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CHAPTER 4—ACCOUNTING FOR FACTORY OVERHEAD

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MULTIPLE CHOICE

1. Fixed costs include:


a. Property Tax
b. Plant Manager’s Salary
c. Factory Insurance
d. All of the these are correct
ANS: D
Fixed costs include factory property taxes, plant manager’s salary, insurance on factory and equipment.

PTS: 1 DIF: Easy REF: P. OBJ: 1


NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

2. Factory overhead includes:


a. Indirect labor but not indirect materials.
b. All manufacturing costs except direct materials and direct labor.
c. All manufacturing costs.
d. Indirect materials but not indirect labor.
ANS: B
Factory overhead includes all manufacturing costs, except direct materials and d
irect labor. Because of the variety and number of items that can be classified a
s factory overhead, this "except" definition is often used to define and classify
factory overhead costs and expenses.

PTS: 1 DIF: Easy REF: P. OBJ: Introduction


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

3. Factory overhead:
a. Can be a variable cost or a fixed cost.
b. Is a prime cost.
c. Can only be a fixed cost.
d. Includes all factory labor.
ANS: A
Factory overhead includes variable costs, such as indirect materials and power e
xpenses, and fixed costs, such as depreciation, property taxes, and insurance. P
rime costs include direct labor and direct materials. All factory labor is incor
rect because this would also include direct labor.

PTS: 1 DIF: Moderate REF: P. OBJ: 1


NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

4. If over- or underapplied factory overhead is material in amount, it should be:


a. Carried forward in the overhead control account from year to year.
b. Eliminated by changing the predetermined factory overhead rate in subsequent ye
ars.
c. Apportioned among the work in process inventory, the finished goods inventory,
and the cost of goods sold.
d. Treated as a special gain or loss occurring during the year.
ANS: C
When the amount of over- or underapplied overhead is material in amount, it shou
ld be allocated to work in process, finished goods, and costs of goods sold exclu
sively.

PTS: 1 DIF: Moderate REF: P. OBJ: 7


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

5. When preparing a flexible budget for factory overhead costs, what will occur to
fixed costs (on a per-unit basis) as production increases?
a. Fixed costs per unit will increase.
b. Fixed costs are not considered in flexible budgeting.
c. Fixed costs per unit will decrease.
d. Fixed costs per unit will remain unchanged.
ANS: C
As production increases, the fixed cost per unit decreases because the total fix
ed cost is spread over a larger number of units.

PTS: 1 DIF: Moderate REF: P. OBJ: 3


NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective

6. Venus Company has developed the following flexible budget formula for annual ind
irect labor cost:

Total annual cost = $12,000 + $.25 / unit

Operating budgets for the current month are based on 5,000 units. Indirect labo
r costs included in this monthly planning budget are:
a. $13,250.
b. $1,250.
c. $3,200.
d. $2,250.
ANS: D
Indirect labor cost for month:
Fixed costs ($12,000 / 12) $1,000
Variable costs (5,000 units ´ $.25) 1,250
Total $2,250

PTS: 1 DIF: Moderate REF: P. OBJ: 3


NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic

7. The Mason Corporation budgeted overhead at $240,000 for the period for Departmen
t A based on a budgeted volume of 60,000 direct labor hours. At the end of the p
eriod, the factory overhead control account for Department A had a debit balance
of $260,000; actual direct labor hours were 63,000. What was the under- or over
applied factory overhead for the period?
a. $12,000 overapplied
b. $ 8,000 overapplied
c. $ 8,000 underapplied
d. $12,000 underapplied
ANS: C
Predetermined rate: $240,000/60,000 (DLH) = $4.00
Actually applied: 63,000 (DLH) ´ $4.00 = $252,000

Applied factory overhead $252,000


Actual factory overhead 260,000
Underapplied overhead $ (8,000)

PTS: 1 DIF: Hard REF: P. OBJ: 7


NAT: IMA 2B- Cost Management TOP: AACSB - Analytic

8. When a manufacturing company has a highly automated manufacturing plant, what is


probably the most appropriate basis of applying factory overhead costs to work i
n process?
a. Machine hours
b. Cost of materials used
c. Direct labor hours
d. Direct labor dollars
ANS: A
In a highly automated plant, the actual factory costs assigned to products throu
gh a predetermined rate would be more accurately allocated by a machine-hour appl
ication method.

PTS: 1 DIF: Moderate REF: P. OBJ: 6


NAT: IMA 2B- Cost Management TOP: AACSB - Reflective

9. Flexible budgeting is a reporting system wherein the:


a. Budget shows estimated costs at different levels of production volume.
b. Budget standards may be adjusted at will.
c. Reporting dates vary according to the levels of activity reported upon.
d. Statements included in the budget report vary from period to period.
ANS: A
Flexible budgeting separates costs into fixed and variable elements and shows es
timated costs at different levels of production volume.

PTS: 1 DIF: Easy REF: P. OBJ: 3


NAT: IMA 2A- Budget Preparation TOP: AACSB - Analytic

10. Overapplied overhead will always result when a predetermined factory overhead ra
te is employed and:
a. Overhead incurred is more than overhead applied.
b. Overhead incurred is less than overhead applied.
c. Production is greater than sales.
d. Actual overhead costs are less than expected.
ANS: B
Whenever the overhead incurred (charges to factory overhead) is less than the ov
erhead credited to factory overhead through the application rate, the result will
be overapplied overhead.

