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2.E: Exercises (Part 1)

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    Questions

    1. Describe the characteristics of companies likely to use a job costing system. Explain how these characteristics differ from companies likely to use a process costing system.
    2. What information is included on the materials requisition form?
    3. What is the purpose of a job cost sheet? Describe the information typically included on a job cost sheet.
    4. What information is included on a timesheet?
    5. What is the purpose of using a predetermined overhead rate?
    6. Review Note 2.23 "Business in Action 2.1" Explain why Boeing likely uses a job costing system. How does the information that comes from a job costing system help Boeing make better decisions?
    7. What is a normal costing system, and why do companies tend to use a normal costing system to apply overhead to jobs rather than using actual overhead costs?
    8. Describe the two important factors in selecting an overhead allocation base.
    9. What cost information is recorded on the debit side of the manufacturing overhead account, and what information is recorded on the credit side?
    10. When is manufacturing overhead underapplied? When is it overapplied?
    11. What two options are available when closing the manufacturing overhead account at the end of the period, depending on the significance of the balance?
    12. How might a job costing system used by a service organization differ from a job costing system used by a manufacturing organization?
    13. Review Note 2.27 "Business in Action 2.2" Why is it important for movie studios to have accurate costs for each movie produced?
    14. How does a job costing system help a company evaluate the profitability of jobs?

    Brief Exercises

    1. Product Costs at Custom Furniture Company. Refer to the dialogue between Dan and Leslie at Custom Furniture Company that appears at the beginning of the chapter. What is Dan concerned about, and how did Leslie propose to help?
    2. Job Costing Versus Process Costing. Indicate whether each of the firms listed in the following would use job costing or process costing.
      1. Oil refinery
      2. Builder of pools
      3. Cereal producer
      4. Legal firm
      5. Upholstery repair shop
      6. Sport drink producer
      7. Toner cartridge producer
      8. Landscape design firm
    3. Job Costing Versus Process Costing. Indicate whether each of the firms listed in the following would use job costing or process costing.
      1. Custom home builder
      2. Dairy farm
      3. Surgical unit of hospital
      4. Candy bar producer
      5. Auto body repair shop
      6. Producer of basketballs
      7. Producer of T-shirts
      8. Plumber
    4. Recording Purchase and Transfer of Raw Materials in T-Accounts. The following transactions occurred during the month of October:
    October 5 Raw materials totaling $15,000 were purchased on account.
    October 8 Direct materials totaling $6,000 were placed in production.
    October 10 Indirect materials totaling $1,000 were placed in production.

    Required:

    1. Set up T-accounts for raw materials inventory, work-in-process inventory, manufacturing overhead, and accounts payable.
    2. Use the T-accounts established in part a to record the transactions for October.
    1. Calculating Predetermined Overhead Rate. Manufacturing overhead costs totaling $1,000,000 are expected for this coming year. The company also expects to use 20,000 in direct labor hours. Calculate the predetermined overhead rate and provide a one-sentence description of how the rate will be used in a job costing system.
    2. Service Organization Accounts. Provide the account name commonly used by service companies for each of the following accounts used in a manufacturing environment.
      1. Raw materials inventory
      2. Work-in-process inventory
      3. Finished goods inventory
      4. Cost of goods sold
      5. Manufacturing overhead
    3. Evaluating Profitability of Jobs. Refer to the job cost information in Figure 2.10 "Job Cost Estimates Versus Actual Results for Custom Furniture Company". Why is Custom Furniture Company comparing estimated product costs to actual product costs for each of the three jobs? Briefly summarize the results of this comparison.

    Exercises: Set A

    1. Raw Materials Inventory Journal Entries. The balance in Sedona Company’s raw materials inventory account was $110,000 at the beginning of September. Raw materials purchased during the month totaled $50,000. Sedona used $17,000 in direct materials and $8,000 in indirect materials for the month.

    Required:

    1. Prepare separate journal entries to record the following items:
      1. Raw materials purchased for the month, assuming all purchases were on account
      2. The transfer of direct materials into production
      3. The transfer of indirect materials into production
    2. Prepare a T-account for raw materials inventory and include the beginning balance for September. Post the appropriate items from the journal entries in part a to this account, and calculate the ending balance in raw materials inventory.
    1. Work-in-Process Inventory Journal Entries. The balance in Reid Company’s work-in-process inventory account was $300,000 at the beginning of March. Manufacturing costs for the month are as follows:
    Direct materials $ 40,000
    Direct labor $ 70,000
    Manufacturing overhead applied $200,000
    Cost of goods manufactured $290,000

    Required:

    1. Prepare separate journal entries to record the following items. (Hint: Use Figure 2.7 "Custom Furniture Company’s Journal Entries for May" as a guide.)
      1. Direct materials placed in production for the month
      2. Direct labor used during the month, assuming employees will be paid next month
      3. Manufacturing overhead applied for the month
      4. Transfer of cost of goods manufactured to finished goods
    2. Prepare a T-account for Work-in-process inventory and include the beginning balance for March. Post the appropriate items from the journal entries in part a to this account, and calculate the ending balance in work-in-process inventory.
    1. Cost of Goods Sold Journal Entries. The balance in Blue Oak Company’s finished goods inventory account was $25,000 at the beginning of September. Cost of goods manufactured for the month totaled $17,000, and cost of goods sold totaled $14,000.

