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11th EditionChapter 3
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Chapter Three
Systems Design: Job-Order Costing
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Types of Product Costing Systems
ProcessCosting
Job-orderCosting
A company produces many units of a single A company produces many units of a single product. product. One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product. The identical nature of each unit of product The identical nature of each unit of product enables enables
assigning the same average cost per unit.assigning the same average cost per unit.
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Types of Product Costing Systems
ProcessCosting
Job-orderCosting
A company produces many units of a single A company produces many units of a single product. product. One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product. The identical nature of each unit of product The identical nature of each unit of product enables enables
assigning the same average cost per unit.assigning the same average cost per unit.
Example companies:Example companies:1. Weyerhaeuser (paper manufacturing)1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)
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Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Many different products are produced each period. Many different products are produced each period. Products are manufactured to order.Products are manufactured to order. The unique nature of each order requires tracing or The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost records for each job.records for each job.
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Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Many different products are produced each period. Many different products are produced each period. Products are manufactured to order.Products are manufactured to order. The unique nature of each order requires tracing or The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost records for each job.records for each job.
Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)
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Comparing Process and Job-Order Costing
Job-Order ProcessNumber of jobs worked Many Single ProductCost accumulated by
Individual Job Department
Average cost computed by Job Department
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Quick Check
Which of the following companies would be likely to use job-order costing rather than process costing?a. Scott Paper Company for Kleenex.b. Architects.c. Heinz for ketchup.d. Caterer for a wedding reception.e. Builder of commercial fishing vessels.
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Quick Check
Which of the following companies would be likely to use job-order costing rather than process costing?a. Scott Paper Company for Kleenex.b. Architects.c. Heinz for ketchup.d. Caterer for a wedding reception.e. Builder of commercial fishing vessels.
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Manufacturing Overhead
Job No. 1
Job No. 2
Job No. 3
Charge Charge direct direct
material and material and direct labor direct labor
costs to costs to each job as each job as
work is work is performed.performed.
Direct Manufacturing Costs
Direct Materials
Direct Labor
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Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect
materialsmaterials and and indirect laborindirect labor, ,
are allocated to are allocated to jobs rather than jobs rather than directly traced directly traced to each job.to each job.
Direct Manufacturing Costs
Direct Materials
Direct Labor
Job No. 1
Job No. 2
Job No. 3Manufacturing Overhead
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PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
Job-Order Cost Accounting
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Materials Requisition Form
Will E. Delite
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Job-Order Cost Accounting
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Employee Time Ticket
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Job-Order Cost Accounting
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Why Use an Allocation Base?
Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base, such as are in process. An allocation base, such as
direct labor hours, direct labor dollars, or direct labor hours, direct labor dollars, or machine hours, is used to assign machine hours, is used to assign
manufacturing overhead to individual jobs.manufacturing overhead to individual jobs.We use an allocation base because:
1. It is impossible or difficult to trace overhead costs to particular jobs.
2. Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary.
3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
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The predetermined overhead rate (POHR) used to apply overhead to jobs is
determined before the period begins.
Manufacturing Overhead Application
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
Ideally, the allocation base is a cost driver that causes
overhead.
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Using a predetermined rate makes itpossible to estimate total job costs sooner.
Actual overhead for the period is notknown until the end of the period.
The Need for a POHR
$
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Actual amount of the allocation based upon the actual level of
activity.
Based on estimates, and determined before the
period begins.
Application of Manufacturing Overhead
Overhead applied = POHR × Actual activity
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For each direct labor hour worked on a particular job, $4.00 of factory overhead
will be applied to that job.
Overhead Application Rate
POHR = $4.00 per DLH
$640,000160,000 direct labor hours (DLH)
POHR =
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
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Job-Order Cost Accounting
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Job-Order Cost Accounting
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Interpreting the Average Unit Cost
The average unit cost should not be interpretedas the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unitwere produced, so the incremental cost of
another unit may be somewhat less than $118.
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Quick Check
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?a. $200.b. $350.c. $380.d. $730.
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Quick Check
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?a. $200.b. $350.c. $380.d. $730.
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Let’s summarize the document flow
in a job-order costing system.
Job-Order CostingDocument Flow Summary
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Job-Order CostingDocument Flow Summary
A sales order is the A sales order is the basis of issuing a basis of issuing a production order. production order.
A production A production order initiates order initiates work on a job.work on a job.
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Job-Order CostingDocument Flow Summary
Job Cost Sheets
MaterialsRequisition
Manufacturing Overhead Account
Direct materials
Indirect materials
Materials usedMaterials usedmay be eithermay be either
direct ordirect orindirect.indirect.
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Job-Order CostingDocument Flow Summary
Job Cost Sheets
Employee Time Ticket
Manufacturing Overhead Account
An employee’stime may be eitherdirect or indirect.
Direct Labor
Indirect Labor
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Job-Order CostingDocument Flow Summary
Manufacturing Overhead Account
OtherActual OHCharges
Job Cost Sheets
AppliedOverhead
MaterialsRequisition
EmployeeTime Ticket
IndirectMaterial
IndirectLabor
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Job-Order System Cost Flows
Let’s examine the cost flows in a
job-order costing system.
