FFMA - Week 7

Question 1

(FFMA-062) What are the main types of product costing systems?

Answer 1

The main types of product costing systems are specific order costing, which includes job and contract costing, and continuous operation costing, which encompasses process costing, service costing, and batch costing.

Question 2

(FFMA-063) What is specific order costing and when is it used?

Answer 2

Specific order costing is used when products are separately identifiable and customized per customer order. It’s appropriate for organizations producing unique items or services such as custom-built boats or construction projects.

Question 3

(FFMA-064) What are the steps involved in job order costing?

Answer 3

Job order costing involves tracking direct materials, direct labor, and allocating manufacturing overheads to each job. It requires recording costs as work is performed, using a job order cost sheet to accumulate costs, and applying overheads to jobs based on a predetermined rate.

Question 4

(FFMA-065) How are overhead costs allocated in job order costing?

Answer 4

Overhead costs that cannot be directly traced to jobs are allocated using a predetermined overhead rate based on estimated costs and productive capacity. This rate is used to apply overhead costs to jobs as they pass through production.

Question 5

(FFMA-066) What is the difference between allocated and apportioned overhead costs?

Answer 5

Allocated overhead costs can be directly attributed to a department or cost center, while apportioned overhead costs must be divided among departments or jobs using a fair and logical basis when direct attribution isn’t possible.

Question 6

(FFMA-067) Why are predetermined overhead rates used in job order costing?

Answer 6

Predetermined overhead rates are used because they allow for estimating total job costs sooner and facilitate timely pricing decisions. Since actual overhead costs aren’t known until the end of the period, predetermined rates based on estimated costs provide a practical means for job cost estimation.

Question 7

(FFMA-068) How is the predetermined overhead rate calculated?

Answer 7

The predetermined overhead rate is calculated by dividing the estimated total manufacturing overhead cost for the period by the estimated total units in the allocation base for that period, which could be labor hours, machine hours, or another cost driver.

Question 8

(FFMA-069) What is the role of a cost driver in determining the predetermined overhead rate?

Answer 8

A cost driver is an activity that causes overhead costs to be incurred. It is used as the allocation base when calculating the predetermined overhead rate. The choice of cost driver should reflect the cause of overhead costs as closely as possible.

Question 9

(FFMA-070) How are overhead costs applied to a job using the predetermined overhead rate?

Answer 9

Overhead costs are applied to a job by multiplying the predetermined overhead rate by the actual amount of the cost driver activity incurred for the job, such as the actual direct labor hours worked on the job.

Question 10

(FFMA-071) What is the distinction between allocated and apportioned overhead costs?

Answer 10

Allocated overhead costs can be directly attributed to a specific department or job, whereas apportioned overhead costs must be divided among departments or jobs based on a logical and fair basis, such as floor area or employee count, when direct attribution is not feasible.

Question 11

(FFMA-072) What is the purpose of apportioning overhead costs in job order costing?

Answer 11

Apportioning overhead costs ensures that each product or job receives a fair share of indirect costs, contributing to accurate product costing and pricing decisions.

Question 12

(FFMA-073) What are service cost centers, and how do they relate to production cost centers?

Answer 12

Service cost centers provide support to production cost centers but are not directly involved in production. Their costs must be reapportioned to production cost centers, which are then absorbed into product costs.

Question 13

(FFMA-074) How is the predetermined overhead rate calculated?

Answer 13

It is calculated by dividing the estimated total manufacturing overhead cost for a period by the estimated total units in the allocation base (e.g., labor hours) for that period.

Question 14

(FFMA-075) Why do we use estimated costs to determine the predetermined overhead rate?

Answer 14

Estimated costs allow for the estimation of job costs before the period begins, enabling timely decision-making and pricing. Actual overhead costs are not known until the period ends.

Question 15

(FFMA-076) How are overhead costs applied to jobs?

Answer 15

Overhead costs are applied using the predetermined overhead rate multiplied by the actual activity of the cost driver (such as labor hours) for each job.

Question 16

(FFMA-077) What is the relevance of using floor area as a basis for apportioning rates overhead?

Answer 16

Floor area is used when the physical space occupied by a department correlates with the overhead costs incurred, such as rent or utilities.

Question 17

(FFMA-078) How do you allocate and apportion canteen costs to departments?

