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Explain the potential problems of using absorption costing and suggest ways to minimize these problems.

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Managers can manipulate profit by simply...

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Crimp Corporation uses direct labor-hours in its predetermined overhead rate.At the beginning of the year,the estimated direct labor-hours were 15,000 hours and the total estimated manufacturing overhead was $258,000.At the end of the year,actual direct labor-hours for the year were 13,100 hours and the actual manufacturing overhead for the year was $253,000.Overhead at the end of the year was:


A) $27,680 overapplied
B) $32,680 overapplied
C) $27,680 underapplied
D) $32,680 underapplied

E) A) and C)
F) A) and D)

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Waldvogel Corporation has provided data concerning the company's Manufacturing Overhead account for the month of April.Prior to the closing of the overapplied or underapplied balance to Cost of Goods Sold,the total of the debits to the Manufacturing Overhead account was $55,000 and the total of the credits to the account was $56,000.Which of the following statements is true?


A) Manufacturing overhead for the month was underapplied by $1,000.
B) Manufacturing overhead applied to Work in Process for the month was $56,000.
C) Actual manufacturing overhead incurred during the month was $56,000.
D) Manufacturing overhead transferred from Finished Goods to Cost of Goods Sold during the month was $55,000.

E) B) and C)
F) A) and B)

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Mieras Inc.has provided the following data for the month of November.There were no beginning inventories;consequently,the direct materials,direct labor,and manufacturing overhead applied listed below are all for the current month. Work In Finished Cost of Process Goods Goods Sold TotalDirect materials.............$3,880$11,440$57,070$72,390Direct labor...................5,10016,72083,410105,230Manufacturing overhead applied..........................4,690‾10,720‾51,590‾67,000‾Total.............................$13,670‾$38,880‾$192,070‾$244,620‾\begin{array}{lrrrr}&\text {Work In}&\text { Finished }&\text {Cost of }\\&\text {Process}&\text { Goods}&\text { Goods Sold}&\text { Total}\\\text {Direct materials.............}&\$ 3,880 & \$ 11,440 & \$57,070& \$ 72,390 \\\text {Direct labor...................}&5,100 & 16,720& 83,410 &105,230 \\\text {Manufacturing overhead}&\\\text { applied..........................}&\underline{4,690} & \underline{10,720}& \underline{51,590} & \underline{67,000} \\\text {Total.............................}&\underline{ \$ 13,670} & \underline{ \$ 38,880} & \underline{ \$ 192,070} & \underline{\$ 244,620}\end{array} Manufacturing overhead for the month was underapplied by $2,000. The company allocates any underapplied or overapplied overhead among work in process,finished goods,and cost of goods sold at the end of the month on the basis of the overhead applied during the month in those accounts. The journal entry to record the allocation of any underapplied or overapplied overhead for November would include the following:


A) credit to Work in Process of $140
B) debit to Work in Process of $140
C) credit to Work in Process of $13,670
D) debit to Work in Process of $13,670

E) B) and C)
F) None of the above

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Paul Company used a predetermined overhead rate during the year just completed of $3.50 per direct labor-hour,based on an estimate of 22,000 direct labor-hours to be worked during the year.Actual overhead cost and activity during the year were:  Actual manufacturing overhead cost incurred $90,000Actual direct labor-hours worked 25,000\begin{array}{llcc} \text { Actual manufacturing overhead cost incurred } &\$90,000 \\\text {Actual direct labor-hours worked } &25,000\end{array} The underapplied or overapplied overhead for the year would be:


A) $13,000 underapplied
B) $10,500 overapplied
C) $2,500 overapplied
D) $2,500 underapplied

E) B) and D)
F) A) and D)

