john wiley & sons, inc. prepared by marianne bradford, ph.d. bryant college accounting...

John Wiley & Sons, Inc.

Prepared byMarianne Bradford, Ph.D.

Bryant College

Accounting Principles, 6e Weygandt, Kieso, & Kimmel

Accounting Principles, 6e Weygandt, Kieso, & Kimmel

CHAPTER 21 JOB ORDER COST ACCOUNTINGCHAPTER 21 JOB ORDER COST ACCOUNTING

After studying this chapter, you should be able to:

1 Explain the characteristics and purposes of cost accounting.

2 Describe flow of costs in a job order cost accounting system.

3 Explain the nature and importance of a job cost sheet.


4 Indicate how the predetermined overhead rate is determined and used.

5 Prepare entries for jobs completed and sold.

6 Distinguish between under- and overapplied manufacturing overhead.

After studying this chapter, you should be able to:

PREVIEW OF CHAPTER 21PREVIEW OF CHAPTER 21

JOB ORDER COST ACCOUNTING

Cost Accounting Systems

Job Order Cost Flow

Accumulating manufacturing costs

Assigning manufacturing costs to work in process

Assigning costs to finished goods

Assigning costs to cost of goods sold

Summary

Job order cost system

Process cost system

PREVIEW OF CHAPTER 21PREVIEW OF CHAPTER 21

JOB ORDER COST ACCOUNTING

Reporting Job Cost Data

Under- or Overapplied Manufacturing

Overhead

Interim balances

Year-end balance

STUDY OBJECTIVE 1STUDY OBJECTIVE 1

Explain the characteristics and purposes of cost accounting.Explain the characteristics and purposes of cost accounting.

Cost accounting involves the measuring, recording, and reporting of product costs.

Both the total cost and the unit cost of each product is determined from the accumulated data.

A cost accounting system consists of accounts for the various manufacturing costs. These accounts that are fully integrated into the general ledger of a company.

COST ACCOUNTING SYSTEMS


An important feature of a cost accounting system is the use of a perpetual inventory system. Such a system provides immediate, up-to-date information on the cost of a product. There are 2 basic types of cost accounting systems:

1 a job order cost system and

2 a process cost system.



Under a job order cost system, costs are assigned to each job.

An example of a job would be the manufacture of a high-speed drilling machine

An example of a batch would be the printing of 225 wedding invitations.

The objective is to calculate the cost per job. A process cost system is used when a series of connected

manufacturing processes or departments produce a large volume of similar products.

Process costing accounts for and accumulates product-related costs for a period of time.



ILLUSTRATION 21-1 JOB ORDER COST

SYSTEMS

ILLUSTRATION 21-1 JOB ORDER COST

SYSTEMSJob Order Cost System

Two jobs: Wedding Invitations and Menus

Each job has distinguishing characteristics and related costs.

Job #9501

Black ink $

Typesetting

$225

Invitations $225

Envelopes $

Vellum stock

$

Job #9502

Typesetting

$White stock $Lamination $50 Copies $

ILLUSTRATION 21-2 PROCESS COST

SYSTEMS

ILLUSTRATION 21-2 PROCESS COST

SYSTEMSProcess Cost System: Compact Disc Production

Similar products are produced over a specified time period.

1. Oil is pumped. 2. Benzene is removed.

3. The benzene is made into pellets...

4. ...from which compact discs are made.


Describe the flow of costs in a job order cost accounting system.Describe the flow of costs in a job order cost accounting system.

The flow of costs in job order cost accounting parallels the physical flow of the materials as they are converted into finished goods.

There are 2 major steps in the flow of costs:1 accumulating the manufacturing costs incurred and2 assigning the accumulated costs to the work done.

As shown in Illustration 21-3, manufacturing costs incurred are accumulated in entries 1-3 by debits to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead.

The remaining entries (entries 4-8) pertain to the assignment of manufacturing costs incurred.

