# Managerial Accounting for Managers Noreen

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```					 NOREEN MANAGERIAL ACCOUNTING FOR MANAGERS 2E
Practice Exam – Chapter 5

your work, as appropriate, and then compare your solutions to those provided at the end of the
practice exam.

1. Explain job-order and process costing. Give an example of the type of company that would
use each costing method. What documents are typically used during the manufacturing
process in a job-order system?

2. Stephens, Inc. had the following estimated costs for next year:

Direct materials                      110,000
Direct labor                          470,000
Indirect materials                     60,000
Rent on factory equipment             118,000
Sales commissions                     400,000
Salary of production supervisor       230,000

The company estimated that 80,000 direct labor hours would be worked and 60,000 machine
hours would be used during the year.

(a) If overhead was applied on the basis of machine hours, what was the overhead rate per
hour?

(b) If they company actually worked 79,000 direct labor hours and 63,000 machine hours,
how much overhead was applied to production?
(c) If the actual overhead for the year was \$425,000 was the overhead over or under applied?
By how much?

3. Teledine Company uses a job-order costing system. Manufacturing overhead cost is applied
to jobs on the basis of direct labor hours. The following estimates were made at the
beginning of the year:

Department                           Machining   Assembly   Total Plant
Direct labor hours...................................   50,000      60,000     110,000
Manufacturing overhead ........................ \$340,000          \$540,000    \$880,000

Jobs require varying amounts of work in both departments. Job 723 used 150 direct labor
hours in the machining department and 310 in assembly.

(a) Assuming Teledine uses a plantwide overhead rate:
1. Compute the overhead rate for the current year.
2. Determine the amount of overhead that would have been applied to Job 723.

(b) Assuming Teledine uses departmental overhead rates:
1. Compute the overhead rate for the current year for each department.
2. Determine the amount of overhead that would have been applied to Job 723.

(c) In companies with large amounts of overhead, which method of applying overhead is
preferable? Why?
4. Wallace Company's job-order costing system, manufacturing overhead is applied to Work in
Process inventory using a predetermined overhead rate. During April, the company’s
transactions included the following:

Direct materials issued to production         \$ 690,000
Indirect materials issued to production           84,000
Direct labor cost incurred                       876,000

(a) Wallace had \$140,000 in beginning inventory and \$110,000 in ending inventory in
April. Calculate the cost of goods manufactured for April.

(b) There was no beginning or ending finished goods inventory in April. Calculate the cost
of goods sold for April.
NOREEN MANAGERIAL ACCOUNTING FOR MANAGERS 2E
Practice Exam – Chapter 5 Solutions
1. Solution (Learning Objectives 1 and 2):
Job-order costing is used in situations where many different products are produced each
period. In a job-order costing system, costs are traced and allocated to jobs and then the total
costs of the job are divided by the total number of units in the job to arrive at an average cost
per unit.

Process costing is used in companies that produce many units of a single product for long
periods. In process costing homogeneous products flow through the production process on a
continuous basis. Process costing systems accumulate costs in a particular operation or
department for an entire period (month, quarter, year) and then divide the accumulated total
manufacturing cost by the total number of units produced during the period.

Job-order costing is used by companies like Levi Strauss and other clothing manufacturers.
Process costing is used by beverage makers like Coca Cola.

The following documents are used in job-order costing: A bill of materials is a document that
lists the type and quantity of each type of direct material needed to complete a unit of
product. The materials requisition form is a document that specifies the type and quantity of
materials to be drawn from the storeroom and identifies the job that will be charged for the
cost of the materials. The form is used to control the flow of materials into production and
also for making entries in the accounting records. A job cost sheet is a form prepared for a
job that records the materials, labor, and manufacturing overhead costs charged to that job.
A time ticket is an hour-by-hour summary of an employee’s activities throughout the day.

2. Solution (Learning Objectives 3, 4, and 5):
(a) If overhead is applied on the basis of machine hours, the overhead rate per hour would be
determined as follows:

Indirect materials                                 \$ 60,000
Rent on factory equipment                            118,000
Salary of production supervisor                      230,000
Estimated machine hours                             60,000

Note that direct materials and direct labor are product costs, but not part of manufacturing
overhead costs, which only include indirect factory costs. Sales commissions and advertising
expenses are selling and administrative expenses which are period not product costs.
(b) If they company actually worked 63,000 machine hours, \$6.80 x 63,000 or \$428,400 was
applied to production.

(c) If the actual overhead for the year was \$425,000 the overhead was overapplied by \$3,400
(\$428,400 from part (b) - \$425,000)

3. Solution (Learning Objectives 3 and 4):

(a) The plantwide rate would be: \$880,000 / 110,000 = \$8.00 per DLH
The amount of overhead applied to Job 723 was \$8.00 x (150 + 310) = \$3,680.00

(b) The departmental rates would be
Machining:   \$340,000 / 50,000 = \$6.80 per DLH
Assembly:    \$540,000 / 60,000 = \$9.00 per DLH

The amount of overhead applied to Job 723 was:
Machining: \$6.80 x 150 = \$1,020.00
Assembly: \$9.00 x 310 = \$2,790.00
Total            \$3,810.00

(c) Use of a plantwide overhead rate is a fairly common practice—particularly in smaller
companies. But in larger companies, multiple predetermined overhead rates are often used.
In a multiple predetermined overhead rate system each production department may have its
own predetermined overhead rate. Such a system, while more complex, is more accurate
because it can reflect differences across departments in how overhead costs are incurred.

4. Solution (Learning Objective 7):
(a) The cost of goods manufactured for the month would be determined as follows:

Direct materials                              \$ 690,000
Direct labor                                     876,000
Total manufacturing cost charged to jobs      \$2,490,000
Add: Beginning work in process inventory         140,000
Deduct: Ending work in process inventory       (110,000)
Cost of goods manufactured                    \$2,520,000
(b) Since there are no beginning or ending finished goods inventories, the cost of goods sold
would be the cost of goods manufactured \$2,520,000 plus the underapplied overhead costs
of \$76,000 for a total of \$2,596,000.