Chapter 4

Management Accounting, 6e (Atkinson et al.
)
Chapter 4 Accumulating and Assigning Costs to Products
Objective 1
1) Overhead costs such as factory rent and supervisory salaries are allocated to cost objects in a
multi-product facility.
Answer: TRUE
Diff: 1
Terms: overhead cost
Objective: 1
AACSB: Reflective thinking
2) In job order costing, only direct costs are used to determine the cost of a job.
Answer: FALSE
Explanation: In job order costing, direct costs and indirect costs are used to determine the cost of
a job.
Diff: 1
Terms: direct cost, indirect cost
Objective: 1
3) Job order costing:
A) can only be used in manufacturing.
B) records the flow of costs for each customer.
C) allocates an equal amount of cost to each unit made during a time period.
D) is commonly used when each unit of output is identical.
Answer: B
Diff: 1
Terms: job order costing
Objective: 1
4) All of the following create problems with accurate product or job costing EXCEPT:
A) incorrect job numbers are recorded on source documents.
B) bar coding is used to record materials used on the job.
C) using budgeted overhead costs to determine overhead cost allocation rates.
D) a computer screen requests an employee number before that employee is able to work on
information related to a specific job.
Answer: B
Diff: 1
Objective: 1
1
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall
5) A job that shows low profitability may be the result of all of the following EXCEPT:
A) inefficient use of direct materials.
B) inefficient direct manufacturing labor.
C) overpricing the job.
D) over-allocating overhead costs.
Answer: C
Diff: 2
Terms: overhead
Objective: 1
Objective 2
1) The raw material used in a product that can be easily traced to the product is generally
classified as an indirect cost.
Answer: FALSE
Explanation: The raw material used in a product that can be easily traced to the product is
generally classified as a direct cost.
Diff: 1
Terms: direct cost
Objective: 2
2) An indirect cost will be traced to the cost object.
Answer: FALSE
Explanation: A direct cost will be traced to the cost object.
Diff: 1
Terms: direct cost
Objective: 2
3) An example of a direct cost for a service provided by an accounting firm, such as a tax return,
would be:
A) depreciation on computer system.
B) labor of staff accountant who prepared the return.
C) labor of file clerk who filed copies of return.
D) rent on the office.
Answer: B
Diff: 1
Terms: direct cost
Objective: 2
2
4) An example of a direct cost in a car repair shop would include:

A) parts used in repair.
B) supervisory labor.
C) depreciation on tools.
D) property taxes on car repair shop.
Answer: A
Diff: 1
Terms: direct cost
Objective: 2
5) In a manufacturing environment, an indirect cost such as ________ would usually be allocated
to a cost object.
A) utilities
B) raw materials
C) labor of employees who operate manufacturing equipment
D) labor of administrative secretaries
Answer: D
Diff: 1
Terms: indirect costs
Objective: 2
6) In the manufacture of cans of beans, all of the following would likely be allocated to a cost
object EXCEPT:
A) utilities.
B) supervisory labor.
C) depreciation on equipment used to can multiple products.
D) beans.
Answer: D
Diff: 1
Objective: 2
7) A cost that depends on the amount of resource that is used is referred to as a
A) fixed cost.
B) variable cost.
C) direct cost.
D) indirect cost.
Answer: B
Diff: 1
Terms: variable cost
Objective: 2
3
8) A cost that is uniquely and unequivocally attributable to a single cost object is a:

