Test 3 Accounting CH 17

Flashcard maker : Lily Taylor
FACTORY OVERHEAD APPLIED TO JOBS
WIP
-> FO
JOBS COMPLTETED
Finished Goods
->WIP
COST OF GOODS SOLD
CGS
->Finished Goods
Under-applied to CGS
CGS
Factory Overhead
Over-applied to CGS
Factory Overhead
CGS
TERMS
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Activity Base
A measure of activity that is related to changes in cost. Used in analyzing and classifying cost behavior. Activity bases are also used in the denominator in calculating the predetermined factory overhead rate to assign factory overhead costs to cost objects.
Activity-based costing
A cost allocation method that identifies activities causing the incurrence of costs and allocates these costs to products (or other cost objects), based on activity drivers (bases).
Cost accounting systems
Systems that measure, record, and report product costs.
Cost allocation
The process of assigning indirect cost to a cost object, such as a job.
Finished Goods Ledger
The subsidiary ledger that contains the individual accounts for each kind of commodity or service produced.
Job Cost Sheet
An account in the work in progress subsidiary ledger in which the costs charged to a particular job order are recorded.
Job Order Cost System
A type of cost accounting system that provides for a separate record of the cost of each particular quantity of product that passes through the factory.
Materials ledger
The subsidiary ledger containing the individual accounts for each type of material.
Materials requisition
The form or electronic transmission used by a manufacturing department to authorize materials issuance from the storeroom.
Overapplied factory overhead
The amount of factory overhead applied in excess of the actual factory overhead costs incurred for production during a period.
Predetermined factory overhead rate
The rate used to apply factory overhead costs to the goods manufactured. The rate is determined by dividing the budgeted overhead cost by the estimated usage at the beginning of the fiscal period.
Process Cost System
A type of cost system that accumulates costs for each of the various departments within a manufacturing facility.
Receiving Report
The form or electronic transmission used by the receiving personnel to indicate that materials have been received and inspected.
Time tickets
The form on which the amount of time spent by each employee and the labor cost incurred for each individual job, or for factory overhead, are recorded.
DISCUSSION QUESTIONS
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1a. Name two principal types of cost accounting systems.
Job order cost system and process cost system
1b. Which system provides for a separate record of each particular quantity of product that passes through the factory?
The job order cost system provides a separate record of each quantity of product that
passes through the factory.
1c. Which system accumulates the costs for each department or process within the factory?
Process cost systems accumulate costs for each department or process within a factory.
2. What kind of firm would use a job order cost system?
Job order costing is used by firms that sell custom goods and services to customers. The job
order system is frequently associated with firms that will produce a product or service specifically to a customer order
3. Which account is used in the job order cost system to accumulate direct materials, direct labor, and factory overhead applied to production costs for individual jobs?
Work in progress
4. What document is the source for (A) debiting the accounts in the materials ledger and (B) crediting the accounts in the materials ledger?
(A)Purchase invoice or receiving report
(B)Materials Requisition
5. What is a job cost sheet?
A job cost sheet is the subsidiary ledger to the work in process control account. The cost of materials, labor, and overhead are listed on each separate job cost sheet for each job. A summary of all the job cost sheets during an accounting period is the basis for journal entries to the control accounts.
6. What is the difference between a clock card and time ticket?
The clock card is a means of recording the hours spent by employees in the factory. The
time ticket is a means of recording the time the employee spends on a specific job.
7. Discuss how the predetermined factory overhead rates can be used in job order cost accounting to assist management in pricing jobs.
The predetermined overhead rate is computed using estimated amounts at the beginning of the
period. This is because managers need timely information on the product costs of each job. If a company waited until all overhead costs were known at the end of the period, the allocated factory overhead would be accurate, but not timely. Only through timely reporting can managers
adjust manufacturing methods or product pricing.
8a. How is a predetermined factory overhead rate calculated?
The predetermined factory overhead rate is determined by dividing the estimated total
factory overhead costs for the forthcoming year by an estimated activity base, one that
reflects the consumption or use of factory overhead costs.
8b. Name three common bases used in calculating the rate.
Direct labor cost, direct labor hours, and machine hours.
9A. What is (1) over applied factory overhead and (2) under applied factory overhead?
(1) If the amount of factory overhead applied is greater than the actual factory overhead incurred, factory overhead is over-applied.
(2) If the amount of actual factory overhead is greater than the amount applied, factory
overhead incurred is under-applied.
9B. If the factory overhead account has a debit balance, was factory overhead under applied or over applied?
Underapplied
9C. If the factory overhead account has a credit balance at the end of the first month of the fiscal year, where will the amount of this balance be reported on the interim balance sheet?
Deferred Credit
10. Describe how a job order cost system can be used for professional service businesses.
Job order cost accumulation would be most appropriate for professional service firms that provide extended, project-type services for clients. Examples would be architectural, consulting, advertising, or legal services. Job cost sheets would accumulate all direct costs of servicing the client. Such costs would include labor, materials, travel, and subcontracted services.

