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Chapter 4: Problem 16

Which of the following does not accurately describe the application of job- order costing? a. Finished goods that are purchased by customers will directly impact cost of goods sold. b. Indirect manufacturing labor and indirect materials are part of the actual manufacturing costs incurred. c. Direct materials and direct manufacturing labor are included in total manufacturing costs. d. Manufacturing overhead costs incurred is used to determine total manufacturing costs.

Short Answer

Expert verified
The statement that does not accurately describe the application of job-order costing is: \( \boxed{\text{d. Manufacturing overhead costs incurred is used to determine total manufacturing costs.}} \) This statement is incorrect as it implies that manufacturing overhead costs are the only factor in determining total manufacturing costs, while in job-order costing we also include direct materials and direct labor.

Step by step solution

01

Understand Job-Order Costing

Job-order costing is a method of calculating the cost of producing a product or providing a service. This method is used when products or services vary significantly in their production processes or requirements, and so each "job" is treated as a distinct cost object with its unique costs associated. In job-order costing, direct materials, direct labor, and manufacturing overhead are accounted for, and these costs are assigned (or allocated) to specific jobs.
02

Analyze Each Statement

a. Finished goods that are purchased by customers will directly impact the cost of goods sold. This statement refers to the relationship between the finished goods and cost of goods sold. When a finished product is sold, its cost is recognized as the cost of goods sold, which is true for job-order costing. b. Indirect manufacturing labor and indirect materials are part of the actual manufacturing costs incurred. This statement is true in the context of job-order costing. Indirect manufacturing labor and indirect materials are included in the manufacturing overhead costs, which are later allocated to specific jobs. c. Direct materials and direct manufacturing labor are included in total manufacturing costs. This statement is true as well. In job-order costing, direct materials and direct manufacturing labor are assigned directly to specific jobs as part of the total manufacturing costs. d. Manufacturing overhead costs incurred are used to determine total manufacturing costs. This statement implies that manufacturing overhead costs are the only factor used to determine total manufacturing costs, which is inaccurate. In job-order costing, total manufacturing costs include direct materials, direct labor, and allocated manufacturing overhead costs. Although manufacturing overhead costs are an important component in determining total manufacturing costs, they are not the sole factor.
03

Identify the Incorrect Statement

Based on our analysis, the statement that does not accurately describe the application of job-order costing is: \( \boxed{\text{d. Manufacturing overhead costs incurred is used to determine total manufacturing costs.}} \) This statement is incorrect as it implies that manufacturing overhead costs are the only factor in determining total manufacturing costs, while in job-order costing we also include direct materials and direct labor.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Manufacturing Costs
In job-order costing, manufacturing costs are essential as they represent the total expenditure incurred in producing products or delivering services. These costs include three main components: direct materials, direct labor, and manufacturing overhead. Each of these elements plays a unique role in calculating the overall cost of a particular job or product. Direct materials are those raw materials that can be directly attributed to and are part of the final product. Direct labor refers to wages for workers who are directly involved in manufacturing the product. Manufacturing overhead encompasses all additional production costs that are not direct materials or direct labor, such as indirect materials, indirect labor, and other overhead expenses like equipment maintenance and utilities. The total manufacturing cost for a specific job is determined by summing these three components. This comprehensive approach ensures that all costs associated with production are accounted for and correctly attributed to each job.
Direct Materials
Direct materials are raw materials or parts that can be directly traced to the production of specific goods or services. In job-order costing, identifying and costing direct materials is critical because these costs are a substantial portion of the overall manufacturing expenses. Examples of direct materials include:
  • Wood for furniture making
  • Steel for car manufacturing
  • Fabric for clothing production
Recording the cost of direct materials involves accurately measuring the quantity consumed for a particular job and applying the appropriate cost rate. These costs are directly assigned to jobs, which helps in understanding the exact material cost associated with each product or service. This clarity allows companies to price their products correctly and control production costs effectively.
Manufacturing Overhead
Manufacturing overhead refers to all indirect costs associated with the production process. Unlike direct materials and labor, these costs cannot be directly traced to individual products but are essential to manufacturing operations. Examples include indirect materials, which are materials used in production but not easily assigned to specific products, and indirect labor, such as salaries of supervisors and maintenance staff. Other overhead costs might involve machinery depreciation, utility expenses, and factory rent. In job-order costing, manufacturing overhead must be allocated to each job using a predetermined overhead rate. This means that even though overhead costs do not meet the criteria for direct attribution, they are still costed to products through a systematic allocation process. Understanding manufacturing overhead ensures that companies consider all aspects of production costs, leading to more accurate pricing and financial reporting.
Cost Accounting
Cost accounting is a fundamental practice used to track, analyze, and manage costs related to producing goods or services. It goes beyond mere bookkeeping by providing insights into where a company鈥檚 money is spent, which products are profitable, and where cost efficiencies can be improved. This detailed information is crucial for developing budgets, setting pricing strategies, and making informed financial decisions. Job-order costing, a form of cost accounting, involves tracing and assigning manufacturing costs to specific jobs or batches, which is particularly useful in industries where each product is unique. This method allows businesses to maintain precise control over manufacturing costs, facilitating competitive pricing and production efficiencies. Incorporating cost accounting practices helps companies remain competitive by optimizing resource allocation, enhancing profitability, and supporting strategic planning. It provides a comprehensive financial picture by capturing the nuances of manufacturing inputs and operational expenditures.

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Most popular questions from this chapter

Describe three major source documents used in job-costing systems.