PTS: 1 DIF: Moderate REF: P. OBJ: 7


NAT: IMA 2B - Cost Management TOP: AACSB - Reflective
11. The Jason Manufacturing Company has two production departments (millwright and a
ssembly) and three service departments (general factory administration, factory m
aintenance, and factory development). A summary of costs and other data for each
department, prior to allocation of service department costs for the year ended M
arch 30, appears below.

The costs of the general factory administration department, factory maintenance


department, and factory development are allocated on the basis of direct labor ho
urs, square footage occupied, and number of employees, respectively.

General
Factory Factory Factory
Millwright Assembly Admin. Maint. Devel.
Direct labor costs: $1,950,000 $2,050,000
Direct material costs: $3,130,000 $ 950,000
Factory overhead costs: $1,975,000 $2,510,000 $95,000 $87,000 $65,000
Direct labor hours: 235,980 376,180
Number of employees: 210 255 51 84 30
Sq. footage occupied: 10,000 40,000 2,500 2,300 5,200

Assuming that Jason elects to use the sequential method to distribute service de
partment costs (starting with factory development), what would be the amount of
factory development that would be allocated to the factory maintenance department
?

a. $ 9,100.
b. $ 4,350.
c. $29,640.
d. $0.
ANS: A
Factory Development allocates its costs based on the number of employees.

Factory Development Costs


Number of Employees:
Millwright 210
Assembly 255
General Factory Adm. 51
Factory Maintenance 84
Total 600

Allocation to Factory Maintenance Department:


84 / 600 ´ $65,000 = $9,100

PTS: 1 DIF: Moderate REF: P. OBJ: 5


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

12. The Lucas Manufacturing Company has two production departments (fabrication and
assembly) and three service departments (general factory administration, factory
maintenance, and factory cafeteria). A summary of costs and other data for each
department, prior to allocation of service department costs for the year ended Ju
ne 30, appears below:

The costs of the general factory administration department, factory maintenance


department, and factory cafeteria are allocated on the basis of direct labor hour
s, square footage occupied, and number of employees, respectively.

General
Factory Factory Factory
Fabrication Assembly Admin. Maint. Cafeteria
Direct labor costs: $1,950,000 $2,050,000
Direct material costs: $3,130,000 $ 950,000
Factory overhead costs: $1,650,000 $1,850,000 $80,000 $67,500 $58,000
Direct labor hours: 237,690 387,810
Number of employees: 160 128 20 42 25
Sq. footage occupied: 20,000 30,000 2,400 2,000 4,800

Assuming that Lucas elects to use the sequential method to distribute service de
partment costs (starting with the factory cafeteria), what would be the amount o
f factory cafeteria costs that would be allocated to the factory maintenance depa
rtment?

a. $3,314
b. $6,960
c. $5,800
d. $0
ANS: B
Factory Cafeteria allocates its costs based on the number of employees.

Factory Cafeteria Costs


Number of Employees:
Fabrication 160
Assembly 128
General Factory Adm. 20
Factory Maintenance 42
Total 350

Allocation to Factory Maintenance Department:


42 / 350 ´ $58,000 = $6,960

PTS: 1 DIF: Moderate REF: P. OBJ: 5


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

13. The Lucas Manufacturing Company has two production departments (fabrication and
assembly) and three service departments (general factory administration, factory
maintenance, and factory cafeteria). A summary of costs and other data for each
department, prior to allocation of service department costs for the year ended Ju
ne 30, appears below:

The costs of the general factory administration department, factory maintenance


department, and factory cafeteria are allocated on the basis of direct labor hour
s, square footage occupied, and number of employees, respectively.

General
Factory Factory Factory
Fabrication Assembly Admin. Maint. Cafeteria
Direct labor costs: $1,950,000 $2,050,000
Direct material costs: $3,130,000 $ 950,000
Factory overhead costs: $1,650,000 $1,850,000 $80,000 $67,500 $58,000
Direct labor hours: 237,690 387,810
Number of employees: 160 128 20 42 25
Sq. footage occupied: 20,000 30,000 2,400 2,000 4,800

Assuming that Lucas elects to distribute service department costs to production


departments using the direct distribution method, the amount of general factory a
dministration department costs that would be allocated to the assembly department
would be (round all final calculations to the nearest dollar):
a. $30,400.
b. $25,650.
c. $0.
d. $49,600.
ANS: D
General Factory Administration allocates its costs based on direct labor hours.

General Factory Administration Costs


Direct labor hours:
Fabrication 237,690
Assembly 387,810
Total 625,500

Allocation to Assembly Department:


387,810 / 625,500 ´ $80,000 = $49,600

PTS: 1 DIF: Moderate REF: P. OBJ: 5


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

14. The Lucas Manufacturing Company has two production departments (fabrication and
assembly) and three service departments (general factory administration, factory
maintenance, and factory cafeteria). A summary of costs and other data for each
department, prior to allocation of service department costs for the year ended Ju
ne 30, appears below.

The costs of the general factory administration department, factory maintenance


department, and factory cafeteria are allocated on the basis of direct labor hour
s, square footage occupied, and number of employees, respectively.

General
Factory Factory Factory
Fabrication Assembly Admin. Maint. Cafeteria
Direct labor costs: $1,950,000 $2,050,000
Direct material costs: $3,130,000 $ 950,000
Factory overhead costs: $1,650,000 $1,850,000 $80,000 $67,500 $58,000
Direct labor hours: 237,690 387,810
Number of employees: 160 128 20 42 25
Sq. footage occupied: 20,000 30,000 2,400 2,000 4,800

Assuming that Lucas elects to distribute service department costs to production


departments using the direct distribution method, the amount of factory maintenan
ce department costs that would be allocated to the fabrication department would b
e (round all final calculations to the nearest dollar):
a. $22,804.
b. $15,000.
c. $27,000.
d. $14,674.
ANS: C
Factory Maintenance allocates its total costs based on square footage.

