1. Of the following manufacturing operations, which is best suited to the utilization of a job order system?

a. Helicopter manufacturing.

b. Soft drink bottling operation.

c. Crude oil refining.

d. Plastic molding operation.

Answera. Job costing systems are best suited to those situations where goods are made upon the receipt of a customer order, according to customer specifications, or in a separate batch. Such would be the case with helicopter manufacturing but not with the other examples cited as they would be more likely produced in a continuous process.

 

2. Which of the following statements concerning job cost sheets is incorrect?

a. A job cost sheet would show the direct materials used on that specific job.

b. A job cost sheet would reveal the selling costs associated with a particular job.

c. The total costs recorded on a job cost sheet should also be reflected in the Work in Process account in the general ledger.

d. The amount of overhead on a job cost sheet is the applied factory overhead rather than the actual factory overhead.

Answerb. Selling costs do not appear on a job cost sheet, only manufacturing costs. The other statements are all true.

 

3. Under normal circumstances the Work in Process account used in a job costing system:

a. Will include charges for direct labor, direct materials, and applied overhead.

b. Will include only charges for direct materials and applied overhead. The labor is charged to expense as incurred.

c. Will include charges for direct labor, direct materials, and actual overhead.

d. Will include only charges for direct labor and direct materials.

Answer a. The Work in Process account captures the actual direct labor and direct material costs, as well as the applied overhead. Actual overhead is recorded in the Factory Overhead account.

 

4. The Factory Overhead account in a job costing system is credited for the:

a. Excess of applied overhead over actual overhead.

b. Actual overhead

c. Applied overhead.

d. Indirect materials and indirect labor.

Answerc. The Factory Overhead account is credited for the amount of applied overhead and debited for the amount of actual overhead. The resulting balance is frequently closed to the Cost of Goods Sold account. Indirect materials and indirect labor are examples of actual overhead which would be debited to the Factory Overhead account.

 

5. The overhead application rate is calculated by:

a. Dividing the estimated factory overhead by the estimated application base.

b. Dividing estimated per unit factory overhead by the sum of the per unit cost for direct labor and direct materials.

c. Multiplying the estimated factory overhead by the estimated application base.

d. Dividing the estimated application base by the estimated factory overhead.

Answer a. Dividing the estimated factory overhead by the estimated application base is the correct formula to determine the overhead application rate. It reveals an amount of estimated overhead per unit of application base.

 

6. With the job order cost system a credit balance in the Factory Overhead account at the end of an accounting period would indicate:

a. That an error in the job cost system has occurred.

b. That the company lost money during the period.

c. The presence of underapplied overhead.

d. The presence of overapplied overhead.

Answer d. A credit balance in the Factory Overhead account indicates that the applied overhead exceeded the actual overhead thereby resulting in overapplied overhead. One would not ordinarily expect actual and applied overhead to be the same, and the extent of under- or overapplied overhead does not necessarily indicate a profit or loss for the period.

 

7. The theoretically correct method of allocating under- or overapplied overhead is to:

a. Allocate the amount to cost of goods sold.

b. Allocate the amount to finished goods.

c. Allocate the amount to work in process and finished goods.

d. Allocate the amount among work in process, finished goods, and cost of goods sold.

Answer d. Theoretically, the amount of under- or overapplied overhead should be distributed among work in process, finished goods, and cost of goods sold on a logical and equitable basis. However, for expediency, many companies will simply close the over- or underapplied amount to cost of goods sold.

 

8. Jensen Manufacturing uses a job order cost system. Overhead is applied at the rate of $20 per direct labor hour. Job #777 includes $2,000 of direct labor cost and 150 direct labor hours. $1,500 of indirect labor cost was actually incurred. The proper journal entry to record the wage related cost is:

a. Debit Work in Process, $3,500; credit Wages Payable, $3,500.

b. Debit Wage Expense, $3,500; credit Wages Payable, $3,500.

c. Debit Work in Process, $2,000; debit Factory Overhead, $1,500; credit Wages Payable, $3,500.

d. Debit Work in Process, $3,500; credit Factory Overhead, $1,500; credit Wage Expense, $2,000.

Answerc. The correct journal entry reflects a $2,000 debit to the Work in Process account for direct labor costs and a $1,500 debit to the Factory Overhead account for the indirect labor costs incurred.

 

9. The appropriate journal entry to record the application of overhead in a job costing system involves a debit to Work in Process and a credit to:

a. Cost of Goods Sold

b. Factory Overhead

c. Cash

d. Income Summary

Answerb. The Factory Overhead account would be credited for the applied overhead. Independently, the Factory Overhead account is debited for the actual overhead incurred. The balance of the Factory Overhead account, if any, is ordinarily closed to Cost of Goods Sold.

 

10. Which of the following statements concerning job costing systems is incorrect?

a. Cost drivers are those items which cause actual overhead to exceed applied overhead.

b. Job costing systems are appropriate to both manufacturing and service businesses.

c. Traditionally, direct labor has been a very popular overhead application base.

d. In a service business, indirect costs of providing a service are treated as overhead and applied in a manner similar to that for factory overhead.

Answera. Overhead application bases are said to be cost drivers, or the factors that cause specific costs to be incurred within an organization. The other statements are all true.