CHAPTER 4: ACCOUNTING FOR FACTORY OVERHEAD

1. Factory overhead includes:

a. Indirect labor but not indirect materials.
b. All manufacturing costs except direct materials and direct
labor.
c. All manufacturing costs.
d. Indirect materials but not indirect labor.

2. Which of the following costs would be included in factory overhead in the manufacture of a student’s desk?
a. The wages of the operator of the machine that bends the metal legs of the desk into shape.
b. The wages of the forklift operator who moves desks from one manufacturing station to the
next.
c. The cost of the plastic used to form the writing surface.
d. The wages of the worker who assembles the components.

3. Which of the following costs would not be included in factory overhead in the manufacture of a student’s desk?
a. The oil used to maintain the machinery.
b. The salary of the supervisor of the Assembly department.
c. The wood used to form the top of the desk.
d. The wages of personnel who perform inspections of incoming materials.

4. Costs that vary in proportion to volume changes, but not directly are considered:
a. semivariable costs.
b. factory overhead costs.
c. variable costs.
d. personnel costs.

5. Costs that remain the same, in total, when production levels change are:
a. fixed costs.
b. semivariable costs.
c. direct labor costs.
d. factory burden
costs.

6. The following cost is an example of a variable factory overhead cost:

a. Plant utilities.
b. Maintenance costs.
c. Salary of the plant manager.
d. Factory supplies.

7. Variable overhead costs include all of the following except:

a. Electricity to power machinery.
b. Factory supplies.

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CHAPTER 4: ACCOUNTING FOR FACTORY OVERHEAD
c. Rental of factory building.
d. Small tools.

8. Fixed factory overhead costs include:

a. Property taxes.
b. Plant manager’s salary.
c. Factory insurance.
d. All of these are
correct.

9. Fixed overhead cost includes all of the following except:

a. Electricity to heat and light the factory.
b. Depreciation on machinery computed based on the units of production
basis.
c. The plant manager’s salary.
d. The salary of the security guard at the front door.

10. Factory overhead:

a. Can be a variable cost or a fixed
cost.
b. Is a prime cost.
c. Can only be a fixed cost.
d. Includes all factory labor.

11. Costs that remain constant over a range of production and then abruptly change include:
a. unexpected costs.
b. step-variable costs.
c. semifixed costs.
d. curvilinear costs.

12. An example of a step-fixed cost would be:

a. the cost of factory insurance because the insurance company increased the premium.
b. the cost of supervision since a second supervisor was added to oversee the new second
shift.
c. depreciation of equipment because it is computed on the units of production method.
d. utility costs because it costs more to heat the building in the winter.

13. Costs that change in relation to volume changes, but not in direct proportion to those changes, are known as:
a. Variable costs.
b. Semivariable costs.
c. Fixed costs.
d. Curvilinear costs.

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CHAPTER 4: ACCOUNTING FOR FACTORY OVERHEAD

14. Consider the following costs:

I. The cost of electricity which is used to power machinery and light the plant.
II. Depreciation on the building which houses both the factory and the sales office.

Which of the following statements is true?

a. Only statement I is an example of a semivariable cost.
b. Only statement II is an example of a semivariable cost.
c. Both statements I and I are examples of semivariable costs.
d. Neither statement I nor II is an example of a semivariable
cost.

15. Which of the following statements about semivariable costs is not true?
a. They first have to be broken down into their fixed and variable components before they can be used to predict
costs at different levels of volume.
b. They are sometimes called mixed costs.
c. They vary in direct proportion to volume changes.
d. They may remain constant over a range of production, then abruptly change.

16. Methods for separating semivariable costs into their fixed and variable components include all of the following except
the:
a. High-low method.
b. Allocation method.
c. Regression (scattergraph) method.
d. Observation method.

17. The method of analyzing the behavior of semivariable costs that relies heavily on the ability of an observer to detect a
pattern of cost behavior by reviewing past cost and volume data is the:
a. High-low method.
b. Method of least squares.
c. Scattergraph method.
d. Observation method.

18. The method of analyzing cost behavior that uses two data points to first determine the variable cost per unit and then
the total fixed cost is the:
a. Method of least squares.
b. Scattergraph method.
c. High-low method.
d. Observation method.

