Prepare a job cost sheet and record the information given above.

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________________________________________________________________________________________
JOB COST SHEET

Job Number_________________ Description__________________________

Date Started_________________ Date Completed______________________

Number of Units Completed ___________

______________________________________________________________________________________
Direct Material

________________________________________________________________
Date Requisition Number
__________________________________________________________________

______________________________________________________________________________________
Direct Labour

___________________________________________________________________
Date Time Sheet Number

______________________________________________________________________________________
Manufacturing Overhead

_____________________________________________________________________
Date Cost Driver

______________________________________________________________________________________
Cost Summary

______________________________________________________________________________________

______________________________________________________________________________________

______________________________________________________________________________________
Cost Item

______________________________________________________________________________________

______________________________________________________________________________________

______________________________________________________________________________________
______________________________________________________________________________________
Delivery Summary
______________________________________________________________________
Date Number of Units Shipped
______________________________________________________________________________________

______________________________________________________________________________________

______________________________________________________________________________________

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Question 62. Schedule of cost of goods manufactured
Woodland Canning Company incurred the following actual costs during the year.
Direct material used $185,000
Direct labour $ 60,000
Manufacturing overhead $126,000

The firm’s predetermined overhead rate is 210 percent of direct labour cost. The January 1, inventory
balances were as follows:
Raw material $ 12,500
Work in process $ 19,500
Finished goods $ 21,000

Each of these inventory balances was 10 percent higher at the end of the year.

REQUIRED:
1. Determine the over (under) applied overhead for the year.
2. Prepare a schedule of cost of goods manufactured for the year.
3. What was the cost of goods sold for the year?

1. Applied manufacturing overhead is $126,000 ($60,000 x 210%). Actual manufacturing overhead is also
$126,000, so there is no over-applied or under-applied overhead.

2.Woodland Canning Company

Schedule of Cost of Goods Manufactured For the Year

Direct material
Raw material inventory, January 1 $ 12,500
Add: Purchases of raw material 186,250
Raw material available for use $198,750

Deduct: Raw material inventory, December 31 (12,500 x 1.10) $13, 750

13, 750 Raw material used $185,000
Direct labour $60,000
Manufacturing overhead 126, 000
Total manufacturing cost 371,000
Add: Work in process inventory, January 1 19,500
Subtotal $390,500
Deduct: Work in process inventory, December 31 21,250
Cost of goods manufactured $369, 050

3.
Finished goods inventory, January 1 $ 21,000
Add: Cost of goods manufactured 369,050
$390,050
Deduct: Finished goods inventory, December 31 23, 100
Cost of goods sold $366,950

Question 63. Basic journal entries in job costing

Davis Educational Products started and finished Job Number B67 during June. The job required $8,000 of
direct material and 40 hours of direct labour at $8 per hour. The predetermined overhead rate is $10.00 per
direct-labour hour.

REQUIRED:
1. Prepare journal entries to record the flow of costs for all jobs in June.
2. Determine the cost of Job Number B67.

1. Journal entries:
Work in Process Inventory 92,000
Raw Material Inventory 92,000

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Work in Process Inventory 32,000
Wages Payable 32,000

Work in Process Inventory 40,000

Manufacturing Overhead 40,000
Applied

Finished Goods Inventory 160,000

Work in Process 160,000

2. Cost of Job Number B67:

Raw materials $8,000
Direct labour (40 @ $8) 320
Overhead applied (40 @ $10) 400
$8,720

Question 64. Job costing cycle

The Windsor Company uses a job costing system. During June there were three jobs in process: job x, job y
and job z. Job x and y were completed. Job z was not completed. Both job x and job y were sold for 60
percent over manufacturing cost. No other jobs were started in June. Job w, completed in May at a cost of
$9,000, was sold in June for $17,000. Marketing and administrative expenses were $6,700. Data for the
month is given below.

x y z Total
Work in process, June 1
Direct materials 2,400 3,100 400 $5,900
Direct labour 3,500 9,600 200 13,300
Applied manufacturing overhead
25% of labour 875 2,400 50 3,325
$22,525
Cost added in June
Direct materials 1,500 2,000 3,900 7,400
Direct labour 2,400 4,100 5,000 11,500

REQUIRED:
1. Prepare journal entries for June.
2. Prepare a T-account for work in process inventory for June.
3. Determine the cost of job z as of June 30.
4. Prepare a Profit and Loss Statement for June.