A) capacity related resource.
B) consumable resource.
C) indirect cost.
D) direct cost.
Answer: A
Diff: 2
Terms: direct cost
Objective: 2
9) Depreciation on factory equipment is best characterized as
A) direct costs.
B) fixed manufacturing overhead.
C) variable overhead.
D) period costs.
Answer: D
Diff: 1
Terms: period cost
Objective: 2
10) Depreciation on computers at the corporate headquarters is best characterized as
A) direct costs.
B) fixed manufacturing overhead.
C) variable overhead.
D) period costs.
Answer: D
Diff: 1
Terms: period cost
Objective: 2
4
11) Distinguish between direct and indirect costs. Give examples of each with regard to a
specific product.
Answer: Direct costs are those costs that can be easily traced to the product and include direct
materials and direct labor. In the manufacture of a baseball bat, the wood would be the direct
material and the labor of the employees who cut and shape the wood would be direct labor.
Indirect costs are costs that cannot easily be traced to the product because it is not possible or
economically feasible to figure out what quantity of the resource was consumed by the
manufacture of the product. Indirect costs must be allocated to products. Indirect costs for the
manufacture of a baseball bat would include the depreciation on the machines used in the
manufacturing process and the utilities for the manufacturing facility.
Diff: 2
Terms: cost driver rate
Objective: 2
MAL: This question is not available in MyAccountingLab.
Objective 3
1) The practical capacity of a cost driver is the short-term capacity made available by the amount
of resources committed to an overhead activity.
Answer: FALSE
Explanation: The practical capacity of a cost driver is the long-term capacity made available by
the amount of resources committed to an overhead activity.
Diff: 2
Terms: practical capacity
Objective: 3
2) Determining cost pools and realistic cost driver rates is a relatively complex process.
Answer: TRUE
Diff: 1
Terms: cost pools
Objective: 3
3) The costs grouped in a cost pool should be driven by the same activity.
Answer: TRUE
Diff: 1
Terms: cost pools
Objective: 3
5
4) In a job order costing system, a cost driver rate is used to apply direct manufacturing costs to a
specific product.
Answer: FALSE
Explanation: In a job order costing system, a cost driver rate is used to apply indirect
manufacturing costs to a specific product
Diff: 1
Terms: job order cost system
Objective: 3
5) In a normal job order costing system even though the cost driver rate is based on estimates,
overhead costs are applied to products based on actual levels of activity.
Answer: TRUE
Diff: 2
Terms: job order cost system
Objective: 3
6) When demand for a product is low, a higher markup should be used since a larger share of the
fixed costs needs to be allocated to each product.
Answer: FALSE
Explanation: When demand for a product is low, a lower markup should be used since a larger
share of the fixed costs needs to be allocated to each product.
Diff: 1
Terms: fixed cost
Objective: 3
7) Labor hours are always an appropriate cost driver in a manufacturing environment.
Answer: FALSE
Explanation: Machine hours is always an appropriate cost driver in a manufacturing
environment.
Diff: 1
Terms: cost driver
Objective: 3
8) The over-allocation of overhead to a product distorts the product's cost and therefore the
evaluation of the product's profitability.
Answer: TRUE
Diff: 2
Terms: overhead
Objective: 3
6
9) In job order costing, individual jobs and products will be allocated different amounts of
overhead costs depending on whether a single cost pool or multiple cost pools is used.
Answer: TRUE
Diff: 2
Terms: cost pools
Objective: 3
10) In a job order costing system, a manufacturing firm typically uses a cost driver rate to
estimate the ________ used for a job.
A) direct materials
B) direct labor
C) variable overhead
D) total costs
Answer: C
Diff: 1
Terms: variable overhead
Objective: 3
11) The normal cost of overhead activities includes:
A) costs of resources committed to the particular activity.
B) amounts for additional overtime payments.
C) allowances for idle time.
D) All of the above are correct.
Answer: A
Diff: 2
Terms: overhead
Objective: 3
12) For each cost pool, a(n) ________ is identified that is the primary factor causing overhead
costs to increase during the accounting period.
A) activity
B) job
C) level
D) process
Answer: A
Diff: 1
Terms: cost pools
Objective: 3
7
13) For the activity cost driver rate, overhead costs ________ should be used in the calculation.
A) actually consumed
B) made available
C) based on a seasonal average
D) None of the above is correct.
Answer: D
Diff: 2
Objective: 3
14) The predetermined overhead cost driver rate is calculated using ________ overhead costs.
A) actual
B) allocated
C) direct
D) estimated
Answer: D
Diff: 2
Objective: 3
Rupe Company has two departments: Machining and Assembly. The following estimates are for
the coming year:
Direct labor hours
Machine hours
Manufacturing overhead
costs
Machining
30,000
150,000
Assembly
40,000
200,000
$600,000
$800,000
15) A single predetermined manufacturing cost driver rate based on total plant direct labor hours
is:
A) $ 4 per direct labor hour.
B) $10 per direct labor hour.
C) $20 per direct labor hour.
D) $40 per direct labor hour..
Answer: C
Diff: 2
Objective: 3
AACSB: Analytical skills
8
16) A predetermined manufacturing cost driver rate for the Machining Department based on the
number of machine hours in that department is:
A) $ 4 per machine hour.
B) $10 per machine hour.
C) $20 per machine hour.
D) $40 per direct labor hour.
Answer: A
Explanation: A) $4 per machine hour = $600,000/150,000 mh
Diff: 2
Objective: 3
For 2011, Steve's Plastics Manufacturing uses a normal job order costing system. The accounting
records contain the following information:
Estimated manufacturing overhead (overhead)
costs
Actual manufacturing overhead costs
Estimated machine hours
Actual machine hours
$100,000
$120,000
20,000
25,000
The only cost driver is machine hours.

17) Using normal job order costing, the 2011 predetermined manufacturing overhead cost driver
rate is:
A) $4.00 per machine hour.
B) $4.80 per machine hour.
C) $5.00 per machine hour.
D) $6.00 per machine hour.
Answer: C
Explanation: C) $5.00 per machine hour = $100,000 / 20,000 estimated mh
Diff: 2
Objective: 3
9
18) Using normal job order costing, the amount of manufacturing overhead costs allocated to
jobs during 2011 is:
A) $150,000.
B) $125,000.
C) $120,000.
D) $100,000.
Answer: B
Explanation: B) $125,000 = $5.00 per machine hour 25,000 actual mh
Diff: 2
Terms: cost driver rate, job order costing
Objective: 3
Ocean Technical Services applies manufacturing overhead costs to products at a predetermined
rate of $70 per direct labor hour. One customer has requested a bid on a special order of a
product. Estimates for this order include: direct materials $50,000; direct labor 900 direct labor
hours @ $30 per hour; and a markup rate of 25%.
19) Manufacturing overhead cost estimates for this special order total:
A) $7,000.
B) $36,000.
C) $45,990.
D) $63,000.
Answer: D
Explanation: D) $63,000 = 900 dlh $70 predetermined rate
Diff: 2
Objective: 3
20) Estimated total product costs for this special order equal:
A) $77,000.
B) $97,000.
C) $140,000.
D) $175,000.
Answer: C
Explanation: C) $140,000 = DM $50,000 + DL $27,000 + MOH $63,000
Diff: 2
Objective: 3
10
21) The bid price for this special order is:

A) $77,000.
B) $97,000.
C) $121,250.
D) $175,000.
Answer: D
Explanation: D) $175,000 = $140,000 1.25
Diff: 3
Objective: 3
LCR Company manufactures paint and applies manufacturing overhead costs to production at a
predetermined rate of $20 per direct labor hour. The following data are obtained from the
accounting records for October 2011:
Direct materials
Direct labor (20,000 hours @ $31/hour)
Plant facility rent
Plant facility insurance
Other miscellaneous plant costs
Depreciation on machinery and
equipment
Sales commissions
Administrative expenses
$1,320,000
$620,000
$ 140,000
$ 80,000
$ 20,000
$ 180,000
$ 60,000
$ 100,000
22) The actual amount of manufacturing overhead costs incurred in October 2011 total:
A) $2,180,000
B) $ 480,000
C) $ 420,000
D) $ 160,000
Answer: C
Explanation: C) $420,000 = $140,000 + $80,000 + $20,000 + $180,000
Diff: 2
Objective: 3
11
23) The amount of manufacturing overhead costs applied to all jobs during October 2011 total:
A) $ 102,000.
B) $400,000.
C) $620,000.
D) $1,240,000.
Answer: B
Explanation: B) $400,000 = 20,000 dlh $20 predetermined overhead rate
Diff: 3
Terms: cost driver rate, job order costing, overhead
Objective: 3
Wisconsin Electronics has received an order for 1,000 specially designed TV/VCR
combinations. The following standards were compiled for this order:
Direct materials:
Part #123
Part #456
Direct labor:
Manufacturing
overhead:
$25 per TV/VCR