Factory Maintenance Costs


Square Footage of:
Fabrication 20,000
Assembly 30,000
Total 50,000

Allocation to Fabrication Department:


20,000 / 50,000 ´ $67,500 = $27,000

PTS: 1 DIF: Moderate REF: P. OBJ: 5


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

15. Activity-based costing considers non-volume-related activities that create costs


such as:
a. Direct labor usage.
b. Machine operations.
c. Consumption of indirect materials and energy usage.
d. Machine setups and product design changes.
ANS: D
(D) Activity-based costing considers non-volume related activities that create
costs such as machine setups and product design changes.

PTS: 1 DIF: Easy REF: P. OBJ: 6


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

16. To successfully employ an ABC system, a company must first identify:


a. Activities in the factory that create costs.
b. Cost drivers.
c. Cost pools.
d. Overhead allocation rates.
ANS: A
To successfully employ an activity-based costing system, a company must first id
entify activities in the factory that create costs.

PTS: 1 DIF: Moderate REF: P. OBJ: 6


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

17. A cost driver is:


a. An overhead or activity rate.
b. A basis used to allocate each of the activity cost pools.
c. The estimated cost of each activity pool.
d. Used only to allocate non-volume-related costs.
ANS: B
A cost driver is a basis used to allocate each of the activity cost pools.
PTS: 1 DIF: Easy REF: P. OBJ: 6
NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

18. The method of analyzing the behavior of semivariable costs that relies heavily o
n the ability of an observer to detect a pattern of cost behavior by reviewing pa
st cost and volume data is the:
a. High-low method.
b. Method of least squares.
c. Scattergraph method.
d. Observation method.
ANS: D
The observation method is the method of analyzing the behavior of semivariable c
osts that relies heavily on the ability of an observer to detect a pattern of cos
t behavior by reviewing past cost and volume data.

PTS: 1 DIF: Easy REF: P. OBJ: 2


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

19. After the observations of cost and production data are plotted on graph paper, a
line is drawn by visual inspection representing the trend shown by most of the d
ata points using the:
a. Observation method.
b. High-low method.
c. Method of least squares.
d. Scattergraph method.
ANS: D
Using the scattergraph method, the observations of cost and production data are
plotted on graph paper, and then a line is drawn by visual inspection representin
g the trend of most of the data points.

PTS: 1 DIF: Easy REF: P. OBJ: 2


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

20. The method of analyzing cost behavior that uses two data points to first determi
ne the variable cost per unit and then the total fixed cost is the:
a. Method of least squares.
b. Scattergraph method.
c. High-low method.
d. Observation method.
ANS: C
The high-low method analyzes cost behavior by using two data points to first det
ermine the variable cost per unit and then the total fixed cost.

PTS: 1 DIF: Moderate REF: P. OBJ: 2


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

21. Costs that change in relation to volume changes, but not in direct proportion to
those changes, are known as:
a. Variable costs.
b. Semivariable costs.
c. Fixed costs.
d. Curvilinear costs.
ANS: B
Semivariable costs are costs that change in total as volume changes, but not in
direct proportion to such changes.

PTS: 1 DIF: Moderate REF: P. OBJ: 1


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

22. In a factory, all of the following would be considered service departments except:
a. Inspection and Packing
b. Assembly
c. Power
d. Human Resources
ANS: B
Inspection and Packing, Power and Human Resources all represent service departme
nts. Assembly is a production department.

PTS: 1 DIF: Easy REF: P. OBJ: 5


NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

23. Kilowatt hours would be an appropriate basis for distributing the cost of which
of the following service departments to production departments?
a. Power
b. Machine Maintenance
c. Human Resources
d. Building Maintenance
ANS: A
Kilowatt hours is a measure of the power used, so this would be an appropriate b
asis with which to distribute the costs of the Power Department.

PTS: 1 DIF: Easy REF: P. OBJ: 5


NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

24. The preferred sequence for distributing the cost of service departments to production departm
ents when using the sequential distribution method is:
a. to distribute the cost of the service department with the largest total overhea
d cost first.
b. to always distribute the cost of the Human Resources Department first.
c. to distribute the costs of the service departments to the production department
having the largest amount of overhead cost first.
d. to distribute the costs of the service department that services the greatest nu
mber of departments first.
ANS: D
The preferred sequence for distributing the cost of service departments when usi
ng the sequential distribution method is to distribute the cost of the service de
partment that services the greatest number of departments first. If there is unc
ertainty as to which department’s costs should be distributed to the other service departments first,
then the service department with the largest total overhead cost should be distributed first.

PTS: 1 DIF: Moderate REF: P. OBJ: 5


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic
25. Meger Manufacturing uses the direct labor cost method for applying factory overh
ead to production. The budgeted direct labor cost and factory overhead for the p
revious fiscal year were $1,000,000 and $800,000, respectively. Actual direct la
bor cost and factory overhead were $1,100,000 and $825,000, respectively.

