Transcript Applied Overhead

Chapter 3
Systems Design:
Job-Order costing
Types of Costing Systems Used to
Determine Product Costs
Process
Costing
Job-order
Costing
Chapter 4
 Many different products are produced each period.
 Products are manufactured to order.
 Costs are traced or allocated to jobs.
 Cost records must be maintained for each distinct
product or job.
Job-Order Costing
Manufacturing
overhead (OH)
Applied to each
job using a
predetermined
rate
Direct
material
THE JOB
Direct
labor
Application of Manufacturing
Overhead
The predetermined overhead rate
(POHR) used to apply overhead to jobs
is determined before the period begins.
POHR =
Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
Ideally, the allocation base is a
cost driver that causes overhead.
The Need for a Predetermined
Manufacturing Overhead Rate
Using a predetermined rate makes it
possible to estimate total job costs sooner.
$
Actual overhead for the period is not
known until the end of the period.
Overhead Application Example
Pear Co applies overhead based on
direct labor hours. Total estimated
overhead for the year is $640,000. Total
estimated labor cost is $1,400,000 and
total estimated labor hours are 160,000.
What is Pear Co’s predetermined
overhead rate per hour?
Predetermined Overhead Rate
 $640,000 Estimated Overhead Cost
 160,000 Est. Direct Labor Hours
 = $4.00/Direct Labor Hour

Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Job-Order System Cost Flows
Let’s examine the
cost flows in a
job-order costing
system. We will
use T-accounts
and start with
materials.
Job-Order System Cost Flows
Raw Materials
Material Direct
Purchases Materials
Indirect
Materials

Mfg. Overhead
Actual Applied
Indirect
Materials
Work in Process
(Job Cost Sheet)
Direct
Materials

Job-Order System Cost Flows
Salaries and
Wages Payable
Direct
Labor
Indirect
Labor

Mfg. Overhead
Actual Applied
Indirect
Overhead
Materials Applied to
Work in
Indirect
Process
Labor
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.
Job-Order System Cost Flows
Now let’s
complete the
goods and sell
them. Still with
me?
Job-Order System Cost Flows
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Overhead
Applied

Cost of
Goods
Mfd.

Finished Goods
Cost of
Goods
Mfd.

Cost of Goods Sold
Cost of
Goods
Sold

Cost of
Goods
Sold

Overhead Application Example
PearCo’s actual overhead for the year was $650,000 for
a total of 170,000 direct labor hours.
How much total overhead was applied to Pear Co’s jobs
during the year? Use Pear Co’s predetermined
overhead rate of $4.00 per direct labor hour and the
actual direct labor hours.
Applied Overhead
170,000 Direct Labor hours
x $4.00/Direct Labor hour
$680,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Manufacturing Overhead
 $680,000
Applied Overhead
-650,000 Actual Overhead
$30,000 Overapplied Overhead
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Overapplied and Underapplied
Manufacturing Overhead - Summary
PearCo’s
Method
If Manufacturing
Overhead is . . .
UNDERAPPLIED
Alternative 1
Close to Cost
of Goods Sold
Alternative 2
INCREASE
Cost of Goods Sold
INCREASE
Work in Process
Finished Goods
Cost of Goods Sold
DECREASE
Cost of Goods Sold
DECREASE
Work in Process
Finished Goods
Cost of Goods Sold
(Applied OH is less
than actual OH)
OVERAPPLIED
(Applied OH is greater
than actual OH)
Allocation
Overhead Application Question 1
Tiger, Inc. had actual manufacturing overhead
costs of $1,210,000 and a predetermined
overhead rate of $4.00 per machine hour. Tiger,
Inc. worked 290,000 machine hours during the
period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Overhead Application Question 2
Assume that Tiger’s overhead was $60,000
underapplied. This amount would result in an
adjustment that would decrease cost of goods
sold by $60,000.
a. True
b. False