CHAPTER 14

JOB COSTING
TRUE/FALSE
1. Typical inputs in manufacturing include materials, labor and equipment.
LO1 True
2. Most production systems exhibit some characteristic of job shops or some
characteristics of process shops, but not both.
LO1 False Most production systems exhibit some characteristics of job shops and
some characteristics of process shops.
3. Job shops and process shops are basically the same in the extent to which we
can trace costs to individual units and jobs.
LO1 False Job shops and process shops differ considerably in the extent to which
we can trace costs to individual units and jobs.
4. In process shops, it is not possible to trace costs to individual units.
LO1 True
5. The production environments in most firms exhibit characteristics of both job
and process shops.
LO1 True
6. In a job shop, because each job is unique, the firm has to track costs
separately for individual jobs.
LO2 True
7. In a job shop material, but not labor and overhead, can be traced to
individual jobs.
LO2 False In a job shop, firms can directly trace many materials and labor costs
to individual jobs. However, we need to allocate overhead costs such
as indirect materials, indirect labor, and capacity costs.
8. Most firms deal with overhead cost by waiting until the end of the accounting
period to compute actual overhead rates.
LO2 False Few firms wait unit the end of the accounting period to compute actual
overhead rates. Instead, most firms use predetermined rates for applying overhead
to jobs.
9. Instead of waiting until the end of the accounting period to compute actual
overhead rates, most firms use predetermined rates for applying overhead to
jobs.
LO2 True
10.A firm would classify payments to employees such as the plant manager as
part of its direct labor costs.

14-1

LO2 False A firm would classify payments to such employees as the plant
manager as part of its fixed manufacturing overhead and allocate the
cost to individual jobs.

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Job Costing
11.A firms actual overhead cost and actual activity volume are likely to remain
relatively constant from month to month, thus fluctuations in overhead rates
remain relatively constant.
LO3 False A firms actual overhead cost and actual activity volume likely change
from month to month. Because of these fluctuations, overhead rates
would fluctuate as would the amounts allocated to jobs and products.
12.The predetermined overhead rate is calculated by dividing expected activity
level by expected overhead costs for the period.
LO3 False The predetermined overhead rate is calculated by dividing expected
overhead costs for the period by the expected activity level.
13.Because of their widespread use, we call systems like job costing normal costing
systems.
LO3 True.
14.The allocation of manufacturing overhead to individual jobs using the
predetermined rate is termed applied overhead.
LO3 True
15.Cost of goods manufactured is the inflow into the work in process inventory
account and cost of goods sold is the outflow from this account.
LO3 False Cost of goods manufactured is the inflow into the finished goods
inventory account, and cost of goods sold is the outflow from this
account.
16.Any unallocated balance in the overhead control account represents over-applied
overhead.
LO4 False Any unallocated balance in the overhead control account represents
under-applied overhead.
17.The use of predetermined overhead rates results in under- or over-applied
overhead because these rates differ from the actual overhead rate.
LO4 True
18.The first choice to zero out the overhead control account is to correct the rate for
the entire year, using actual overhead costs and actual activity volumes at the
end of the year.
LO4 True
19.If a firm charges under-applied overhead to costs of goods sold, the underapplied overhead will decrease the cost of goods sold account.
LO4 False Under-applied overhead increases cost of goods sold, thereby
decreasing reported income.
20.If over- under-applied overhead amount is small, it is justifiable to write it off to
cost of goods sold.
LO4 True

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Balakrishnan/Managerial Accounting, 2e

14-4

Job Costing
MULTIPLE CHOICE
21.Which of the following entities would not use job costing systems?
A. Law firms.
B. Manufacturer of electronic equipment used in aircraft.
C. Remodeling contractors.
D. PepsiCo.
E. All of the above would use job costing.
LO1 D
22.The most logical business which would use job order costing would be:
A. An oil refinery
B. A paper company
C. A custom-home builder
D. A car dealership
LO-1-Self test-C
23.Which of the following statements is not true?
A. Job costing systems are appropriate for make-to-order custom products.
B. Job costing systems are appropriate for make-to-stock batches.
C. Process costing systems are appropriate for non-stop production.
D. Process costing systems are appropriate for make-to-stock small batches.
E. All of the above are true.
LO1 D
24.Which of the following entities would not use process costing?
a. Kellogg Company.
b. Remodeling contractors.
c. Steel mills.
d. PepsiCo.
e. All of the above would use process costing.
LO1 B
25.Which of the following is the correct formula for cost of goods sold?
A. Opening WIP inventory + cost of goods manufactured + ending WIP
inventory.
B. Opening WIP inventory cost of goods manufactured = ending WIP inventory.
C. Opening finished goods inventory cost of goods manufactured + Ending
finished goods inventory.
D. Opening finished goods inventory + cost of goods manufactured Ending
finished goods inventory.
E. None of the above.
LO1 D

