Transcript horngren_ima16_stppt13

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Chapter 13
Accounting for
Overhead Costs
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Chapter 13 Learning Objectives
1. Compute budgeted factory-overhead rates
and apply factory overhead to production.
2. Determine and use appropriate costallocation bases for overhead application to
products and services.
3. Use normalized variable- and fixed-overhead
application rates and explain the disposition
of overhead variances.
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Chapter 13 Learning Objectives
4. Compare variable- and absorption-costing
systems.
5. Construct an income statement using the
variable-costing approach.
6. Construct an income statement using the
absorption-costing approach.
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Chapter 13 Learning Objectives
7. Distinguish between product-costing and
planning-and-control purposes in accounting
for variable and fixed costs.
8. Compute the production-volume variance and
show how it should appear in the income
statement.
9. Reconcile variable- and absorption-costing
operating income and explain why a company
might prefer to use a variable-costing
approach.
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Learning
Objective 1
Accounting for Factory Overhead
Years ago, direct materials and direct
labor were the largest costs for most
companies. Today, automated companies
have lower direct labor costs but much
larger overhead costs.
Methods for assigning overhead costs
to the products are an important part of
accurately measuring product costs.
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Budgeted Overhead Application Rates
1.
2.
3.
4.
5.
Select one or more cost-allocation bases.
Prepare a factory overhead budget.
Compute the factory overhead rate.
Obtain actual cost-allocation base data.
Apply the budgeted overhead to the
products or services.
6. Account for any differences between the
amount of overhead actually incurred and
overhead applied.
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Budgeted Overhead Application Rates
Overhead rates are budgeted; they are
estimates. The budgeted rates are used
to apply overhead based on actual events.
Budgeted
Total budgeted
overhead = Factory overhead
application
Total budgeted
rate
Amount of cost driver
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Illustration of Overhead Application
Enriquez Machine Parts Company selects a
single cost-allocation in each department for
applying overhead, machine hours in machining
and direct-labor in assembly.
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Illustration of Overhead Application
Total overhead applied to a particular product
equals budgeted overhead rates multiplied by
actual machine hours (MH) or labor cost (LC)
used by that product.
Thus, we would apply $44 of overhead to a
product that uses 6 MH in machining and incurs
direct-labor cost of $40 in assembly.
Machining: 6 actual MH X $4 per MH= $24
Assembly: $40 of DL cost X 50%
= 20
Total overhead
$44
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Illustration of Overhead Application
Suppose that at the end of the year Enriquez
had used 70,000 machine hours in Machining.
How much overhead was applied to Machining?
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Illustration of Overhead Application
Suppose that at the end of the year Enriquez
had incurred $190,000 in direct labor cost.
How much overhead was applied to Assembly?
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Illustration of Overhead Application
Total factory overhead applied:
Machining:
$280,000
Assembly:
95,000
Total Factory Overhead Applied $375,000
The $375,000 is an estimate of Enriquez’s
overhead for the year, and it will become part of
the cost of goods sold expense on Enriquez’s
income statement when the units produced are
subsequently sold.
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Learning
Objective 2
Choice of Cost-Allocation Bases
The accountant’s goal is to find the costallocation base that best links cause and effect.
No one cost-allocation base is right for all
situations. A separate cost pool should be
identified for each cost-allocation base.
Pool 1
Base 1
Base 2
Pool 2
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Learning
Objective 3
Normalized Overhead Rates
“Normal” product costs include
an average or normalized
chunk of overhead.
Actual direct material
+ Actual direct labor
+ Normal applied overhead
= Cost of manufactured product
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Disposing of Underapplied
or Overapplied Overhead
Recall that Enriquez applied
$375,000 to its products, but . . .
it incurred $392,000 of actual
manufacturing overhead during the year.
$392,000 actual overhead
–375,000 applied overhead
$ 17,000 underapplied overhead
The $375,000 becomes part of Cost of Goods
Sold when the product is sold, however . . .
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Disposing of Underapplied
or Overapplied Overhead
The applied overhead is $17,000 less
than the amount incurred. It is:
Overapplied overhead occurs when the
amount applied exceeds the amount incurred.
A company must report actual costs
incurred in its financial statements.
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Disposing of Underapplied
or Overapplied Overhead
Accountants uses two methods for the adjustment:
1) Write-off to cost of goods sold
2) Proration, apportioning over- or
underapplied overhead to cost of goods
sold, work-in-process inventory, and
finished-goods inventory in proportion to
the ending balances of each account.
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Immediate Write-Off
This method regards the $17,000 as a reduction in
current income and adds it to Cost of Goods Sold.