19. Bellisimo Industries’ material handling costs and tons of material over a six-month period follow:
Tons of Material
Material Handling Cost
January 2,000 $1,600
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February 2,400 2,100
March 3,000 2,400
April 2,300 1,900
May 2,800 2,500
June 2,100 1,800

Using the high-low method, what is the estimated material handling cost per ton of material?

a. $.90
b. $1.25
c. $1.00
d. $.80

20. Nutt Industries electricity costs and machine hours over a six-month period follow:
Machine Electricity
Hours Cost
January 2,000 $4,800
February 2,500 5,200
March 3,000 5,400
April 2,400 5,000
May 2,800 5,600
June 2,200 5,000

Using the high-low method, what is the formula that can be used to estimate electricity costs at different levels of volume?

a. Electricity costs = $2,800 + ($1.00 x number of machine hours)

b. Electricity costs = $2,600 + ($1.00 x number of machine hours)
c. Electricity costs = $400 + ($1.67 x number of machine hours)
d. Electricity costs = $3,600 + ($.60 x number of machine hours)

21. After the observations of cost and production data are plotted on graph paper, a line is drawn by visual inspection
representing the trend shown by most of the data points using the:
a. Observation method.
b. High-low method.
c. Method of least squares.
d. Scattergraph method.

22. A major disadvantage of the observation method of analyzing cost behavior is:
a. It bases its solution on only two observations.
b. It results in its analyzed cost being treated as either fixed or variable, based on which type of behavior it more
closely resembles.
c. Two persons could draw different lines through the data points.
d. It enables non-representative points, called outliers, to be identified.

23. A major disadvantage of the high-low method of analyzing cost behavior is:
a. It bases its solution on only two possibly extreme observations, rather than all of the data points.

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CHAPTER 4: ACCOUNTING FOR FACTORY OVERHEAD
b. It results in its analyzed cost being treated as either fixed or variable, based on which type of behavior it more
closely resembles.
c. Two persons could draw different lines through the data points.
d. It enables non-representative points, called outliers, to be identified.

24. A major disadvantage of the scattergraph method of analyzing cost behavior is:
a. It bases its solution on only two observations.
b. It results in its analyzed cost being treated as either fixed or variable, based on which type of behavior it more
closely resembles.
c. Two persons could draw different lines through the data points.
d. It enables non-representative points, called outliers, to be identified.

27. Flexible budgeting is a reporting system in which the:

a. Budget shows estimated costs at different levels of production volume.
b. Budget standards may be adjusted at will.
c. Reporting dates vary according to the levels of activity reported upon.
d. Statements included in the budget report vary from period to period.

28. Wiggins Company’s flexible budget for 25,000 units shows $75,000 and $25,000 in variable and fixed costs,
respectively. At 35,000 units, the flexible budget would show:
a. Variable costs of $100,000 and fixed costs of
$25,000.
b. Variable costs of $90,000 and fixed costs of $30,000.
c. Variable costs of $75,000 and fixed costs of $30,000.
d. Variable costs of $105,000 and fixed costs of
$25,000.

29. Venus Company has developed the following flexible budget formula for annual indirect labor cost:

Total annual cost = $12,000 + $.25 per unit

Operating budgets for the current month are based on 6,000 units. Indirect labor costs included in this monthly planning
budget are:
a. $13,500.
b. $12,000.
c. $1,500.
d. $2,500.

31. When preparing a flexible budget for factory overhead costs, what will occur to fixed costs (on a per-unit basis) as
production increases?
a. Fixed costs per unit will increase.
b. Fixed costs are not considered in flexible
budgeting.
c. Fixed costs per unit will decrease.
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CHAPTER 4: ACCOUNTING FOR FACTORY OVERHEAD
d. Fixed costs per unit will remain unchanged.

54. Meger Manufacturing uses the direct labor cost method for applying factory overhead to production. The budgeted
direct labor cost and factory overhead for the previous fiscal year were $1,000,000 and $700,000, respectively. Actual
direct labor cost and factory overhead were $1,100,000 and $825,000, respectively.

What was Meger’s predetermined factory overhead rate?

a. 70.0%
b. 82.5%
c. 63.6%
d. 133.0%

55. Meger Manufacturing uses the direct labor cost method for applying factory overhead to production. The budgeted
direct labor cost and factory overhead for the previous fiscal year were $1,000,000 and $800,000, respectively.

