Transcript Chapter 3 - Overhead

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Chapter 3 - Overhead
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Sequence of Events in a JobOrder Costing System
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
Job No. 2
Job No. 3
Charge
direct
material and
direct labor
costs to
each job as
work is
performed.
Calculating and Applying
Overhead
1.
2.
3.
4.
5.
6.
Calculate a Predetermined
Overhead Rate based on
Budget Data
Charge Actual Overhead to the
Overhead account
Calculate the applied amount
of Overhead $$$$, charge to
WIP
Post applied Overhead to the
Manufacturing Overhead
account (above) and WIP
Balance in Overhead account
is equal to Over/Under Applied
overhead
Transfer ending balance in
Manufacturing Overhead out,
leaving a ZERO balance in
Manufacturing Overhead
Manufacturing Overhead
Manufacturing costs that cannot be traced
directly to specific units produced.
Examples: Indirect labor and indirect materials and
indirect manufacturing costs (rent, utilities, etc.)
Wages paid to employees
who are not directly
involved in production
work.
Examples: maintenance
workers, janitors and
security guards.
Materials used to support
the production process.
Examples: lubricants and
cleaning supplies used in the
automobile assembly plant.
Tiger Co.
List of costs:
Budgeted Costs
Direct mtls
$
1,500,000
Direct labor
$
380,000
Sales commissions
$
650,000
Salary of production supervisors
$
350,000
Salary of purchasing dept.
$
300,000
Indirect materials
$
50,500
Advertising expense
$
75,000
Training for production employees on new system
$
62,000
Training for accounting employees on new system
$
20,000
Rent (factory uses 75% of floorspace)
$
510,000
Utilities
$
100,000
Tiger Co.
List of costs:
Budgeted Costs
Direct mtls
$
1,500,000
Direct labor
$
380,000
Sales commissions
$
650,000
Salary of production supervisors
$
350,000
Salary of purchasing dept.
$
300,000
Indirect materials
$
50,500
Advertising expense
$
75,000
Training for production employees on new system
$
62,000
Training for accounting employees on new system
$
20,000
Rent (factory uses 75% of floorspace)
$
382,500
Utilities
$
75,000
Budgeted Cost Driver
• For this problem,
assume a cost driver
of Direct Machine
Hours:
• Budgeted Machine
Hours = 305,000
hours
• What is your
Predetermined
Overhead Rate?
Predetermined Overhead rate
$1,220,000/305,000
hours = $4/per what?
_________________
Do we use ACTUAL costs to
apply Overhead to WIP?
•
NO NO NO NO NO NO NO NO NO NO!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Charge to Manufacturing Overhead instead –
debit
How much and which accounts?
How do you apply overhead?
Sequence of Events in a JobOrder Costing System
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
Job No. 2
Job No. 3
Apply
overhead to
each job
using a
predetermined rate.
Application of Manufacturing
Overhead
Based on estimates, and
determined before the
period begins.
Overhead applied = POHR × Actual activity
Actual amount of the allocation
base such as units produced,
direct labor hours, or machine
hours incurred during the
period.
Tiger Co.
List of costs:
ACTUAL Costs
Direct mtls
$
1,490,000
Direct labor
$
364,000
Sales commissions
$
650,000
Salary of production supervisors
$
350,000
Salary of purchasing dept.
$
300,000
Indirect materials
$
50,000
Advertising expense
$
75,000
Training for production employees on new system
$
60,000
Training for accounting employees on new system
$
20,000
Rent (factory uses 75% of floorspace)
$
500,000
Utilities
$
104,000
Tiger Co.
List of costs:
ACTUAL Costs
Direct mtls
$
1,490,000
Direct labor
$
364,000
Sales commissions
$
650,000
Salary of production supervisors
$
350,000
Salary of purchasing dept.
$
300,000
Indirect materials
$
50,000
Advertising expense
$
75,000
Training for production employees on new system
$
60,000
Training for accounting employees on new system
$
20,000
Rent (factory uses 75% of floorspace)
$
375,000
Utilities
$
78,000
Job-Order System Cost Flows
Mfg. Overhead
Actual Applied
Indirect
Overhead
Materials Applied to
Work in
Indirect
Process
Labor
Other
Indirect
Costs
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Overhead
Applied


If actual and applied
manufacturing overhead
are not equal, a year-end
adjustment is required.
How much to Apply?
Tiger, Inc. has a predetermined overhead
rate of $4.00 per machine hour. Tiger,
Inc. expected to work 305,000 hours
during the period but actually worked
290,000 machine hours during the
period. How much should Tiger apply?
How much to Apply?
Tiger, Inc. has a predetermined overhead
rate of $4.00 per machine hour. Tiger,
Inc. expected to work 305,000 hours
during the period but actually worked
290,000 machine hours during the
period. How much should Tiger apply?
290,000 x $4 = $1,160,000
MOH – Cost flows
Mfg. Overhead
Actual
$
350,000
$
300,000
$
50,000
$
$
$
60,000
375,000
78,000
$ 53,000
Applied
$ 1,160,000
Is it Over or Under Applied?
Tiger, Inc. had actual manufacturing
overhead costs of:
$1,213,000
Tiger, Inc. expected to work:
305,000 machine hours
but actually worked:
290,000 machine hours
MOH – Cost flows
Mfg. Overhead
$
Actual
350,000
$
300,000
$
50,000
$
$
$
60,000
375,000
78,000
$ 1,213,000
Applied
$ 1,160,000
Job-Order System Cost Flows
Work in Process
(Job Cost Sheet)
Mfg. Overhead
Actual
$1,213,000
Applied

1,190,000

1,190,000
If actual and applied
manufacturing overhead
are not equal, a year-end
adjustment is required.
MOH – Cost flows
Mfg. Overhead
$
Actual
350,000
$
300,000
$
50,000
$
$
$
60,000
375,000
78,000
$ 1,213,000
$
53,000
Applied
Actual costs are Greater than
Applied Rate:
Is this Over or Under Applied????
$ 1,160,000
MOH – Cost flows
Mfg. Overhead
Actual
$
350,000
$
300,000
$
50,000
$
$
$
60,000
375,000
78,000
$ 53,000
Applied
$ 1,160,000
Overhead is UNDER applied
Overapplied and Underapplied
Manufacturing Overhead
Tiger Co’s Cost
of Goods Sold
Unadjusted
Balance
$53,000
Adjusted
Balance
Tiger Co’s
Mfg. Overhead
Actual Overhead
overhead Applied
costs
to jobs
$1,213,000 $1,160,000
$53,000
underapplied
$53,000
Over/Under Applied
• Actual $$$ > Applied $$$ = Under Applied
or Debit Balance (unfavorable, increases
COGS when you adjust)
• Actual $$$ < Applied $$$ = Over Applied
or Credit Balance (favorable, decreases
COGS when you adjust)
What affect does this adjusting
entry have:
• On COGS (increase or decrease)
• On Net income (increase or decrease)