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Roofe Inc.has provided the following data for the month of October.There were no beginning inventories;consequently,the direct materials,direct labor,and manufacturing overhead applied listed below are all for the current month. Work In Finished Cost of Process Goods Goods Sold TotalDirect materials.............$23,900$16,800$112,840$133,540Direct labor...................1,31012,00080,60093,910Manufacturing overhead applied..........................1,650‾7,150‾46,200‾55,000‾Total.............................$6,860‾$35,950‾$239,640‾$282,450‾\begin{array}{lrrrr}&\text {Work In}&\text { Finished }&\text {Cost of }\\&\text {Process}&\text { Goods}&\text { Goods Sold}&\text { Total}\\\text {Direct materials.............}&\$ 23,900 & \$ 16,800 & \$ 112,840 & \$ 133,540 \\\text {Direct labor...................}&1,310 & 12,000&80,600 &93,910 \\\text {Manufacturing overhead}&\\\text { applied..........................}&\underline{1,650} & \underline{7,150}& \underline{46,200} & \underline{55,000} \\\text {Total.............................}&\underline{ \$6,860} & \underline{ \$ 35,950} & \underline{ \$ 239,640} & \underline{\$ 282,450}\end{array} Manufacturing overhead for the month was underapplied by $2,000. The company allocates any underapplied or overapplied overhead among work in process,finished goods,and cost of goods sold at the end of the month on the basis of the overhead applied during the month in those accounts. -The journal entry to record the allocation of any underapplied or overapplied overhead for October would include the following:


A) credit to Finished Goods of $260
B) credit to Finished Goods of $35,950
C) debit to Finished Goods of $260
D) debit to Finished Goods of $35,950

E) B) and D)
F) A) and C)

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Mcgarey Inc.has provided the following data for the month of November.There were no beginning inventories;consequently,the direct materials,direct labor,and manufacturing overhead applied listed below are all for the current month. Work In Finished Cost of Process Goods Goods Sold TotalDirect materials.............$1,970$10,500$65,100$77,570Direct labor...................3,15025,250125,550148,950Manufacturing overhead applied..........................3,600‾11,700‾74,700‾90,000‾Total.............................$8,720‾$42,450‾$265,350‾$316,520‾\begin{array}{lrrrr}&\text {Work In}&\text { Finished }&\text {Cost of }\\&\text {Process}&\text { Goods}&\text { Goods Sold}&\text { Total}\\\text {Direct materials.............}&\$ 1,970 & \$ 10,500& \$ 65,100 & \$77,570 \\\text {Direct labor...................}&3,150& 25,250& 125,550 &148,950 \\\text {Manufacturing overhead}&\\\text { applied..........................}&\underline{3,600} & \underline{11,700}& \underline{74,700} & \underline{90,000} \\\text {Total.............................}&\underline{ \$8,720} & \underline{ \$ 42,450} & \underline{ \$ 265,350} & \underline{\$ 316,520}\end{array} Manufacturing overhead for the month was underapplied by $12,000. The company allocates any underapplied or overapplied overhead among work in process,finished goods,and cost of goods sold at the end of the month on the basis of the overhead applied during the month in those accounts. -The cost of goods sold for November after allocation of any underapplied or overapplied overhead for the month is closest to:


A) $253,350
B) $275,310
C) $255,390
D) $277,350

E) None of the above
F) A) and C)

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Niglio Inc.has provided the following data for the month of December.There were no beginning inventories;consequently,the direct materials,direct labor,and manufacturing overhead applied listed below are all for the current month. Work In Finished Cost of Process Goods Goods Sold TotalDirect materials.............$6,350$16,940$40,480$63,700Direct labor...................6,96022,33053,36082,650Manufacturing overhead applied..........................6,960‾15,080‾35,960‾58,000‾Total.............................$20,270‾$54,350‾$129,800‾$204,420‾\begin{array}{lrrrr}&\text {Work In}&\text { Finished }&\text {Cost of }\\&\text {Process}&\text { Goods}&\text { Goods Sold}&\text { Total}\\\text {Direct materials.............}&\$6,350 & \$ 16,940& \$ 40,480 & \$ 63,700 \\\text {Direct labor...................}&6,960 & 22,330&53,360&82,650 \\\text {Manufacturing overhead}&\\\text { applied..........................}&\underline{6,960} & \underline{15,080}& \underline{35,960} & \underline{58,000} \\\text {Total.............................}&\underline{ \$ 20,270} & \underline{ \$ 54,350} & \underline{ \$ 129,800} & \underline{\$ 204,420}\end{array} Manufacturing overhead for the month was underapplied by $10,000. The company allocates any underapplied or overapplied overhead among work in process,finished goods,and cost of goods sold at the end of the month on the basis of the overhead applied during the month in those accounts. The finished goods inventory at the end of December after allocation of any underapplied or overapplied overhead for the month is closest to:


A) $56,950
B) $51,750
C) $51,691
D) $57,009

E) B) and C)
F) A) and B)