JOB ORDER COST FLOWJOB ORDER COST FLOW

ILLUSTRATION 21-3 FLOW OF COSTS IN JOB ORDER

COST ACCOUNTING

ILLUSTRATION 21-3 FLOW OF COSTS IN JOB ORDER

COST ACCOUNTING

Manufacturing Costs

RAW MATERIALS

FACTORYLABOR

MANUFACTURING OVERHEAD

Assigned toAssigned to

ILLUSTRATION 21-3FLOW OF COSTS IN JOB ORDER COST ACCOUNTING

ILLUSTRATION 21-3FLOW OF COSTS IN JOB ORDER COST ACCOUNTING

Work in Process Inventory

CompletedCompleted

WORK IN PROCESS

ILLUSTRATION 21-3FLOW OF COSTS IN JOB ORDER

COST ACCOUNTING


COST ACCOUNTING

FINISHED GOODS

SoldSold

Finished Goods Inventory


COST ACCOUNTING


COST ACCOUNTING

Cost of Goods Sold

COST OF GOODS SOLD

ILLUSTRATION 21-4 JOB ORDER

COST ACCOUNTING SYSTEM

ILLUSTRATION 21-4 JOB ORDER

COST ACCOUNTING SYSTEMJob Order Cost AccountingJob Order Cost Accounting

Accum ulation Assignm ent1. Purchase raw m aterials 4. Raw m aterials are used2. Incur factory labor 5. Factory labor is used3. Incur m anufacuring 6. O verhead is applied

overhead 7. Com pleted goods arerecognized

8. Cost of goods sold isrecognized

Key to Entries:Key to Entries:

R a w M a te r ia ls In v e n t o r y( 1 ) P u r c h a s e s ( 4 ) M a t e r ia l s

u s e d

F a c t o r y L a b o r( 2 ) F a c t o r y l a b o r ( 5 ) F a c t o r y l a b o r

i n c u r r e d u s e d

M a n u f a c t u r i n g O v e r h e a dA c t u a l O v e r h e a d ( 6 ) O v e r h e a di n c u r r e d : a p p l i e d

( 3 ) D e p r e c i a t i o nI n s u r a n c eR e p a i r s

( 4 ) I n d i r e c tm a t e r i a l s u s e d

( 5 ) I n d i r e c tl a b o r u s e d

W o r k i n P r o c e s s I n v e n t o r y( 4 ) D i r e c t ( 7 ) C o s t o f

m a t e r i a l s u s e d c o m p l e t e d( 5 ) D i r e c t j o b s

l a b o r u s e d( 6 ) O v e r h e a d

a p p l i e d

F i n i s h e d G o o d s I n v e n t o r y( 7 ) C o s t o f ( 8 ) C o s t o f g o o d s

c o m p l e t e d s o l dj o b s

C o s t o f G o o d s S o l d( 8 ) C o s t o f g o o d s

s o l d

4 7

5

6

8


In a job order cost system, manufacturing costs are recorded in the period in which they are incurred.

The costs of raw materials purchased are debited to Raw Materials Inventory when the materials are received.

No effort is made at this point to associate the cost of materials with specific jobs or orders.

Wallace Products Inc. purchases 2,000 handles at $5 per unit ($10,000) and 800 modules at $40 per unit ($32,000) for a total cost of $42,000.

D a t e A c c o u n t T i t l e s a n d E x p l a n a t i o n D e b i t C r e d i t( 1 )

J a n . 4 R a w M a t e r i a l s I n v e n t o r y A c c o u n t s P a y a b l e ( P u r c h a s e o f r a w m a t e r i a l s o n a c c o u n t )

42,00042,000

ILLUSTRATION 21-5 MATERIALS INVENTORY

CARD

ILLUSTRATION 21-5 MATERIALS INVENTORY

CARD

Item: Handles Part No: AA2746Receipts Issues Balance

Date Units Cost Total Units Cost Total Units Cost Total1/4 2,000 $5 $10,000 2,000 $5 $10,000

Raw Materials Inventory is a control account. The subsidiary ledger consists of individual records – in the form of

1 mechanically or manually prepared accounts or cards or

2 data files maintained electronically on disks or magnetic tape. The card for Stock No. AA2746 following the purchase is shown below.


