# Accounting 202 - Chapter 3.4

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In today’s class we covered how to correct misallocations of overhead cost and journal entries in a manufacturing account. The test below is designed to test how well you understood out previous class and if you can make correct journal entries. Give it a try and all the best of luck!

• 1.

### If manufacturing overhead has been underallocated during the period, and most of the jobs produced have been sold, then:

• A.

Cost of goods sold should be decreased

• B.

Cost of goods sold should be increased

• C.

Finished goods inventory should be increased

• D.

Work in process inventory should be decreased

B. Cost of goods sold should be increased
Explanation
If manufacturing overhead has been underallocated during the period, it means that the actual overhead costs incurred are higher than the allocated amount. This implies that the cost of producing the goods has been underestimated. If most of the jobs produced have been sold, it means that the goods have been sold at a lower cost than they should have been. Therefore, to correct this underallocation and reflect the actual cost of producing the goods, the cost of goods sold should be increased.

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• 2.

### Determining how much manufacturing overhead is overallocated or underallocated is done:

• A.

Before the period starts

• B.

During the period

• C.

At the end of the period

• D.

At any time

C. At the end of the period
Explanation
Manufacturing overhead is allocated based on estimates at the beginning of the period. However, the actual amount of overhead incurred may differ from the estimated amount. Therefore, at the end of the period, a comparison is made between the allocated and actual overhead costs. If the allocated amount is higher than the actual amount, it is considered overallocated, and if it is lower, it is considered underallocated. This helps in identifying any discrepancies and adjusting the overhead costs accordingly for accurate financial reporting.

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• 3.

### Under what circumstance should the amount of overallocation or underallocation be reflected as an adjustment to cost of goods sold?

• A.

In all circumstances

• B.

If most of the inventory produced during the period has not been sold

• C.

Under no circumstance

• D.

If most of the inventory produced during the period has been sold

D. If most of the inventory produced during the period has been sold
Explanation
If most of the inventory produced during the period has been sold, it means that the company has successfully generated revenue from its production. However, if there is overallocation or underallocation, it indicates that the actual costs incurred for producing the inventory are different from the allocated costs. In order to accurately reflect the true cost of goods sold, the overallocation or underallocation needs to be adjusted. This adjustment ensures that the cost of goods sold accurately represents the actual costs incurred by the company for producing the sold inventory.

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• 4.

### Cost of goods sold is debited and finished goods inventory is credited for

• A.

Purchase of goods on account

• B.

Transfer of goods to the finished goods storeroom

• C.

The sale of goods to a customer

• D.

Transfer of materials into work in process inventory

C. The sale of goods to a customer
Explanation
When goods are sold to a customer, the cost of goods sold is debited and finished goods inventory is credited. This is because the cost of the goods that were sold is transferred from the inventory to the cost of goods sold account, reducing the value of the finished goods inventory. This transaction reflects the fact that the company has incurred the cost of producing the goods and is now recognizing the revenue from their sale.

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• 5.

### Finished goods inventory is debited and work in process inventory is credited for:

• A.

Purchase of goods on account

• B.

Transfer of goods to the finished goods storeroom

• C.

Transfer goods out of the factory

• D.

Transfer of material to work in process inventory

B. Transfer of goods to the finished goods storeroom
Explanation
When goods are transferred to the finished goods storeroom, it means that the goods have completed the production process and are ready to be sold. Therefore, the finished goods inventory account is debited to record the increase in the value of finished goods. On the other hand, the work in process inventory account is credited because the goods are no longer in the production process and have been transferred out of the factory.

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• 6.

### Raw materials inventory is credited and work in process inventory is debited when:

• A.

Material is transferred to the factory

• B.

We ship goods to the customer

• C.

We transfer goods to the storeroom

• D.

We purchase goods on account

A. Material is transferred to the factory
Explanation
When material is transferred to the factory, it means that it is being used in the production process. This leads to a decrease in the raw materials inventory, which is why it is credited. At the same time, the work in process inventory increases as the material is now part of the production process, which is why it is debited.

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• 7.

### The cost of direct labor used in production is recorded as a

• A.

Debit to manufacturing overhead credit to wages expense

• B.

Debit to work in process inventory credit to wages payable

• C.

Debit to wages expense credit to manufacturing overhead

• D.

Debit to wages payable credit to work in process inventory

B. Debit to work in process inventory credit to wages payable
Explanation
When direct labor is used in production, it is considered as a cost of manufacturing the goods. Therefore, it is recorded as a debit to the work in process inventory account, which represents the cost of unfinished goods. At the same time, the wages payable account is credited to show that the company owes money to its employees for their labor. This ensures that the cost of direct labor is properly allocated to the work in process inventory and the liability to pay wages is accurately recorded.

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• 8.

### The cost of direct materials used in production is recorded as a

• A.

Debit to manufacturing overhead credit to direct materials expense.

• B.

Debit to work in process inventory credit to raw materials inventory.

• C.

Debit to raw materials inventory credit to work in process inventory.

• D.

Debit to direct materials expense credit to manufacturing overhead.

B. Debit to work in process inventory credit to raw materials inventory.
Explanation
When direct materials are used in production, the cost of these materials is recorded as a debit to work in process inventory because it represents the cost of materials that are currently being used in the production process. At the same time, a credit is made to raw materials inventory because the materials are being taken out of inventory and used in production. This ensures that the cost of the materials is properly allocated to the work in process inventory and that the raw materials inventory is reduced by the amount used.

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• 9.

### The journal entry needed to record the receipt of a factory utility bill would include a:

• A.

• B.

• C.

Debit to accounts payable

• D.

Debit to utilities payable

Explanation
When a factory utility bill is received, it needs to be recorded in the accounting system. Since the bill represents an expense related to the manufacturing process, it should be debited to the manufacturing overhead account. This account is used to accumulate all indirect manufacturing costs. By debiting manufacturing overhead, the expense is recognized and allocated to the cost of goods produced. The other options, such as crediting or debiting accounts payable or utilities payable, are not appropriate because they do not reflect the nature of the transaction.

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• 10.

### The journal entry needed to record depreciation on the factory equipment would include a:

• A.

Debit to manufacturing overhead credit to accumulated depreciation.

• B.

Debit to work in process inventory credit to accumulated depreciation.

• C.

Debit to depreciation expense credit to accumulated depreciation.

• D.

Debit to accumulated depreciation credit to manufacturing overhead.

A. Debit to manufacturing overhead credit to accumulated depreciation.
Explanation
The correct answer is debit to manufacturing overhead and credit to accumulated depreciation. This is because depreciation on factory equipment is considered as an indirect cost and is allocated to the manufacturing overhead. The debit to manufacturing overhead increases the manufacturing overhead expense, while the credit to accumulated depreciation reduces the value of the factory equipment on the balance sheet.

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• 11.

### The journal entry needed to allocate manufacturing overhead to specific jobs would include a:

• A.

• B.

• C.

Debit to cost of goods sold

• D.

Credit to work in process inventory

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

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• 12.

### The journal entry needed to record the receipt of a bill from the company's marketing agency would include a:

• A.

• B.

Debit to marketing expense

• C.

Debit to work in process inventory

• D.

Credit to work in process inventory

B. Debit to marketing expense
Explanation
The correct answer is debit to marketing expense. When a bill is received from the company's marketing agency, it represents an expense incurred by the company for marketing services. To record this expense, it is necessary to debit the marketing expense account, which reflects the increase in expenses.

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