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Mcgarey Inc.has provided the following data for the month of November.There were no beginning inventories;consequently,the direct materials,direct labor,and manufacturing overhead applied listed below are all for the current month. Work In Finished Cost of Process Goods Goods Sold TotalDirect materials.............$1,970$10,500$65,100$77,570Direct labor...................3,15025,250125,550148,950Manufacturing overhead applied..........................3,600‾11,700‾74,700‾90,000‾Total.............................$8,720‾$42,450‾$265,350‾$316,520‾\begin{array}{lrrrr}&\text {Work In}&\text { Finished }&\text {Cost of }\\&\text {Process}&\text { Goods}&\text { Goods Sold}&\text { Total}\\\text {Direct materials.............}&\$ 1,970 & \$ 10,500& \$ 65,100 & \$77,570 \\\text {Direct labor...................}&3,150& 25,250& 125,550 &148,950 \\\text {Manufacturing overhead}&\\\text { applied..........................}&\underline{3,600} & \underline{11,700}& \underline{74,700} & \underline{90,000} \\\text {Total.............................}&\underline{ \$8,720} & \underline{ \$ 42,450} & \underline{ \$ 265,350} & \underline{\$ 316,520}\end{array} Manufacturing overhead for the month was underapplied by $12,000. The company allocates any underapplied or overapplied overhead among work in process,finished goods,and cost of goods sold at the end of the month on the basis of the overhead applied during the month in those accounts. -The journal entry to record the allocation of any underapplied or overapplied overhead for November would include the following:


A) debit to Work in Process of $8,720
B) debit to Work in Process of $480
C) credit to Work in Process of $480
D) credit to Work in Process of $8,720

E) B) and D)
F) All of the above

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The sum of all amounts transferred from the Work in Process account and into the Finished Goods account represents the Cost of Goods Manufactured for the period.

A) True
B) False

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When closing overapplied manufacturing overhead to cost of goods sold,which of the following would be true?


A) Work in process will decrease.
B) Cost of goods sold will increase.
C) Net income will decrease.
D) Gross margin will increase.

E) A) and D)
F) C) and D)

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The actual manufacturing overhead incurred at Huberty Corporation during January was $73,000,while the manufacturing overhead applied to Work in Process was $78,000.The company's Cost of Goods Sold was $349,000 prior to closing out its Manufacturing Overhead account.The company closes out its Manufacturing Overhead account to Cost of Goods Sold.Which of the following statements is true?


A) Manufacturing overhead was overapplied by $5,000;Cost of Goods Sold after closing out the Manufacturing Overhead account is $354,000
B) Manufacturing overhead was underapplied by $5,000;Cost of Goods Sold after closing out the Manufacturing Overhead account is $344,000
C) Manufacturing overhead was underapplied by $5,000;Cost of Goods Sold after closing out the Manufacturing Overhead account is $354,000
D) Manufacturing overhead was overapplied by $5,000;Cost of Goods Sold after closing out the Manufacturing Overhead account is $344,000

E) All of the above
F) C) and D)

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Which of the following situations always results in underapplied overhead?


A) actual overhead is greater than applied overhead
B) actual overhead is less than applied overhead
C) estimated overhead is greater than actual overhead
D) estimated overhead is less than actual overhead

E) B) and C)
F) A) and D)

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If a company applies overhead to jobs on the basis of a predetermined overhead rate,a credit balance in the Manufacturing Overhead account at the end of any period means that:


A) more overhead cost has been charged to jobs than has been incurred during the period.
B) more overhead cost has been incurred during the period than has been charged to jobs.
C) the amount of overhead cost charged to jobs is greater than the estimated cost for the period.
D) the amount of overhead cost charged to jobs is less than the estimated overhead cost for the period.

E) None of the above
F) A) and C)

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A credit balance in the Manufacturing Overhead account at the end of the year means that overhead was underapplied.