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Balakrishnan/Managerial Accounting, 2e
26.In a job costing system, when a firm issues materials to the shop floor, it
removes the cost from:
A. Finished goods inventory.
B. Work-in-process inventory.
C. Raw materials inventory.
D. Cost of goods manufactured.
E. None of the above.
LO1 C
27.If a company using job-order costing overestimates its manufacturing overhead
costs the affect will be to:
a. Overstate net operating income.
b. Understate the ending finished goods inventory account balance.
c. Overstate cost of goods sold.
d. Overstate cost of goods manufactured.
LO-2-Self test-D
28.In a job-order costing system, direct labor costs are shown as an increase to
what account?
a. Finished goods inventory.
b. Work-in-process inventory.
c. Cost of goods manufactured.
d. Raw materials inventory.
LO2-Self test-B
29.The Whitestone Company uses a job-order costing system. The predetermined
overhead rate for fixed manufacturing overhead is based on direct labor hours.
The company has provided the following estimates:
Direct labor hours
4,000
Variable manufacturing overhead
$14,000
Fixed manufacturing overhead
$10,000
Direct labor dollars
$48,000
The company will use a predetermined fixed manufacturing overhead rate of:
a. $2.50 per direct labor hour
b. $12.00 per direct labor hour
c. $7.00 per direct labor dollar
d. $6.00 per direct labor dollar
LO3-Self test-A
30.Which of the following represents the flow of costs in a job costing system?
A. WIP, FG, CGS.
B. WIP, FG, CGM.
C. FG, WIP, CGS.
D. FG, WIP, CGM.
E. None of the above.
LO2 A

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Job Costing
31.In process costing it is not possible to trace costs to individual units. All that is
required is to determine the cost of an average unit. Process costing systems
accomplish this task by:
A. Allocating all costs based on a pre-determined rate.
B. Accumulating all costs by department or process.
C. Accumulating all costs on a job cost report.
D. Waiting until all products are completed and calculating the actual cost at
that time.
E. None of the above.
LO2 B
32.During December, Morgan Manufacturing purchased $65,000 of raw materials.
Morgans inventories were as follows:
Balance
Balance
December 1
December 31
Raw material
$15,000
$13,000
Work in$23,000
$26,000
process
Finished goods
$35,000
$37,000
What is the amount of raw materials used in production during December?
A. $65,000
B. $2,000
C. $67,000
D. $64,000
E. None of the above.
LO2 C
33.During December, Morgan Manufacturing transferred $67,000 of raw materials
into production. Morgans inventories were as follows:
Balance
Balance
December 1
December 31
Raw material
$15,000
$13,000
Work in$23,000
$26,000
process
Finished goods
$35,000
$37,000
What is the amount of work-in-process inventory transferred to finished goods
during December?
a. $3,000
b. $67,000
c. $62,000
d. $64,000
e. None of the above.
LO2 D

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Balakrishnan/Managerial Accounting, 2e
34.During December, Morgan Manufacturing transferred $64,000 to ending
inventory. Morgans inventories were as follows:
Balance
Balance
December 1
December 31
Raw material
$15,000
$13,000
Work in$23,000
$26,000
process
Finished goods
$35,000
$37,000
What was the amount of cost of goods sold for December?
a. $62,000
b. $67,000
c. $65.000
d. $2,000
e. None of the above.
LO2 A
35.Combs Manufacturing Company uses predetermined overhead rates based on
direct labor. The Company budgeted to spend $750,000 on labor during the
period. Combs estimates annual variable overhead to be $225,000 and annual
fixed overhead to be $900,000. What are Combs overhead variable and fixed
rates?
a. $0.30 variable/$1.20 fixed.
b. $1.80 variable/$0.83 fixed.
c. $1.50 variable/$1.50 fixed.
d. $0.67 variable/$0.67 fixed.
e. None of the above.
LO3 A
36.The Watering Hole Company uses job-order costing and a predetermined
overhead rate of 120% of direct labor dollars. The following information is
available for the month of October:
Added in October
Job #
Work-in-Process
Direct
Direct
Balance @ 10/1
Materials
Labor
1
$1,400
$200
$300
2
$2,100
$200
$200
3
$800
$500
$700
4
$1,600
$400
$800
Total debits to the work-in-process account in October totaled:
a. $11,600
b. $5,700
c. $3,300
d. $9,200
LO3-Self test-B