What was Meger’s predetermined factory overhead rate?


a. 80%
b. 125%
c. 75%
d. 133%
ANS: A
Predetermined factory overhead rate = Budgeted factory overhead
Budgeted direct labor cost
$800,000/$1,000,000 = 80%

PTS: 1 DIF: Moderate REF: P. OBJ: 6


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

26. Meger Manufacturing uses the direct labor cost method for applying factory overh
ead to production. The budgeted direct labor cost and factory overhead for the p
revious fiscal year were $1,000,000 and $800,000, respectively. Actual direct la
bor cost and factory overhead were $1,100,000 and $825,000, respectively.

What is the amount of under- or overapplied factory overhead?


a. $25,000 overapplied
b. $55,000 overapplied
c. $80,000 overapplied
d. $50,000 underapplied
ANS: B
Predetermined factory overhead rate = Budgeted factory overhead
Budgeted direct labor cost
$800,000/$1,000,000 = 80%

Applied factory overhead = $1,100,000 x 80% $880,000


Actual factory overhead incurred 825,000
Overapplied factory overhead $ 55,000

PTS: 1 DIF: Hard REF: P. OBJ: 7


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

27. Meger Manufacturing uses the direct labor cost method for applying factory overh
ead to production. The budgeted direct labor cost and factory overhead for the p
revious fiscal year were $1,000,000 and $800,000, respectively.

During the year, the company started and completed Job 352A, which had direct ma
terial and labor costs of $32,000 and $45,000, respectively. What was the cost o
f Job 352A?
a. $77,000
b. $81,000
c. $102,600
d. $113,000
ANS: D
Predetermined factory overhead rate = Budgeted factory overhead
Budgeted direct labor cost
$800,000/$1,000,000 = 80%

Direct material $ 32,000


Direct labor 45,000
Applied factory overhead - $45,000 x 80% 36,000
Total job cost $113,000

PTS: 1 DIF: Moderate REF: P. OBJ: 6


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

28. Which of the following statements about using the direct labor hour method of ap
plying factory overhead to production is false?
a. It may not be as accurate as the direct labor cost method if factory overhead p
rimarily consists of items more closely tied to employee wages, such as benefits.
b. The application base could be substantially smaller than when direct labor cost
is used.
c. It is the most appropriate method for a highly automated department.
d. The amount of factory overhead applied is not affected by the mix of labor rate
s.
ANS: C
It would be more appropriate to use the machine hour method of applying factory
overhead in a highly automated environment.

PTS: 1 DIF: Moderate REF: P. OBJ: 6


NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

29. The Mason Corporation budgeted overhead at $240,000 for the period for Departmen
t A based on a budgeted volume of 60,000 direct labor hours. During the period,
Mason started and completed Job B25, which incurred 200 labor hours at a cost of
$2,200, and $5,000 of direct materials. What was the cost of Job B25?
a. $7,400
b. $8,000
c. $7,250
d. $13,800
ANS: B
Predetermined overhead rate = Budgeted factory overhead
Budgeted direct labor hours

$240,000/ 60,000 hours = $4/ direct labor hour

Direct material $5,000


Direct labor 2,200
Applied factory overhead - 200 hours x $4 800
Total job cost $8,000

PTS: 1 DIF: Moderate REF: P. OBJ: 6


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

30. The Owens Company uses the machine hour method of applying factory overhead to p
roduction. The budgeted factory overhead last year was $200,000, and there were
40,000 machine hours budgeted. Job 84 was started and completed during the perio
d. Direct materials costing $900 were incurred. Twenty-five direct labor hours
were worked at a cost of $350, and 40 machine hours were incurred. What was the
cost of Job 84?
a. $1,450
b. $1,375
c. $1,250
d. $1,290
ANS: A
Predetermined overhead rate = Budgeted factory overhead
Budgeted machine hours

$200,000/ 40,000 hours = $5/ machine hour

Direct material $ 900


Direct labor 350
Applied factory overhead - 40 hours x $5 200
Total job cost $1,450

PTS: 1 DIF: Moderate REF: P. OBJ: 6


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

31. The Owens Company uses the machine hour method of applying factory overhead to p
roduction. The budgeted factory overhead last year was $200,000, and there were
40,000 machine hours budgeted. Actual machine hours incurred during the period we
re 38,000, and actual factory overhead was $215,000. What was the amount of unde
r- or overapplied factory overhead?
a. $10,000 underapplied
b. $15,000 underapplied
c. $25,000 underapplied
d. $10,000 overapplied
ANS: C
Predetermined overhead rate = Budgeted factory overhead
Budgeted machine hours

$200,000/ 40,000 hours = $5/ machine hour

Applied factory overhead = 38,000 x $5 $190,000


Actual factory overhead incurred 215,000
Underapplied factory overhead $(25,000)

PTS: 1 DIF: Hard REF: P. OBJ: 7


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

32. Cooper Company had overapplied factory overhead of $2,000 last year. Assuming t
he amount was considered small enough not to materially distort net income, the e
ntries needed to close factory overhead are:
a. Factory Overhead 2,000
Applied Factory Overhead 2,000

Applied Factory Overhead 2,000


Cost of Goods Sold 2,000
b. Factory Overhead 2,000
Under- and Overapplied
Factory Overhead 2,000

Cost of Goods Sold 2,000


Under- and Overapplied
Factory Overhead 2,000

c. Factory Overhead 2,000


Under- and Overapplied
Factory Overhead 2,000

Under- and Overapplied Factory


Overhead 2,000
Cost of Goods Sold 2,000

d. Factory Overhead 2,000


Applied Factory Overhead 2,000

Applied Factory Overhead 2,000


Cost of Goods Sold 2,000

ANS: C
After closing the Applied Factory Overhead account into the Factory Overhead Acc
ount, the Factory Overhead Account will have a credit balance of $2,000. A debit
for $2,000 will be needed to close the Factory Overhead Account into the Under-
and Overapplied Factory Overhead Account, which will be credited for $2,000. A d
ebit of $2,000 will then be needed to close the Under- and Overapplied Factory Ov
erhead account to Cost of Goods Sold, which will be credited for $2,000.

