Never give up Never surrender!

Chapter 3 - Overhead
You will get this

Sequence of Events in a JobOrder Costing System

Direct Materials Direct Materials Direct Labor Direct Labor Manufacturing Manufacturing Overhead Overhead Job No. 1 Job No. 1 Job No. 2 Job No. 2 Job No. 3 Job No. 3

Charge Charge direct direct material and material and direct labor direct labor costs to costs to each job as each job as work is work is performed. 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 Examples: Indirect labor and indirect materials and indirect manufacturing costs (rent, utilities, etc.) 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.

Budgeted Costs Direct mtls Direct labor Sales commissions

Tiger Co. List of costs:

$ $ $ $ $ $ $ $ $ $ $ 1,500,000 380,000 650,000 350,000 300,000 50,500 75,000 62,000 20,000 510,000 100,000

Salary of production supervisors Salary of purchasing dept. Indirect materials Advertising expense Training for production employees on new system Training for accounting employees on new system Rent (factory uses 75% of floorspace) Utilities

Budgeted Costs Direct mtls Direct labor Sales commissions

Tiger Co. List of costs:

$ $ $ $ $ $ $ $ $ $ $ 1,500,000 380,000 650,000 350,000 300,000 50,500 75,000 62,000 20,000 382,500 75,000

Salary of production supervisors Salary of purchasing dept. Indirect materials Advertising expense Training for production employees on new system Training for accounting employees on new system Rent (factory uses 75% of floorspace) Utilities

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 Direct Materials Direct Labor Direct Labor Manufacturing Manufacturing Overhead Overhead Job No. 1 Job No. 1 Job No. 2 Job No. 2 Job No. 3 Job No. 3

Apply Apply overhead to overhead to each job each job using a using a predeterpredetermined rate. mined rate.

Application of Manufacturing Overhead

Based on estimates, and Based on estimates, and determined before the determined before the period begins. period begins.

Overhead applied = POHR Actual activity

Actual amount of the allocation Actual amount of the allocation base such as units produced, base such as units produced, direct labor hours, or machine direct labor hours, or machine hours incurred during the hours incurred during the period. period.

ACTUAL Costs Direct mtls Direct labor Sales commissions

Tiger Co. List of costs:

$ $ $ $ $ $ $ $ $ $ $ 1,490,000 364,000 650,000 350,000 300,000 50,000 75,000 60,000 20,000 500,000 104,000

Salary of production supervisors Salary of purchasing dept. Indirect materials Advertising expense Training for production employees on new system Training for accounting employees on new system Rent (factory uses 75% of floorspace) Utilities

ACTUAL Costs Direct mtls Direct labor Sales commissions

Tiger Co. List of costs:

$ $ $ $ $ $ $ $ $ $ $ 1,490,000 364,000 650,000 350,000 300,000 50,000 75,000 60,000 20,000 375,000 78,000

Salary of production supervisors Salary of purchasing dept. Indirect materials Advertising expense Training for production employees on new system Training for accounting employees on new system Rent (factory uses 75% of floorspace) Utilities

Job-Order System Cost Flows

Mfg. Overhead
Actual Applied Indirect Overhead Materials Applied to Indirect Work in Process Labor Other Indirect Costs

Work in Process (Job Cost Sheet)

Direct

Direct Materials Labor Overhead Applied

If actual and applied If actual and applied manufacturing overhead manufacturing overhead are not equal, a year-end are not equal, a year-end adjustment is required. 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
$ $ $ $ $ $ 350,000 300,000 50,000 60,000 375,000 78,000

Actual

Applied

$ 1,160,000

$ 53,000

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

Applied

$ 1,160,000

$ 1,213,000

Job-Order System Cost Flows

Mfg. Overhead
Actual $1,213,000

Work in Process (Job Cost Sheet)

Applied 1,190,000

1,190,000

If actual and applied If actual and applied manufacturing overhead manufacturing overhead are not equal, a year-end are not equal, a year-end adjustment is required. adjustment is required.

MOH Cost flows

Mfg. Overhead
$ $ $ $ $ $

Actual 350,000
300,000 50,000 60,000 375,000 78,000

Applied

Actual costs are Greater than Applied Rate: Is this Over or Under Applied????

$ 1,160,000

$ 1,213,000 $ 53,000

MOH Cost flows

Mfg. Overhead
$ $ $ $ $ $ 350,000 300,000 50,000 60,000 375,000 78,000

Actual

Applied

$ 1,160,000

$ 53,000

Overhead is UNDER applied

Overapplied and Underapplied Manufacturing Overhead

Tiger Cos Cost of Goods Sold
Unadjusted Balance $53,000 Adjusted Balance

Tiger Cos 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)