BGN 5e Exam Questions - Chapter 2

1. Wise Company has the following estimated costs for next year:

Sales commissions $150,00

0
Direct labor 110,000
Salary of production supervisor 70,000
Rent on factory equipment 32,000
Direct materials 30,000
Advertising expense 22,000
Indirect materials 10,000

The company estimates that 20,000 direct labor and 32,000 machine hours will be
worked during the year. If overhead is applied on the basis of machine hours, the
predetermined overhead rate per machine hour will be:
A) $3.50.
B) $6.94.
C) $7.63.
D) $8.56.

Feedback – The correct answer is A:

Learning Objective 5 – Determine the predetermined overhead rate per hour as follows:

Salary of production supervisor $ 70,000

Indirect materials 10,000
Rent on factory equipment 32,000
Estimated manufacturing overhead costs 112,000
Estimated machine hours ÷ 32,000
Predetermined overhead rate $3.50/MH

2. Llanes Company uses a predetermined overhead rate based on direct labor hours to apply
manufacturing overhead to jobs. At the beginning of the year, the company estimated
manufacturing overhead would be $100,000 and direct labor hours would be 10,000. The
actual figures for the year were $110,000 for manufacturing overhead and 10,500 direct
labor hours. The cost records for the year will show:
A) overapplied overhead of $10,000.
B) overapplied overhead of $5,000.
C) underapplied overhead of $10,000.
D) underapplied overhead of $5,000.

Feedback – The correct answer is D:

Learning Objective 3 – First, determine the predetermined overhead rate (based on
 direct labor hours here) as follows:
Predetermined overhead rate = Estimated overhead costs ÷ Estimated direct labor hours
Predetermined overhead rate = $100,000 ÷ 10,000 direct labor hours = $10.00/direct
labor hour
Learning Objective 5 – Then, determine the amount of manufacturing overhead applied
during the period as follows:
Overhead applied = Predetermined overhead rate x Actual direct labor hours
Overhead applied = $10.00/direct labor hour x 10,500 direct labor hours = $105,000
Learning Objective 8 – Finally, compare the actual manufacturing overhead costs to the
amount applied, and decide whether it is over- or underapplied as follows:

Actual $110,000
Applied 105,000
Underapplied overhead $ 5,000

3. Hill Company’s predetermined overhead rate is based on direct labor hours. At the
beginning of the current year, the company estimated that its manufacturing overhead
would total $440,000 during the year. During the year, the company incurred $400,000 in
actual manufacturing overhead costs. The Manufacturing Overhead account showed that
overhead was underapplied by $16,000 during the year. If the predetermined overhead
rate was $20.00 per direct labor hour, how many hours were worked during the year?
A) 19,200 hours
B) 20,000 hours
C) 20,800 hours
D) 22,000 hours

Feedback – The correct answer is A:

Learning Objective 5 – First, determine the amount of overhead applied to production
by reference to the information about the Manufacturing Overhead account as follows:
Amount underapplied = Actual overhead – Amount applied to production
Amount underapplied = $400,000 – Amount applied to production = $16,000
Amount applied to production = $384,000
Learning Objective 3 – Then, solve for the direct labor hours here (the activity base for
the overhead rate) as follows:
Manufacturing overhead applied = Predetermined overhead rate x Actual direct labor
hours
Manufacturing overhead applied = $20.00/direct labor hour x Actual direct labor hours =
$384,000 (from above)
Actual direct labor hours = 19,200

4. Belcher Company's job-order costing system applies manufacturing overhead to Work in

Process inventory using a predetermined overhead rate. During August, the company’s
transactions included the following:
Manufacturing overhead cost incurred $250,000
Manufacturing overhead cost applied 226,000
Direct labor cost incurred 214,000
Direct materials issued to production 180,000
Indirect materials issued to production 16,000

The company had no beginning or ending inventories in August. What was the cost of
goods manufactured for August?
A) $604,000
B) $620,000
C) $644,000
D) $660,000

Feedback – The correct answer is B:

Learning Objective 6 – Determine the cost of goods manufactured during August as
follows:

Work in process, beginning of period $ 0

Direct materials issued to production 180,000
Direct labor cost incurred 214,000
Manufacturing overhead cost applied 226,000
Total manufacturing costs 620,000
Less: work in process, end of period (0)
Cost of goods manufactured $620,000