PTS: 1 DIF: Moderate REF: P. OBJ: 7


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

33. The method of distributing service department costs to production departments wh


ich makes no attempt to determine the extent to which one service department rend
ers its services to another department is the:
a. Direct distribution method.
b. Sequential distribution method.
c. Service department distribution method.
d. Algebraic distribution method.
ANS: A
The direct distribution method distributes service department costs to productio
n departments without regard to any services the service departments render to ea
ch other.

PTS: 1 DIF: Easy REF: P. OBJ: 5


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

34. The method of distributing service department costs to production departments wh


ich distributes service department costs regressively to other service department
s, and then to production departments is the:
a. Direct distribution method.
b. Sequential distribution method.
c. Service department distribution method.
d. Algebraic distribution method.
ANS: B
The sequential distribution method distributes service department costs regressi
vely to other service departments and then to production departments.

PTS: 1 DIF: Easy REF: P. OBJ: 5


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

35. The number of workers in the departments served would most likely be the basis for distributing the
cost of which service department?
a. Human Resources
b. Tool Room
c. Building Maintenance
d. Machine Shop
ANS: A
The number of workers in the departments served would be an appropriate basis to
distribute the costs of the Human Resource Department to other departments.

PTS: 1 DIF: Easy REF: P. OBJ: 5


NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

36. The most appropriate basis for allocating the factory building rent to specific departme
nts would be the:
a. Number of machines in each department.
b. Number of employees in each department.
c. Square footage of each department.
d. Amount of time the plant manager spends in the department.
ANS: C
Factory rent should be allocated to departments based on the amount of space eac
h department occupies within the factory.

PTS: 1 DIF: Moderate REF: P. OBJ: 4


NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

37. The report that is prepared after the posting is completed at the end of the acc
ounting period that shows the items of expense by department and in total, and is
used to prove the balance of the Factory Overhead Control account is the:
a. Schedule of Fixed Cost.
b. Summary of Factory Overhead.
c. Flexible Budget.
d. Subsidiary Ledger.
ANS: B
The Summary of Factory Overhead shows the items of expense by department and in
total and is used to prove the balance of the Factory Overhead Control account.

PTS: 1 DIF: Moderate REF: P. OBJ: 4


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

38. Which of the following statements about semivariable costs is not true?
a. They first have to be broken down into their fixed and variable components befo
re they can be used to predict costs at different levels of volume.
b. They are sometimes called mixed costs.
c. They vary in direct proportion to volume changes.
d. They may remain constant over a range of production, then abruptly change.
ANS: C
Variable costs vary in direct proportion to volume changes.

PTS: 1 DIF: Moderate REF: P. OBJ: 1


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

39. A major disadvantage of the scattergraph method of analyzing cost behavior is:
a. It bases its solution on only two observations.
b. It results in its analyzed cost being treated as either fixed or variable, base
d on which type of behavior it more closely resembles.
c. Two persons could draw different lines through the data points.
d. It enables non-representative points, called outliers, to be identified.
ANS: C
(a) is a disadvantage of the high-low method.
(b) is a disadvantage of the observation method.
(d) is an advantage of the scattergraph method.

PTS: 1 DIF: Moderate REF: P. OBJ: 2


NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

40. Stanforth Company’s flexible budget for 50,000 units shows $100,000 and $150,000 in variable and
fixed costs, respectively. At 60,000 units, the flexible budget would show:
a. Variable costs of $150,000 and fixed costs of $150,000.
b. Variable costs of $120,000 and fixed costs of $180,000.
c. Variable costs of $100,000 and fixed costs of $180,000.
d. Variable costs of $120,000 and fixed costs of $150,000.
ANS: D
Variable costs per unit = $100,000/50,000 = $2 per unit.

60,000 units x $2 = $120,000. Fixed costs of $150,000 remain constant.

PTS: 1 DIF: Hard REF: P. OBJ: 3


NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic

41. Methods for separating semivariable costs into their fixed and variable componen
ts include all of the following except the:
a. High-low method.
b. Allocation method.
c. Scattergraph method.
d. Observation method.
ANS: B
The high-low, scattergraph and observation methods are all methods used to separ
ate semivariable costs into their fixed and variable components.

PTS: 1 DIF: Easy REF: P. OBJ: 2


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic
42. Nutt Industries electricity costs and machine hours over a six-month period foll
ow:

Machine Electricity
Hours Cost
January 2,000 $4,800
February 2,500 5,200
March 3,000 5,400
April 2,400 5,000
May 2,800 5,600
June 2,200 5,000

Using the high-low method, what is the estimated electricity cost per machine ho
ur?

a. $.60
b. $1.67
c. $1.00
d. $.80
ANS: A
Variable cost:
Machine Hours Electricity Costs
High volume 3,000 $5,400
Low volume 2,000 4,800
Difference 1,000 $ 600

Variable cost per labor hour = $600 / 1,000 hours = $.60/machine hour

PTS: 1 DIF: Moderate REF: P. OBJ: 2


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

43. Nutt Industries electricity costs and machine hours over a six-month period foll
ow:

Machine Electricity
Hours Cost
January 2,000 $4,800
February 2,500 5,200
March 3,000 5,400
April 2,400 5,000
May 2,800 5,600
June 2,200 5,000