In a manufacturing company, the cost of factory labor consists of

1 gross earnings of factory workers,

2 employer payroll taxes on such earnings, and

3 fringe benefits incurred by the employer. Labor costs are debited to Factory Labor when they are incurred. Wallace Products incurs $32,000 of factory labor costs, of which $27,000 relates to wages payable and $5,000 relates to

payroll taxes payable in January. The entry is:


J a n . 3 1 F a c t o r y L a b o r F a c t o r y W a g e s P a y a b l e E m p l o y e r P a y r o l l T a x e s P a y a b l e ( T o r e c o r d f a c t o r y l a b o r c o s t s )

32,000 27,000 5,000


Overhead costs may be recognized daily, as in the case of machinery repairs and the use of indirect materials and indirect labor.

Overhead costs may also be recorded periodically through adjusting entries. Property taxes, depreciation, and insurance. Are recorded periodically for example

A summary entry for overhead in Wallace Products Company is:

D a te A c c o u n t T it le s a n d E x p la n a t io n D e b it C re d it(3 )

J a n . 3 1 M a n u fa c tu r in g O v e rh e a d U t i l i t ie s P a y a b le P re p a id In s u ra n c e A c c o u n ts P a y a b le ( fo r re p a irs ) A c c u m u la te d D e p re c ia t io n P ro p e r ty T a x e s P a y a b le (T o re c o rd o v e rh e a d c o s ts )

13,8004,8002,0002,6003,0001,400


Explain the nature and importance of a job cost sheet.Explain the nature and importance of a job cost sheet.

ILLUSTRATION 21-6

JOB COST SHEETILLUSTRATION 21-6

JOB COST SHEETA job cost sheet is a form used to record the costs chargeable to a specific job and to determine the total and unit cost of the completed job. Postings to job cost sheets are made daily.

Job Cost SheetJob No. _________________________________ Quantity ________________________________Item ___________________________________ Date Requested __________________________For ____________________________________ Date Completed __________________________

Direct Direct ManufacturingDate Materials Labor Overhead

Cost of completed job Direct materials $ Direct labor Manufacturing overheadTotal cost $

Unit cost (total dollars ÷ quantity) $

ILLUSTRATION 21-7 MATERIALS REQUISITION

SLIP

ILLUSTRATION 21-7 MATERIALS REQUISITION

SLIPThe authorization for issuing raw materials is made on a prenumbered materials requisition slip. As shown below, the requisition should indicate whether (1) the quantity and type of materials (direct or indirect) withdrawn and (2) the amount to be charged.

Wallace Manufacturing CompanyMaterials Requisition Slip

Deliver to: Assembly Department Req. No. R247Charge to: Work in Process – Job No. 101 Date 1/6/02

Quantity Description Stock No. Cost Per Unit Total200 Handles AA2746 $5.00 $1,000

Requested by: Received by:

Approved by: Costed by:


•The requisition is prepared in duplicate. A copy is retained in the storeroom as evidence of the materials released; the original is sent to accounting, where the cost per unit and total cost of the materials used are determined.

•If $24,000 of direct materials and $6,000 of indirect materials are used in Wallace Products in January, the entry is an shown below.