$50 per TV/VCR
2.0 hours per TV/VCR at $15 per
hour
$40 per direct labor hour
24) The estimated direct labor cost for this order is:
A) $30,000.
B) $40,000.
C) $80,000.
D) $115,000.
Answer: A
Explanation: A) $30,000 = 1,000 unit order 2.0 dlh $15 per hour
Diff: 2
Objective: 3
12
25) The estimated manufacturing overhead cost assigned to this order totals:
A) $30,000.
B) $40,000.
C) $80,000.
D) $115,000.
Answer: C
Explanation: C) $80,000 = 1,000 unit order 2.0 dlh $40 per hour
Diff: 2
Objective: 3
26) Assume the company adds a 10% markup to arrive at a selling price. The bid price for this
order totals:
A) $203,500.
B) $185,000.
C) $115,500.
D) $80,000.
Answer: A
Explanation: A) $203,500 = (DM $75,000 + DL $30,000 + MOH $80,000) 1.10
Diff: 3
Objective: 3
13
Wood Manufacturing is a small textile manufacturer using machine-hours as the single, plantwide predetermined cost driver rate to allocate manufacturing overhead costs to the various jobs
contracted during the year. The following estimates are provided for the coming year for the
company and for the Winfield High School band jacket job:
Direct materials
Direct labor
costs
Machine-hours
Company
$40,000
$10,000
$30,000
100,000
Winfield High School

Job
$1,000
$ 200
900
27) For Wood Manufacturing, what is the annual manufacturing overhead cost driver rate?
A) $0.50 per machine hour
B) $0.80 per machine hour
C) $0.30 per machine hour
D) $33.33 per machine hour
Answer: C
Explanation: C) $0.30 per mh = $30,000 / 100,000mh
Diff: 2
Objective: 3
28) What amount of manufacturing overhead costs will be allocated to the Winfield job?
A) $270
B) $720
C) $450
D) $30,000
Answer: C
Explanation: C) $270 = 900 mh $0.30 per mh
Diff: 2
Objective: 3
14
29) What are the total manufacturing costs of this job?

A) $1,200
B) $1,470
C) $1,650
D) $1,920
Answer: B
Explanation: B) $1,470 = DM $1,000 + DL $200 + MOH $270
Diff: 2
Objective: 3
30) What is the bid price for the Winfield High School Job if the company uses a 40% markup of
total manufacturing costs?
A) $2,310
B) $588
C) $1,680
D) $2,058
Answer: D
Explanation: D) $2,058 = $1,470 1.40
Diff: 2
Objective: 3
15
Apple Valley Corporation uses a job order cost system and has two production departments, A
and B. Budgeted manufacturing costs for the year are:
Department
Department A
Direct materials
$700,000
Direct labor
$200,000
$600,000
B
$100,000
$800,000
$400,000
The actual material and labor costs charged to Job #432 are as follows:
Job #432
Direct materials:
$25,000
Direct labor:
Department A
$ 8,000
Department B
$12,000
$20,000
Apple Valley applies manufacturing overhead costs to jobs on the basis of direct labor cost using
departmental rates determined at the beginning of the year.
31) For Department A, the manufacturing overhead cost driver rate is:
A) 33% of direct labor costs.
B) 66% of direct labor costs.
C) 300% of direct labor costs.
Answer: C
Explanation: C) 300% = $600,000 / $200,000
Diff: 2
Objective: 3
32) For Department B, the manufacturing overhead cost driver rate is:
A) 50% of direct labor costs.
B) 80% of direct labor costs.
C) 100% of direct labor costs.
D) 200% of direct labor costs.
Answer: A
Explanation: A) 50% = $400,000 / $800,000
Diff: 2
Objective: 3
16
33) Manufacturing overhead costs applied to Job #432 total:

A) $12,000.
B) $24,000.
C) $36,000.
Answer: D
Explanation: D) $30,000 = ($8,000 300%) + ($12,000 50%)
Diff: 2
Objective: 3
34) Total manufacturing costs associated with Job #432 equal:
A) $55,000.
B) $65,000.
C) $70,000.
D) $75,000.
Answer: D
Explanation: D) $75,000 = DM $25,000 + DL $20,000 + MOH $30,000
Diff: 2
Objective: 3
17
Sheppard Manufacturing uses departmental cost driver rates to allocate manufacturing overhead
costs to products. Manufacturing overhead costs are allocated on the basis of machine hours in
the Machining Department and on the basis of direct labor hours in the Assembly Department. At
the beginning of 2011, the following estimates were provided for the coming year:
Direct labor cost
costs
Direct labor-hours
Machine-hours
Machining
$500,000
Assembly
$900,000
$420,000
30,000
80,000
$240,000
60,000
20,000
The accounting records of the company show the following data for Job #316:
Direct labor-hours
Machine-hours
Direct material cost
Direct labor cost
Machining
120
60
$300
$100
Assembly
70
5
$200
$400
35) For the Machining Department, what is the annual manufacturing overhead cost driver rate?
A) $4.00 per machine hour
B) $4.20 per machine hour
C) $4.67 per machine hour
D) $5.25 per machine hour
Answer: D
Explanation: D) $5.25 per mh = $420,000 / 80,000mh
Diff: 2
Objective: 3
36) What amount of manufacturing overhead costs will be allocated to Job #316?
A) $439
B) $502
C) $595
D) $532
Answer: C
Explanation: C) $595 = ($5.25 60 mh) + [($240,000 / 60,000) 70dlh]
Diff: 2
Objective: 3
18
37) What are the total manufacturing costs of Job #316?

