Accounting 202 - Chapter 3

To calculate the predetermined manufacturing overhead rate, you need to divide the total estimated manufacturing overhead costs by the total estimated amount of the allocation base. This rate is used to allocate manufacturing overhead costs to different products or activities. The allocation base is a measure that is used to assign overhead costs, such as direct labor hours or machine hours, to the products being produced. By dividing the total estimated manufacturing overhead costs by the total estimated amount of the allocation base, you can determine the rate at which overhead costs should be allocated.

Job costing and process costing are the two basic types of costing systems. Job costing is used when products or services are customized or unique, and costs are tracked for each specific job or project. Process costing, on the other hand, is used when products or services are produced in large quantities and costs are averaged over multiple units. This distinction allows for more accurate cost allocation and helps businesses determine the profitability of different jobs or processes.

Finished goods inventory comes third in the flow of costs because it represents the cost of goods that have been completed but have not yet been sold. The flow of costs starts with raw materials inventory, which is the cost of materials used in the production process. Then, the raw materials are transferred to work in process inventory, where the costs of labor and overhead are added. Once the goods are completed, they are transferred to finished goods inventory, where the total cost of production is recorded. Finally, when the goods are sold, the cost of goods sold is calculated by subtracting the cost of finished goods inventory from the revenue generated.

Cost of goods sold comes last in the flow of costs because it represents the cost of the goods that have been sold to customers. This cost includes the direct materials, direct labor, and overhead costs associated with producing the goods. Once the goods are sold, their cost is no longer considered an inventory cost and is instead recognized as an expense on the income statement. Therefore, the cost of goods sold is the final stage in the flow of costs from raw materials inventory to work in process inventory to finished goods inventory and finally to cost of goods sold.

A job cost record is a document that accumulates all the costs associated with a particular job or project. It includes details such as materials used, labor costs, overhead expenses, and any other costs incurred during the job. This record is essential for tracking and analyzing the profitability of each job, as well as for estimating future costs and making informed business decisions.

Computing the predetermined manufacturing overhead rate is done before the period starts because it involves estimating the total amount of manufacturing overhead costs that will be incurred during the period and then dividing it by the estimated amount of the allocation base, such as direct labor hours or machine hours. This calculation is typically done in advance to help in budgeting and planning for the upcoming period's manufacturing overhead expenses.

When material is transferred to the factory, it means that raw materials are being used in the production process. As a result, the raw materials inventory decreases, which is why it is credited. At the same time, work in process inventory increases because the materials are now being used in the production process, which is why it is debited. This transaction reflects the movement of materials from one inventory account to another as they are being used in the manufacturing process.

A manufacturer of luxury yachts would most likely use a job costing system. This is because luxury yachts are typically custom-made and produced in small batches or even as one-of-a-kind products. Job costing is ideal for tracking the costs of individual projects or jobs, allowing the manufacturer to allocate direct materials, direct labor, and overhead expenses to each specific yacht. This system provides more accurate cost information for pricing and profitability analysis, which is crucial in the luxury yacht industry where customization and high-quality craftsmanship are key factors.

Indirect labor refers to the labor that is not directly involved in the production process but supports it, such as supervisors, maintenance workers, or quality control personnel. These costs are considered part of manufacturing overhead, which includes all indirect costs of production. Therefore, to record the costs of indirect labor, they would be debited to the manufacturing overhead account.

Manufacturing overhead includes all manufacturing costs except direct materials and direct labor. This means that it encompasses expenses such as indirect labor costs, indirect materials, factory utilities, depreciation of manufacturing equipment, and other indirect costs associated with the production process. These costs are not directly traceable to a specific product but are necessary for the overall manufacturing operation. By excluding direct materials and direct labor, which are directly attributable to the production of a specific product, manufacturing overhead focuses on the indirect costs incurred in the manufacturing process.

Raw materials records would substantiate the balance of the raw materials inventory account shown on the company's balance sheet. These records provide a detailed account of the quantity and value of raw materials held by the company. By comparing the information in the raw materials records with the balance sheet, one can ensure that the reported inventory balance is accurate and supported by the actual inventory records.

