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Exam 3: Product Costing and Cost Accumulation in a Batch Production Environment

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Question 1

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Harris, Inc., has just completed job nos. 78 and 79, which were similar in terms of complexity, production processes, and units manufactured. Job no. 78 was manufactured by Joe Barton who earns $14 per hour, whereas job no. 79 was completed by Susan Franklin who earns $20 per hour. If Joe and Susan are equally efficient, would the company be better off using direct labor cost or direct labor hours as the cost driver in its predetermined overhead rate? Briefly explain.

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The jobs produced by Barton and Franklin are similar in terms of complexity, production processes, and units manufactured, and both workers are equally efficient. Thus, the amount of overhead incurred on job no. 78 should be relatively the same as that incurred on job no. 79. If direct labor hours are used in the predetermined overhead rate, the overhead applied to the two jobs will be the same, which is good accounting in this case. Conversely, if direct labor cost were used, Susan's job would absorb more overhead because of the higher labor cost-an improper accounting since both jobs incurred the same amount.

Question 2

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A computer manufacturer recently shipped several laptops to a customer (cost: $25,000) and billed the customer $30,000. Which of the following options correctly expresses the accounts that are debited and credited to record this transaction?

A) Debits: Accounts Receivable, Finished-Goods Inventory; credits: Sales Revenue, Cost of Goods Sold.
B) Debits: Accounts Receivable, Cost of Goods Sold; credits: Sales Revenue, Finished-Goods Inventory.
C) Debits: Sales Revenue, Cost of Goods Sold; credits: Accounts Receivable, Finished-Goods Inventory.
D) Debits: Sales Revenue, Finished-Goods Inventory; credits: Accounts Receivable, Cost of Goods Sold.
E) Debits: Accounts Receivable; credits: Finished-Goods Inventory, Profit on Sale.

F) None of the above
G) A) and E)

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Question 3

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Manufacturing overhead:

Serina Manufacturing recently sold goods that cost $35,000 for $45,000 cash. The journal entries to record this transaction would include:

Which of the following is the correct method to calculate a predetermined overhead rate?

Trenton worked on four jobs during its first year of operation: nos. 401, 402, 403, and 404. A review of job no. 403's cost record revealed direct material charges of $40,000 and total manufacturing costs of $50,000. If Trenton applies overhead at 150% of direct labor cost, the overhead applied to job no. 403 must have been:

Reynardo Company incurred $90,000 of depreciation for the year. Eighty percent relates to the firm's production facilities, and 20% relates to sales and administrative offices. If all items are handled in the proper manner, a review of the company's accounting records should reveal a:

Electricity costs that were incurred by a company's production processes should be debited to:

Boxworth and Associates designs relatively small sports stadiums and arenas at various sites throughout the country. The firm's accountant prepared the following budget for the upcoming year: $\begin{array}{lr}\text { Professional staff salaries } & \$ 3,000,000 \\\text { Administrative support staff } & 800,000 \\\text { Other operating costs } & 200,000\end{array}$ Eighty percent of professional staff salaries are directly traceable to client projects, a figure that falls to 60% for the administrative support staff and other operating costs. Traceable costs are charged directly to client projects; nontraceable costs, on the other hand, are treated as firm overhead and charged to projects by using a predetermined overhead application rate. Boxworth had one project in process at year-end: an arena that was being designed for Charlotte County. Costs directly chargeable to this project were: $\begin{array}{lr}\text { Professional staff salaries } & \$ 90,000 \\\text { Administrative support staff } & 17,300 \\\text { Other operating costs } & 6,700\end{array}$ Required: A. Determine Boxworth's overhead for the year and the firm's predetermined overhead application rate. The rate is based on costs directly chargeable to firm projects. B. Compute the cost of the Charlotte County arena project as of year-end. C. Present three examples of "other operating costs" that might be directly traceable to the Charlotte County project.

Fogg Company, which uses labor hours to apply overhead to manufacturing, may have increased amounts of underapplied overhead at month-end if:

If the amount of effort and attention to products varies substantially throughout a company's various manufacturing operations, the company might consider the use of:

Which of the following manufacturers would most likely use job-order costing?

Sting Corporation debited Cost of Goods Sold and credited Manufacturing Overhead at year-end. On the basis of this information, one can conclude that:

Describe the types of manufacturing environments that would best be suited for (1) job-order costing and (2) process costing. Include two examples of manufacturers that would likely use job-cost systems.

Finney & Associates is an interior decorating firm in Tucson. The following costs were incurred in a project to redecorate the mayor's offices: $\begin{array}{lr}\text { Direct material } & \$ 29,000 \\\text { Direct professional labor } & 42,000\end{array}$ The firm's budget for the year included the following estimates: $\begin{array}{lr}\text { Budgeted overhead } & \$ 800,000 \\\text { Budgeted direet professional labor } & 640,000\end{array}$ Overhead is applied to contracts by using a predetermined overhead rate that is based on direct professional labor cost. Actual professional labor during the year was $655,000 and actual overhead was $793,000. Required: A. Determine the total cost to redecorate the mayor's offices. B. Calculate the under- or overapplied overhead for the year. Be sure to label your answer.

A custom-home builder would likely utilize:

Under- or overapplied manufacturing overhead at year-end is most commonly:

At the Nassau Advertising Agency, partner and staff compensation cost is a key driver of agency overhead. In light of this fact, which of the following is the correct expression to determine the amount of overhead applied to a particular client job?

A manufacturing firm produces goods in accordance with customer specifications, commencing production upon receipt of a purchase order. To accumulate the cost of each order, the company would use a:

Manufacturing overhead is applied to production. A. Describe several situations that may give rise to underapplied overhead. B. Assume that underapplied manufacturing overhead is treated as an adjustment to Cost of Goods Sold. Explain why an underapplication of overhead increases Cost of Goods Sold.