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23) Moira Company has just finished its first year of operations and must decide which method to use for
adjusting cost of goods sold. Because the company used a budgeted indirect-cost rate for its
manufacturing operations, the amount that was allocated ($435,000) to cost of goods sold was different
from the actual amount incurred ($425,000).
Ending balances in the relevant accounts were:
Work-in-Process $ 40,000
Finished Goods 80,000
Cost of Goods Sold 680,000
Required:
a. Prepare a journal entry to write off the difference between allocated and actual overhead directly to
Cost of Goods Sold. Be sure your journal entry closes the related overhead accounts.
b. Prepare a journal entry that prorates the write-off of the difference between allocated and actual
overhead using ending account balances. Be sure your journal entry closes the related overhead accounts.
24) Bullz Company manufactures an energy drink. The company uses a budgeted indirect-cost rate for its
manufacturing operations and during 2014 allocated $1,000,000 to work-in-process inventory. Actual
overhead incurred was $1,200,000.
Ending balances in the following accounts are:
Work-in-Process $ 100,000
Finished Goods 750,000
Cost of Goods Sold 4,150,000
Required:
a. Prepare a journal entry to write off the difference between allocated and actual overhead directly to
Cost of Goods Sold. Be sure your journal entry closes the related overhead accounts.
b. Prepare a journal entry that prorates the write-off of the difference between allocated and actual
overhead using ending account balances. Be sure your journal entry closes the related overhead accounts.
25) The following information was gathered for Zeba Company for the year ended December 31, 2014
Budgeted Actual
Direct labor-hours 50,000 dlh 60,000 dlh
Factory overhead $550,000 $600,000
Assume that direct labor-hours are the cost-allocation base.
Required:
a. Compute the budgeted factory overhead rate.
b. Compute the factory overhead applied.
c. Compute the amount of over/underapplied overhead.
26) Markswell Corp uses a budgeted factory overhead rate to apply overhead to production. The
following data are available for the year ended December 31, 2014. The company has budgeted factory
overhead of $750,000, direct labor costs of $500,000, and direct labor hours of 15,000. The actual factory
overhead incurred is $800,000, direct labor costs of 450,000, and direct labor hours of 17,000.
Required:
a. Determine the budgeted factory overhead rate based on direct labor-hours.
b. What is the applied overhead based on direct labor-hours?
c. Is overhead overapplied or underapplied? Explain.
27) Schulz Corporation applies overhead based upon machine-hours. Budgeted factory overhead was
$266,400 and budgeted machine-hours were 18,500. Actual factory overhead was $287,920 and actual
machine-hours were 19,050. Before disposition of under/overapplied overhead, the cost of goods sold
was $560,000 and ending inventories were as follows:
Direct materials $ 60,000
WIP 190,000
Finished goods 250,000
Total $500,000
Required:
a. Determine the budgeted factory overhead rate per machine-hour.
b. Compute the over/underapplied overhead.
c. Prepare the journal entry to dispose of the variance using the write-off to cost of goods sold
approach.
d. Prepare the journal entry to dispose of the variance using the proration approach.
28) Health Care County Hospital uses an indirect job-costing system for all patients. In June, the
budgeted nursing care charges for each department and budgeted allocation bases of nursing days are as
follows:
June Critical Care Special Care General Care
Budgeted nursing costs $2,480,000 $1,644,000 $1,280,400
Budgeted nursing days 5,000 4,000 8,000
Patient Ms. Pinto spent six days in critical care, eight days in special care. She was shifted back to critical
care due to an emergency for 6 days and finally the remainder of the month was spent in general care.
Required:
a. Determine the budgeted overhead rate for each department.
b. What are the total charges to Ms. Pinto if she was in the facility the entire month?
29) Hammond and Jarrett provide tax consulting for estates and trusts. Their job-costing system has a
single direct-cost category (professional labor) and a single indirect-cost pool (research support). The
indirect-cost pool contains all the costs except direct personnel costs. All budgeted indirect costs are
allocated to individual jobs using actual professional labor-hours.
Required:
a. Discuss the reasons a consulting firm might use a normal costing system rather than an actual costing
system.
b. What might be some reasons for the firm to change from a one-pool to a multiple-pool allocation
concept?
1) In the service sector ________.
A) direct labor costs are always easy to trace to jobs
B) a budgeted direct-labor cost rate may be used to apply direct labor to jobs
C) normal costing may not be used
D) overhead is generally applied using an actual cost-allocation rate
2) In the service sector, to achieve timely reporting on the profitability of an engagement, a company will
use ________.