Payroll costs for factory employees who do NOT work directly on the product are considered manufacturing overhead. Manufacturing overhead includes indirect costs such as employee salaries, benefits, and other expenses that are not directly attributable to the production process. These costs are necessary for the overall operation of the factory but do not directly contribute to the creation of the product. Examples of such employees may include maintenance workers, supervisors, or quality control personnel who support the production process but do not directly work on the product itself.

If manufacturing overhead has been underallocated during the period, it means that less overhead costs have been allocated to the jobs produced. This would result in the jobs being undercosted because the actual overhead costs incurred are higher than what has been allocated. Therefore, the correct answer is that the jobs produced during the period have been undercosted.

A labor time record is a source document used to track the number of hours worked by employees. It is used to record the start and end times of each employee's work shift, as well as any breaks or overtime hours. This record helps in accurately calculating the total labor costs associated with a specific job or project. It is an essential tool for monitoring employee productivity, managing payroll, and ensuring accurate job costing.

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The difference between the sales price and the job cost is referred to as gross profit. Gross profit represents the amount of money earned from the sale of goods or services after deducting the direct costs associated with producing those goods or services. It is an important measure of profitability and indicates the efficiency of a company's operations. Gross profit does not take into account other expenses such as overhead costs or taxes, so it is different from net income or operating income.

Cost allocation refers to the process of assigning manufacturing overhead costs and other indirect costs to specific cost objects, such as products or departments. This is done in order to accurately determine the total cost of producing a particular product or providing a specific service. Cost allocation is an essential step in cost accounting and helps in decision-making, budgeting, and pricing. It ensures that all costs are appropriately assigned to the relevant cost objects, allowing for a more accurate analysis of costs and profitability.

If manufacturing overhead has been overallocated during the period, it means that more manufacturing overhead costs have been allocated to the cost of goods sold than the actual amount incurred. This suggests that the cost of goods sold has been overstated. To correct this, the cost of goods sold should be decreased to reflect the actual amount of manufacturing overhead costs incurred.

Raw materials inventory comes first in the flow of costs because it represents the initial stage of production where raw materials are acquired and stored before being used in the manufacturing process. Once raw materials are used, they move into the work in process inventory as the production progresses. After completion, the goods move into the finished goods inventory. Finally, when the finished goods are sold, the cost of goods sold is recorded. Therefore, raw materials inventory is the first step in the cost flow process.

When goods are transferred to the finished goods storeroom, it means that the goods have completed the manufacturing process and are ready to be sold. Therefore, the finished goods inventory account is debited to increase the value of the finished goods on hand. At the same time, the work in process inventory account is credited to decrease the value of goods that are still in the manufacturing process. This transfer helps in accurately tracking the value of finished goods and work in process inventory.

Manufacturing overhead can be allocated on the basis of machine hours, direct labor hours, or direct labor costs. This means that the allocation of manufacturing overhead can be determined by any of these factors, depending on the specific needs and circumstances of the manufacturing process. For example, if a company's manufacturing process is heavily reliant on the use of machines, then allocating overhead based on machine hours would be appropriate. Similarly, if the labor component is significant, then allocating overhead based on direct labor hours or costs would be suitable. Therefore, any of these factors can be used to allocate manufacturing overhead.

The job cost record is used to accumulate the costs of a job. This document tracks all the costs associated with a specific job, including labor costs, materials costs, and any other expenses incurred during the job. It provides a comprehensive overview of the total cost of the job, allowing for accurate cost analysis and budgeting. The other documents listed, such as labor time record, materials inventory requisition form, and bill of materials, may be used in the process of gathering information for the job cost record, but they do not directly accumulate the costs themselves.

If manufacturing overhead has been underallocated during the period, it means that the actual overhead costs incurred are higher than the allocated amount. Since most of the jobs produced have been sold, it implies that the cost of goods sold has already been recorded based on the allocated overhead. Therefore, to correct for the underallocation of overhead, the cost of goods sold should be increased by the amount of the underallocated overhead. This adjustment ensures that the actual overhead costs are properly matched with the goods that have been sold.

Work in process inventory comes second in the flow of costs. The flow of costs starts with raw materials inventory, which is then transferred to the work in process inventory as the materials are used in the production process. Once the production is completed, the cost is transferred to the finished goods inventory. Finally, when the goods are sold, the cost is transferred to the cost of goods sold. Therefore, work in process inventory is the second stage in the flow of costs.