In addition, overhead would be applied using a predetermined overhead rate. The costs accumulated by the job cost sheet would be treated as work in process (a current asset) until the service is completed. Once completed, the cost would be transferred to the cost of services on the income statement.

OBJECTIVES
——————
OBJ 1
A cost accounting system accumulates
product costs.
Two primary cost accounting systems are-
job order and the process cost systems.
Job order cost systems accumulate costs for
each quantity of product that passes through the factory.
Two primary cost accounting systems are
job order and process cost systems.
Job order cost systems accumulate costs for
each quantity of product or “job” that passes through the factory.
Process cost systems accumulate costs for
each department or process within the factory.
JOB COST System
These are assigned to individual jobs based on quantity used.
Direct materials and direct labor
OBJ 2
Direct materials, direct labor, and factory overhead are accumulated on the job cost sheet, which is the subsidiary cost ledger for each job.
Direct Materials and Direct Labor are assigned to individual jobs, based on quantity used.
Factory overhead costs are assigned to each job based on-
an activity base that reflects the use of factory overhead costs.
OBJ 3
Job order cost systems can be used to
evaluate cost performance.
Units can be compared over time to determine
if product costs are staying within expected ranges
OBJ 4
Job order cost accounting systems can be used by service businesses to-
plan and control operations.
Because the product is a service-
the focus is on direct labor and overhead costs.
The costs of providing a service are-
accumulated in a work in process account and transferred to a cost of services account upon completion.
OTHER EX FROM CH#:
Period Costs are recorded as expenses of the current period as either selling or administrative expenses.
selling or administrative
Assembling Example
Employees assemble and finish the guitars
Cutting Example
Employees cut the body and neck of the guitar out of wood
The 3 inventory ledger accounts
Materials Inventory, Work in Progress, Finished Goods Inventory
JOURNAL ENTRIES
————————–
Issuance of Materials
“record the purchase”
Materials
AP
Purchase of Materials

“Materials purchased on account, $634,000.”

Materials
Accounts Payable
Record the requisition from the materials storeroom.
Work in Process
Materials
Direct labor costs
Flow of Labor Costs into Production
Work in Progress
Wages Payable
Record the Requisition from Storeroom
Work in Progress
Materials
Entry for Issuing Materials

“2 Materials requisitioned, $646,200, of which $74,500 was for general factory use.”

Work in Process
Factory Overhead
Materials
Entry for Factory Labor Costs

“31 Factory labor used, $660,200, of which $91,200 was indirect.”

Work in Process
Factory Overhead
Wages Payable
Journalize
Factory Overhead incurred
Factory Overhead
Materials (Indirect Materials)
Wages Payable (Indirect Labor)
Utilities Payable (Utilities Cost)
Accumulated Depreciation-Factory (Factory Depreciation)
PREDETERMINED FACTORY OVERHEAD RATE
Direct Labor
______________
Example: “Avg Shop Direct Labor Rate” is Activity Base
Avg Shop Direct Labor Rate, GIVEN
xx
Activity Base x Amount of HRS for each job
Prepare the journal entry on Apr.30 to apply factory overhead to both jobs

“Applying factory overhead”

Work in Progress
Factory Overhead
Entries for direct labor and factory overhead

Required:
A. Journalize the April 30 entry to record the factory labor costs.
B. Journalize a second entry on April 30 to apply factory overhead to production for April.
“applying factory overhead”