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Raw MaterialsMaterial
Purchases
Mfg. Overhead
Work in Process(Job Cost Sheet)
Actual Applied
Direct Materials Direct
Materials
Indirect Materials
Indirect Materials
Job-Order System Cost Flows
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Cost Flows – Material Purchases
Raw material purchases are recorded in aninventory account.
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Cost Flows – Material Usage
Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials.
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Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Direct Labor
Indirect Materials
Actual Applied
IndirectLabor
IndirectLabor
Job-Order System Cost Flows
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Cost Flows – Labor
The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases
Manufacturing Overhead.
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Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Direct Labor
Indirect Materials
Actual Applied
IndirectLabor
IndirectLabor
Job-Order System Cost Flows
OtherOverhead
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Cost Flows – Actual Overhead
In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to
the Manufacturing Overhead account as they are incurred.
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Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Direct Labor
Indirect Materials
Actual Applied
IndirectLabor
IndirectLabor
Job-Order System Cost Flows
OtherOverhead
Overhead Applied
OverheadApplied to
Work inProcess
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
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Cost Flows – Overhead Applied
Work in Process is increased when Manufacturing Overhead is applied to jobs.
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Nonmanufacturing Cost Flows
Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the
period incurred.
Examples:Examples:1.1. Salary expense of employeesSalary expense of employees
that work in a marketing, selling,that work in a marketing, selling,or administrative capacity.or administrative capacity.
2.2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.
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Nonmanufacturing Cost Flows
Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.
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Finished GoodsWork in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Overhead Applied
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Job-Order System Cost Flows
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Cost Flows – Cost of Goods Manufactured
As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods
from Work in Process.
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Finished Goods
Cost of Goods Sold
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Overhead Applied
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Cost ofGoodsSold
Cost ofGoodsSold
Job-Order System Cost Flows
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Cost Flows – Sales
When finished goods are sold, two entries are required: (1) to record the sale, and (2) to
record COGS and reduce Finished Goods.
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Defining Under- and Overapplied Overhead
The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is termed either underapplied or overapplied
overhead.
Underapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead rate is less than the total
amount of overhead actually incurred during the period.
Overapplied overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs
during the period using the during the period using the predetermined overhead predetermined overhead
rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.
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PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor direct labor
hours worked on jobs.hours worked on jobs.How much total overhead was applied to How much total overhead was applied to
PearCo’s jobs during the year? Use PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of PearCo’s predetermined overhead rate of
$4.00 per direct labor hour. $4.00 per direct labor hour.
Overhead Application Example
Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
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PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor direct labor
hours worked on jobs.hours worked on jobs.How much total overhead was applied to How much total overhead was applied to
PearCo’s jobs during the year? Use PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of PearCo’s predetermined overhead rate of
$4.00 per direct labor hour. $4.00 per direct labor hour.
Overhead Application Example
Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
PearCo has PearCo has overappliedoverappliedoverhead for the yearoverhead for the yearby $30,000. What willby $30,000. What will
PearCo do?PearCo do?
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Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.b. $50,000 underapplied.c. $60,000 overapplied.d. $60,000 underapplied.
Quick Check
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Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.b. $50,000 underapplied.c. $60,000 overapplied.d. $60,000 underapplied.
Quick Check
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160,000 = $50,000
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Disposition of Under- or Overapplied Overhead
$30,000 may be$30,000 may beclosed directly toclosed directly to
cost of goods sold. cost of goods sold.
Cost of Goods Sold
PearCo’s Method
Work inProcess
FinishedGoods
Cost of Goods Sold
$30,000$30,000may be allocatedmay be allocated
to these accounts.to these accounts.
OROR
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Disposition of Under- or Overapplied Overhead
PearCo’sMfg. OverheadActual
overhead costs
$650,000$30,000
overapplied
PearCo’s Costof Goods Sold
Unadjusted Balance
AdjustedBalance
$30,000
$30,000
Overhead appliedto jobs
$680,000
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Allocating Under- or Overapplied Overhead Between Accounts
Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold is shown below:
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Allocating Under- or Overapplied Overhead Between Accounts
Amount Percent of
Total Allocation of
$30,000 Work in process 68,000$ 10% 3,000$ Finished Goods 204,000 30% 9,000 Cost of Goods Sold 408,000 60% 18,000 Total 680,000$ 100% 30,000$
We would complete the following allocation of $30,000 overapplied overhead:
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Allocating Under- or Overapplied Overhead Between Accounts
Amount Percent of
Total Allocation of
$30,000 Work in process 68,000$ 10% 3,000$ Finished Goods 204,000 30% 9,000 Cost of Goods Sold 408,000 60% 18,000 Total 680,000$ 100% 30,000$
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Overapplied and Underapplied Manufacturing Overhead - Summary
Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation
UNDERAPPLIED INCREASE INCREASECost of Goods Sold Work in Process
(Applied OH is less Finished Goodsthan actual OH) Cost of Goods Sold
OVERAPPLIED DECREASE DECREASECost of Goods Sold Work in Process
(Applied OH is greater Finished Goodsthan actual OH) Cost of Goods Sold
PearCo’s Method
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Quick Check
What effect will the overapplied overhead have on PearCo’s net operating income?a. Net operating income will increase.b. Net operating income will be unaffected.c. Net operating income will decrease.
