COST TERMINOLOGY, COST BEHAVIOR, PREDETERMINED OVERHEAD RATE

C. NAVOR

MULTIPLE CHOICE THEORIES: CHOOSE THE BEST ANSWER. (2 points each)

1. Which one of the following best describes direct labor?

A) A prime cost
B) A period cost
C) A product cost
D) Both a product cost and a prime cost

2. In cost terminology, conversion sosts consists of

A) Direct labor and indirect labor
B) Direct labor and direct materials
C) Direct labor and factory overhead
D) Indirect labor and variable factory overhead

3. In a broad sense, cost accounting can best be defined within the accounting system as
A) Internal and external reporting that may be used in making nonroutine decisions
and in developing plans and policies
B) External reporting to government, various outside parties and shareholders
C) Internal reporting for use in management planning and control, and external
reporting to the extent its product costing function satisfies external reporting
requirement
D) Internal reporting for use in planning and controlling routine operations.

4. Which one of the following categories of cost most likely not considered a component of
fixed factory overhead?
A) Rent
B) Property taxes
C) Depreciation
D) Power

5. Managerial accounting differs from financial accounting in that financial accounting is

A) More oriented toward the future
B) Primarily concerned with external financial reporting
C) Concerned with nonquantitative information
D) Heavily involved with decision analysis and implementation of decisions

6. A fixed cost that would be considered a direct cost is

A) A cost accountants salary when the cost object is a unit of product
B) The rental cost of a warehouse to store inventory when the cost object is
Purchasing Department
C) A production supervisors salary when the cost object is the Production
Department
D) Board of Directors fees when the cost object is the Marketing Department

7. Units of production is an appropriate overhead allocation base when

A) Several well-differentiated products are manufactured
B) Direct labor costs are low
C) Direct material costs are large relative to direct labor costs incurred
D) Only one product is manufactured

8. Indirect labor is a
A) Prime Cost
B) Product Cost
C) Period Cost
D) Non manufacturing cost
9. As current technology changes manufacturing processes, it is likely that direct
A) Labor will increase
B) Labor will decrease
C) Materials will increase
D) Materials will decrease

10. For inventoriable costs to become expenses under the matching principle
A) The product must be finished and in stock
B) The product must be expensed based on its percentage of completion
C) The product to which they attached must be sold
D) Alla ccounts payable must be settled

11. Immaterial amount of over/underapplied Factory Overhead is closed in the following account
A) Raw Materials
B) Work in Process
C) Finished Goods
D) Cost of Goods Sold

12. The following are factors in the computation of high-low method, except:
A) Highest Cost
B) Highest Activity Level
C) Average Activity Level
D) Lowest Activity Level

13. As production increases, variable cost per unit will

A) Increase
B) Decrease
C) Remain constant
D) Cannot be determined

14. As production increases, fixed cost per unit will

A) Increase
B) Decrease
C) Remain constant
D) Cannot be determined

15. As production increases, total fixed cost will

A) Increase
B) Decrease
C) Remain constant
D) Cannot be determined

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PROBLEM SOLVING: Supply the Answer. Round off your final answer to the nearest centavo,
(2.5 points each)

A. The following information was taken from Kay Companys accounting records for the year
ended December 31, 2015.

Increase in raw materials inventory Php 15,000

Decrease in finished goods inventory 35,000
Raw materials purchased 430,000
Direct manufacturing labor payroll 200,000
Factory overhead 300,000
Freight-out 45,000

There was no work in process inventory at the beginning or end of the year.

1) Kays cost of goods sold is? 950,000

2) Kays cost of goods manufactured is? 915,000
3) Kays raw materials used? 415,000

Solution:

Cost of Goods
915,000
Manufactured
Decrease in Finished goods 35,000
Cost of goods sold 950,000

Raw Materials Used 415,000

Direct Labor 200,000
Factory Overhead 300,000
Cost of Goods
915,000
Manufactured

Increase in Raw Materials (15,000)

Raw Materials Purchased 430,000
Raw Materials Used 415,000

B. A company allocates overhead to jobs in process using direct labor costs, raw material costs
and machine hours. The overhead application rates for the current year are

100% of direct labor

20% of raw materials
Php 117 per machine hour

A particular production run incurred the following costs:

Direct labor, Php 8,000

Raw materials, Php 2,000
A total of 140 machine hours were required for the production run

4) How much is the total cost charged to the production run? 34,780
5) How much is the applied factory overhead? 24,780

Raw Materials Used 2,000

Direct Labor 8,000
Factory overhead applied 24,780
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Total cost charged to production 34,780