J a n . 3 1 W o r k i n P r o c e s s I n v e n t o r yM a n u f a c t u r i n g O v e r h e a d R a w M a t e r i a l s I n v e n t o r y ( T o a s s i g n m a t e r i a l s t o j o b s a n d o v e r h e a d )

24,000 6,000 30,000

ILLUSTRATION 21-8 JOB

COST SHEETS- DIRECT MATERIALS


COST SHEETS- DIRECT MATERIALSG e n e r a l L e d g e r

W o r k i n P r o c e s s I n v e n t o r y1 / 3 1 2 4 , 0 0 0

The requisition slips show total direct materials costs of $12,000 for Job No. 101, $7,000 for Job No. 102, and $5,000 for Job No. 103. The posting of requisition slip R247 and other postings to the job cost sheets are shown in this illustration.

Source documents for posting to job cost sheets: Materials requisition slips

J o b N o . 1 0 1 Q u a n t i ty 1 ,0 0 0 U n itsD ir e c t D ir e c t M a n u f a c tu r in g

D a te M a te r ia ls L a b o r O v e r h e a d1 /6 1 ,0 0 0

1 /1 2 7 ,0 0 01 /2 6 4 ,0 0 0

S u b s i d i a r y L e d g e rJ o b C o s t S h e e t s


D a te M a te r ia l s L a b o r O v e r h e a d1 /1 0 3 ,8 0 01 /1 7 3 ,2 0 0


D a te M a te r ia ls L a b o r O v e r h e a d1 /2 7 5 ,0 0 0

General Ledger

Work in Process Inventory1/31 24,000

ILLUSTRATION 21-9 MATERIALS INVENTORY CARD FOLLOWING ISSUANCES

ILLUSTRATION 21-9 MATERIALS INVENTORY CARD FOLLOWING ISSUANCES

The materials inventory record for Part No. AA2746, shows the posting of requisition slip R247 and an assumed requisition slip for 760 handles costing $3,800 on January 10 for Job 102, is shown below.

Item: Handles Part No: AA2746Receipts Issues Balance

Date Units Cost Total Units Cost Total Units Cost Total1/4 2,000 $5 $10,000 2,000 $5 $10,0001/6 200 $5 $1,000 1,800 $5 9,0001/10 760 $5 3,800 1,040 $5 5,200

ILLUSTRATION 21-10

TIME TICKETILLUSTRATION 21-10

TIME TICKETFactory labor costs are assigned to jobs on the basis of time tickets prepared when the work is performed. The time ticket should indicate the employee, the hours worked, the account and job to be charged, and the total labor cost. Work in Process Inventory is debited for direct labor and Manufacturing Overhead is debited for indirect labor.

Bob Kadler M.Cher


If the $32,000 total factory labor cost incurred consists of $28,000 of direct labor and $4,000 of indirect labor, the entry is as shown below.


J a n . 3 1 W o r k i n P r o c e s s I n v e n t o r yM a n u f a c t u r i n g O v e r h e a d F a c t o r y L a b o r ( T o a s s i g n l a b o r t o j o b s a n d o v e r h e a d )

28,000 4,000 32,000


Indicate how the predetermined overhead rate is determined and used.Indicate how the predetermined overhead rate is determined and used.


COST SHEETS - DIRECT LABOR


COST SHEETS - DIRECT LABOR S u b s i d i a r y L e d g e r

J o b C o s t S h e e t s

J o b N o . 1 0 1 Q u a n t i t y 1 ,0 0 0 U n i t sD i r e c t D i r e c t M a n u f a c t u r i n g

D a t e M a t e r i a l s L a b o r O v e r h e a d1 / 6 1 ,0 0 0

1 / 1 0 9 ,0 0 01 / 1 2 7 ,0 0 01 / 2 6 4 ,0 0 01 / 3 1 6 ,0 0 0


D a te M a te r ia ls L a b o r O v e r h e a d1 /1 0 3 ,8 0 01 /1 5 4 ,0 0 01 /1 7 3 ,2 0 01 /2 2 5 ,0 0 0

J o b N o . 1 0 3 Q u a n tity 2 ,0 0 0 U n itsD ir e c t D ir e c t M a n u fa c tu r in g

D a te M a te r ia ls L a b o r O v e r h e a d1 /2 7 5 ,0 0 01 /2 9 4 ,0 0 0

G e n e r a l L e d g e r

W o r k i n P r o c e s s I n v e n t o r y1 / 3 1 2 4 , 0 0 01 / 3 1 2 8 , 0 0 0

The labor costs chargeable to the three jobs are $15,000, $9,000, and $4,000. The postings to the direct labor columns of the job cost sheets should equal the posting of direct labor to Work in Process Inventory.