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Job Costing
37.In a job-order costing system, when manufacturing overhead is applied to a job
what account is debited:
a. Cost of goods sold
b. Work-in-process
c. Finished goods
d. Manufacturing overhead control
LO3-Self test-B
38.The Peterson Company uses a predetermined overhead rate of 120% of direct
labor costs to apply manufacturing overhead. Estimated costs for the upcoming
year are:
Direct materials
$12,000
Advertising
$4,000
Factory supplies
$12,000
Indirect materials
$11,000
Indirect labor
$6,000
Sales commissions
$6,000
Tools for factory equipment
$2,000
If actual direct labor costs for the year were $19,000, manufacturing overhead
will have been:
a. Underapplied by $8,200
b. Underapplied by $3,800
c. Underapplied by $2,000
d. Underapplied by $2,200
LO3-Self test-A
39.What method is not acceptable for closing the balance in the manufacturing
overhead control accounts?
a. Post any over or underapplied overhead directly to cost of goods sold
b. Correct the rates for the entire year, once actual overhead costs are known
c. Prorate the under or overapplied overhead amount between the inventory
accounts
d. Show overapplied costs as revenue and underapplied costs as an expense
directly on the income statement
LO3-Self test-D
40.The Gladstone Company has a balance of $3,300 in its work-in-process (WIP)
account at the end of the year. Job costs sheets indicate that this consists of
costs incurred from two jobs still in process. Job A has incurred costs of $400 for
direct materials and $800 for direct labor whereas Job B has incurred costs of
$200 for direct materials and $400 for direct labor. If the company applied
overhead based on a percentage of direct labor dollars, the company must be
using a predetermined rate of :
a. 45.45%
b. 80%
c. 125%
d. 275%
LO3-Self test-C

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Balakrishnan/Managerial Accounting, 2e
41.In which of the following accounts do firms accumulate indirect manufacturing
costs?
a. General and administrative expense accounts.
b. Work-in-process inventory accounts.
c. Overhead control accounts.
d. Over- or under-applied overhead accounts.
e. None of the above.
LO3 C
42.Systems like job costing (systems that use predetermined overhead rates to
apply overhead) are referred to as:
a. Standard costing systems.
b. Actual costing systems.
c. Normal costing systems.
d. Discretionary costing systems.
e. None of the above.
LO3 C
43.The amount of overhead applied to a job increases which of the following
inventory accounts?
a. Overhead control account.
b. Work-in-process inventory account.
c. Overhead application account.
d. Finished goods inventory account.
e. None of the above.
LO3 B
44.The amount of overhead applied to a job decreases which of the following
accounts?
a. Work-in-process inventory account.
b. Overhead application account.
c. Finished goods inventory account.
d. Overhead control account.
e. None of the above.
LO3 D

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Job Costing
45.The Prestige Company, which utilizes job-order costing, uses a predetermined
overhead rate based on machine hours to apply both variable and fixed
manufacturing overhead to jobs. Estimates for the month of April are as follows:
Total manufacturing overhead (fixed and variable)
$24,000
Machine hours
8,000
Actual results for April were:
Total manufacturing overhead (fixed and variable)
$22,000
Machine hours
7,800
The balance in the manufacturing overhead control account at the end of April
will indicate the overhead was:
a. Underapplied by $1,400
b. Overapplied by $1,400
c. Overapplied by $2,000
d. Overapplied by $2,000
LO4-Self test-B
46.The RacingStripe Company began the period with a balance of $13,000 in its
work-in-process (WIP) account. During the period the company incurred $16,000
in direct labor costs, requisitioned $10,000 in direct materials, and applied
$17,000 in manufacturing overhead. Actual overhead costs for the period were
$18,500. If the balance in the WIP account at the end of the period was $22,000
then cost of goods manufactured for the period was:
a. $34,000
b. $21,000
c. $35,500
d. $56,000
LO4-Self test-A
47.The Fendandez Company provided the following information at the end of 2013:
Finished goods inventory, ending
$51,000
Cost of goods manufactured
$87,000
Cost of goods sold
$93,000
Work-in-process inventory, beginning
$43,000
Work-in-process inventory, ending
$38,000
The balance in the finished goods inventory account at January 1 st must have
been:
a. $92,000
b. $45,000
c. $57,000
d. $44,000
LO4-Self test-C
48.The Chesney Company uses job-order costing and a predetermined overhead
rate based on direct labor dollars. For 2013 the company incurred $489,000 of
actual manufacturing overhead costs. Their manufacturing overhead control
account at the end of the year indicated that they had under-applied
manufacturing overhead costs by $19,000. If the predetermined overhead rate
was 80% of direct labor dollars, then direct labor costs for the year totaled:
a. $587,500
b. $635,000