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Quick Check
What effect will the overapplied overhead have on PearCo’s net operating income?a. Net operating income will increase.b. Net operating income will be unaffected.c. Net operating income will decrease.
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Multiple Predetermined Overhead Rates
To this point we have assumed that there is a To this point we have assumed that there is a single predetermined overhead rate called a single predetermined overhead rate called a
plantwide overhead rate.plantwide overhead rate.
Large companies Large companies often use multiple often use multiple predetermined predetermined overhead rates.overhead rates.
May be more May be more complex but . . .complex but . . .
May be more accurate because it reflects differences across departments.
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Job-Order Costing in Service Companies
Job-order costing is used in many Job-order costing is used in many difference types of service companies.difference types of service companies.
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The Use of Information Technology
Technology plays an important part in many Technology plays an important part in many job-order cost systems. When combined with job-order cost systems. When combined with Electronic Data Interchange (EDI) or a web-Electronic Data Interchange (EDI) or a web-
based programming language called based programming language called Extensible Markup Language (XML), bar Extensible Markup Language (XML), bar coding eliminates the inefficiencies and coding eliminates the inefficiencies and
inaccuracies associated with manual clerical inaccuracies associated with manual clerical processes.processes.
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Appendix 3a
The Predetermined Overhead Rate & Capacity
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Predetermined Overhead Rate and Capacity
Calculating predetermined overhead rates using Calculating predetermined overhead rates using an estimated, or budgeted amount of the an estimated, or budgeted amount of the allocation base has been criticized because:allocation base has been criticized because:
1.1. Basing the predetermined overhead rate upon Basing the predetermined overhead rate upon budgeted activity results in product costs that budgeted activity results in product costs that fluctuate depending upon the activity level.fluctuate depending upon the activity level.
2.2. Calculating predetermined rates based upon Calculating predetermined rates based upon budgeted activity charges products for costs that budgeted activity charges products for costs that they do not use.they do not use.
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Capacity-Based Overhead Rates
Criticisms can be overcome by using Criticisms can be overcome by using estimated total units in the allocation base at estimated total units in the allocation base at
capacity in the denominator of the capacity in the denominator of the predetermined overhead rate calculation.predetermined overhead rate calculation.
Let’s look at the difference!Let’s look at the difference!
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An Example
Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be
produced. The company estimates that 40,000 units will be produced and sold next year. What is the
predetermined overhead rate?
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An Example
Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be
produced. The company estimates that 40,000 units will be produced and sold next year. What is the
predetermined overhead rate?
TraditionalMethod = $2.50 per unit$100,000
40,000=
Capacity Method = $2.00 per unit$100,000
50,000=
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Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.
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Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.
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Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.
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Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.
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Quick Check
When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?a. The predetermined overhead rate goes up when
activity goes down.b. The predetermined overhead rate stays the
same; it is not affected by changes in activity.c. The predetermined overhead rate goes down
when activity goes down.
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Quick Check
When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?a. The predetermined overhead rate goes up when
activity goes down.b. The predetermined overhead rate stays the
same; it is not affected by changes in activity.c. The predetermined overhead rate goes down
when activity goes down.
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Quick Check
When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?a.The predetermined overhead rate goes up when
activity goes down.b.The predetermined overhead rate stays the
same; it is not affected by changes in activity.c.The predetermined overhead rate goes down
when activity goes down.
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Quick Check
When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?a.The predetermined overhead rate goes up when
activity goes down.b.The predetermined overhead rate stays the
same; it is not affected by changes in activity.c.The predetermined overhead rate goes down
when activity goes down.
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Basing the rate on capacity
Actual volume 40,000 casesSelling price $40.00 per caseVariable production cost $24.00 per caseFixed manufacturing overhead $100,000 per yearCapacity 50,000 casesPredetermined overhead rate $2.00 per caseFixed selling and admin. expense $500,000 per year
Revenue 1,600,000$ Cost of goods sold 1,040,000 Gross margin 560,000 Cost of idle capacity 20,000 Selling and admin. expense 500,000 Net operating income 40,000$
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Actual volume 40,000 casesSelling price $40.00 per caseVariable production cost $24.00 per caseFixed manufacturing overhead $100,000 per yearExpected volume 40,000 casesPredetermined overhead rate $2.50 per caseFixed selling and admin. expense $500,000 per year
Revenue 1,600,000$ Cost of goods sold 1,060,000 Gross margin 540,000 Cost of idle capacity - Selling and admin. expense 500,000 Net operating income 40,000$
Basing the rate on expected volume
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End of Chapter 3