1. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 11 th Edition Chapter 3

2. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Chapter Three Systems Design: Job-Order Costing

3. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Types of Product Costing Systems Process Costing Job-order Costing  A company produces many units of a single product.  One unit of product is indistinguishable from other units of product.  The identical nature of each unit of product enables assigning the same average cost per unit.  A company produces many units of a single product.  One unit of product is indistinguishable from other units of product.  The identical nature of each unit of product enables assigning the same average cost per unit.

4. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Types of Product Costing Systems Process Costing Job-order Costing  A company produces many units of a single product.  One unit of product is indistinguishable from other units of product.  The identical nature of each unit of product enables assigning the same average cost per unit.  A company produces many units of a single product.  One unit of product is indistinguishable from other units of product.  The identical nature of each unit of product enables assigning the same average cost per unit. Example companies: 1. Weyerhaeuser (paper manufacturing) 2. Reynolds Aluminum (refining aluminum ingots) 3. Coca-Cola (mixing and bottling beverages) Example companies: 1. Weyerhaeuser (paper manufacturing) 2. Reynolds Aluminum (refining aluminum ingots) 3. Coca-Cola (mixing and bottling beverages)

5. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Types of Product Costing Systems Process Costing Job-order Costing  Many different products are produced each period.  Products are manufactured to order.  The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.  Many different products are produced each period.  Products are manufactured to order.  The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

6. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Types of Product Costing Systems Process Costing Job-order Costing  Many different products are produced each period.  Products are manufactured to order.  The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.  Many different products are produced each period.  Products are manufactured to order.  The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. Example companies: 1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production) Example companies: 1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production)

7. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Comparing Process and Job-Order Costing

8. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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. 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.

9. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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. 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.

10. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as work is performed. Direct Manufacturing Costs Direct Materials Direct Labor

11. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Manufacturing Overhead, including indirect materials and indirect labor, are allocated to jobs rather than directly traced to each job. Direct Manufacturing Costs Direct Materials Direct Labor Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead

12. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin PearCo Job Cost Sheet Job Number A - 143Date Initiated 3-4-05 Date Completed Department B3Units Completed Item Wooden cargo crate Direct MaterialsDirect LaborManufacturing Overhead Req. No.AmountTicketHoursAmountHoursRateAmount Cost SummaryUnits Shipped Direct MaterialsDateNumberBalance Direct Labor Manufacturing Overhead Total Cost Unit Product Cost Job-Order Cost Accounting

13. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Materials Requisition Form Will E. Delite

14. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Job-Order Cost Accounting

15. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Employee Time Ticket

16. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Job-Order Cost Accounting

17. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Why Use an Allocation Base? Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign 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.

18. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Manufacturing Overhead Application Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = Ideally, the allocation base is a cost driver that causes overhead.

19. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Using a predetermined rate makes it possible to estimate total job costs sooner. Actual overhead for the period is not known until the end of the period. The Need for a POHR $

20. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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

21. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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 $640,000 160,000 direct labor hours (DLH) POHR = Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR =

22. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Job-Order Cost Accounting

23. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Job-Order Cost Accounting

24. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Interpreting the Average Unit Cost The average unit cost should not be interpreted as the costs that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be somewhat less than $118. The average unit cost should not be interpreted as the costs that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be somewhat less than $118.

25. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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. 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.

26. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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. 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.

27. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Let’s summarize the document flow in a job-order costing system. Job-Order Costing Document Flow Summary

28. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Job-Order Costing Document Flow Summary A sales order is the basis of issuing a production order. A production order initiates work on a job.

29. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Job-Order Costing Document Flow Summary Job Cost Sheets Materials Requisition Manufacturing Overhead Account Direct materials Indirect materials Materials used may be either direct or indirect.

30. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Job-Order Costing Document Flow Summary Job Cost Sheets Employee Time Ticket Manufacturing Overhead Account An employee’s time may be either direct or indirect. Direct Labor Indirect Labor

31. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Job-Order Costing Document Flow Summary Manufacturing Overhead Account Other Actual OH Charges Job Cost Sheets Applied Overhead Materials Requisition Employee Time Ticket Indirect Material Indirect Labor

32. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Job-Order System Cost Flows Let’s examine the cost flows in a job-order costing system.

33. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Raw Materials Material Purchases Mfg. Overhead Work in Process (Job Cost Sheet) ActualApplied Direct Materials Indirect Materials Job-Order System Cost Flows

34. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Cost Flows – Material Purchases Raw material purchases are recorded in an inventory account.

35. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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.

36. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labor Indirect Materials ActualApplied Indirect Labor Job-Order System Cost Flows

37. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Cost Flows – Labor The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.

38. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labor Indirect Materials ActualApplied Indirect Labor Job-Order System Cost Flows Other Overhead

39. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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.

40. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labor Indirect Materials ActualApplied Indirect Labor Job-Order System Cost Flows Other Overhead Overhead Applied Overhead Applied to Work in Process If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.

41. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Cost Flows – Overhead Applied Work in Process is increased when Manufacturing Overhead is applied to jobs.

42. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Nonmanufacturing Cost Flows Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred. Examples: 1. Salary expense of employees that work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred. Examples: 1. Salary expense of employees that work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred.

43. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Nonmanufacturing Cost Flows Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.

44. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Finished Goods Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied Cost of Goods Mfd. Job-Order System Cost Flows

45. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Cost Flows – Cost of Goods Manufactured As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process.

46. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Finished Goods Cost of Goods Sold Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied Cost of Goods Mfd. Cost of Goods Sold Job-Order System Cost Flows

47. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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.

48. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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 overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

49. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. Overhead Application Example Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

50. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. Overhead Application Example Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 PearCo has overapplied overhead for the year by $30,000. What will PearCo do?

51. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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. 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

52. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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. 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 Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000 Underapplied Overhead $1,210,000 - $1,160,000 = $50,000

53. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Disposition of Under- or Overapplied Overhead $30,000 may be closed directly to cost of goods sold. Cost of Goods Sold PearCo’s Method Work in Process Finished Goods Cost of Goods Sold $30,000 may be allocated to these accounts. OROR

54. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Disposition of Under- or Overapplied Overhead PearCo’s Mfg. Overhead Actual overhead costs $650,000 $30,000 overapplied PearCo’s Cost of Goods Sold Unadjusted Balance Adjusted Balance $30,000 Overhead applied to jobs $680,000

55. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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:

56. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Allocating Under- or Overapplied Overhead Between Accounts We would complete the following allocation of $30,000 overapplied overhead:

57. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Allocating Under- or Overapplied Overhead Between Accounts

58. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Overapplied and Underapplied Manufacturing Overhead - Summary PearCo’s Method

59. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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. 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.

60. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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. 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.

61. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Multiple Predetermined Overhead Rates To this point we have assumed that there is a single predetermined overhead rate called a plantwide overhead rate. Large companies often use multiple predetermined overhead rates. May be more complex but... May be more accurate because it reflects differences across departments.

62. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Job-Order Costing in Service Companies Job-order costing is used in many difference types of service companies.

63. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Use of Information Technology Technology plays an important part in many job-order cost systems. When combined with Electronic Data Interchange (EDI) or a web- based programming language called Extensible Markup Language (XML), bar coding eliminates the inefficiencies and inaccuracies associated with manual clerical processes.

64. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Appendix 3a The Predetermined Overhead Rate & Capacity

65. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Predetermined Overhead Rate and Capacity Calculating predetermined overhead rates using an estimated, or budgeted amount of the allocation base has been criticized because: 1.Basing the predetermined overhead rate upon budgeted activity results in product costs that fluctuate depending upon the activity level. 2.Calculating predetermined rates based upon budgeted activity charges products for costs that they do not use. Calculating predetermined overhead rates using an estimated, or budgeted amount of the allocation base has been criticized because: 1.Basing the predetermined overhead rate upon budgeted activity results in product costs that fluctuate depending upon the activity level. 2.Calculating predetermined rates based upon budgeted activity charges products for costs that they do not use.

66. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Capacity-Based Overhead Rates Criticisms can be overcome by using estimated total units in the allocation base at capacity in the denominator of the predetermined overhead rate calculation. Let’s look at the difference!

67. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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?

68. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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? Traditional Method = $2.50 per unit $100,000 40,000 = Capacity Method = $2.00 per unit $100,000 50,000 =

69. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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. 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.

70. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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. 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.

71. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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. 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.

72. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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. 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.

73. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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. 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.

74. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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. 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.

75. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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. 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.

76. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 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. 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.

77. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Basing the rate on capacity

78. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Basing the rate on expected volume

79. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin End of Chapter 3