Source documents for posting to job cost sheets: Time tickets

ILLUSTRATION 21-12 FORMULA FOR

PREDETERMINED OVERHEAD RATE

ILLUSTRATION 21-12 FORMULA FOR

PREDETERMINED OVERHEAD RATE

Estimated Annual Overhead Costs

Expected Annual Operating Activity÷ = Predetermined

Overhead Rate

Manufacturing overhead is estimated and assigned to work in process and to specific jobs on an estimated bases through a predetermined overhead rate

This rate is established by the beginning of the year and is based on the relationship between estimated annual overhead costs and expected annual operating activity.

This relationship is expressed in terms of a common activity base such as direct labor costs, direct labor hours, machine hours, or any other measure that will provide an equitable basis for applying overhead costs to jobs.

The predetermined overhead rate. The formula for a predetermined overhead rate is shown below.


At Wallace Products, direct labor cost is the activity base. Annual overhead costs are expected to be $280,000 and

$350,000 of direct labor costs are anticipated. The overhead rate is 80% ($280,000 ÷ $350,000). Overhead applied for January is $22,400 ($28,000 X

80%) This application is recorded through the entry below.


J a n . 3 1 W o r k i n P r o c e s s I n v e n t o r y M a n u f a c t u r i n g O v e r h e a d ( T o a s s i g n o v e r h e a d t o j o b s )

22,400 22,400

ILLUSTRATION 21-13 USING

PREDETERMINED OVERHEAD RATES

ILLUSTRATION 21-13 USING

PREDETERMINED OVERHEAD RATES

XActivity Base

Predetermined Overhead Rate

is assigned

to

Work in Process

and specific

jobs

Job 1 Job 2 Job 3

ILLUSTRATION 21-14 JOB COST SHEETS

MANUFACTURING OVERHEAD APPLIED

ILLUSTRATION 21-14 JOB COST SHEETS

MANUFACTURING OVERHEAD APPLIED

G e n e r a l L e d g e r

W o r k i n P r o c e s s I n v e n t o r y1 / 3 1 2 4 , 0 0 01 / 3 1 2 8 , 0 0 01 / 3 1 2 2 , 4 0 0

The debit of $22,400 to Work in Process Inventory equals the sum of the overhead assigned to jobs: Job 101 $12,000

Job 102 $7,200

Job 103 $3,200.

Source documents for posting to job cost sheets: Predetermined overhead rate (80% of direct labor cost)

S u b s i d i a r y L e d g e rJ o b C o s t S h e e t s


D a te M a te r ia ls L a b o r O v e r h e a d1 /6 1 ,0 0 0

1 /1 0 9 ,0 0 0 7 ,2 0 01 /1 2 7 ,0 0 01 /2 6 4 ,0 0 01 /3 1 6 ,0 0 0 4 ,8 0 0

J o b N o . 1 0 2 Q u a n t i ty 1 ,5 0 0 U n i tsD ir e c t D ir e c t M a n u f a c t u r in g

D a t e M a t e r ia l s L a b o r O v e r h e a d1 /1 0 3 ,8 0 01 /1 5 4 ,0 0 0 3 ,2 0 01 /1 7 3 ,2 0 01 /2 2 5 ,0 0 0 4 ,0 0 0

J o b N o . 1 0 3 Q u a n tity 2 ,0 0 0 U n itsD ir e c t D ir e c t M a n u fa c tu r in g

D a te M a te r ia ls L a b o r O v e r h e a d1 /2 7 5 ,0 0 01 /2 9 4 ,0 0 0 3 ,2 0 0

ILLUSTRATION 21-15 PROOF OF JOB COST SHEETS TO

WORK IN PROCESS INVENTORY

ILLUSTRATION 21-15 PROOF OF JOB COST SHEETS TO

WORK IN PROCESS INVENTORY At the end of each month, the balance in Work in

Process Inventory should equal the sum of the costs shown on the job cost sheets of unfinished jobs.