Service firms develop an indirect cost allocation rate to allocate indirect costs to their products or services. This rate helps determine how much of the indirect costs should be assigned to each unit of output. By using this rate, service firms can accurately determine the total cost of providing their services and set appropriate prices for their customers.

A predetermined manufacturing overhead rate is an estimated rate that is calculated before the year begins. It is used to allocate manufacturing overhead costs to products or services. This rate is determined by dividing the estimated total manufacturing overhead costs by an estimated allocation base, such as direct labor hours or machine hours. The predetermined rate is then used to apply overhead costs to individual products or services based on their usage of the allocation base. This allows for more accurate cost allocation and helps in determining the cost of goods sold and inventory valuation.

The journal entry to record depreciation on the factory equipment would include a debit to manufacturing overhead because depreciation is considered an indirect manufacturing cost. Manufacturing overhead accounts for all the indirect costs incurred during the production process, such as rent, utilities, and depreciation. By debiting manufacturing overhead, the company recognizes the decrease in the value of the factory equipment over time, which is an indirect cost of manufacturing the goods.

The correct answer is debit to marketing expenses. This is because the bill from the company's marketing agency represents an expense incurred for marketing activities. By debiting marketing expenses, the company recognizes the increase in its marketing expenses and reduces its overall profitability.

The hourly price charged to clients for professional labor is referred to as the billing rate. This rate is determined by the company or individual providing the service and is typically based on factors such as the level of expertise, market demand, and the cost of doing business. The billing rate is used to calculate the total cost of services rendered to clients and is an important aspect of financial planning and profitability for service-based businesses.

When direct materials are requisitioned, they flow directly into the work in process inventory. This is because work in process inventory represents the partially completed goods that are still undergoing the manufacturing process. Direct materials, which are the raw materials directly used in the production process, are added to the work in process inventory as they are used. This inventory account reflects the value of materials, labor, and overhead costs incurred up to a specific point in the manufacturing process.

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The completion of a job means that the goods produced are ready to be sold. Therefore, the journal entry would include a debit to finished goods inventory, as this account represents the cost of the completed goods that are ready for sale.

A manufacturer of plywood would most likely use a process costing system. Process costing is used when a product goes through multiple stages of production and each unit of the product is identical. In the case of plywood, the manufacturing process involves several steps, such as cutting and gluing the wood veneers, pressing them together, and finishing the surface. Each unit of plywood produced is essentially the same, so process costing would be the appropriate method to allocate costs to each unit based on the average cost incurred during the production process.

The correct answer is "at the end of the period." This is because determining how much manufacturing overhead is overallocated or underallocated requires comparing the actual manufacturing overhead costs incurred during the period with the allocated manufacturing overhead costs. This calculation can only be done accurately once the period has ended and all the relevant data, such as actual costs and production levels, are available.

When direct materials are used in the production process, they are recorded as a debit to the work in process inventory. This is because the work in process inventory account represents the cost of partially completed goods, including the direct materials that have been used but have not yet been fully transformed into finished products. By debiting the work in process inventory, the company recognizes the cost of the direct materials that have been incorporated into the production process.

Overallocated manufacturing overhead occurs when the actual overhead costs incurred during production are less than the amount allocated or budgeted for. This means that the company has allocated more overhead costs than what was actually needed or used in the production process. This can happen due to various reasons such as improved efficiency, lower than expected costs, or changes in production volume. It indicates that the company has overestimated the amount of overhead costs required for production.

A materials requisition is a document that informs the storeroom to send specific materials to the factory floor. This document is typically used to request the transfer of materials from the inventory or storeroom to the production area. It specifies the quantity and type of materials needed for a particular job or process. The materials requisition serves as a formal request and authorization for the movement of materials, ensuring that the necessary supplies are available for production.

When a factory utility bill is received, it needs to be recorded in the accounting system. Since the bill is related to the manufacturing process, it is appropriate to debit the manufacturing overhead account. This account represents the indirect costs associated with the production process. By debiting manufacturing overhead, the company recognizes the expense and increases the overall manufacturing costs.