Proration of overhead. The Ride-On-Wave Company (ROW) produces a line of non- motorized boats. ROW uses a normal-costing system and allocates manufacturing overhead using direct manufacturing labor cost. The following data are for 2017 ? Budgeted manufacturing overhead cost Budgeted direct manufacturing labor cost Budgeted direct manufacturing labor cost Actual direct manufacturing labor cost \(\$ 125,000\) \(\$ 250,000\) \(\$ 117,000\) \(\$ 228,000\) Inventory balances on December 31,2017 , were as follows: \(\begin{tabular}{lcc} & & 2017 direct manufacturing \\ Account & Ending balance & labor cost in ending balance \\ \hline Work in process & \)\$ 50,700\( & \)\$ 20,520\( \\ Finished goods & 245,050 & 59,280 \\ cost of goods sold & 549,250 & 148,200 \end{tabular}\) 1\. Calculate the manufacturing overhead allocation rate. 2\. Compute the amount of under-or overallocated manufacturing overhead. 3\. Calculate the ending balances in work in process, finished goods, and cost of goods sold if under-or overallocated manufacturing overhead is as follows: a. Written off to cost of goods sold b. Prorated based on ending balances (before proration) in each of the three accounts c. Prorated based on the overhead allocated in 2017 in the ending balances (before proration) in each of the three accounts 4\. Which method would you choose? Justify your answer.

Atkinson Construction assembles residential houses. It uses a job-costing system with two direct-cost categories (direct materials and direct labor) and one indirect-cost pool (assembly support). Direct labor-hours is the allocation base for assembly support costs. In December 2016, Atkinson budgets 2017 assembly-support costs to be \(8,800,000 and 2017 direct labor- hours to be 220,000. At the end of 2017 , Atkinson is comparing the costs of several jobs that were started and completed in 2017 . $$\begin{array}{lcc} & \text { Laguna Model } & \text { Mission Model } \\ \hline \text { Construction period } & \text { Feb-June 2017 } & \text { May-0ct 2017 } \\ \text { Direct material costs } & \$ 106,550 & \$ 127,450 \\ \text { Direct labor costs } & \$ 36,250 & \$ 41,130 \\ \text { Direct labor-hours } & 970 & 1,000 \end{array}$$ Direct materials and direct labor are paid for on a contract basis. The costs of each are known when direct materials are used or when direct labor-hours are worked. The 2017 actual assembly-support costs were \)\$ 8,400,000,$ and the actual direct labor-hours were 200,000. 1\. Compute the (a) budgeted indirect-cost rate and (b) actual indirect-cost rate. Why do they differ? 2\. What are the job costs of the Laguna Model and the Mission Model using (a) normal costing and (b) actual costing? 3\. Why might Atkinson Construction prefer normal costing over actual costing?

Dakota Products uses a job-costing system with two direct-cost categories (direct materials and direct manufacturing labor) and one manufacturing overhead cost pool. Dakota allocates manufacturing overhead costs using direct manufacturing labor costs. Dakota provides the following information: $$\begin{array}{lcc} & \text { Budget for 2017 } & \text { Actual Results for 2017 } \\ \hline \text { Direct material costs } & \$ 2,250,000 & \$ 2,150,000 \\ \text { Direct manufacturing labor costs } & 1,700,000 & 1,650,000 \\ \text { Manufacturing overhead costs } & 3,060,000 & 3,217,500 \end{array}$$ 1\. Compute the actual and budgeted manufacturing overhead rates for 2017 . 2\. During March, the job-cost record for Job 626 contained the following information: Direct materials used Direct manufacturing labor costs \(\$ 55,000\) \(\$ 45,000\) Compute the cost of Job 626 using (a) actual costing and (b) normal costing. 3\. At the end of 2017 , compute the under-or overallocated manufacturing overhead under normal costing. Why is there no under- or overallocated manufacturing overhead under actual costing? 4\. Why might managers at Dakota Products prefer to use normal costing?

Overview of general ledger relationships. Estevez Company uses normal costing in its job-costing system. The company produces kitchen cabinets. The beginning balances (December 1 ) and ending balances (as of December 30 ) in their inventory accounts are as follows: $$\begin{array}{lcc} & \text { Beginning Balance 12/1 } & \text { Ending Balance 12/30 } \\ \hline \text { Materials Control } & \$ 4,200 & \$ 17,000 \\ \text { Work-in-Process Control } & 13,400 & 18,000 \\ \text { Manufacturing Department 0verhead Control } & \- & 188,000 \\ \text { Finished Goods Control } & 8,800 & 38,800 \end{array}$$ a. Direct materials purchased during December were \(\$ 132,600\). b. cost of goods manufactured for December was \(\$ 468,000\). c. No direct materials were returned to suppliers. d. No units were started or completed on December 31 and no direct materials were requisitioned on December 31 e. The manufacturing labor costs for the December 31 working day: direct manufacturing labor, \(\$ 8,600\), and indirect manufacturing labor, \(\$ 2,800\) f. Manufacturing overhead has been allocated at \(110 \%\) of direct manufacturing labor costs through December 31 1\. Prepare journal entries for the December 31 payroll. 2\. Use T-accounts to compute the following: a. The total amount of materials requisitioned into work in process during December b. The total amount of direct manufacturing labor recorded in work in process during December (Hint. You have to solve requirements \(2 b\) and \(2 c\) simultaneously c. The total amount of manufacturing overhead recorded in work in process during December d. Ending balance in work in process, December 31 e. cost of goods sold for December before adjustments for under- or overallocated manufacturing overhead 3\. Prepare closing journal entries related to manufacturing overhead. Assume that all under- or overallocated manufacturing overhead is closed directly to cost of Goods Sold.
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