Manufacturing Overhead
392,000 - 375,000 = 17,000
Applied
Overhead
(Budgeted)
Cost of Goods Sold
Incurred
Overhead
(Actual)
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Prorating Among Inventories
This method prorates the $17,000 of
underapplied overhead to Work-In-Process (WIP),
Finished Goods, and Cost of Goods Sold accounts.
Companies generally prorate overhead
variances only when material.
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Variable and Fixed Application Rates
The presence of fixed costs is a
major reason of costing difficulties.
Some companies distinguish between
variable overhead and fixed
overhead for product costing.
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Learning
Objective 4
Variable Versus Absorption Costing
Variable costing excludes fixed manufacturing
overhead from the cost of products.
Variable
costing
Absorption
costing
Absorption costing includes fixed
manufacturing overhead in the cost of products.
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Variable Versus Absorption Costing
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Facts for Illustration
Basic Production Data at Standard Cost
Direct material
$205
Direct labor
75
Variable manufacturing overhead
20
Standard variable costs per unit $300
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Facts for Illustration
The annual budget for fixed
manufacturing overhead is $1,500,000
Budgeted production is 15,000 computers.
Sales price = $500 per unit
$20 per computer is variable overhead.
Fixed S&A expenses = $650,000
Sales commissions = 5% of dollar sales
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Facts for Illustration
Actual product quantities are:
There are no variances from the standard variable
manufacturing or selling and administrative costs,
the actual fixed manufacturing overhead incurred is
$1,500,000 each year, and the actual fixed selling
and administrative cost is $650,000 each year.
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Learning
Objective 5
Comparative Income Statement
Using Variable-Costing
Desk PC Division: Comparative Income Statements
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Fixed-Overhead Rate
The fixed-overhead rate is the
amount of fixed manufacturing
overhead applied to each
unit of production.
Fixed overhead rate =
budgeted fixed manufacturing overhead
expected volume of production
$1,500,000 ÷ 15,000 = $100
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Learning
Objective 6
Absorption-Costing Method
Comparative Income Statement
Desk PC Division: Comparative Income Statements
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Variable Costing vs. Absorption Costing
On a variable-costing income
statement, costs Are separated into the
Major categories of fixed and variable.
Revenue less all variable costs (both
manufacturing and nonmanufacturing) is the
contribution margin.
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Variable Costing and Absorption Costing
On an absorption-costing income
statement, costs are separated into
the major categories of manufacturing
and non-manufacturing.
Revenue less manufacturing costs
(both fixed and variable) is gross
profit or gross margin.
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Learning
Objective 7
Product-costing and planning-andcontrol purposes in accounting for
variable and fixed costs.
The differences between variable- and
absorption-costing formats arise because
the two formats treat fixed manufacturing
overhead differently.
Variable and Fixed Unit Costs:
To stress the basic assumptions behind
absorption costing, split manufacturing
overhead into variable and fixed components.
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Fixed Overhead and
Absorption Costs of Product
Compare
(1) the manufacturing overhead costs in the
flexible budget used for departmental
budgeting and control purposes
With
(2) the manufacturing overhead
costs applied to products under an
absorption-costing system
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Variable Overhead Costs
The expected variable-overhead costs from the
flexible budget are the same as the variableoverhead costs applied to the products.
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Fixed Overhead Costs
The graph for applied fixed-overhead costs
differs from that for the flexible budget.
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Learning
Objective 8
Production-Volume Variance
The difference between applied
and budgeted fixed overhead is
the production-volume variance.
In practice, accountants often call
the production-volume variance
simply the volume variance.
Production-volume variance =
(actual volume – expected volume) X fixed overhead rate
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Production-Volume Variance
A production-volume variance arises when the
actual production volume achieved does not
coincide with the expected volume of production
used as a denominator for computing the fixedoverhead rate for product-costing purposes:
1. When expected production volume and actual
production volume are identical, there is no
production-volume variance.
2. When actual volume is less than expected volume,
the production-volume variance is unfavorable
because usage of facilities is less than expected
and fixed overhead is underapplied.
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Learning
Objective 9
Reconciliation of AbsorptionCosting and Variable-Costing
The difference in variable-costing and
absorption-costing operating income can be
explained by multiplying the fixed-overhead
product-costing rate by the change in the total
units in the beginning and ending inventories.
Consider 20X1: The change in inventory
was 2,000 units, so the difference in net income
would be 2,000 units
× $100 = $200,000.
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Effects of Sales and Production
on Reported Income
The relationship between sales and production
determines the difference between
variable-costing and absorption-costing income.
Whenever units sold are greater than (less than)
units produced, variable-costing income is greater
than (less than) absorption costing income.
This means that when inventories decrease
(increase), variable-costing income is greater
than (less than) absorption-costing income.
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