The last step in implementing a manufacturing overhead allocation system is to allocate some manufacturing overhead to each individual job. This step involves assigning a portion of the total manufacturing overhead costs to each job based on a predetermined allocation base. By doing this, manufacturers can accurately track and allocate the costs associated with each job, which helps in determining the overall profitability and costs of production.

The journal entry to allocate manufacturing overhead to specific jobs would include a credit to manufacturing overhead. This is because manufacturing overhead represents the indirect costs incurred in the production process, such as rent, utilities, and depreciation. By crediting manufacturing overhead, we are increasing the balance in this account to account for the allocation of these costs to the respective jobs.

If manufacturing overhead has been overallocated during the period, it means that more manufacturing overhead costs have been assigned to the jobs produced than what was actually incurred. This results in an overestimation of the costs associated with the jobs, leading to the conclusion that the jobs produced during the period have been overcosted.

Management can use job cost information for each of the listed choices. Determining the cost of goods sold helps in accurately calculating the expenses associated with producing goods. Determining the profitability of different jobs allows management to identify which jobs are generating the most profit and make informed decisions. Bidding on custom jobs requires knowing the cost of labor, materials, and other expenses to determine a competitive price. Therefore, all of the listed choices are possible uses of job cost information.

The correct answer is dividing the total job cost by the number of units in the job. This method allows managers to calculate the unit cost by evenly distributing the total cost of the job across all the units produced. By dividing the total job cost by the number of units, managers can determine the cost per unit, providing valuable information for pricing decisions and cost analysis.

When goods are sold to a customer, the cost of those goods is recognized as an expense called Cost of Goods Sold (COGS). This expense is debited to the COGS account to reflect the reduction in inventory and the cost associated with producing the goods. At the same time, the value of the goods sold is credited to the Finished Goods Inventory account to reduce the inventory balance. This transaction helps to accurately track the cost of goods sold and the remaining inventory on hand.

When direct labor is used in production, it is recorded as a debit to the work in process inventory. This is because direct labor is a cost directly associated with the production process, and it increases the value of the work in process inventory. By debiting the work in process inventory, the company recognizes the cost of direct labor and includes it in the total cost of the goods being produced.

The correct answer is debit to raw materials inventory. In a job costing system, raw materials purchased on account are recorded by debiting the raw materials inventory account. This increases the balance of the raw materials inventory account, reflecting the purchase of materials for use in specific jobs. The other options are incorrect as they do not accurately reflect the proper entry for recording the purchase of raw materials on account in a job costing system.

When using cost-plus pricing, the markup is added to the job cost to cover operating expenses, generate a profit, and determine the price to charge for the job. Cost-plus pricing is a method where the cost of producing a product or service is calculated and a markup is added to cover expenses and generate profit. This pricing strategy ensures that all costs are covered, including operating expenses, while also allowing for a profit to be made. By adding the markup to the job cost, the price to charge for the job can be determined, ensuring that all expenses are covered and a profit is generated.

Manufacturing overhead costs are allocated during the period because these costs are incurred throughout the production process. They include indirect costs such as factory rent, utilities, and depreciation of equipment. Allocating these costs during the period allows for a more accurate determination of the total cost of production, which is crucial for pricing decisions and financial reporting. By allocating manufacturing overhead costs during the period, companies can ensure that these costs are appropriately assigned to the products being produced, providing a more accurate reflection of the true cost of each unit.

When job costing is used at a service firm, the bill to the client shows the billing rate and hours spent on the job. This is because job costing involves tracking the direct costs (such as labor and materials) and indirect costs (such as overhead) associated with a specific job or project. The billing rate represents the cost per hour or unit of service provided, while the hours spent on the job indicate the amount of time dedicated to completing the service. Including these details on the bill allows the client to understand the breakdown of costs and the basis for the final amount charged.

Underallocated manufacturing overhead occurs when the actual overhead costs incurred in the production process are greater than the amount of overhead allocated or assigned to the production. This means that the company did not allocate enough overhead to cover the actual expenses, resulting in a shortfall. This can happen due to various reasons such as unexpected increases in costs, inefficiencies in the production process, or inaccurate estimation of overhead expenses. Consequently, underallocated manufacturing overhead can lead to inaccurate product costing and financial reporting, affecting the company's profitability and decision-making processes.