100% of direct labor 8,000

20% of raw materials 400
117 per MH 16,380
Factory overhead applied 24,780

C. Northcast Manufacturing Company, a small manufacturer of parts used in appliances, has just
completed its first year of operations. The companys controller, Vic Trainor has been revieweing
the actual result for the year and is concerned about the application of factory overhead.
Trainor is using the followung information to assess operations

Northcasts equipment consists of several machines with a combined cost of

Php2,200,000 and no residual value. Eeach machine has an output of five units of
product per hour and a useful life of 20,000 hours.
Below are selected actual data of Northcasts operations

Products manufactured 650,000 units

Machine utilization 130,000 hours
Direct labor usage 35,000 hours
Labor rate Php 15 per hour
Total factory overhead Php 1,130,000
Cost of goods sold Php 1,720,960
Finished goods inventory (at year-end) Php 430,240
Work in process inventory (at year-end) Php 0

Total factory overhead is applied at direct labor cost using predetermined plant
wide rate
The budgeted activity for the year included 20 employees each working 1,800
productive hours per year to produce 540,000 units of product. The machines are
highly automated and each employee can operate two to four machines
simultaneously. Machine operators are paid Php 15 per hour
Budgeted factory overhead costs for the past year for various level of activity are
shown in the table below

Northcast Manufacturing Company

Budgeted Annual Costs for Total Factory Overhead

Units of Product 360,000 540,000 720,000

Labor hours 30,000 36,000 42,000
Machine hours 72,000 108,000 144,000

Total factory overhead costs:

Plant supervision Php 70,000 Php 70,000 Php 70,000
Plant rent 40,000 40,000 40,000
Equipment depreciation 288,000 432,000 576,000
Maintenance 42,000 51,000 60,000
Utilities 144,600 216,600 288,600
Indirect Materials 90,000 135,000 180,000
Other Costs 11,200 16,600 22,000
Total Php 685,800 Php 961,200 Php 1,236,600

6) What is the predetermined overhead application rate for the year? 1.78
7) How much is the factory overhead over/underapplied? 195,500 under
8) What amount of underapplied overhead allocated to cost of goods sold (if
material)? 156,400
9) If machine hours were used as the application base, what would be the
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 predetermined overhead rate? 8.90

Budgeted Factory 961,200

Budgeted DL cost 540,000
OH rate 1.78

Actual DL Cost 525,000

OH rate 1.78
Factory overhead applied 934,500
Factory overhead actual 1,130,000
195,500
Allocation of OH disposition
Work in Process 0
Finished Goods 39,100
Cost of Goods Sold 156,400

Budgeted Factory 961,200

Machine Hours 108,000
OH rate 8.90

D. Pane Company uses a job costing system and applies overhead to products on the basis of
direct labor cost. Job no. 75, the only job in process on January 1 had the following costs
assigned as of that date: direct materials, Php 40,000; direct labor, Php 80,000; and factory
overhead, Php 120,000. The following selected costs were incurred during the year:

Traceable to jobs:
Direct Materials Php 178,000
Direct labor 345,000

Not traceable to jobs

Factory materials & supplies 46,000
Indirect labor 235,000
Plant maintenance 73,000
Depreciation of factory equipment 29,000
Other factory costs 76,000

Panes profit plan for the year included budgeted direct labor cost of Php 320,000 and factory
overhead of Php 448,000. Assuming no work in process on December 31.

10) How much is the ending balance of factory overhead control account? (Indicate
whether debit/credit and over/under applied). 24,000 credit. Overapplied
11) How much is the total manufacturing cost charged to work in process? 1,006,000
12) How much is the cost of gooods manufactured? 1,246,000
Factory Overhead applied 483,000
Factory overhead actual 459,000
Overapplied (credit) 24,000

Raw Materials Used 178,000

Direct Labor 345,000
Factory Overhead applied 483,000
Total Manufacturing Cost 1,006,000

Total Manufacturing Cost 1,489,000

Work in Process beginning 120,000
Cost of Goods Manufactured 1,609,000
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E. The following information relates to Yellow Corporation for the last year. Yellow uses direct
labor hours as an overhead base.
Estimated direct labor hours 360,000 hours
Estimated manufacturing overhead costs P90,000
Actual manufacturing overhead costs P108,840
Applied manufacturing overheads costs P120,000
Cost of Goods Sold P500,000

13) What was the actual number of direct labor hours worked last year at Yellow
Corporation? 480,000
14) What is the adjusted balance of the Cost of Goods Sold? (if disposition of
over/under applied overhead involves an immaterial amount) 488,840

