Managerial Accounting for Managers 3rd Edition Solution Manual

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Solutions Manual, Chapter 3 1

Chapter 3

Job-Order Costing

Solutions to Questions

3-1 By definition, manufacturing overhead

consists of costs that cannot be practically traced

to jobs. Therefore, if these costs are to be a s-

signed to jobs, they must be allocated rather than

traced.

3-2 The first step is to estimate the total

amount of the allocation base (the denominator)

that will be required for next period's estimated

level of production. The second step is to est i-

mate the total fixed manufacturing overhead cost

for the coming period and the variable manufa c-

turing overhead cost per unit of the allocation

base. The third step is to use the cost formula

Y

=

a

+

bX

to estimate the total manufacturing

overhead cost (the numerator) for the coming

period. The fourth step is to compute the prede-

termined overhead rate.

3-3 The job cost sheet is used to record all

costs that are assigned to a particular job. These

costs include direct materials costs traced to the

job, direct labor costs traced to the job, and

manufacturing overhead costs applied to the job.

When a job is completed, the job cost sheet is

used to compute the unit product cost.

3-4 Some production costs such as a factory

manager's salary cannot be traced to a particular

product or job, but rather are incurred as a result

of overall production activities. In addition, some

production costs such as indirect materials cannot

be easily traced to jobs. If these costs are to be

assigned to products, they must be allocated to

the products.

3-5 If actual manufacturing overhead cost is

applied to jobs, the company must wait until the

end of the accounting period to apply overhead

and to cost jobs. If the company computes actual

overhead rates more frequently to get around this

problem, the rates may fluctuate widely due to

seasonal factors or variations in output. For this

reason, most companies use predetermined over-

head rates to apply manufacturing overhead costs

to jobs.

3-6 The measure of activity used as the all o-

cation base should drive the overhead cost; tha t

is, the allocation base should cause the overhead

cost. If the allocation base does not really cause

the overhead, then costs will be incorrectly a t-

tributed to products and jobs and product costs

will be distorted.

3-7 Assigning manufacturing overhead costs

to jobs does not ensure a profit. The units pr o-

duced may not be sold and if they are sold, they

may not be sold at prices sufficient to cover all

costs. It is a myth that assigning costs to pro d-

ucts or jobs ensures that those costs will be r e-

covered. Costs are recovered only by selling to

customers— not by allocating costs.

3-8 The Manufacturing Overhead account is

credited when overhead cost is applied to Work in

Process. Generally, the amount of overhead a p-

plied will not be the same as the amount of actual

cost incurred because the predetermined ove r-

head rate is based on estimates.

3-9 Underapplied overhead occurs when the

actual overhead cost exceeds the amount of

overhead cost applied to Work in Process invento-

ry during the period. Overapplied overhead occurs

when the actual overhead cost is less than the

amount of overhead cost applied to Work in Pr o-

cess inventory during the period. Underapplied or

overapplied overhead is disposed of by either

closing out the amount to Cost of Goods Sold or

by allocating the amount among Cost of Goods

Sold and ending inventories in proportion to the

applied overhead in each account. The adjus t-

ment for underapplied overhead increases Cost of

Managerial Accounting for Managers 3rd Edition Solution Manual

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