A) $715
B) $880
C) $1,595
D) $1,000
Answer: C
Explanation: C) $1,595 = DM $500 + DL $500 + MOH $595
Diff: 2
Objective: 3
38) Each cost pool:
A) utilizes a separate cost driver rate.
B) is a subset of total labor costs.
C) can be associated with several normal levels of activity.
D) All of the above are correct.
Answer: A
Diff: 1
Terms: cost pools
Objective: 3
39) In job order costing, the optimum number of cost pools is ________.
A) one
B) more than one
C) 1,000
D) none
Answer: A
Diff: 1
Terms: cost pool, job order costing
Objective: 3
40) More cost pools:
A) always result in better estimates of overhead costs.
B) seldom result in better estimates of overhead costs.
C) are usually beneficial if the pattern of demand varies across resources.
D) result in lower estimates of total overhead costs.
Answer: C
Diff: 1
Terms: cost pools
Objective: 3
19
41) Different products consume different proportions of manufacturing overhead costs because
of differences in all of the following EXCEPT:
A) product design.
B) product size.
C) setup time.
D) sales prices.
Answer: D
Diff: 1
Terms: overhead
Objective: 3
42) Lois Manufacturing is a small clothing manufacturer using machine hours as the single cost
driver to allocate manufacturing overhead costs to the various jobs contracted during the year.
The following estimates are provided for the coming year for the company and for the Harford
County School Uniform job.
Direct materials
Direct labor
Manufacturing
Overhead costs
Markup 32%
Machine hours
Company Harford County Job