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Balakrishnan/Managerial Accounting, 2e
c. $611,250
d. $581,560
LO4-Self test-A
49.The Keith Company uses job-order costing and a predetermined overhead rate
based on direct material dollars. The following information is available for the
month of August:
Added in August
Job #
Work-in-Process
Direct
Direct
Balance @ 8/1
Materials
Labor
16
$560
$100
$150
22
$1,020
$300
$420
31
$890
$680
$780
Manufacturing overhead is charged to jobs at 90% of the direct materials cost.
Jobs #22 and #31 were completed during the period and transferred to finished
goods. Job #16 was completed and delivered to customers during the month.
Cost of goods sold for August was:
a. $810
b. $250
c. $340
d. $900
LO4-Self test-D
50.Assume that a company closes any remaining balances in the manufacturing
overhead control account to cost of goods sold account. If the company has
overapplied its manufacturing overhead the company would record which of the
following entries:
a. DR

cost of goods sold

CR manufacturing overhead control
b. DR
work-in-process
CR cost of goods sold
c. DR
manufacturing overhead control
CR cost of goods sold
d. DR
cost of goods sold
CR cost of goods manufactured
LO4-Self test-C
51.Under-applied overhead indicates:
a. An amount applied to jobs is smaller than the amount actually spent on
overhead.
b. An amount applied to jobs is larger than the amount actually spent on
overhead.
c. The predetermined overhead rate was calculated incorrectly.
d. The budget needs to be revised.
e. None of the above.
LO4 A
52.Under- over-applied overhead is computed as:

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Job Costing
a. Actual overhead expense
period.
b. Actual overhead expense
c. Actual overhead expense
d. Actual overhead expense
e. None of the above.
LO4 C

for the period less budgeted overhead for the

less cost of goods manufactured.
for the period less applied overhead for the period.
multiplied by contribution margin ratio.

53.GAAP permits which of the following methods for zeroing out the overhead
control account?
a. Correct the rates at year end.
b. Charge the under-applied or over-applied overhead to cost of goods sold.
c. Prorate the under-applied or over-applied overhead among the inventory
accounts and cost of goods sold.
d. B and C only.
e. A, B and C.
LO4 E
54.Water Sports, Inc. uses a predetermined overhead rate based on direct labor
costs. For the current year, the company estimated overhead to be $300,000,
based on budgeted production of 20,000 direct labor hours at $6 per hour.
Actual overhead for the period was $290,000, with actual direct labor costs of
$110,000. What was the over- applied or under-applied overhead for the
period?
a. $25,000 over-applied.
b. $25,000 under-applied.
c. $15,000 over-applied.
d. $15,000 under-applied.
e. None of the above.
LO4 D
55.Which of the following methods for zeroing out the over-applied or under-applied
overhead is the easiest method, but the least accurate?
a. Correct rates at year end.
b. Write-off to the miscellaneous expense account.
c. Prorate the under-applied or over-applied amount among the inventory
accounts.
d. Write-off to cost of goods sold.
e. None of the above.
LO4 D

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Balakrishnan/Managerial Accounting, 2e
Problems
1. The characteristics of a firms production process determine the features of its
cost accounting system. However, every process converts inputs to outputs.
Required:
Enter the identifying letters in the blanks below to indicate the term that best
matches each description.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10
.

A.
B.

Applied overhead
Cost accounting

Operations costing
Over-applied overhead

Fixed manufacturing overhead

Job shops

F.
G
.
H.
I.

C.
D
.
E.

Normal costing

J.

Under-applied overhead

Predetermined overhead rate

Process shops

Settings that involve continuous production of homogeneous

products.
Indirect manufacturing costs that do not vary with production volume.
Amount of overhead allocated to products using a predetermined
overhead rate.
Arises when actual overhead is larger than applied overhead.
Accounting systems for calculating values of ending inventories and
cost of goods sold.
Rate computed using expected overhead costs and volumes at the
start of a period.
Settings that involve discrete production of unique products.
Arises when actual overhead is smaller than applied overhead.
Product-costing system that uses predetermined rates to apply
overhead to products.
A combination of job costing and process costing.

2. Gustav Machinery Works uses a job cost system. The company provides the
following information related to the Work in Process account for the current
month.
Beginning balance
Direct material used
Direct labor incurred
Manufacturing overhead applied

$25,000
$28,000
$20,000
$35,000

Gustav applies manufacturing overhead based on direct labor cost. Job No. 22,
started during the current period, was the only job still in process at the end of
the period, containing $4,000 in materials and $2,600 in labor.
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Job Costing

Required:
Determine the Cost of Goods Manufactured during January.
3. Tabb Manufacturing produces vacuum cleaners. Tabb uses a job cost system and
applies overhead based on direct labor hours. Only one job, Job #33, remained
in progress at the end of the period. The following information is for the period:
Estimated overhead
Estimated direct labor hours
Material used during period for Job
#33
Labor costs during period for Job
#33
Actual overhead during period
Actual labor hours worked
Actual labor rate for Job #33

$75,000
15,000
$2,500
$6,000
$72,000
14,000
hrs.
$6

Required:
a.