Work in Process
Factory Overhead
Wages Payable

Work in Process
Factory Overhead

FACTORY OVERHEAD RATES, ENTRIES, AND ACCOUNT BALANCE

“Factory overhead costs applied to jobs”

1. Work in Process
Factory Overhead

2.Work in Process
Factory Overhead

Predetermined Factory Overhead Rate (book)
Estimated Total Factory Overhead Costs
_______________
Estimated Activity Base
xx
Predetermined Factory Overhead Rate
Direct Labor
______________
Avg Shop Direct Labor Rate

= Activity Base

xx
Predetermined Shop Overhead Rate
Total Shop Overhead
_________________
Activity Base
2 FORMULAS

Predetermined Shop Overhead Rate
or
Predetermined Overhead Rate

FOH RATE x ACTUAL MACHINE HRS gives you # for -> applying factory overhead
Work in Process
Factory Overhead
($117,600 – $119,000)
-1,400 = 1,400 (Credit) Overapplied
Jobs completed, $1,002,000.
Finished Goods
–>Work in Process
Balance of Factory Overhead Accounts
Underapplied vs Overapplied
Actual Factory Overhead –
Cost of goods sold, $890,000.
Cost of Goods Sold
–> Finished Goods
To Close 6,000 FOH V Debit
Debit Cost of Goods Sold
Credit Factory Overhead
To Close 6,000 FOH V Credit
Debit Factory Overhead
Credit Cost of Goods Sold
($102,350 – $100,620)
$1,730 (Debit) (Underapplied)
Spring Street Engine Shop uses a job order cost system to determine the cost of performing engine repair work. Estimated costs and expenses for the coming period are as follows:

Engine parts $875,000
Shop direct labor 660,000
Shop and repair equipment depreciation 44,500
Shop supervisor salaries 138,000
Shop property taxes 27,500
Shop supplies 10,000
Advertising expense 22,100
Administrative office salaries 73,500
Administrative office depreciation expense 8,600
Total costs and expenses $1,859,200

Shop and repair equipment depreciation 44,500
Shop supervisor salaries 138,000
Shop property taxes 27,500
Shop supplies 10,000

^Only included in Factory Overhead

The average shop direct labor rate is $30 per hour.
The estimated activity base is determined by dividing the shop direct labor cost
by the direct labor rate, as follows:
$660,000
$30 per hour= 22,000 hours

The predetermined shop overhead rate is:
$220,000
22,000 hours = $10.00 per direct labor hour

BOOK
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OTHER
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QUIZ QUESTIONS CENGAGE
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A cost accounting system that accumulates costs for each manufacturing department or process is called a
process cost system.
A process cost system will be used by all of the following manufacturing companies except
a custom sailboat factory.
Which of the following products/services would most likely be accounted for using a job order cost system?
a job audit
Which of the following is the flow of manufacturing costs?
materials, work in process, finished goods, cost of goods sol
Neon Lighting is comparing actual and applied overhead amounts at the end of the year and finds the factory overhead account has a credit balance. What does this mean?
Applied costs are higher than actual costs.
Icy Mocha Company estimates its factory overhead costs to be $35,000 and machine hours to be 5,000 for the year. If the actual hours worked on Jobs 333 and Jobs 334 total 4,980 and actual factory overhead costs are $34,700, what is the amount of either over- or under applied factory overhead?
over applied $160
In a job order costing system, ____________ make up the work in process ledger.
job cost sheets
A job order cost system can be used by a hospital to
charge patients with services provided.
The manager of a company is analyzing direct labor and has found that expenses are higher than expected. Which of the following could be the reason?
All of these choices are correct. (A)
higher hourly rates are being paid
inefficient use of time
new employees unfamiliar with the process
A baking company has determined that direct material costs are increasing. All of the following are reasons why this may be true except
the fruits used in baking are out of season.
the oven is malfunctioning.
cakes are being sold at a special rate during the month.
a new baker has been hired who is not familiar with the ingredients.
cakes are being sold at a special rate during the month.
A hotel will use a job order cost system for which of the following expenses?
Room service
The job order cost system for a service business includes all of the following except
Materials Inventory
In service companies, _________ is supported by a cost ledger with a job cost sheet for each client.
Work in Process
ACCOUNTING COACH
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