$1,000,000
$2,000
$120,000
$3,200
$320,000
80,000
1,200
Required:
a. For Lois Manufacturing, determine the annual manufacturing overhead cost driver rate.
b. Determine the amount of manufacturing overhead costs estimated for the Harford County job.
c. Determine the bid price for the Harford County's job.
Answer:
a. Overhead cost driver rate = $4 per mh = $320,000/80,000mh
b. $4,800 estimated overhead costs = 1,200 mh $4 per mh cost driver rate
c. Harford County Job price = $6,600 computed as follows:
Direct materials
$2,000
Direct labor 3,200
Overhead costs
4,800
Estimated total manufacturing costs 10,000
Markup (32%)
3,200
Bid price
$13,200
Diff: 2
Terms: job-order costing
Objective: 3
20
43) Tangipahoa Manufacturing uses departmental cost driver rates to apply manufacturing
overhead costs to products. Manufacturing overhead costs are applied on the basis of machine
hours in the Machining Department and on the basis of direct labor dollars in the Assembly
Department. At the beginning of 2007, the following estimates were provided for the coming
year:
Direct labor hours
Machine hours
Direct labor cost
Manufacturing Overhead costs
Machining
20,000
40,000
$400,000
$440,000
Assembly
40,000
20,000
$920,000
$460,000
The accounting records of the company show the following data for Product #A273:
Direct labor hours
Machine hours
Direct labor cost
Machining
50
200
$2,100
$1,000
Assembly
100
50
$1,200
$2,300
Required:
a. Compute the predetermined manufacturing overhead cost driver rate for each department.
b. Compute the total cost of Product #A273.
c. Provide possible reasons why Tangipahoa Manufacturing uses two different cost drivers.
Answer:
a. Machining Department cost driver rate: $11.00 / mh = $440,000/40,000 mh
Assembly Department cost driver rate: $.50 / dl$ = $460,000/$920,000 dl$
b. Total cost of Product #A273 is $9,950 = Direct materials $3,300 + Direct labor $3,300 +
Overhead costs $3,350 (Machining $2,200 + Assembly $1,150).
c. Ideally, cost driver(s) should reflect the factor(s) that cause manufacturing overhead costs to
increase. Apparently, Tangipahoa regards the use of machines as the principal cause of
manufacturing overhead costs (such as depreciation and repairs) in the Machining Department.
In contrast, Tangipahoa regards direct labor dollars as the principal cause of manufacturing
overhead costs (such as indirect labor) in the Assembly Department. This suggests that the
products vary in complexity and may require workers with different skill levels and therefore
different wage rates.
Each department uses different types and amounts resources. More than one factor is driving
manufacturing overhead costs.
Diff: 2
Objective: 3
21
44) Elfie Enterprises uses three cost pools to allocate manufacturing overhead costs. The
following estimates were provided for the coming year.
Manufacturing
Cost Pool
Overhead Costs
Supervision of direct labor
$320,000
Machine maintenance
$120,000
Facility rent
$200,000
Total overhead costs
$640,000
Cost driver
Activity level
Direct labor hours
800,000
Machine hours
960,000
Square feet of area
100,000
The accounting records show the Lacio Job consumed the following resources.
Cost driver
Direct labor hours
Machine hours
Square feet of area
Actual level
200
1,600
50
Required:
a. If direct labor hours are considered the only manufacturing overhead cost driver, compute:
1. the single cost driver rate for Elfie Enterprises; and
2. the amount of manufacturing overhead costs allocated to the Lacio job.
b. If Elfie Enterprises uses the three cost pools to allocate manufacturing overhead costs,
compute:
1. the cost driver rate for each of the three overhead activities above; and
2. the amount of manufacturing overhead costs allocated to the Lacio job.
c. Review the amount of manufacturing overhead costs allocated in (a2) and (b2). Why do the
two estimates differ? Which method of allocation probably best estimates the actual
manufacturing overhead costs used? Why?.
Answer:
a. 1. Single cost driver rate is $0.80 per dlh = $640,000 / 800,000 dlh
2. $160 = 200 dlh $0.80 per dlh
b. 1. Supervision cost driver rate is $0.40 per dlh = $320,000 / 800,000 dlh
Machine maintenance cost driver rate is $0.125 per mh = $120,000 / 960,000 mh
Facility rent cost driver rate is $2 per sq ft = $200,000 / 100,000 sq ft
2. $380 = (200 $0.40 per dlh) + (1,600 $0.125 per mh) + (50 $2 per sq ft)
c. The two estimates calculated for overhead costs differ because the $160 was calculated using
a single cost driver rate and the $380 was calculated using multiple cost driver rates. The best
estimate of actual overhead costs used is probably the $380 since total overhead costs are
affected by each of the three cost drivers.
Diff: 3
Terms: cost driver rate, overhead
Objective: 3
22
45) Poseidon Company produces customized sailboats. The company uses a job order costing
system. Its plant has three production departments: cutting, machining, and assembly. The
estimated manufacturing overhead cost and direct labor cost for each department for 2011
follow:
Manufacturing Overhead cost
Direct labor cost
Cutting
$600,000
$300,000
Machining
$800,000
$200,000
Assembly
$100,000
$500,000
In May 2011, the company received an invitation from Duluth Sailing Company to bid on an
order of five luxury sailboats that must be delivered by the end of September 2011. This Duluth
Job would require direct manufacturing costs in the three departments as follows:
Direct labor cost
Cutting
$12,000
$ 7,000
Machining
$ 800
$2,000
Assembly
$ 4,600
$15,000
Required:
a. Assume that a single, plantwide predetermined manufacturing cost driver rate based on direct
labor cost is used. Determine the manufacturing cost driver rate and manufacturing overhead
costs applied to the Duluth Job.
b. Assume that separate, departmental predetermined manufacturing cost driver rates based on
direct labor cost are used in each department. Determine the departmental manufacturing cost
driver rates and manufacturing overhead costs applied to the Duluth job.
c. Assume that Poseidon has a policy to add a 60% markup to estimated job costs to arrive at
the bid price. Determine the bid price for the Duluth job using:
1. a plantwide manufacturing overhead cost driver rate; and
2. departmental manufacturing overhead cost driver rates.
d. Review the bid prices computed in (c). Why do the two bids differ?
e. What are the possible consequences of overbidding a job? Underbidding a job?
Answer:
a. Plantwide overhead cost rate is 150% of direct labor cost
= $(600,000 + 800,000 + 100,000) / $(300,000 + 200,000 + 500,000)
Overhead costs applied to the Duluth Job are $36,000 = ($7,000 + $2,000 +
$15,000) 150%
b. Cutting overhead cost rate is 200% of direct labor cost = ($600,000 / $300,000)
Machining overhead cost rate is 400% of direct labor cost = ($800,000 / $200,000)
Assembly overhead cost rate is 20% of direct labor cost = ($100,000 / $500,000)
Total overhead costs applied to the Duluth Job are $25,000 = (Cutting $7,000 200%) +
(Machining $2,000 400%) + (Assembly $15,000 20%)
23
c. Bid price using plantwide cost driver rate is $123,840 = [DM $17,400 + DL $24,000 + SC
$36,000 = $77,400 160%]
Bid price using departmental cost driver rates is $106,240 = [DM $17,400 + DL $24,000
+ SC $25,000 = $66,400 160%]
d. The two bids differ because the plantwide rate assumes that overhead resources are used
uniformly in all three departments, whereas the departmental rates assume overhead resources
are not uniformly used within the three departments.
e. Overbidding a job can result in lost business to competitors, while underbidding can result in
too little profit per job.
Diff: 3
Objective: 3
46) In a job order costing system, explain why it is necessary to apply overhead costs to
production through the use of a predetermined activity cost driver rate.
Answer: First, actual overhead costs are not known until the end of year. In order to price and
invoice jobs in a timely manner, annual overhead costs need to be estimated and allocated to
specific jobs during the accounting period.
Secondly, overhead costs are usually not incurred evenly throughout the year. The use of a
predetermined activity cost driver rate evenly distributes overhead costs over the entire year.
Diff: 2
Objective: 3
47) Explain how an activity cost driver rate is determined.
Answer: Overhead activity cost driver rates are determined by dividing the cost of the resources
committed to the overhead activity by the capacity made available by the resources committed to
the overhead activity.
Diff: 2
Terms: cost driver rates
Objective: 3
24
48) Why is an accurate product cost important?

Answer: Accurate product costing is important for a number of reasons including
1) allocation of resources
2) evaluation of profitability, and
3) competitive pricing.
Diff: 2
Terms: job-order costing, process costing
Objective: 3
49) Does adding more cost pools always result in better overhead costs estimates? Why or why
not?
Answer: No, adding more cost pools does not always result in better cost estimates. The cost of
the additional cost pools may be more than the benefit of the information. However, more cost
pools are usually beneficial if:
1) the cost or productivity of resources are different; and
2) the pattern of demand varies across resources.
Diff: 2
Terms: cost pools, overhead
Objective: 3
Objective 4
1) If cost driver rates were based on actual short-term usage, periods of lower demand would
result in lower cost driver rates.
Answer: FALSE
Explanation: If cost driver rates were based on actual short-term usage, periods of lower demand
would result in higher cost driver rates
Diff: 2
Terms: cost driver
Objective: 4
2) Use of a single cost driver rate will always distort product costs.
Answer: FALSE
Explanation: Use of a single cost driver rate will distort product costs when different products
use differing amounts of organizational resources.
Diff: 2
Terms: cost driver
Objective: 4
25
3) Costing system distortions relate to the handling of indirect costs.