Assuming that all jobs are unfinished, proof of the agreement of the control and subsidiary accounts in Wallace Products is shown below.


Prepare entries for jobs completed and sold.Prepare entries for jobs completed and sold.

ILLUSTRATION 21-16 COMPLETED JOB COST

SHEET

ILLUSTRATION 21-16 COMPLETED JOB COST

SHEETWhen a job is completed, the costs are summarized and the lower portion of the applicable job cost sheet is completed. If Job No. 101 is completed on January 31, the job cost sheet will show the following:


When a job is finished, an entry is made to transfer its total cost to Finished Goods Inventory. The entry for Wallace Products is:


J a n . 3 1 F i n i s h e d G o o d s I n v e n t o r y W o r k i n P r o c e s s I n v e n t o r y ( T o r e c o r d c o m p l e t i o n o f J o b N o . 1 0 1 )

39,00039,000

ILLUSTRATION 21-17 FINISHED GOODS RECORDILLUSTRATION 21-17 FINISHED GOODS RECORD

Finished Goods Inventory is a control account. Itcontrols individual finished goods records in a

finished goods subsidiary ledger. Postings to the receipts columns are made directly from

completed job cost sheets. The finished goods inventory record for Job No. 101 is

shown below.

Item: Magnetic Sensors Job No: 101Receipts Issues Balance

Date Units Cost Total Units Cost Total Units Cost Total1/31 1,000 $39 $39,000 1,000 $39 $39,0002/2 1,000 $39 $39,000 –0–

ASSIGNING COSTS TO COST OF GOODS SOLDASSIGNING COSTS TO COST OF GOODS SOLD

•Recognition of the cost of goods sold is made when each sale occurs.

•On January 31 Wallace Products sells Job No. 101, costing $39,000, for $50,000. The entries are:

Date Account Titles and Explanation Debit Credit(8)

Jan. 31 Accounts Receivable Sales (To record sale of Job No. 101)

31 Cost of Goods Sold Finished Goods Inventory (To record cost of Job No. 101)

50,00050,000

39,00039,000

ILLUSTRATION 21-18 JOB ORDER COST SYSTEM

FLOW OF COSTS

ILLUSTRATION 21-18 JOB ORDER COST SYSTEM

FLOW OF COSTS

Flow of CostsFlow of Costs

Accum ulation Assignm ent1. Purchase raw m aterials 4. Raw m aterials are used2. Incur factory labor 5. Factory labor is used3. Incur m anufacuring 6. O verhead is applied

overhead 7. Com pleted goods arerecognized

8. Cost of goods sold isrecognized

Key to Entries:Key to Entries:

F a c to r y L a b o r( 2 ) 3 2 ,0 0 0 ( 5 ) 3 2 ,0 0 0

R a w M a t e r ia ls In v e n t o r y( 1 ) 4 2 ,0 0 0 ( 4 ) 3 0 ,0 0 0B a l . 1 2 ,0 0 0

M a n u f a c t u r i n g O v e r h e a d( 3 ) 1 3 , 8 0 0 ( 6 ) 2 2 , 4 0 0( 4 ) 6 , 0 0 0( 5 ) 4 , 0 0 0B a l . 1 , 4 0 0