Using the high-low method, what is the formula that can be used to estimate elec
tricity costs at different levels of volume?

a. Electricity costs = $2,800 + ($1.00 x number of machine hours)


b. Electricity costs = $2,600 + ($1.00 x number of machine hours)
c. Electricity costs = $400 + ($1.67 x number of machine hours)
d. Electricity costs = $3,600 + ($.60 x number of machine hours)
ANS: D
Variable cost:
Machine Hours Electricity Costs
High volume 3,000 $5,400
Low volume 2,000 4,800
Difference 1,000 $ 600

Variable cost per labor hour = $600 / 1,000 hours = $.60/machine hour

Fixed cost:
2,000 Hours 3,000 Hours
Cost $4,800 $5,400
Variable @ $.60/hour 1,200 1,800
Difference $3,600 $3,600

Electricity costs = $3,600 + ($.60 x number of machine hours)

PTS: 1 DIF: Hard REF: P. OBJ: 2


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

44. Variable overhead costs include all of the following except:


a. Electricity to power machinery.
b. Indirect materials.
c. Rental of factory building.
d. Small tools.
ANS: C
The rent paid for the factory would not vary with production levels. The costs
of electricity, indirect materials and small tools would increase as production l
evels increased.

PTS: 1 DIF: Easy REF: P. OBJ: 1


NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

45. Fixed overhead cost includes all of the following except:


a. Electricity to heat and light the factory.
b. Depreciation on machinery based on the number of hours the equipment is used.
c. The plant manager’s salary.
d. The salary of the security guard at the front door.
ANS: B
Depreciation calculated based on the number of hours the equipment is used is a
variable cost.

PTS: 1 DIF: Moderate REF: P. OBJ: 1


NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

46. Consider the following costs:


I. The cost of electricity which is used to power machinery and light the pl
ant.
II. Depreciation on the building which houses both the factory and the sales
office.

Which of the following statements is true?


a. Only statement I is an example of a semivariable cost.
b. Only statement II is an example of a semivariable cost.
c. Both statements I and I are examples of semivariable costs.
d. Neither statement I nor II is an example of a semivariable cost.
ANS: A
The electricity cost has both fixed and variable components, making it a semivar
iable cost. The building depreciation is a fixed cost which has both manufacturi
ng and selling cost components.

PTS: 1 DIF: Moderate REF: P. OBJ: 1


NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

47. An predetermined factory overhead rate is computed by dividing


a. Actual overhead cost by actual activity.
b. Actual overhead cost by budgeted activity.
c. Budgeted overhead by actual activity.
d. Budgeted overhead by budgeted activity.
ANS: D
Overhead needs to be allocated through a period of time. Actual costs and activ
ity per period are not known until the period is done.

PTS: 1 DIF: Easy REF: P. OBJ: 6


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

48. Which of the following is most likely to be considered a service department in a


manufacturing plant?
a. Assembly
b. Maintenance
c. Finishing
d. Fabrication
ANS: B
A maintenance department is a service provided to direct production departments,
such as those listed in answers a, c, and d.

PTS: 1 DIF: Moderate REF: P. OBJ: 5


NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

PROBLEM

1. You have been hired by Thompson Waterfall Manufacturing. Your first task is exa
mine different distribution methods for applying factory overhead to the various
production orders that are processed during a year.

The following information was taken from the annual budget:

Direct labor hours 80,000


Machine hours 160,000

Manufacturing costs:
Direct labor $400,000
Direct materials 190,000
Indirect labor 65,000
Electric power 46,000
Payroll taxes 12,800
Machine maintenance and repair 10,200
Factory supplies 17,000
Factory heat and light 15,000
Depreciation, taxes, and insurance:
Factory buildings 124,000
Machinery 310,000
$1,190,000

Determine the following factory overhead application rates under each of the
a. following methods:
(1) Direct labor cost
(2) Direct labor hours
(3) Machine hours

b. Prepare a schedule showing the prime cost and total cost of Order 329 with th
e factory overhead costs applied on each of the three bases; Job Cost Sheet 329 s
hows the following: raw materials, $6,200; direct labor, 6,000 hours and $29,000
; machine hours, 2,800.

ANS:
(a) Factory overhead costs:
Indirect labor $ 65,000
Electric power 46,000
Payroll taxes 12,800
Machine maintenance and repair 10,200
Factory supplies 17,000
Factory heat and light 15,000
Depreciation, taxes, and insurance:
Factory buildings 124,000
Machinery 310,000
$600,000

(1) Direct labor cost: $600,000/$400,000 = 150%

(2) Direct labor hours: $600,000/80,000 = $7.50/hour

(3) Machine hours: $600,000/160,000 = $3.75/hour

(b) ORDER 329


Direct Direct
Labor Labor Machine
Cost Hours Hours
Raw materials $ 6,200 $ 6,200 $ 6,200
Direct labor 29,000 29,000 29,000
Factory overhead:
150% ´ $29,000 43,500
6,000 hours ´ $7.50 45,000
2,800 hours ´ $3.75 10,500
$78,700 $80,200 $45,700
PTS: 1 DIF: Hard REF: P. OBJ: 6
NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

2. The controller has asked you to examine different distribution methods for apply
ing factory overhead to the various production orders that are processed during a
year.