A) budgeted rates for all direct costs
B) budgeted rates for indirect costs
C) actual costing
D) budgeted rates for some direct costs and indirect costs
3) Luke employs 20 professional cleaners. Budgeted costs total $1,800,000 of which $1,550,000 is direct
costs. Budgeted indirect costs are $750,000 and actual indirect costs were $795,800. Budgeted professional
labor-hours are 1,000,000 and actual hours were 1,218,000. What is the budgeted direct cost-allocation
rate?
A) $1.80 per hour
B) $1.7857 per hour
C) $0.75 per hour
D) $1.55 per hour
4) The budgeted direct-labor cost rate includes ________.
A) budgeted total costs in indirect cost pool
B) budgeted total direct-labor costs in the denominator
C) budgeted total direct-labor costs in the numerator
D) budgeted total direct-labor hours in the numerator
5) The law firm of Smith & Jones has a staff of 30 lawyers and administrative staff. Budgeted total costs of
the firm total $4,000,000 of which $2,500,000 is direct-labor costs. Assuming that the remaining costs are
indirect and direct-labor cost is the allocation base, calculate the budgeted indirect cost rate.
A) 38 of direct-labor cost
B) 60% of direct-labor cost
C) 63% of direct-labor cost
D) 160% of direct-labor cost
Answer the following questions using the information below:
A local accounting firm employs 20 full-time professionals. The budgeted annual compensation per
employee is $40,500. The average chargeable time is 500 hours per client annually. All professional labor
costs are included in a single direct-cost category and are allocated to jobs on a per-hour basis.
Other costs are included in a single indirect-cost pool, allocated according to professional labor-hours.
Budgeted indirect costs for the year are $787,500, and the firm expects to have 90 clients during the
coming year.
6) What is the budgeted direct labor cost rate per hour?
A) $18.00 per hour
B) $17.50 per hour
C) $4.05 per hour
D) $2,000 per hour
7) What is the budgeted indirect-cost rate per hour?
A) $1,575.00 per hour
B) $78.75 per hour
C) $18.00 per hour
D) $17.50 per hour
8) If ten clients are lost and the workforce stays at 20 employees, then the direct labor cost rate per hour:
A) $18.00 per hour
B) $17.50 per hour
C) $20.25 per hour
D) $15.00 per hour
9) A company may choose to use budgeted rates to allocate direct labor accounts if direct labor costs are
difficult to trace to jobs as they are completed.
10) In some variations of normal costing, organizations use budgeted rates to assign direct costs as well as
indirect costs to jobs.
11) At the end of the year, the direct costs traced to jobs using the budgeted rates will equal actual direct
costs.
12) New Age Electronics manufactures surround sound systems and applies manufacturing costs to
production at a budgeted indirect-cost rate of $20 per direct-labor hour. The following data are obtained
from the accounting records for August 2014:
Direct materials $350,000
Direct labor (7,000 hours @ $15/hour) $105,000
Indirect labor $ 25,000
Plant lease $ 75,000
Depreciation on plant and equipment $ 50,000
Marketing expense $ 20,000
Plant utilities $ 20,000
Required:
a. What actual amount of manufacturing overhead cost was incurred during August 2014?
b. What amount of manufacturing overhead was allocated to all jobs during August 2014?
c. For August 2014, was manufacturing overhead underallocated or overallocated? Explain.
13) Ruby Corp is bidding on a design project for a new client. The total budgeted direct-labor costs for
the firm are $400,000. The total budgeted indirect costs are $800,000. It is estimated that there are 10,000
billable hours in total.
Required:
a. What is the budgeted direct-labor cost rate?
b. What is the budgeted indirect-cost rate assuming direct-labor cost is the allocation base?
c. What should be the engineering firm bid on the project if the direct labor hours are estimated at 300
hours?
14) Venus Corp employs ten full-time professionals. The budgeted compensation per employee is
$50,000. The maximum billable hours for each client are 500. Clients always receive their full amount of
time. All professional labor costs are included in a single direct-cost category and are traced to jobs on a
per-hour basis. Any other costs are included in a single indirect-cost pool, allocated according to
professional labor-hours. Budgeted indirect costs for the year are $250,000 and the firm had 30 clients.
Required:
a. What is the direct-labor-cost rate per hour?
b. What is the indirect-cost rate per hour?
c. What is the total cost incurred to the employer per hour?
d. How will the total cost be affected if the firm loses out on 5 clients?