Applied Factory Overhead 120,000

OH rate 0.25
Actual DL Hours 480,000

Cost of Goods Sold 500,000

Overapplied Overhead 11,160
CGS (adjusted) 488,840

F. Calum Inc. has provided the following information for 20x5:

a. Purchased raw materials on account for P120,000.

b. Issued P115,000 in raw materials to production (P22,000 were not traceable to specific
jobs).
c. Incurred P115,000 in direct labor costs (14,375 hours) and P62,500 in supervision costs
(paid in cash).
d. Incurred the following additional manufacturing overhead costs: factory lease P24,000
(paid in cash); depreciation on equipment P20,000; custodial supplies P7,500 (paid in
cash).
e. Incurred the following nonmanufacturing costs, both paid in cash: advertising P75,000;
sales commissions P88,000.
f. Applied manufacturing overhead to jobs in process at a rate of P10 per direct labor hour.
g. Completed jobs costing a total of P345,000.
h. Sold jobs for P425,000 on account. The cost of the jobs was P342,000.
i. Closed the Manufacturing Overhead account balance.

15) What is the Ending Balance of the Work In Process?

16) What are the Total Manufacturing Costs?
17) What is the Cost of Goods Sold? (after adjustment of over/under applied Factory
Overhead, assumed to be immaterial)
18) What is the over/underapplied Factory Overhead? (indicate whether over or
under applied)
19) What is the Gross Profit?

G. Below information pertains to Riley Companys Operations

Machine Hours Overhead Costs

175 P 9,200
120 P 8,000
150 P 8,900
200 P 10,000
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 20) Using the high-low method, what is the variable cost per machine hours? 25
21) Using the high-low method, what is the Total Fixed Costs? 5,000
22) What is the Total Cost equation? Y = 5,000 + 25x

H. Below information pertains to Penguin manufacturing operations:

Inventories Feb 1 Feb 28

Direct Materials Php 36,000 Php 30,000
Work in Process 18,000 12,000
Finished goods 54,000 72,000

Additional information for the month of February:

Direct Materials purchased Php 84,000

Direct manufacturing payroll 60,000
Direct manufacturing labor rate per hour 7.50
Factory overhead rate per direct labor hour 10.00

23) For the month of February, prime cost was? 150,000

24) For the month of February, conversion cost was? 140,000
25) For the month of February, cost of goods manufactured was? 236,000
Direct Materials used 90,000
Direct Labor 60,000
Prime Cost 150,000

Direct Labor 60,000

Factory Overhead applied 80,000
Conversion Cost 140,000

Direct Materials used 90,000

Direct Labor 60,000
Factory Overhead applied 80,000
Work in Process beginning 18,000
Work in process end (12,000)
Cost of goods manufactured 236,000

I. Snoopy Company had the following inventories at the beginning and end of the month of
January.

January 1 January 31
Finished goods Php 125,000 Php 117,000
Work in process 235,000 251,000
Direct materials 134,000 124,000

The following additional manufacturing data were available for the month of January:

Direct materials purchased Php 189,000

Purchase returns and allowances 1,000
Freight-in 3,000
Direct labor 300,000
Actual factory overhead 175,000

Snoopy Company applies factory overhead at a rate of 60% of direct labor cost, and any
overapplied or underapplied factory overhead is deferred until the end of the year, December
31.
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 26) Snoopy Companys prime cost for January was? 501,000
27) Snoopy Companys total manufacturing cost for January was? 681,000
28) Snoopy Companys cost of goods manufactured for January was? 665,000
29) Snoopy Companys cost of goods sold for January was? 673,000
30) Snoopy Companys balance in factory overhead control for January was? (Specify
debit/credit and over/underapplied). 5,000 credit- overapplied

Direct Materials beginning 134,000

Raw Materials Purchases 189,000
Purchase returns and allowances (1,000)
Freight in 3,000
Direct Materials end (124,000)
Direct Labor 300,000
Prime Cost 501,000

Direct Materials used 201,000

Direct Labor 300,000
Factory Overhead applied 180,000
Total Manufacturing Cost 681,000

Total Manufacturing Cost 681,000

Work in Process beginning 235,000
Work in process end (251,000)
Cost of Goods Manufactured 665,000

Cost of Goods Manufactured 665,000

Finished goods beginning 125,000
Finished goods end (117,000)
Cost of Goods Sold 673,000

Factory overhead actual 175,000

Factory Overhead applied 180,000
Credit - overapplied 5,000

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