The most important criterion in accurate cost allocations is
Answer (C) is correct. All the cost objects gathered in a cost pool should be similar enough that a single allocation base can be selected that will appropriately allocate all of them.
A capital-intensive manufacturer of large construction equipment has a manufacturing process that relies heavily on specialized machinery. This machinery is run by a relatively small number of highly skilled laborers. In determining its predetermined overhead rate, what allocation base should the company use?
Answer (C) is correct. A cost allocation base is the common denominator for systematically correlating indirect costs and a cost object. The cost driver of the indirect costs is ordinarily the allocation base. In a capital-intensive manufacturer, machine hours are the best allocation base to use.
A company has budgeted overhead costs at its normal capacity based on machine hours. Variable factory overhead is $180,000, and fixed factory overhead is $560,000. If the firm operates at a slightly lower rate of activity, it will expect total
Answer (B) is correct. Since fixed costs are by their nature unchanging within the relevant range, fixed costs will remain constant at $560,000. Additionally, variable overhead costs per hour remain constant in the relevant range.
A manufacturing process normally produces defective units equal to 1% of production. Defective units are subsequently reworked and sold. The cost of reworking these defective units should be charged to
Answer (A) is correct. Normal rework costs incurred because of factors common to all units produced ordinarily are charged to factory overhead control to spread the costs over all good units.
During the current accounting period, a manufacturing company purchased $70,000 of raw
materials, of which $50,000 of direct materials and $5,000 of indirect materials were used in
production. The company also incurred $45,000 of total labor costs and $20,000 of other
manufacturing overhead costs. An analysis of the work-in-process control account revealed
$40,000 of direct labor costs. Based upon the above information, what is the total amount
accumulated in the overhead control account?
Answer (B) is correct.
Overhead consists of all costs, other than direct materials and direct
labor, that are associated with the manufacturing process. The overhead
control account should have the following costs:
Indirect materials $ 5,000
Indirect labor ($45,000 – $40,000) 5,000
Other overhead 20,000
Total overhead $30,000
Wagner Corporation applies factory overhead based upon machine hours. At the beginning
of the year, Wagner budgeted factory overhead at $250,000 and estimated that 100,000
machine hours would be used to make 50,000 units of product. During the year, the
company produced 48,000 units using 97,000 machine hours. Actual overhead for the year
was $252,000. Under a standard cost system, the amount of factory overhead applied
during the year was
Answer (A) is correct.
Wagner’s application rate for overhead is $2.50 per machine hour
($250,000 budgeted total ÷ 100,000 estimated machine hours), and each
unit of output is estimated to require 2 machine hours (100,000 estimated
machine hours ÷ 50,000 units budgeted output). Under a standard cost
system, the amount of overhead applied during the year was therefore
$240,000 (48,000 units actual output × $2.50 per machine hour
application rate × 2 machine hours standard per unit).
"From the following budgeted data, calculate the budgeted indirect cost rate that would be
used in a normal costing system."
Total direct labor hours
Total indirect labor hours
Total indirect labor related costs
Total indirect nonlabor related costs
Answer (D) is correct.
Total indirect costs are $12,000,000 ($5,000,000 + $7,000,000). The
appropriate allocation base is direct labor hours, since this more closely
matches activity level than does indirect labor or the combination of the
two. The budgeted indirect cost rate is thus $48 per direct labor hour
($12,000,000 ÷ 250,000).
"Baldwin Printing Company uses a job order costing system and applies overhead based on
machine hours. A total of 150,000 machine hours have been budgeted for the year. During
the year, an order for 1,000 units was completed and incurred the following:"
Direct material costs
Direct labor costs
"The accountant calculated the inventory cost of this order to be $4.30 per unit. The annual
budgeted overhead in dollars was"
Answer (B) is correct.
The results from the production run of 1,000 units allow Baldwin to
calculate its per-unit costs for materials ($1,000 ÷ 1,000 units = $1.00)
and labor ($1,500 ÷ 1,000 units = $1.50). Overhead can then be derived
Total cost per unit $4.30
Less: direct materials (1.00)
Less: direct labor (1.50)
Overhead per unit $1.80
The number of machine hours required to manufacture a single unit is .45
(450 hours ÷ 1,000 units). Therefore, $1.80 represents 45% of the cost of
a machine hour ($1.80 ÷ .45 = $4.00). Since 150,000 hours were
budgeted, total budgeted overhead for the year was $600,000 (150,000
hours × $4.00 per hour).
Patterson Corporation expects to incur $70,000 of factory overhead and $60,000 of general
and administrative costs next year. Direct labor costs at $5 per hour are expected to total
$50,000. If factory overhead is to be applied per direct labor hour, how much overhead will
be applied to a job incurring 20 hours of direct labor?
Answer (C) is correct.
Direct labor hours budgeted for next year are 10,000 ($50,000 total ÷ $5
per hour). Factory overhead is applied at the rate of $7 per direct labor
hour ($70,000 ÷ 10,000 hours). A job incurring 20 hours of direct labor
will thus be charged with $140 of overhead ($7 per direct labor hour ×
In allocating factory service department costs to producing departments, which one of the
following items would most likely be used as an activity base?
Answer (C) is correct.
Service department costs are considered part of factory overhead and
should be allocated to the production departments that use the services. A
basis reflecting cause and effect should be used to allocate service
department costs. For example, the number of kilowatt hours used by
each producing department is probably the best allocation base for