Determine the predetermined overhead rate for the period.

b. Determine the amount of overhead charged to work in process during the

period.
c. Determine the amount of under-applied or over-applied overhead for the
period.
d. Assuming that 100 units were completed, determine the unit product cost.

4. Slaughters Manufacturing makes wood tables, selling them to retail outlets.

During the most recent period, actual variable and fixed overhead were $45,000
and $60,000, respectively. Slaughter applies overhead based on the number of
tables manufactured at the rate of $25 per table ($10 variable and $15 fixed).
Slaughter made 5,000 tables during the most recent period.
Required:
a. What was the total amount of overhead applied during the most recent
period?
b. What was the over-applied or under-applied variable overhead?
c. What was the over-applied or under-applied fixed overhead?

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Balakrishnan/Managerial Accounting, 2e
Problems Solutions
1. Terms (LO1)
1.

2.
3.

C
A

4.
5.

J
B

6.

7.
8.
9.

D
G
E

10
.

Settings that involve continuous production of homogeneous

products.
Indirect manufacturing costs that do not vary with production volume.
Amount of overhead allocated to products using a predetermined
overhead rate.
Arises when actual overhead is larger than applied overhead.
Accounting systems for calculating values of ending inventories and
cost of goods sold.
Rate computed using expected overhead costs and volumes at the
start of a period.
Settings that involve discrete production of unique products.
Arises when actual overhead is smaller than applied overhead.
Product-costing system that uses predetermined rates to apply
overhead to products.
A combination of job costing and process costing.

2. Basic Job Costing (LO2)

Beginning
WIP
$25,000

Added During Period

+
$28,000 + $20,000 +
35,000

Ending WIP

$11,500

(4,000 + 2,600 +
4,550)
(2,600 x 1.75 =
$4,550)
Predetermined overhead rate = $35,000 $20,000 = $1.75

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= CGM
$96,850

Job Costing
3. Pre-determined rates and job cost (LO3)
a. Predetermined overhead rate:
$75,000 15,000 = $5 per direct labor hour
b. Overhead charged to WIP:
14,000 direct labor hours x $5 per hour = $70,000
c. Over-applied/under-applied overhead:
$72,000 actual overhead - $70,000 applied overhead = $2,000
underapplied
d. Unit cost:
Direct materials $ 2,500
Labor
$ 6,000
Overhead applied
$ 5,000 (1,000 hrs x $5)
Total cost
$13,500
Unit cost = $13,500 100 units = $135 per unit

4. Under/Over-applied overhead (LO4)

a. Overhead applied:
$25 x 5,000 = $125,000
b. Actual variable overhead
$45,000
Applied variable overhead
50,000
Over-applied
$ 5,000
c. Actual fixed overhead $60,000
Applied fixed overhead
75,000
Over-applied
$15,000

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Balakrishnan/Managerial Accounting, 2e
Short Answer
1. What are the two major kinds of production environments?
2. What is a job-costing system? Give two examples of a job-costing system.
3. What is a process-costing system? Give two examples of a process-costing
system.
4. In a job-costing system, what costs are traced to define the terms work in
process (WIP) inventory, cost of goods manufactured (COGM), and cost of goods
sold (COGS) products? What costs are allocated to products?
5. Define the terms work in process (WIP) inventory, cost of goods manufactured
(COGM), and cost of goods sold (COGS).
6. What is a predetermined overhead rate?
7. Why do firms use predetermined overhead rates?
8. What is a normal costing system?
9. What do the terms underapplied overhead and overapplied overhead mean?
10.If a firm has underapplied overhead at year-end, its actual overhead rate is lower
than its pre-determined rate. True or False? Justify your answer.
11.What are the three methods firms can use to deal with underapplied or
overapplied overhead at the end of an accounting period?
12.Suppose a firm has underapplied overhead at yearend. Also assume the firm
writes off this underapplied overhead to COGS. Would the adjustment increase or
decrease COGS? What is the effect on net income?
13.Describe the proration method.
14.Suppose a firm has underapplied overhead at year-end. If the firm decides to use
the proration approach, what accounts will be affected?
15.Suppose a firm has underapplied overhead at year-end. Will the income be
higher or lower under the proration method relative to writing off this amount to
cost of goods sold?

