CHAPTER 4:
overhead, the cost will increase. Because the
1. What are job-order costing and process costing?
What type of firms use job-order costing? Process
costing?
- Job order costing is a costing system in which
costs are accumulated by job, while process
costing is a costing system that is used in
situations where a homogeneous product is
produced on a continuous basis.
- The firms that use job order costing are firms
that do customized and built-to-order products.
- The firms that use process costing are those
firms in process industry. (cement and
petroleum)
2. Give some examples of service firms that might
use job-order costing, explain why it is used in
those firms.
- Examples: beautician, construction, medical and
dental services. It is used in those firms because
a job is associated with a particular customer
order.
3. What is normal costing? How does it differ from
actual costing?
- Normal costing is used to value manufactured
products with the actual materials costs, the
actual direct labor costs, and manufacturing
overhead based on a predetermined
manufacturing overhead rate. It differs from
actual costing which uses the actual cost of
materials and labor to calculate production
costs.
4. Why are actual overhead rates seldom used in
practice?
- Actual overhead rate is rarely used because of
problems with accuracy and timeliness.
(Waiting until the year to ensure accuracy is
rejected because of the need to have timely
information.)
5. Explain how overhead is assigned to production
when a predetermined overhead rate is used.
- Applied overhead
6. What is underapplied overhead? When COGS is
adjusted for underapplied overhead, will the cost
increase or decrease? Why?
- The underapplied overhead is when the actual
overhead is greater than applied overhead.
When the COGS is adjusted for underapplied
cost appears lower than it really is.
7. What is overapplied overhead? When COGS is
adjusted for overapplied overhead, will the cost
increase or decrease? Why?
- The overapplied overhead is when the actual
overhead is less than applied overhead. When
the COGS is adjusted for overapplied overhead,
the cost will decrease. Because the cost appears
higher than it really is.
8. Suppose that you and a friend decide to set up a
lawn mowing service next summer. Describe the
source documents that you would need to account
for your activities.
- We will need job-order cost sheets for each
customer; labor time tickets to record the
amount of time spent on each job, both to cost
the job and to pay the individual doing the
work; materials requisition form may be
needed if fertilizer or weed control products are
used.
9. Why might a company decide to use departmental
overhead rates instead of a plantwide overhead
rate?
- Because departmental overhead rates allow
companies to recognize the different producing
departments have different overhead costs.
These rates allow more precise application of
overhead as units pass through one or more
departments.
10. What is the role of materials requisition forms in a
job-order costing system? Time tickets?
Predetermined overhead rates?
- Materials requisition forms serve as the source
documents for posting materials usage and
costs to individual jobs. Time or work tickets
serve a similar function for la-bor.
Predetermined overhead rates are used to
allocate overhead to jobs.
11. Carver Company uses a plantwide overhead rate
based on direct labor cost. Suppose that during the
year, Carver raises its wage rate for direct labor.
How would that affect overhead applied? The total
cost of jobs?
-
12. What is an overhead variance? How is it accounted b. Custodial services – square footage
for typically? c. Laundry – pound of laundry
- Overhead variance is the difference between d. Receiving, shipping, and storage – orders
applied and actual overhead. It is recognized processed
and closed to the cost of goods sold account to e. Maintenance – maintenance hours worked
reflect actual overhead spending. f. Personnel – number of employees
13. Is the cost of a job related to the price charged? g. Accounting – number of transactions
Explain. processed
- Yes, because the higher the cost of the job, the 20. Explain the difference between the direct method
higher the price charged to the customer. and the sequential method.
(By comparing the cost of the individual job - The direct method assigns support department
with the price charged, the firm can determine costs only to the producing departments, while
the profit attributable to each job. Then, the recognizes that interactions among support
firm can decide whether the profit is sufficient departments occur, but does not fully account
to continue offering the product or service for support department interaction.
under the current terms.)
14. If a company decides to increase advertising
expense by $25,00, how will that affect the
predetermined overhead rate? Eventual cost of
goods sold?
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15. How can a departmental overhead system be
converted to a plantwide overhead system?
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16. Describe the difference between producing and
support departments.
- Producing departments make the product or
service that is sold to customers, while support
departments provide essential services for
producing departments, but do not make the
product/service being sold.
17. Assume that a company has decided not to
allocate any support department costs to
producing departments. Describe the likely
behavior of the managers of the producing
departments. Would this be good or bad? Explain
why allocation would correct this type of behavior.
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18. Why is it important to identify and use causal
factors to allocate support department costs?
- The identification and use of causal factors
ensures that service costs are accurately
assigned. It enhances product costing accuracy.
19. Identify some possible causal factors for the
following support departments:
a. Cafeteria – number of employees