Answer 17

Canteen costs are allocated based on direct usage or apportioned based on the number of employees using the canteen from each department.

Question 18

(FFMA-079) In job costing, how do you handle overhead costs that are directly attributable to a specific department?

Answer 18

These costs are allocated directly to the department without the need for apportionment.

Question 19

(FFMA-080) What factors influence the choice of an absorption rate base?

Answer 19

The choice is influenced by the primary cost driver in each department, such as machine hours or labor hours, that correlates with overhead costs.

Question 20

(FFMA-081) Why are predetermined overhead rates used in job order costing?

Answer 20

Predetermined overhead rates are used to estimate job costs sooner, as actual overhead costs are not known until the end of the period, enabling timely decision-making and pricing.

Question 21

(FFMA-082) How do you calculate a predetermined overhead absorption rate based on direct material cost?

Answer 21

Divide the estimated total overhead cost for the period by the estimated total direct material cost, then multiply by 100 to get a percentage.

Question 22

(FFMA-083) How do you calculate a predetermined overhead absorption rate based on direct labor hours?

Answer 22

Divide the estimated total overhead cost for the period by the estimated total direct labor hours to get a rate per labor hour.

Question 23

(FFMA-084) What is the impact of using different methods of overhead recovery on the cost charged to a job?

Answer 23

Different methods of overhead recovery can result in significant differences in the cost charged to a job, affecting pricing and profitability.

Question 24

(FFMA-085) How is the overhead cost charged to job ZX using a percentage of direct material cost calculated?

Answer 24

Multiply the direct material cost incurred by job ZX by the predetermined overhead rate (as a percentage of direct material cost) to find the overhead cost to charge.

Question 25

(FFMA-086) How is the overhead cost charged to job ZX using direct labor hours calculated?

Answer 25

Multiply the number of direct labor hours worked on job ZX by the predetermined overhead rate per labor hour to find the overhead cost to charge.

Question 26

(FFMA-087) Why might there be a significant difference in overhead costs when using different rates?

Answer 26

Different bases for calculating overhead rates (like direct materials versus labor hours) can lead to large variances in overhead costs due to the distinct nature of each cost driver.

Question 27

(FFMA-088) What are the considerations when choosing an overhead absorption rate method?

Answer 27

Considerations include the correlation between cost drivers and overhead costs, the nature of production processes, and the consistency of cost behavior with activity levels.

Question 28

(FFMA-089) Why is the concept of under and over-applied overheads important in job order costing?

Answer 28

It is important because it ensures that the recorded overhead costs match the actual overhead costs incurred, maintaining the accuracy of job costs and financial statements.

Question 29

(FFMA-090) How is the total overhead applied to jobs calculated?

Answer 29

Multiply the predetermined overhead rate by the actual activity level (e.g., direct labor hours worked) to find the total overhead applied to jobs.

Question 30

(FFMA-091) What indicates that overheads have been under-applied?

Answer 30

When the actual overheads incurred are greater than the overheads applied to jobs, indicating that not all costs have been accounted for in product pricing or financial records.

Question 31

(FFMA-092) What indicates that overheads have been over-applied?

Answer 31

When the overheads applied to jobs exceed the actual overheads incurred, suggesting that products or jobs have been charged too much for overheads.

Question 32

(FFMA-093) What is the treatment for under-applied overheads in the accounts?

Answer 32

Increase the cost of goods sold or allocate the under-applied amount to work in progress, finished goods, and cost of goods sold proportionally.

Question 33

(FFMA-094) What is the treatment for over-applied overheads in the accounts?

Answer 33

Decrease the cost of goods sold or reduce the amounts reported for work in progress, finished goods, and cost of goods sold proportionally.

Question 34

(FFMA-095) How does Phoenix Ltd. calculate its predetermined overhead absorption rate?

Answer 34

By dividing the budgeted production overhead by the budgeted direct labor hours or direct materials cost, depending on the chosen basis for absorption.

Question 35

(FFMA-096) How would you apply overheads to job ZX using a percentage of direct material costs?

Answer 35

Multiply the direct materials cost of job ZX by the predetermined overhead rate (expressed as a percentage) calculated from the budgeted data.

Question 36

(FFMA-097) How would you apply overheads to job ZX using direct labor hours?

Answer 36

Multiply the number of direct labor hours worked on job ZX by the predetermined overhead rate per labor hour calculated from the budgeted data.