INTENDED LEARNING ACTIVITY

Review Questions/Applications
1. What is job-order costing?
 Job-order costing is applied when a business offers a wide range of goods or
services, such as furniture industry, medical facilities, and law firms.
2. What is absorption costing?
 Absorption costing is a management accounting technique for including all
production-related costs in the value of inventory that has been generated.
3. What is normal costing?
 Normal costing is assigning costs to products based on the materials, labor, and
overhead required in their production.
4. How is the unit product cost of a job calculated?
 The cost per unit of a product is calculated by dividing the total manufacturing
expenses attributed to a job by the quantity of units it contains.
5. Explain the four-step process used to compute a predetermined overhead rate.
 The four-step process to compute a predetermined over rate; The first step
estimate the total amount of the allocation base (the denominator) that will be
needed for the anticipated level of production for the following period. The next
step is to estimate both the total variable manufacturing overhead cost per unit of
the allocation base as well as the total fixed manufacturing overhead cost for the
upcoming period. The third step is to calculate the numerator, or total
manufacturing overhead costs, for the upcoming period using the cost formula Y
= a + bX.
6. What is the purpose of the job cost sheet in a job-order costing system?
 The job cost sheet's function is to keep track of all expenses related to a specific
job. Direct labor costs, direct material costs, and manufacturing overhead costs
are directly related to the job and are included in these prices. The job cost sheet
is used to determine the unit product cost when a task is finished.
7. Explain why some production costs must be assigned to products through an allocation
process.
 Some production expenses, like the wage of a plant manager, cannot be linked to
a specific good or task but rather are incurred because of production operations as
a whole. These expenses must be allocated to the products if they are to be linked
to them.
8. Why do companies use predetermined overhead rates rather than actual manufacturing
overhead costs to apply overhead to jobs?
 Predetermined manufacturing is preferred by businesses over actual
manufacturing since the latter must wait until the end of the accounting period to
apply overhead and cost jobs if actual manufacturing overhead expenses are
applied to employment.
9. What factors should be considered in selecting an allocation base to be used in computing
a predetermined overhead rate?
 The overhead expenses should be caused by the measure of activity used as the
allocation base, not the other way around. Expenses will be mistakenly assigned
 to products, jobs, and product costs if the allocation process does not actually
result in overheads.
10. If a company fully allocates all of its overhead costs to jobs, does this guarantee that a
profit will be earned for the period?
 A profit is not guaranteed by allocating manufacturing overhead costs to jobs. The
units created might not be sold, and even if they are, they might not be sold for
enough money to cover all expenditures. Costs are not allocated; rather, they are
only recovered by selling to customers.
11. Would you expect the amount of applied overhead for a period to equal the actual
overhead costs of the period? Why or why not?
 No, because there will always be a gap between the real overhead costs and the
predetermined one as the predetermined overhead rate is just an estimate of what
costs are anticipated to be established before the period begins.
12. What is underapplied overhead? Overapplied overhead?
 When the amount of overhead applied to jobs during the period is less than the
amount of actual overhead cost, this is known as underapplied overhead. When
the amount of overhead applied to jobs during the time period was greater than
the amount of actual overhead cost, this is known as overapplied overhead.
13. What is a plantwide overhead rate? Why are multiple overhead rates, rather than a
plantwide overhead rate, used in some companies?
 A single overhead rate that is applied to all production departments in a plant is
known as a plantwide overhead rate. Because it more effectively divides overhead
expenses among products, some businesses utilize various overhead rates as
opposed to plantwide rates.

ACTIVITY/ASSESSMENT

1. Required:
a. If Squid Game uses a predetermined plantwide overhead rate with direct labor-hours as
the allocation base, how much manufacturing overhead would be applied to Job 456?
 Predetermined plantwide overhead
= P 600,000/50,000 = P 12 per direct labor-hours
 Manufacturing overhead applied to job 456
= P 12 x 13 = P 156 of overhead applied to Job 456
b. If Squid Game uses predetermined departmental overhead rates with direct labor-hours as
the allocation base in Assembly and machine-hours as the allocation base in Fabrication,
how much total manufacturing overhead cost would be applied to Job 456?
 Assembly overhead rate
= P 300,000 / 30,000 = P 10 per direct labor hour
 Fabrication overhead rate
= P 300,000 / 40,000 = P 7.5 per MH
 Manufacturing overhead applied to job 456
Job 456 (1) (2) Applied Overhead
Overhead Rate Actual Hours Used (1) x (2)
Assembly Department P 10 per DLH 5 hours P 50
Fabrication Department P 7.5 per MH 14 hours 105
 Total applied overhead P 155

c. Assume that Squid Game uses the departmental overhead rates mentioned in requirement
2 and that Job 456 includes 60 units. What is the unit product cost for Job 456?  
Job 456 Assembly Fabrication Total
Direct Material P 100 P 50 150
Direct Labor 50 40 90
Overhead 50 105 155
Total job cost (a) 395
No. of units in Job 456 60
(b)
Unit product cost (a/b) P 6.68
2. Required:
1. Assuming Squid Game Hospital uses only one predetermined overhead rate, calculate:
a. The predetermined overhead rate.
Estimated fixed overhead cost 15,000,000
Estimated variable overhead cost 2,450,000
Estimated total overhead cost 17,450,000
Divided total patients - days 20,000
Predetermined overhead rate 872.5

b. The total cost, including direct materials, direct labor and applied overhead,
assigned to Patient 1 and Patient 456.
Patient 1 Patient 456
Direct materials P 5,000 P 7,000
Direct labor P 25,000 P 40,000
Applied overhead 6,107.5 12,215
Total cost 36,107.5 59,215

2. Assuming Squid Game Hospital calculates two overhead rates as recommended by the
staff accountant, calculate:
a. The ICU and Other overhead rates.
Predetermined ICU overhead rate.
Estimated fixed overhead cost 5,000,000
Estimated variable overhead cost 750,000
Estimated total overhead cost 5,750,000
Divide by estimated no. of patients days 3,000
Predetermined ICU overhead rate 1,916.67

b. The total cost, including direct materials, direct labor and applied overhead,
assigned to Patient 1 and Patient 456.
Patient 1 Patient 456
Direct Material P 5,000 P 7,000
Direct Labor P 25,000 P 40,000
Overhead 4,817.68 18,234.37
Total cost 34,817.68 65,234.37