Answer: TRUE
Diff: 2
Objective: 4
4) If a business offers both routine and specialized services, a single cost driver rate will
overprice:
A) the routine service.
B) the specialized service.
C) both the routine and the specialized service.
D) neither the routine nor the specialized service.
Answer: A
Diff: 1
Objective: 4
5) Three types of product costs are estimated on a job bid sheet. List each of these costs and
explain how each is estimated.
Answer:
Direct materials: For each item of material, the quantity is based on standard engineering
specifications. The current price is obtained from records maintained and updated by the
purchasing department.
Direct labor: These estimates are obtained from industrial engineering
specifications
developed on the basis of work and motion studies, or by analog with comparable standard
products. The wage rate is determined from records disclosing wage rates for each grade of
labor needed for this job.
Overhead costs: Activity costs are assigned to jobs in two steps. First, overhead activity cost
driver rates are determined by dividing the cost of the resources committed to the overhead
activity by the capacity made available by the resources committed to the activity. Next, activity
costs are assigned to each job based on the level of cost driver activity using the overhead
activity cost driver rate determined in the first step.
Diff: 2
Objective: 4
26
6) On a job bid sheet, four items are added together to arrive at a bid price. List each of these
items and explain why each is necessary to arrive at the bid price.
Answer: Direct materials, direct labor, overhead costs, and margin.
Direct materials, direct labor, and overhead costs together are the estimated costs for production
and margin adds an amount for profit.
Diff: 2
Objective: 4
7) The markup rate on a job bid sheet includes amounts for certain items. Discuss these items.
Answer: The markup rate on a job bid sheet includes amounts for profit, organizational costs,
and overhead costs not already estimated on the job bid sheet.
A service organization may use a combined conversion cost driver, and therefore, allow amounts
for direct labor, in addition to profit, organizational costs, and overhead costs not already
estimated on the job bid sheet.
Diff: 2
Objective: 4
8) List at least three factors taken into consideration when determining the markup rate.
Answer: Markup rate is the percentage addition to the estimated job cost to calculate the bid
price. The markup rate depends on a variety of factors including:
1) amount of indirect costs excluded from the numerator in the computation of the overhead cost
driver rate;
2) target rate of return desired by the firm;
3) past bidding strategies of key competitors;
4) demand conditions; and
5) overall product-market strategies.
6) competitive intensity
Diff: 2
Objective: 4
27
9) In job order costing, explain how comparing actuals to the estimates for direct material and
direct labor costs can be helpful to management.
Answer: Conducting cost variance analysis can help managers in several ways. If the managerial
actions that led to actual costs being lower than estimated costs are identified, similar cost
savings can be realized by repeating those actions in the production of other jobs. If factors
resulting in actual costs being higher are identified, then managers may be able to take the
necessary actions to eliminate or control those factors. If cost changes are likely to be permanent,
however, the revised cost information can be used in bidding for jobs in the future.
Diff: 2
Terms: direct material, direct labor
Objective: 4
10) Noble Printers has contracts to complete weekly supplements required by forty-six
customers. For the year 2011, overhead cost estimates total $420,000 for an annual production
capacity of 12 million pages.
For 2011 Noble Printers has decided to evaluate the use of additional cost pools. After analyzing
overhead costs, it was determined that the number of design changes, setups, and inspections are
the primary overhead cost drivers. The following information was gathered during the analysis.
Cost pool
Design Changes
Setups
Inspections
Total overhead costs
Overhead costs
Activity level
$ 60,000 300 design changes
$320,000
5,000 setups
$ 40,000 8,000 inspections
$420,000
During 2011, two customers, Wealth Managers and Health Systems, are expected to use the
following printing services.
Activity
Pages
Design changes
Setups
Inspections
Wealth Managers
60,000
10
20
30
Health Systems
76,000
0
10
38
Required:
a. Calculate the cost driver rate if overhead costs are considered one large cost pool and are
assigned based on 12 million pages of production capacity.
b. Using the cost driver rate determined in (a), calculate the overhead cost estimate for Wealth
Managers during 2011.
c. Assuming cost pools for design changes, setups, and inspections are used, calculate the cost
driver rates for each of the three cost pools.
d. Using the cost driver rates determined in (c), calculate the overhead cost estimate for Wealth
Managers during 2011.
28
e. Review the overhead costs estimates computed in (b) and (d). Discuss what conclusions can
be drawn from this exercise in regard to the use of cost pools.
Answer:
a.
Cost driver rate is $0.035 / page = ($420,000 / 12,000,000 pages)
b. Overhead costs applied to Wealth Managers total $2,100 = 60,000 pages $0.035/page
c. Design changes overhead cost rate is $200 per design change = ($60,000/300 design
changes)
Setups overhead cost rate is $64 per setup = ($320,000/5,000 setups)
Inspections overhead cost rate is $5 per inspection = ($40,000/8,000 inspections)
d. Wealth Managers overhead cost estimate is $3,430 = (10 $200 per design change) = (20
$64 per setup) + (30 $5 per inspection)
e. The overhead cost estimates for Wealth Mangers differ greatly depending on whether costs
are allocated based on printed pages or the three cost overhead pools. By using number of
printed pages to allocate overhead costs, the additional costs of design changes, setups, and
inspections are allocated uniformly to all jobs, rather than to those jobs that use these special
resources. If pages produced continues to be used to allocate overhead costs, some customers,
such as Wealth Managers, will be grossly underbilled for the job, while other jobs will be
unfairly overbilled.
Diff: 3
Objective: 3, 4
11) Explain why more than one cost pool usually results in more realistic overhead cost
estimates.
Answer: In today's industrial environment, the production process often involves the
employment of multiple overhead activities that require multiple activity cost drivers. If the
demand for different activity cost drivers varies in different proportions, a separate cost driver
rate must first be determined for each activity cost and then used for estimating product costs.
Therefore, a cost system with a single cost driver rate is likely to distort product costs if multiple
activity cost drivers are actually required.
Diff: 2
Terms: cost pools
Objective: 3, 4
29
12) Explain what accounts for the difference between each amount reported on the job bid sheet
and the job cost sheet for an individual job.
Answer: The job bid sheet estimates costs for direct material and direct labor while the job cost
sheet records the actual costs. The job bid sheet includes overhead cost estimates based on an
estimated level of activity while the job cost sheet estimates are based on the actual level of
activity. The job bid sheet includes margin but the job cost sheet does not.
Diff: 2
Objective: 3, 4
Objective 5
1) Job order costing would be appropriate for the construction of a cruise liner.
Answer: TRUE
Diff: 1
Objective: 5
2) Increasing prices in the face of falling demand is never a good strategy and can cause what is
called a death spiral.
Answer: TRUE
Diff: 2
Terms: death spiral
Objective: 5
3) Direct labor and overhead are referred to as conversion costs because they convert direct
materials into finished products.
Answer: TRUE
Diff: 1
Terms: conversion costs
Objective: 5
30
4) If overhead cost driver rates are calculated monthly, distortions might occur because of:
A) rental costs paid monthly.
B) property tax payments made in July and December.
C) routine, monthly preventive maintenance costs that benefit future months.
D) property tax payments made in July and December, and routine, monthly preventative
maintenance costs that benefit future months.
Answer: B
Diff: 1
Objective: 5
5) Fixed manufacturing overhead costs remain constant at $400,000 per month and are allocated
based on a monthly professional labor-hour allocation rate. Professional labor hours are
estimated at 12,000 for high-output months and 3,000 for low-output months. The final customer
price includes a markup of 50% of cost. As a result:
A) low-output months will allocate less manufacturing overhead costs to each job.
B) low-output months will deter customers due to the higher prices.
C) the high-output months present a more accurate method of pricing.
D) an annual allocation rate would result in lower prices during the high-output months than the
monthly allocation rate.
Answer: B
Diff: 1
Objective: 5
6) Conversion costs:
A) include all the factors of production.
B) include direct materials.
C) in process costing are usually considered to be added evenly throughout the production
process.
D) include direct materials, and in process costing are usually considered to be added evenly
throughout the production process.
Answer: C
Diff: 1
Terms: conversion costs
Objective: 5
31
JB Juice Company uses a manufacturing process that has two distinct stages: the juicing process
(P1) and the straining process (P2). Raw material is consumed in P1 at the beginning of the
process. No additional raw material is required in the second stage of the process (in P2). The
following information pertains to the production of 5,000 units of output in March 2011:
Assume 5,000 units are 100% complete with respect to raw materials and conversion costs at the
end of March.
Direct raw materials
Direct labor
Equipment maintenance
Plant depreciation
P1
$120,000
$40,000
$60,000
$80,000
P2
$
0
$60,000
$80,000
$100,000
7) The conversion costs for P1, the juicing process, total:

A) $120,000.
B) $160,000.
C) $100,000.
D) $180,000.
Answer: D
Explanation: D) $180,000 = $40,000 + $60,000 + $80,000
Diff: 3
Terms: conversion cost, process costing
Objective: 5
8) The conversion cost per unit of output for stage PI for the JB Juice Company totals:
A) $84 per unit.
B) $36 per unit.
C) $64 per unit.
D) $20 per unit.
Answer: B
Explanation: B) $36 per unit = $180,000/5,000 units
Diff: 3
Terms: conversion cost, process costing
Objective: 5
32
9) Roland Company uses a manufacturing process that has two distinct stages: P1 and P2. Raw
material is consumed in P1 at the beginning of the process. No additional material is required in
the second stage of the process (in P2). The following information pertains to the production of
10,000 units of output in March 2012:
Assume all units are completed at the end of March. Assume all costs are added in March.
P1
Direct materials
$100,000
Direct labor
$ 80,000
Equipment maintenance $ 20,000
Plant depreciation
$ 40,000
P2
$
0
$160,000
$ 40,000
$ 60,000
Required:
a. Determine the direct material cost per unit of output.
b. Determine the conversion cost per unit of output for Stage P1 and Stage P2.
Answer: a. Direct material cost per unit of output is $10 per unit = $100,000/10,000
b. Conversion cost per unit of output is:
$14 for P1 : $80,000 $20,000 $40,000