The following information was taken from the annual budget:

Direct labor hours 84,000


Machine hours 120,000

Manufacturing costs:
Direct labor $525,000
Direct materials 180,000
Indirect labor 75,000
Electric power 48,000
Payroll taxes 12,600
Machine maintenance and repair 9,200
Factory supplies 16,000
Factory heat and light 14,000
Depreciation, taxes, and insurance:
Factory buildings 135,000
Machinery 320,200
$1,335,000

Actual results for the year follow:


Direct labor hours 85,000
Machine hours 110,000

Manufacturing costs:
Direct labor $ 540,000
Direct material 200,000
Factory overhead 625,000
$1,365,000

a. Determine the following factory overhead application rates under each of the
following methods:
(1) Direct labor cost
(2) Direct labor hours
(3) Machine hours

b. Determine the under- or overapplied factory overhead under each of the follow
ing methods:
(1) Direct labor cost
(2) Direct labor hours
(3) Machine hours

ANS:
(a) Factory overhead costs:
Indirect labor $ 75,000
Electric power 48,000
Payroll taxes 12,600
Machine maintenance and repair 9,200
Factory supplies 16,000
Factory heat and light 14,000
Depreciation, taxes, and insurance:
Factory buildings 135,000
Machinery 320,200
$630,000
Predetermined factory overhead rates:
(1) Direct labor cost: $630,000/$525,000 = 120%

(2) Direct labor hours: $630,000/84,000 hours = $7.50/hour

(3) Machine hours: $630,000/120,000 hours = $5.25/hour

(b) Applied factory overhead:


(1) Direct labor cost: $540,000 x 120% = $648,000

(2) Direct labor hours: 85,000 hours x $7.50/hour = $637,500

(3) Machine hours: 110,000 hours x $5.25/hour = $577,500

Under- or overapplied factory overhead:


Direct labor Direct labor hours Machine
cost hours
Applied factory overhead $648,000 $637,500 $ 577,500
Actual factory overhead 635,000 625,000 625,000
Over-(Under)applied factory
overhead $ 23,000 $ 12,500 $(47,500)

PTS: 1 DIF: Hard REF: P. OBJ: 6, 7


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

3. Factory overhead for the Praeger Company has been estimated as follows:

Fixed overhead $122,500


Variable overhead $90,000

Budgeted direct labor hours 42,500

Production for the month was 90 percent of the budget, and actual factory overhe
ad totaled $175,000.

Calculate:
a. The predetermined factory overhead rate.
b. The under- or overapplied factory overhead.

ANS:
$122,500 + $90,000 $5.00
(a) Predetermined overhead rate = =
42,500 DLH DLH

(b) Applied overhead (38,250 hrs ´ $5.00/DL hr) $191,250


Actual overhead 175,000
Overapplied factory overhead $ 16,250

PTS: 1 DIF: Moderate REF: P. OBJ: 6, 7


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

4. Estimates made for a production department of the Automate Company for the month
of October show:

Budgeted factory overhead for hours worked $17,360


Estimated direct labor hours 3,100

Factory overhead is applied on the basis of direct labor hours. On October 31, t
he records show these account balances:

Actual overhead $18,625


Factory overhead applied 19,180

Prepare the entry or entries to close out the two factory overhead account balan
ces to set up the overapplied or underapplied factory overhead, and to close the
balance in under- or overapplied factory overhead to Cost of Goods Sold.

ANS:

Applied Factory Overhead 19,180


Factory Overhead 19,180

Factory Overhead 555


Under- and Overapplied Factory Overhead 555

Under- and Overapplied Factory Overhead 555


Cost of Goods Sold 555

PTS: 1 DIF: Moderate REF: P. OBJ: 7


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

5. Jarcly Manufacturing Company uses activity-based costing. The factory overhead


budget for the coming period is $1,053,000, consisting of the following:

Cost Pool Budgeted Amount


Supervision $ 320,000
Machine usage 420,000
Machine setups 187,000
Design changes 126,000
Totals $1,053,000

The potential allocation bases and their estimated amounts were as follows:
Allocation Base Budgeted Amount
Number of design changes 35
Number of setups 110
Machine hours 6,000
Direct labor hours 10,000

a. Determine the overhead rate for each cost pool, using the most appropriate al
location base for each pool.
b. Job 80130 required $45,000 for direct materials, $20,000 for direct labor, 2,
000 direct labor hours, 800 machine hours, five setups, and four design changes.
Determine the cost of Job 80130.

ANS:

(a) Supervision: $320,000 / 10,000 = $32 -- direct labor hour


Machine usage: $420,000 / 6,000 = $70 -- machine hour
Machine setups: $187,000 / 110 = $1,700 -- setup
Design changes: $126,000 / 35 = $3,600 -- design change

(b) Direct materials $ 45,000


Direct labor 20,000
Supervision ($32 ´ 2,000) 64,000
Machine usage (800 ´ 70) 56,000
Machine setups (5 ´ 1,700) 8,500
Design changes (4 ´ 3,600) 14,400
Total $207,900

PTS: 1 DIF: Hard REF: P. OBJ: 6


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

6. Kater Company manufactures shelving units. The company receives pre-cut wood, d
rills holes in the wood so that movable shelves may be installed, then assembles
and paint the units. Classify each of the following items of factory overhead as
either fixed or variable cost.

