Chapter 3 - Overhead

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Chapter 3 - Overhead
Never give up Never surrender!

• You will get this

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Sequence of Events in a Job-Order Costing System
Charge direct material and direct labor costs to
each job as work is performed.
Direct Materials
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
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Calculating and Applying Overhead

• 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

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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.)
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Tiger Co.List of costs
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Tiger Co.List of costs
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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?

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Predetermined Overhead rate
1,220,000/305,000 hours 4/per
what? _________________
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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?
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How do you apply overhead?
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Sequence of Events in a Job-Order Costing System
Direct Materials
Apply overhead to each job using a predeter-mined
rate.
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
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Application of Manufacturing Overhead
Based on estimates, and determined before the
period begins.
Actual amount of the allocation base such as
units produced, direct labor hours, or machine
hours incurred during the period.
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Tiger Co.List of costs
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Tiger Co.List of costs
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Job-Order System Cost Flows
Work in Process(Job Cost Sheet)
Mfg. Overhead

• Direct Materials

Actual
Applied

• OverheadApplied to Work inProcess

• Indirect Materials

• Direct Labor

• IndirectLabor

• Overhead Applied

• Other Indirect Costs

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

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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
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MOH Cost flows

• Mfg. Overhead

Actual
Applied
1,160,000
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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

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MOH Cost flows

• Mfg. Overhead

Actual
Applied
1,160,000
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Job-Order System Cost Flows
Work in Process(Job Cost Sheet)
Mfg. Overhead
Actual
Applied

• 1,190,000

1,213,000

• 1,190,000

If actual and applied manufacturing overheadare
not equal, a year-end adjustment is required.
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MOH Cost flows

• Mfg. Overhead

Actual
Applied
Actual costs are Greater than Applied Rate Is
this Over or Under Applied????
1,160,000
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MOH Cost flows

• Mfg. Overhead

Actual
Applied
1,160,000
Overhead is UNDER applied
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Overapplied and Underapplied Manufacturing
Overhead
Tiger Cos Costof Goods Sold
Tiger CosMfg. Overhead
Unadjusted Balance
Actualoverheadcosts 1,213,000
OverheadAppliedto jobs 1,160,000
53,000
53,000 underapplied
53,000
AdjustedBalance
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Over/Under Applied

• Actual gt Applied Under Applied or Debit
  Balance (unfavorable, increases COGS when you
  adjust)
• Actual lt Applied Over Applied or Credit
  Balance (favorable, decreases COGS when you
  adjust)

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What affect does this adjusting entry have

• On COGS (increase or decrease)
• On Net income (increase or decrease)

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