During the year, the company started and completed Job 352A, which had direct material and labor costs of $32,000 and
$45,000, respectively. What was the cost of Job 352A?
a. $ 77,000
b. $ 81,000
c. $102,600
d. $113,000

56. The Davis Corporation uses the direct labor hour method of applying factory overhead to production. The budgeted
factory overhead last year was $300,000, and there were 50,000 machine hours and 40,000 direct labor hours
budgeted. Job 564 was started and completed during the period. Direct materials costing $5,400 were incurred. Thirty-
six direct labor hours were worked at a cost of $500, and 50 machine hours were incurred. What is the amount of factory
overhead applied to Job 564?
a. $375
b. $270
c. $216
d. $300

57. The Mason Corporation budgeted overhead at $240,000 for the period for Department A based on a budgeted volume
of 60,000 direct labor hours. During the period, Mason started and completed Job B25, which incurred 200 labor hours at
a cost of $2,200, and $5,000 of direct materials. What was the cost of Job B25?
a. $7,400
b. $8,000
c. $7,250
d. $13,800

58. Which of the following statements about using the direct labor hour method of applying factory overhead to
production is false?
a. It may not be as accurate as the direct labor cost method if factory overhead primarily consists of items more
closely tied to employee wages, such as benefits.
b. The application base could be substantially smaller than when direct labor cost is used.
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c. It is the most appropriate method for a highly automated department.
d. The amount of factory overhead applied is not affected by the mix of labor rates.

59. When a manufacturing company has a highly automated manufacturing plant, what is probably the most appropriate
basis of applying factory overhead costs to work in process?
a. Machine hours
b. Cost of materials used
c. Direct labor hours
d. Direct labor dollars

60. The Owens Company uses the machine hour method of applying factory overhead to production. The budgeted
factory overhead last year was $200,000, and there were 40,000 machine hours budgeted. Job 84 was started and
completed during the period. Direct materials costing $900 were incurred. Twenty-five direct labor hours were worked at
a cost of $350, and 40 machine hours were incurred. What was the cost of Job 84?
a. $1,450
b. $1,375
c. $1,250
d. $1,290

61. Activity-based costing considers non-volume-related activities that create costs such as:
a. Direct labor usage.
b. Machine operations.
c. Consumption of indirect materials and energy usage.
d. Machine setups and product design changes.

62. To successfully employ an ABC system, a company must first identify:

a. Non-volume related activities in the factory that create costs.
b. Cost drivers.
c. Cost pools.
d. Overhead allocation rates.

63. A cost driver is:

a. An overhead or activity rate.
b. A basis used to allocate each of the activity cost
pools.
c. The estimated cost of each activity pool.
d. Used only to allocate non-volume-related costs.

64. In Activity-based costing, the activity rates that are used to charge costs to each job are based on:
a. the direct labor hours incurred by each activity.
b. the number of units produced.
c. each activity’s consumption of the resources required to sustain it.

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CHAPTER 4: ACCOUNTING FOR FACTORY OVERHEAD
d. volume related cost drivers.

65. The entry to apply factory overhead to jobs includes:

a. a debit to Applied Factory Overhead.
b. a debit to Work in Process.
c. a credit to Work in Process.
d. a debit to Cost of Goods Sold.

66. The Gerald Company budgeted overhead at $480,000 for the period for Department A based on a budgeted volume of
60,000 direct labor hours. At the end of the period, the factory overhead control account for Department A had a debit
balance of $475,000; actual direct labor hours were 58,000. What was the under- or over applied factory overhead for the
period?
a. $8,000 overapplied
b. $11,000 overapplied
c. $11,000 underapplied
d. $8,000 underapplied

67. Meger Manufacturing uses the direct labor cost method for applying factory overhead to production. The budgeted
direct labor cost and factory overhead for the previous fiscal year were $1,000,000 and $800,000, respectively. Actual
direct labor cost and factory overhead were $1,100,000 and $825,000, respectively.

What is the amount of under- or overapplied factory overhead?

a. $25,000 overapplied
b. $55,000 overapplied
c. $80,000 overapplied
d. $50,000 underapplied

68. The Owens Company uses the machine hour method of applying factory overhead to production. The budgeted
factory overhead last year was $200,000, and there were 40,000 machine hours budgeted. Actual machine hours incurred
during the period were 38,000, and actual factory overhead was $215,000. What was the amount of under- or overapplied
factory overhead?
a. $10,000 underapplied
b. $15,000 underapplied
c. $25,000 underapplied
d. $10,000 overapplied

69. Overapplied overhead will always result when a predetermined factory overhead rate is employed and:
a. Overhead incurred is more than overhead applied.
b. Overhead incurred is less than overhead applied.
c. Production is greater than sales.
d. Actual overhead costs are more than expected.