10,000
= $14
per unit
$26 for P2 : $160,000 $40,000 $60,000

= $26 per unit
10,000
Diff: 3
Objective: 5
10) What considerations are important in estimating product costs in continuous processing
plants?
Answer: Continuous processing plants are characterized by the fact that production flows
continuously, semi-continuously, or in large batches from one process stage to the next. At each
successive process stage further progress is made toward converting the raw materials into
finished products. Therefore, the product costing system must accumulate conversion costs
assigned to individual products for successive process stages. Product costs must also reflect the
yield rates--the proportion of the input materials in a process stage that is transferred to the next
process stage.
Diff: 2
Terms: process costing
Objective: 5
33
Objective 6
1) Job order costing is an approach to costing that estimates costs for specific customer orders
because the orders vary from customer to customer.
Answer: TRUE
Diff: 1
Objective: 6
2) An example of a situation in which process costing might be used would be a consulting
engagement.
Answer: FALSE
Explanation: An example of a situation in which job order costing might be used would be a
consulting engagement.
Diff: 1
Objective: 6
3) The goal of both job order costing and process costing is accurate product cost.
Answer: TRUE
Diff: 1
Terms: job order costing, process costing
Objective: 6
4) Process costing systems are used when products manufactured are relatively homogeneous
and there are few and relatively small differences in the production requirements for different
products.
Answer: TRUE
Diff: 1
Objective: 6
5) While costs are measured for individual jobs in a job order costing system, they are measured
for individual process stages in a process costing system.
Answer: TRUE
Diff: 1
Terms: job order costing, process costing
Objective: 6
34
6) Costing systems that are used for the costing of like or similar units of products in mass
production are called:
A) inventory-costing systems.
B) job order costing systems.
C) process-costing systems.
D) conversion costing systems.
Answer: C
Diff: 1
Objective: 6
7) Process costing:
A) allocates conversion costs.
B) results in different costs for different jobs.
C) is commonly used by general contractors who construct custom-built homes.
D) assigns costs to unique jobs based on a overhead cost driver.
Answer: A
Diff: 1
Objective: 6
8) Which of the following manufactured products would use process costing?
A) polo shirts imprinted with individualized logos
B) picnic packs containing ketchup, mustard, and relish
C) customized boats used for racing
D) handmade stained-glass lamps for recreational rooms
Answer: B
Diff: 1
Objective: 6
9) Process costing should be used to assign costs to products when:
A) the units produced are similar.
B) the units produced are dissimilar.
C) the calculation of unit costs requires the averaging of all manufacturing costs over all units
produced.
D) Either A or C are present.
Answer: A
Diff: 1
Objective: 6
35
10) Which one of the following statements is FALSE?

A) In a job order costing system, individual jobs use different quantities of production resources.
B) In a process-costing system, each unit uses approximately the same amount of resources.
C) An organization that manufactures several types of cereal would use a job order costing
system.
D) A corporation whose sole business activity is processing the customer deposits of several
banks would use a process-costing system.
Answer: C
Diff: 1
Terms: process costing, job-order costing
Objective: 6
Objective 7
1) (Appendix) The direct allocation method recognizes possible interactions between service
departments when allocating service department's costs to production departments.
Answer: FALSE
Explanation: The reciprocal allocation method recognizes possible interactions between service
departments when allocating service department's costs to production departments.
Diff: 3
Terms: reciprocal method
Objective: 7
2) (Appendix) The direct method of allocating service department costs assigns indirect costs to
products in two stages. In the first stage, production department costs are allocated to the service
departments.
Answer: FALSE
Explanation: The reciprocal method assigns indirect costs to products in two stages. In the first
stage, the reciprocal cost of each service department is computed. In the second stage these
reciprocal costs are used to allocate the service department costs to the production departments.
Diff: 3
Objective: 7
3) (Appendix) Using the direct method for service department's cost allocations are likely to
undercost low-volume products.
Answer: TRUE
Diff: 3
Terms: direct method
Objective: 7
36
4) Under reciprocal cost allocation method:

A) the first step is to develop a reciprocal cost equation.
B) the first step is to allocate the service department costs to the production departments.
C) one service department is chosen to allocate costs first.
D) service department costs are allocated directly to the production departments.
Answer: A
Diff: 2
Objective: 7
5) Product costs estimated using the sequential method of cost allocation
Answer: C
Diff: 2
Terms: sequential method
Objective: 7
6) Product costs estimated using the direct method of cost allocation
Answer: D
Diff: 2
Objective: 7
37
Long Island Manufacturing Company developed the following information for its service
departments, S1 and S2, and its production departments, P1 and P2:
Overhead Cost
Service Provided by
S1
Service Provided by
S2
S1
$8,000
S2
$14.400
P1
$16,000
P2
$20,000
---
30%
30%
40%
25%
---
30%
45%
7) Using the direct method of service department cost allocation, how much is to be allocated
from S2 to P2 if calculations are rounded to the nearest dollar?
A) $5,720
B) $6,480
C) $8,640
D) $4,430
Answer: C
Explanation: C) $8,640 = $14,400 45/(30+45)
Diff: 2
Objective: 7
8) Using the reciprocal method of service department cost allocation, how much is the total
overhead cost for P1 for the period if calculations are rounded to the nearest dollar?
A) $25,210
B) $33,188
C) $25,120
D) $25,188
Answer: A
Explanation: A) S1 = $8,000+ 0.25 [$14,400 + 0.30 (S1)]
S1 = $8,000 + $3,600 + 0.075 (S1)
S1 = $12,540 = $11,600 / 0.925
S2 = $18,162 = $14,400 + 0.30 ($12,540)
$25,210 = $16,000 + 0.30 ($12,540) + 0.30 ($18,162)
Diff: 2
Objective: 7
38
9) Why do product costing systems using the direct method, sequential method, and reciprocal
method allocate service department overhead costs first to the production departments before
assigning them to individual jobs?
Answer: Because jobs are worked on only in the production departments, these methods assume
that we cannot obtain direct measures of the consumption of service department's resources on
individual jobs as conveniently as we can of production department's resources. Therefore, these
costing systems allocate service department's overhead costs first to the production departments.
Diff: 2
Terms: direct method, sequential method, reciprocal method
Objective: 7
39

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Management Accounting, 6e (Atkinson et al.

4) An example of a direct cost in a car repair shop would include:

8) A cost that is uniquely and unequivocally attributable to a single cost object is a:

The only cost driver is machine hours.

21) The bid price for this special order is:

$25 per TV/VCR

Winfield High School

29) What are the total manufacturing costs of this job?

33) Manufacturing overhead costs applied to Job #432 total:

37) What are the total manufacturing costs of Job #316?

Company Harford County Job

48) Why is an accurate product cost important?

3) Costing system distortions relate to the handling of indirect costs.

7) The conversion costs for P1, the juicing process, total:

$14 for P1 : $80,000 $20,000 $40,000

$26 for P2 : $160,000 $40,000 $60,000

10) Which one of the following statements is FALSE?

4) Under reciprocal cost allocation method:

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