F in is h e d G o o d s In v e n to r y( 7 ) 3 9 ,0 0 0 ( 8 ) 3 9 ,0 0 0

W o r k i n P r o c e s s I n v e n t o r y( 4 ) 2 4 , 0 0 0 ( 7 ) 3 9 , 0 0 0( 5 ) 2 8 , 0 0 0( 6 ) 2 2 , 4 0 0B a l . 3 5 , 4 0 0

C o s t o f G o o d s S o ld(8 ) 3 9 ,0 0 0

7

5

84

6

ILLUSTRATION 21-19 FLOW OF DOCUMENTS IN A JOB ORDER COST SYSTEM

ILLUSTRATION 21-19 FLOW OF DOCUMENTS IN A JOB ORDER COST SYSTEM

Flow of DocumentsFlow of Documents

Materials Requisition Slips

Labor Time Tickets

Predetermined Overhead Rate

Job Cost Sheet

Jobs Are Charged Through

Cost of Jobs is Summarized on a

The job cost sheet summarizes the cost of jobs completed and not completed at the end of the accounting period. Jobs completed are transferred to finished goods to await sale.

ILLUSTRATION 21-20 COST OF GOODS MANUFACTURED

SCHEDULE

ILLUSTRATION 21-20 COST OF GOODS MANUFACTURED

SCHEDULE

The cost of goods manufactured schedule in job order costing is the same as in Chapter 20 with one exception: Manufacturing overhead applied, rather than actual overhead costs, is added to direct materials and direct labor to determine total manufacturing costs. The schedule is prepared directly from the Work in Process Inventory account.

ILLUSTRATION 21-21

PARTIAL INCOME STATEMENTILLUSTRATION 21-21

PARTIAL INCOME STATEMENT

The cost of goods manufactured ($39,000) agrees with the amount transferred from Work in Process Inventory to Finished Goods Inventory in journal entry No. 7 in Illustration 21-18.


Distinguish between under- and overapplied manufacturing overhead.Distinguish between under- and overapplied manufacturing overhead.

UNDER- OR OVERAPPLIED MANUFACTURING OVERHEAD


Underapplied overhead means that

1 manufacturing overhead has a debit balance and

2 the overhead assigned to work in process is less than the overhead incurred.

Overapplied overhead means that

1 manufacturing overhead has a credit balance and

2 the overhead assigned to work in process is greater than the overhead incurred.



The existence of under- or overapplied overhead at the end of a month usually does not require corrective action by management.

Under- or overapplied overhead is on the monthly balance sheet:

1) underapplied overhead is a prepaid expense (current asset) and

2) overapplied overhead is unearned revenue (current liability).

ILLUSTRATION 21-22 UNDER- AND

OVERAPPLIED OVERHEAD

ILLUSTRATION 21-22 UNDER- AND

OVERAPPLIED OVERHEAD

MANUFACTURING OVERHEAD

Manufacturing Overhead

Actual

(Costs Incurred)

Applied

(Costs Assigned)

If actual is greater than applied, manufacturing overhead is underapplied.

If actual is less than applied, manufacturing overhead is overapplied.



• Any year-end balance in Manufacturing Overhead is eliminated by an adjusting entry.

• Under- or overapplied overhead is usually considered to be an adjustment to cost of goods sold.

• Thus, underapplied overhead is debited to Cost of Goods Sold and overapplied overhead is credited to Cost of Goods Sold.

• Wallace Products has a $2,500 credit balance in Manufacturing Overhead at December 31. The adjusting entry for the overapplied overhead is shown below.

D a te A c c o u n t T it le s a n d E x p la n a t io n D e b it C re d itD e c . 3 1 M a n u fa c tu r in g O v e rh e a d

C o s t o f G o o d s S o ld (T o t ra n s fe r o v e ra p p lie d o v e rh e a d to c o s t o f g o o d s s o ld )

2,500 2,500

COPYRIGHTCOPYRIGHT

Copyright © 2002 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Copyright © 2002 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.