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Job Costing
Short Answer Solution
1.
(LO-1) (1) Discrete production of customized products (job shops), and (2)
continuous production of homogeneous products (process shops).
2.

(LO-1) A job-costing system accumulates and analyzes costs separately for

each product or small batches of products. Examples of firms that use jobcosting systems include law firms and firms that build custom houses.

3.

(LO-1) A process-costing system accumulates and analyzes costs by each

process (or a department) rather than by each job. Examples of firms that use
process-costing systems include steel mills and paper companies.

4.

(LO-2) Direct materials and direct labor are traced, and overhead is allocated.

5.

(LO-2) Work in process inventory is the inventory of unfinished products at the

start of a period. Cost of goods manufactured is the cost of items finished and
transferred from work in process inventory to finished goods inventory. Cost of
goods sold is the cost of products sold in a period. It is the cost of items
transferred from finished goods inventory to the income statement.

6.

(LO-3) A predetermined overhead rate equals expected overhead costs for the
period divided by the expected activity level.

7.

(LO-3) Firms use predetermined overhead rates because actual overhead

costs and activity volumes frequently fluctuate.

8.

(LO-3) A normal-costing system is a job-costing system that uses a

predetermined overhead rate.

9.

(LO-3) Underapplied overhead means that the overhead applied to jobs is

smaller than the amount actually spent on overhead. Overapplied overhead
means that the overhead applied to jobs exceeds the amount spent on
overhead.

10.

(LO-4) False if a firm has underapplied overhead, the actual rate must have
exceeded the predetermined rate.

11.

(LO-4)
(1) Correct rates are year end, (2) write off to cost of goods sold,
and (3) prorate among inventory accounts and cost of goods sold.

12.

(LO-4) The adjustment will increase cost of goods sold and, in turn, decrease
net income.

13.

(LO-4) The proration method allocates the under- or overapplied overhead to

WIP inventory, FG inventory, and cost of goods sold in proportion to their
unadjusted ending balances.

14.
15.

(LO-4) Three accounts will be affected: (1) WIP, (2) FG, and (3) COGS.
(LO-4) Income will be higher under the proration method because some of the
adjustment will be to the inventory account.

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Balakrishnan/Managerial Accounting, 2e
Short Essays
1. Variations in the traceability of costs is the key distinction between job- and
process-costing systems. Comment.
2. Costing systems in hospitals are like job-costing systems in many respects. Do
you agree with this statement? Why or why not?
3. Describe service firms that are likely to have a job costing-like system; a process
costing-like system.
4. The only difference between job- and process costing systems relates to the size
of the average batch for a product. True or False? Justify your response.
5. How does the use of predetermined overhead rates help with performance
evaluation and cost control?
6. Suppose your firm disposes of under- or overapplied overhead by writing it off to
cost of goods sold. How could you increase the chances of obtaining an incomeincreasing adjustment at year-end?
7. Suppose a firm, with a normal costing system, uses the number of units
produced to allocate overhead to products. Use a numerical example to prove
that under- or overapplied overhead equals the error in calculating the
predetermined rate times the actual production in units.
8. Suppose you dispose of underapplied and overapplied overhead by writing it off
to cost of goods sold. Would income differ compared to a setting where you use
actual overhead rates to allocate indirect costs?
9. Suppose you dispose of underapplied and overapplied overhead by writing it off
to cost of goods sold. Would income differ compared to a setting where you
prorate under- and overapplied overhead among work-in-process inventory,
finished goods inventory, and cost of goods sold?
10.Consider the following claim: Whether firms underapply or overapply overhead
is not relevant for decision making. Consequently, how they dispose of this
amount is also not relevant for decision making. Do you agree? Why or why
not?

