chapter 3 - overhead you will get this never give up never surrender!
TRANSCRIPT
Chapter 3 - Overhead
You will get this
Never give upNever surrender!
Manufacturing Overhead
Manufacturing Overhead
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3
Charge direct
material and direct labor
costs to each job as
work is performed.
Charge direct
material and direct labor
costs to each job as
work is performed.
Sequence of Events in a Job-Order Costing System
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Calculating and Applying Overhead
1. Calculate a Predetermined Overhead Rate based on Budget Data
2. Charge Actual Overhead to the Overhead account
3. Calculate the applied amount of Overhead $$$$, charge to WIP
4. Post applied Overhead to the Manufacturing Overhead account (above) and WIP
5. Balance in Overhead account is equal to Over/Under Applied overhead
6. Transfer ending balance in Manufacturing Overhead out, leaving a ZERO balance in Manufacturing Overhead
Manufacturing costs that cannot be traced directly to specific units produced.
Manufacturing Overhead
Examples: Indirect labor and indirect materials and indirect manufacturing costs (rent, utilities, etc.)
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?
Apply overhead to
each job using a
predeter-mined rate.
Apply overhead to
each job using a
predeter-mined rate.
Sequence of Events in a Job-Order Costing System
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3Manufacturing Overhead
Manufacturing Overhead
Actual amount of the allocation base such as units produced, direct labor hours, or machine
hours incurred during the period.
Actual amount of the allocation base such as units produced, direct labor hours, or machine
hours incurred during the period.
Based on estimates, and determined before the
period begins.
Based on estimates, and determined before the
period begins.
Application of Manufacturing Overhead
Overhead applied = POHR × Actual activity
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
Mfg. OverheadWork in Process(Job Cost Sheet)
Direct
Materials
Overhead Applied
OverheadApplied to
Work inProcess
Direct LaborIndirect
Labor
Indirect Materials
Actual Applied
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
Job-Order System Cost Flows
Other Indirect Costs
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 Applied $ 350,000
$ 300,000
$ 50,000
$ 60,000 $ 375,000 $ 78,000
$ 53,000
$ 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 Applied $ 350,000
$ 300,000
$ 50,000
$ 60,000 $ 375,000 $ 78,000
$ 1,213,000
$ 1,160,000
Mfg. OverheadWork in Process(Job Cost Sheet)
1,190,000
Actual Applied
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
Job-Order System Cost Flows
1,190,000$1,213,000
MOH – Cost flows
Mfg. Overhead
Actual Applied $ 350,000
$ 300,000
$ 50,000
$ 60,000 $ 375,000 $ 78,000
$ 1,213,000
$ 53,000
$ 1,160,000
Actual costs are Greater than Applied Rate:
Is this Over or Under Applied????
MOH – Cost flows
Mfg. Overhead
Actual Applied $ 350,000
$ 300,000
$ 50,000
$ 60,000 $ 375,000 $ 78,000
$ 53,000
$ 1,160,000
Overhead is UNDER applied
Overapplied and Underapplied Manufacturing Overhead
Tiger Co’sMfg. Overhead
Actualoverhead
costs
$1,213,000
$53,000 underapplied
Tiger Co’s Cost
of Goods SoldUnadjusted
Balance
$53,000
$53,000
AdjustedBalance
OverheadAppliedto jobs
$1,160,000
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)