1.
Work in process $ 7,400
Material inventory $ 7,400

Work in process $11,500

Accrued payroll $11,500

Work in process $2,875

Applied manufacturing $2,875
overhead

Finished goods $33,500

Work in process $33,500

Cost of goods sold $42,500

Work in process $42,500

Accounts receivable $70,600*

Sales $70,600*

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* Job x 11,275 x 1.6 $18,040
Job y 22,225 x 1.6 35,560
Job w 17, 000
70,600

Marketing and administrative 16,700

expenses
Various accounts 16,700

2. T-account for work in pr6cess

Work in Process

Balance $22,525
Material 7,400
Labour 11,500
Overhead 2,875 Manufactured
cost of goods $33,500

Bal 6/30 10,800

Total $44,300 $44,300

3.
Schedule for cost of job z at June 30
(see schedule above journal entries)

Direct materials (400 + 3900) $4,300

Direct labour (200 + 5000) $5,200
Overhead ( 50 + 1250) 1,300
$ 10,800

4.
Profit and Loss Statement for June.

WINDSOR COMPANY
Profit and Loss Statement
For Month of June

Sales $53, 600

Cost of goods sold 33, 500
Gross profit $20 100
Marketing and administrative expenses 6,700
Profit $13, 400

Question 65. Over and under-applied manufacturing overhead

The following information applies to the Mingola Company at the end of fiscal year.
Debits for actual manufacturing overhead $520,000
Credits for applied manufacturing overhead $450,000

REQUIRED:
1. Is the manufacturing overhead under-applied or over-applied?
2. Describe the two possible methods of disposing of the difference between actual and applied overhead.
3. Prepare journal entries to dispose of the overhead. Assume 20% of production is still in work in process
and 15% is finished but unsold. Use both of the methods described in Part 2.
4. How would the above entries be different if the accounts were as follows?
Actual manufacturing overhead $450,000
Applied manufacturing overhead $520,000

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1. Under-applied by $70,000.

2. (A) Charge the under-applied overhead directly to cost of goods sold.

(B) Charge the under-applied overhead to work in process inventory, finished goods inventory and cost of
goods sold in proportion to the total amount of applied overhead in each of these accounts.

3. (A)
Cost of goods sold 70,000
Manufacturing overhead 70,000

(B)
Work in process ($70,000 x.20) 14,000
Finished goods ($70,000 x.15) 10,500
Cost of goods sold ($70,000 x.65) 45,500
Manufacturing overhead 70,000

4. The overhead would be over-applied by $70,000. The accounts that were debited before for disposing of
under-applied manufacturing overhead would be credited.

Question 66. Flow of Costs.

Describe the flow of goods through the manufacturing accounts in order to calculate cost of goods sold.

As production is occurring, all partially completed manufacturing inventory costs such as materials, labour
and overhead are being accumulated in the work in process account. Once the products are completed, the
related costs are transferred from the work in process to the finished goods inventory account. When the
goods are sold, the related costs are transferred from finished goods inventory to cost of goods sold expense.

Question 67. Applied overhead

Discuss the reasons for using applied overhead-rather than actual overhead to determine the cost of
production jobs.

There are three reasons. First, overhead costs usually bear no obvious relationship to individual jobs or units
of products, but must be incurred for the production process to take place. Therefore, it is crucial that
overhead costs are applied to products in order to have a complete picture of product costs.

Second, actual overhead is not known until after the end of the accounting period. The cost of jobs would not
be available in a timely fashion if actual overhead costs were used.

Third, overhead costs often vary due to seasonal factors. This variation is not relevant (once a decision has
been made to operate through the seasonal factors) to decisions involving products or pricing in the short
term. Thus it is better to use applied overhead to eliminate cost variation due simply to seasonal factors.

Question 68. Cost allocation

List the stages used in a two-stage cost allocation process and discuss the significance of each stage.

1. Cost Distribution or Allocation: First, all manufacturing costs are assigned to departmental overhead
centres. Second, service department cost allocation: all service department costs are reassigned to the
production departments through this process.

2. Overhead Application: All of the manufacturing cost accumulated in each production department is
assigned to production jobs that passed through the department.

Question 69. Job costing and process costing

Differentiate between the types of manufacturing environments which would be suited to: (a) process costing
and (b) job costing. Include two examples of manufacturers which would fit each of these two environments.

(a) Job costing is typically used in manufacturing environments in which goods are produced in distinct
batches, called jobs. Two examples of such manufacturers are aircraft and furniture manufacturers.

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(b) Process costing is typically used in manufacturing environments in which large numbers of identical
product units are manufactured. Two examples of such manufacturers are textiles and processed food.

Question 70. Underapplied overhead

1. Describe how overhead may be under-applied.
2. Assume that under-applied overhead is treated as an adjustment to cost of goods sold. Explain why an
under application of overhead increases cost of goods sold.

Overhead will be under-applied when total actual overhead costs exceed applied overhead. This can occur for
a variety of reasons including underestimation of some overhead costs, mis-estimation of production, or
changes in the mix of products that affect the level of overhead costs incurred.

In most manufacturing environments, the bulk of products made during the period are also sold and ending
work in process is modest relative to the amount of goods manufactured. Therefore the vast majority of the
overhead applied to the work in process account will flow through to finished goods inventory and to cost of
goods sold expense. However, if overhead is under-applied, the cost of goods sold has been increased by an
insufficient amount. Consequently the under-applied overhead should be added to cost of goods sold.

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