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Job Costing
Short Essay Solutions
1. (LO-1)
Job shops and process shops differ considerably in the extent to
which we can trace costs to individual units and jobs. A pure job shop
makes custom products. Each unit is a separate job and is unique. It is
therefore possible to trace many costs directly to each job. However, in
process shops, it is not possible to trace most costs to individual units.
Rather, we can trace the costs, even for direct materials and direct labor,
only at the process or departmental level.
2. (LO-1)
Yes. Each patients care may be viewed as a job. Many of the
costs, including the costs of nurse care, attending physicians time,
medicines and drugs, room occupancy can be directly traced to the
patient. Some indirect costs may still have to be allocated. However, such
a system also has elements of process costing in that we might use predetermined rates (e.g., $40 per hour of nursing or $100 per visit by a
doctor) to determine costs rather than use actual costs.
3. (LO-1)
Business consulting firms are likely to have job-costing like
systems. Fast food restaurants like McDonalds have more of process
costing-type environment.
4. (LO-1)
True. Batch size is one of the main differences that distinguish
job shops from process shops. Job shops can be viewed as having a
production batch size of one with each batch being unique, while the
batch size in process shops is typically large, with each batch consisting of
a large number of identical units.
5. (LO-3)
A firms actual overhead cost and actual activity volume likely
change from month to month. Firms compute a predetermined overhead
rate using expected overhead costs and expected activity levels at the
start of a plan period (usually a year), which provides a basis for
computing overhead variances as the difference between actual overhead
and applied overhead. These overhead variances can be potentially used
for control purposes.
6. (LO-4)
Using a higher predetermined overhead (for instance, using a
smaller denominator volume to calculate the rate) tends to result in the
overhead being overapplied. In this case, the year-end adjustment would
be income-increasing.
7. (LO-3,4) Assume that the budgeted overhead is $100,000 and the normal
volume is 10,000 units. Then the predetermined overhead rate is $10 per
unit. Let us say that the actual volume is 9,500 units, and the actual
overhead is also $100,000. Overhead would be underapplied by $5,000
(9,500 10 - $100,000). The actual overhead rate is $100,000/9,500.
The error in the predetermined rate is $10 ($100,000/9,500). Multiplying
this by the actual production units we get 9,500 [$10
($100,000/9,500)] = -$5,000, or $5,000 underapplied.

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Balakrishnan/Managerial Accounting, 2e
8. (LO-4)
Yes, it will. Adjusting the income for the entire amount of the
underapplied or overapplied, means that the entire amount is charged to
COGS. With actual rates, the adjustment will differ because some of the
amount will go toward WIP and FG inventories. Indeed, the amounts will
not agree even with proration because we use unadjusted balances as the
allocation basis.
9. (LO-3)
Yes it would. If the overhead is underapplied, the income would
be higher when it is prorated among work-in-process inventory, finished
goods inventory, and cost of goods sold rather than written off. If
overhead is overapplied, the income would be lower when it is prorated
among work-in-process inventory, finished goods inventory, and cost of
goods sold.
10.
(LO-4) We would generally agree with this statement. We view the
method for disposing of overhead as an accounting exercise to balance
the books and to zero out control accounts. The specific method used
does not affect the estimate of future capacity costs and thus is not likely
to be very useful from a decision making perspective.

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Job Costing
Exercises
1.

2.

Predetermined rates and cost flows (LO2, LO3). Ace Company has the
following (unadjusted) amounts in its accounts as of December 31:
Cost of goods sold $100,000
Finished goods inventory $75,000
Raw materials inventory $50,000
Work-in-process inventory $25,000
The company prorates over- or underapplied overhead.
Required: What will the adjusted balance in work-in-process inventory be if
overhead has been overapplied by $10,000?
VBK, Inc. applies overhead costs to its products using direct labor costs as its
cost driver. For the most recent year, its budgeted overhead costs were
$525,000, and its budgeted direct labor costs were $150,000. During the year,
VBK actually paid $140,000 for direct labor, and actual overhead costs were
$530,000.
Required: Determine the firms over- or underapplied overhead.

3.

Von Maur and Company uses a predetermined overhead rate of $5 per

machine hour. A review of the companys accounting records shows that it
budgeted $25,000 for overhead, and that actual overhead was $26,000. The
firm also underapplied manufacturing overhead by $6,000.
Required: What were Von Maurs budgeted and actual machine hours?

4.

Worthington Company employs a job-order costing system. Before disposition

of the underapplied or overapplied over-head, selected year-end balances from
Worthingtons accounting records were:
Cost of goods sold $720,000
Raw material inventory 36,000
Work-in-process inventory 54,000
Finished goods inventory 90,000
Required:
If the adjusted ending balance (after proration of underapplied or overapplied
overhead) of cost of goods sold is $757,500, what is the underapplied or
overapplied overhead for the period?

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Balakrishnan/Managerial Accounting, 2e
5.

Basic job costing. Greer Corporation, which uses a job-costing system, had
two jobs in process at the start of the quarter: job no. J5-59 (beginning value:
$95,000) and job no. X9-60 (beginning value: $39,500). It had a zero balance in
its finished goods inventory account. The firm provides the following
information:
The predetermined overhead rate is $36 per machine hour.
The company worked on three jobs during the first quarter.
Relevant data about costs incurred during the quarter are as follows:
Job No. Direct Material Direct Labor Machine Hours
J5-59
$18,000
$45,000
900
X9-60

20,000
200
T10-61
37,000
35,000 1,200
Greer completed jobs J5-59 and X9-60, and sold Job J5-59.
Required:
a. Determine the cost of the job(s) still in production at the end of the first
quarter.
b. Determine the value of ending finished goods inventory.