    Required:

    1. Prepare separate journal entries to record the following items. (Hint: Use Figure 2.7 "Custom Furniture Company’s Journal Entries for May" as a guide.)
      1. Cost of goods manufactured for the month
      2. Cost of goods sold for the month
    2. Prepare a T-account for finished goods inventory and include the beginning balance for September. Post the appropriate items from the journal entries in part a to this account, and calculate the ending balance in finished goods inventory.
    1. Income Statement (with cost of goods sold adjustment). Rambler Company had the following activity for the year ended December 31.
    Sales revenue $2,050,000
    Selling expenses $ 575,000
    General and administrative expenses $ 330,000
    Cost of goods sold (before adjustment) $ 700,000
    Underapplied overhead $ 23,000

    Required:

    Prepare an income statement for year ended December 31.

    1. Manufacturing Overhead Allocation Base and Calculating the Cost of Jobs. Pyramid Company expects to incur $3,000,000 in manufacturing overhead costs this year. During the year, it expects to use 40,000 direct labor hours at a cost of $600,000 and 80,000 machine hours.

    Required:

    1. Prepare a predetermined overhead rate based on direct labor hours, direct labor cost, and machine hours.
    2. Why might Pyramid Company prefer to use machine hours to allocate manufacturing overhead?
    3. Using each of the predetermined overhead rates calculated in part a and the data that follows for job 128, determine the cost of job 128.
    Direct materials $6,000
    Direct labor $4,000 (200 hours at $15 per hour) + (100 hours at $10 per hour)
    Machine time 700 hours

    Exercises: Set B

    1. Raw Materials Inventory Journal Entries. The balance in Clay Company’s raw materials inventory account was $45,000 at the beginning of April. Raw materials purchased during the month totaled $55,000. Clay used $48,000 in direct materials and $14,000 in indirect materials for the month.

    Required:

    1. Prepare separate journal entries to record the following items:
      1. Raw materials purchased for the month, assuming all purchases were on account
      2. The transfer of direct materials into production
      3. The transfer of indirect materials into production
    2. Prepare a T-account for raw materials inventory and include the beginning balance for April. Post the appropriate items from the journal entries in part a to this account, and calculate the ending balance in raw materials inventory.
    1. Work-in-Process Inventory Journal Entries. The balance in the work-in-process inventory account of Verdi Production, Inc., was $900,000 at the beginning of May. Manufacturing costs for the month are as follows:
    Direct materials $ 340,000
    Direct labor $ 810,000
    Manufacturing overhead applied $ 660,000
    Cost of goods manufactured $1,960,000

    Required:

    1. Prepare separate journal entries to record the following items. (Hint: Use Figure 2.7 "Custom Furniture Company’s Journal Entries for May" as a guide.)
      1. Direct materials placed in production for the month
      2. Direct labor used during the month, assuming employees will be paid next month
      3. Manufacturing overhead applied for the month
      4. Transfer of cost of goods manufactured to finished goods
    2. Prepare a T-account for work-in-process inventory and include the beginning balance for May. Post the appropriate items from the journal entries in part a to this account, and calculate the ending balance in work-in-process inventory.
    1. Cost of Goods Sold Journal Entries. The balance in Posada Company’s finished goods inventory account was $650,000 at the beginning of March. Cost of goods manufactured for the month totaled $445,000, and cost of goods sold totaled $470,000.

    Required:

    1. Prepare separate journal entries to record the following items. (Hint: Use Figure 2.7 "Custom Furniture Company’s Journal Entries for May" as a guide.)
      1. Cost of goods manufactured for the month
      2. Cost of goods sold for the month
    2. Prepare a T-account for finished goods inventory and include the beginning balance for March. Post the appropriate items from the journal entries in part b to this account, and calculate the ending balance in finished goods inventory.
    1. Income Statement (with cost of goods sold adjustment). Statton Company had the following activity for the year ended December 31.
    Sales revenue $4,000,000
    Selling expenses $ 825,000
    General and administrative expenses $ 470,000
    Cost of goods sold (before adjustment) $1,900,000
    Overapplied overhead $ 109,000

    Required:

    Prepare an income statement for year ended December 31.

    1. Manufacturing Overhead Allocation Base and Calculating the Cost of Jobs. Elko Company expects to incur $800,000 in manufacturing overhead costs this year. During the year, it expects to use 10,000 direct labor hours at a cost of $200,000 and 4,000 machine hours.

    Required:

    1. Prepare a predetermined overhead rate based on direct labor hours, direct labor cost, and machine hours.
    2. Why might Elko Company prefer to use direct labor hours or direct labor costs, rather than machine hours, to allocate manufacturing overhead?
    3. Using each of the predetermined overhead rates for Elko Company calculated in part a and the data that follows for job 15B, determine the cost of job 15B.
    Direct materials $1,750
    Direct labor $860 (30 hours at $12 per hour) + (50 hours at $10 per hour)
    Machine time 20 hours

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