A) True
B) False

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Burkhammer Inc.has provided the following data for the month of August.There were no beginning inventories;consequently,the direct materials,direct labor,and manufacturing overhead applied listed below are all for the current month. Work In Finished Cost of Process Goods Goods Sold TotalDirect materials.............$2,260$12,180$81,480$95,920Direct labor...................1,90014,50097,000113,400Manufacturing overhead applied..........................1,590‾6,890‾44,520‾53,000‾Total.............................$5,750‾$33,750‾$223,000‾$262,320‾\begin{array}{lrrrr}&\text {Work In}&\text { Finished }&\text {Cost of }\\&\text {Process}&\text { Goods}&\text { Goods Sold}&\text { Total}\\\text {Direct materials.............}&\$ 2,260 & \$ 12,180 & \$ 81,480 & \$ 95,920 \\\text {Direct labor...................}&1,900& 14,500& 97,000&113,400 \\\text {Manufacturing overhead}&\\\text { applied..........................}&\underline{1,590} & \underline{6,890}& \underline{44,520} & \underline{53,000} \\\text {Total.............................}&\underline{ \$5,750} & \underline{ \$ 33,750} & \underline{ \$ 223,000} & \underline{\$ 262,320}\end{array} Manufacturing overhead for the month was underapplied by $9,000. The company allocates any underapplied or overapplied overhead among work in process,finished goods,and cost of goods sold at the end of the month on the basis of the overhead applied during the month in those accounts. Required: Determine the cost of work in process,finished goods,and cost of goods sold AFTER allocation of the underapplied or overapplied overhead for the period.

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Roswick Inc.has provided the following data for the month of August.There were no beginning inventories;consequently,the direct materials,direct labor,and manufacturing overhead applied listed below are all for the current month. Work In Finished Cost of Process Goods Goods Sold TotalDirect materials.............$2,990$10,560$40,960$54,510Direct labor...................4,72017,16066,56088,440Manufacturing overhead applied..........................3,290‾8,930‾34,780‾47,000‾Total.............................$11,00‾$36,650‾$142,300‾$189,950‾\begin{array}{lrrrr}&\text {Work In}&\text { Finished }&\text {Cost of }\\&\text {Process}&\text { Goods}&\text { Goods Sold}&\text { Total}\\\text {Direct materials.............}&\$ 2,990 & \$ 10,560 & \$ 40,960 & \$ 54,510 \\\text {Direct labor...................}&4,720 & 17,160& 66,560 &88,440 \\\text {Manufacturing overhead}&\\\text { applied..........................}&\underline{3,290} & \underline{8,930}& \underline{34,780} & \underline{47,000} \\\text {Total.............................}&\underline{ \$11,00} & \underline{ \$ 36,650} & \underline{ \$ 142,300} & \underline{\$ 189,950}\end{array} Manufacturing overhead for the month was underapplied by $3,000. The company allocates any underapplied or overapplied overhead among work in process,finished goods,and cost of goods sold at the end of the month on the basis of the overhead applied during the month in those accounts. The journal entry to record the allocation of any underapplied or overapplied overhead for August would include the following:


A) debit to Cost of Goods Sold of $142,300
B) credit to Cost of Goods Sold of $2,220
C) credit to Cost of Goods Sold of $142,300
D) debit to Cost of Goods Sold of $2,220

E) All of the above
F) A) and C)

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Alvernaz Inc.has provided the following data for the month of April.There were no beginning inventories;consequently,the direct materials,direct labor,and manufacturing overhead applied listed below are all for the current month. Work In Finished Cost of Process Goods Goods Sold TotalDirect materials.............$7,440$13,300$35,150$55,890Direct labor...................7,56018,20048,10073,860Manufacturing overhead applied..........................5,700‾8,740‾23,560‾38,000‾Total.............................$20,700‾$40,240‾$106,810‾$167,750‾\begin{array}{lrrrr}&\text {Work In}&\text { Finished }&\text {Cost of }\\&\text {Process}&\text { Goods}&\text { Goods Sold}&\text { Total}\\\text {Direct materials.............}&\$ 7,440 & \$ 13,300 & \$ 35,150 & \$ 55,890 \\\text {Direct labor...................}&7,560 & 18,200& 48,100 &73,860 \\\text {Manufacturing overhead}&\\\text { applied..........................}&\underline{5,700} & \underline{8,740}& \underline{23,560} & \underline{38,000} \\\text {Total.............................}&\underline{ \$20,700} & \underline{ \$ 40,240} & \underline{ \$ 106,810} & \underline{\$ 167,750}\end{array} Manufacturing overhead for the month was overapplied by $2,000. The company allocates any underapplied or overapplied overhead among work in process,finished goods,and cost of goods sold at the end of the month on the basis of the overhead applied during the month in those accounts. -The work in process inventory at the end of April after allocation of any underapplied or overapplied overhead for the month is closest to:


A) $20,947
B) $20,400
C) $21,000
D) $20,453

E) A) and B)
F) A) and C)

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