6.

Overhead application. Lone Star Glassworks applies factory overhead at the

rate of $8 per direct labor hour. The company has provided you with the
following information for the most recent year of operations:

Required:
a. Calculate the total factory overhead applied during the year.
b. Compute the amount of underapplied or overapplied overhead for the year.

14-24

Job Costing
Exercise Solutions
1. (LO-2, LO-3)
Since overhead was overapplied, then the products cost
for the period should decrease. Because Ace uses the proration method, we
should allocate the overapplied overhead among the WIP, FG and COGS
accounts.
The WIP account will decrease by
$10,000 [$25,000 / ($25,000 + $75,000 + $100,000)]
= $10,000 0.125 = $1,250.
Thus, the adjusted balance is $25,000 - $1,250 = $23,750.
Alternatively, you could construct a table as follows:
Item
Amou
Perc
nt
ent

Cost of Goods
Sold
Finished Goods
Inventory
Work-in-process
inventory
Total

$100,
000
$75,0
00
$25,0
00
200,0
00

50.0
%
37.5
%
12.5
%
100.0
%

Alloca
ted
Amou
nt of
$10,0
00
$5,000
$3,750
$1,250
10,000

Adjus
ted
Amou
nt

$95,0
00
$71,2
50
$23,7
50
190,0
00

2. (LO-3)

Overhead application rate = Budgeted overhead / Budgeted DL costs.

Thus, the pre-determined rate is $525,000 / $150,000 = $3.50 per
labor dollar.
Applied overhead = predetermined overhead rate Actual DL costs.
Thus, Applied overhead = $140,000 labor $ $3.50 per labor $ =
$490,000.
Under/Overapplied overhead = Actual overhead - Applied overhead.
Thus, $530,000 - $490,000 = $40,000 underapplied

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Balakrishnan/Managerial Accounting, 2e
3. (LO-3, LO-4)
We know that
Overhead rate = budgeted overhead / budgeted activity volume
$5 per machine hour = $25,000 / budgeted hours
Budgeted hours = 5,000.
Next, we know that
Applied overhead actual overhead = under/ (overapplied overhead)
In this case, applied overhead is smaller than actual overhead because
overhead is under applied. Thus,
Applied overhead = $26,000 -$6,000 = $20,000.
Furthermore,
Applied overhead = actual # of machine hours rate per machine
hour
Plugging in the relevant values, we have:
Actual number of machine hours = $20,000 / $5 per machine hour = 4,000
hours.
4. (LO4)
We know that adjusted COGS is larger than the unadjusted amount.
Hence, overhead is under-applied. Further, the adjustment is $757,500 $720,000 = $37,500.
However, this is not the entire amount of the underapplied overhead. This is only
the portion allocated to COGS. Under proration, COGS would have received
$720,000 / ($720,000 + $54,000 + $90,000) = 83.33% of the total underapplied
overhead.
Thus, the total underapplied overhead is $37,500/0.83333 = $45,000
underapplied.
5. (LO2, LO3)
a. We can do this problem in two ways. The first way is to calculate the flow
through the WIP account. However, this method is tedious.
A shorter way, however, is to recognize that neither jobs J5-59 nor X9-60 are
in the WIP account. Only job T10-61 is left in WIP. This job has costs of:
Direct materials
$37,000
Direct labor
35,000
Mfg. overhead
43,200
1,200 hours $36 per machine hour
Total
$115,200

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Job Costing
b. The only job remaining in Finished Goods is X9-60. Using the same logic as in
part (a), the cost in the FG inventory is:
Beginning value
Direct materials
Direct labor
Mfg. overhead
Total

$39,500
0
$20,000
$ 7,200
$66,700

none were added

200 hours $36 per machine hour

6. (LO3, LO4)
a.
Lone Star Glassworks would apply factory overhead as:
Factory overhead applied =
Overhead rate per direct labor hour actual direct labor hours.
Thus, Factory overhead applied = $8 50,000 = $400,000.
b. We calculate underapplied (overapplied) overhead as:
Underapplied (overapplied) overhead = Actual overhead incurred
Applied overhead
From part (a), we know factory overhead applied = $400,000.
Actual factory overhead for the year = $415,000
= $160,000 indirect labor + $75,000 depreciation on manufacturing
equipment + $60,000 factory fuel + $120,000 factory rent.
Note: We do not include sales commissions because, under GAAP, sales
commissions are a period cost and not an inventoriable product cost.
For Lone Star, overhead was underapplied by $15,000 = $415,000
$400,000 for the year.

14-27