a. Janitorial service (an outside service, not company employees)

b. Supervisor of the Drilling Department

c. Oil used to lubricate drill press machines

d. Propane for forklift trucks used to move the material from the Drilling Departme
nt to the Assembly Department

e. Natural gas used to heat the plant

f. Security guard

g. Drill bits used in the drilling department

h. Insurance on factory building

i. Electricity to power drill press machines


j. Rent of factory building

ANS:
a. Fixed. A janitorial service is most likely hired for a nightly cleaning, regard
less of production volume.
b. Fixed. The cost of supervisors is likely to remain constant unless production v
olumes increase significantly.
c. Variable. The higher the production volume, the more the presses will run and m
ore oil will be required to lubricate them.
d. Variable. The higher the production volume, the more the forklifts will be need
ed to move materials to the Assembly Department.
e. Fixed. Heating costs will not vary in proportion to production volumes.
f. Fixed. Increased production volumes will not necessitate additional security, w
hich is dictated more by plant size, location and type of business.
g. Variable. Drill bits wear out as they are being used. Increased production vol
umes will call for an increased number of drill bits.
h. Fixed. Insurance premium based on value of building, not on production volumes.
i. Variable. Increased production volumes will necessitate increased electricity u
sage.
j. Fixed. Building rental determined by contract, not production volumes.

PTS: 1 DIF: Moderate REF: P. OBJ: 1


NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

7. Perry Company has two service departments, Maintenance and Human Resources, and
two production departments, Machining and Assembly. The following data have been
estimated for next year’s operations:
Department: Direct Charges Square Footage Labor Hours
Human Resources $135,000 -- --
Maintenance 100,000 -- 5,000
Machining 275,000 2,000 20,000
Assembly 225,000 3,000 25,000

The Human Resources Department services all departments.

Requirements:
(1) Distribute the service department costs using the direct distribution method.
(2) Distribute the service department costs using the sequential distribution method
with the department servicing the greatest number of other departments being dis
tributed first.
(3) Using the results from the direct distribution method, calculate the predetermin
ed factory overhead rate for the machining department using labor hours as the ba
sis.

ANS:
(1) Direct Distribution Method:
Human
Resources Maintenance Machining Assembly Total
Total direct charges 135,000 100,000 275,000 225,000 735,000
Human resources
distribution (labor hrs.)
Machining
60,000
20,000 x $3.00*
Assembly
25,000 x 3.00
75,000
Maintenance distribution
(sq. ft.)
Machining
40,000
2,000 x $20.00**
Assembly
3,000 x 20.00 60,000
375,000 360,000 735,000
* $135,000/(20,000 + 25,000) labor hours = $3.00/labor hour
** $100,000/(2,000 + 3,000) square feet = $20.00/square foot

(2) Sequential Distribution Method


Human
Resources Maintenance Machining Assembly Total
Total direct charges 135,000 100,000 275,000 225,000 735,000
Human resources
distribution (labor hrs.)
Maintenance
13,500
5,000 x $2.70*
113,500
Machining 54,000
20,000 x 2.70
Assembly
25,000 x 2.70 67,500
Maintenance distribution
(sq. ft.)
Machining
45,400
2,000 x $22.70**
Assembly
3,000 x 22.70 68,100
374,400 360,600 735,000

* $135,000/(5,000 + 20,000 + 25,000) labor hours = $2.70/labor hour


** $113,500/(2,000 + 3,000) square feet = $22.70/square foot

(3) $375,000/20,000 = $18.75/labor hour

Note to instructor: To reduce the difficulty of the problem, assign requirement


s 1 and 3 only, or requirement 2 only.

PTS: 1 DIF: Hard REF: P. OBJ: 5


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

8. Santorini Ltd. has accumulated the following data over a six-month period:

Indirect Labor Indirect Labor Cost


Hours
January 500 $ 9,500
February 400 9,000
March 600 10,000
April 800 12,000
May 700 11,000
June 650 10,500

Determine the formula that could be used to determine Santorini’s indirect labor cost at various levels
of production using the high-low method.

ANS:
Variable cost:
Labor Hours Labor Costs
High volume 800 $12,000
Low volume 400 9,000
Difference 400 $ 3,000

Variable cost per labor hour = $3,000 / 400 hours = $7.50/labor hour

Fixed cost:
400 Hours 800 Hours
Cost $9,000 $12,000
Variable @ $7.50/hour 3,000 6,000
Difference $6,000 $ 6,000

Santorini’s cost formula:


Indirect labor costs = $6,000 + ($7.50 x number of indirect labor hours)

PTS: 1 DIF: Moderate REF: P. OBJ: 2


NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

9. Domino Bakery has the following budget at 1,000,000 dozen donuts baked:

Direct materials $300,000


Direct labor 250,000
Variable factory overhead 200,000
Fixed factory overhead 180,000
$930,000

(1) Compute the cost per dozen donuts at 1,000,000 dozen.


(2) Develop the budget for 1,200,000 dozen donuts.
(3) Compute the cost per dozen donuts at 1,200,000 dozen.
(4) Explain why the difference in the cost per dozen occurs at the different levels
of volume.

ANS:
(1) Cost per dozen = $930,000/1,000,000 dozen = $.93/dozen donuts
(2)
Budget @ 1,200,000
Cost per dozen dozen
Direct materials 300,000/1,000,000 = .30/dozen $ 360,000
Direct labor 250,000/1,000,000 = .25/dozen 300,000
Variable factory overhead 200,000/1,000,000 = .20/dozen 240,000
Fixed factory overhead 180,000
$1,080,000

(3) Cost per dozen = $1,080,000/1,200,000 dozen = $.90/dozen donuts

(4) The cost per dozen decreases as volume increases because fixed costs are spread
over a larger number of units.

PTS: 1 DIF: Moderate REF: P. OBJ: 3


NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic

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