70. Spencer Company had overapplied factory overhead of $5,000 last year. Which of the following statements is not
true?
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CHAPTER 4: ACCOUNTING FOR FACTORY OVERHEAD
a. A higher level of production may have been achieved than budgeted for.
b. The Work in Process account was overcharged for the costs of factory overhead incurred during the period.
c. The actual factory overhead expenses may have been less than budgeted for the operating level achieved.
d. Assuming the amount is not material enough to distort net income, Cost of Goods Sold should be increased by
this amount.

71. At the end of the year, Jenkins Corporation had $120,000 in the Factory Overhead account and applied factory
overhead of $100,000. Mark Gibbs, the controller, has decided that the difference is to large to close to Cost of Goods
Sold. Work in process inventories were $30,000, finished goods inventories were $60,000 and cost of goods sold during
the year was $210,000. How should the entry to dispose of the difference in overhead incurred and overhead applied
affect Cost of Goods Sold?
a. $14,000 credit.
b. $14,000 debit.
c. $6,000 credit.
d. 20,000 debit.

73. If over- or underapplied factory overhead would materially distort net income if the entire amount was charged to Cost
of Goods Sold, it should be:
a. Carried forward in the overhead control account from year to year.
b. Eliminated by changing the predetermined factory overhead rate in subsequent years.
c. Apportioned among the work in process inventory, the finished goods inventory, and the cost of goods
sold.
d. Treated as a special gain or loss occurring during the year.

83. Lynch Audio produces stereo components for a major automotive stereo manufacturer. It currently uses the machine
hour method of applying factory overhead to production. Information for the previous year follows:
Budgeted amounts Actual amounts
Factory overhead $3,000,000 $3,050,000
Direct labor hours @ $10 per hour 250,000 248,000
Machine hours 750,000 735,000
During the year, Lynch produced a new product, Super Tweeters, which involved $27,000 of material, 3,100 direct labor
hours and 4,500 machine hours.

a. Compute the predetermined factory overhead rate.

b. Compute the amount of under- or overapplied factory overhead.
c. Determine the cost of the Super Tweeter job.

84. Factory overhead for the Praeger Company has been estimated as follows:
Fixed overhead $122,500
Variable overhead $90,000

Budgeted direct labor hours 42,500

Production for the month was 90 percent of the budget, and actual factory overhead totaled $175,000.

Calculate:
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CHAPTER 4: ACCOUNTING FOR FACTORY OVERHEAD
a. The predetermined factory overhead rate.
b. The under- or overapplied factory overhead.

85. The controller has asked you to examine different distribution methods for applying factory overhead to the various
production orders that are processed during a year.

The following information was taken from the annual budget:

Direct labor hours 84,000
Machine hours 120,000

Manufacturing costs:
Direct labor $525,000
Direct materials 180,000
Indirect labor 75,000
Electric power 48,000
Payroll taxes 12,600
Machine maintenance and repair 9,200
Factory supplies 16,000
Factory heat and light 14,000
Depreciation, taxes, and insurance:
Factory buildings 135,000
Machinery 320,200
$1,335,000
Actual results for the year follow:
Direct labor hours 85,000
Machine hours 110,000

Manufacturing costs:
Direct labor $ 540,000
Direct material 200,000
Factory overhead 625,000
$1,365,000

a. Determine the following predetermined factory overhead rates under each of the following
methods:
(1) Direct labor cost
(2) Direct labor hours
(3) Machine hours
b. Determine the under- or overapplied factory overhead under each of the following methods:
(1) Direct labor cost
(2) Direct labor hours
(3) Machine hours

87. Estimates made for a production department of the Automate Company for the month of October show:
Budgeted factory overhead for hours worked $17,360
Estimated direct labor hours 3,100
Factory overhead is applied on the basis of direct labor hours. On October 31, the records show these actual figures:
Actual overhead incurred $18,625
Direct labor hours worked 3,425
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Prepare the entry or entries to 1) apply factory overhead to production; 2) record actual factory overhead incurred
assuming all items were purchased from vendors; 3) close out the two factory overhead account balances to set up the
overapplied or underapplied factory overhead; and 4) to close the balance in under- or overapplied factory overhead to
Cost of Goods Sold.

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