APPLICATION OF OVERHEAD
In a job-order costing system, the cost of a job consists of:
1. Actual direct material costs traced to the job.
2. Actual direct labor costs traced to the job.
3. Manufacturing overhead applied to the job using a predetermined
overhead rate. Actual overhead costs are not assigned to jobs.
PREDETERMINED OVERHEAD RATE FORMULA
The formula for computing a predetermined overhead rate is:
Predetermined = Estimated total manufacturing overhead cost
overhead rate Estimated total amount of the allocation base
The company in the preceding example applies overhead costs to jobs
on the basis of direct labor-hours. In other words, direct labor-hours is the
allocation base.
At the beginning of the year the company estimated that it would incur
$320,000 in manufacturing overhead costs and would work 40,000 direct
labor-hours. The company’s predetermined overhead rate is:
$320,000
= $8 per DLH
40,000 DLHs
APPLICATION OF OVERHEAD TO JOBS
The process of assigning overhead to jobs is known as applying
overhead.
In the preceding example, Job 2B47 required 27 direct labor-hours.
Therefore, $216 of overhead cost was applied to the job as follows:
Predetermined overhead rate ....................
Direct labor-hours required for Job 2B47 ....
Overhead applied to Job 2B47 ...................
$8 per DLH
× 27 DLHs
$216
FISHER COMPANY (Revised 9/26/08)
Fisher Company, a producer of porcelain and glass commemorative plates, worked on two jobs during
April, the first month of its fiscal year. Job A, a special order of 1,000 porcelain plates commemorating
the landing on the moon, was started during March and was the only unfinished job in the factory at the
end of that month. By the end of March, $30,000 in manufacturing costs had been recorded for the job.
Job B, an order for 10,000 glass plates commemorating the landing on Mars, was started in April.
a) On April 1, Fisher Company had $7,000 in raw materials inventory. During the month the
company purchased an additional $60,000 in raw materials on account.
b) During April, $52,000 in raw materials were requisitioned from the storeroom for use in
production. $28,000 of the direct materials requisitioned was used on Job A, $22,000 in Job B,
and the remaining was used as indirect material.
c) During April, Fisher Company incurred $75,000 in labor costs (on account). Of this, $60,000
were direct labor costs ($40,000 for Job A, and $20,000 for Job B). The remainder consisted of
indirect labor costs (Supervision, Janitorial, Maintenance, etc.).
d) The following manufacturing overhead costs were also incurred and paid in cash:
Utilities (heat, water and power)
....................
$21,000
Rent on factory equipment
....................
16,000
Miscellaneous factory costs
....................
3,000
Total
……………
$40,000
e) Fisher Company recognized $13,000 in accrued property taxes for the factory in April.
f) Prepaid insurance on Factory buildings and equipment in the amount of $7,000 expired in April.
g) Fisher Company recorded depreciation on factory equipment in the amount of $18,000 in April.
h) Fisher Company applies manufacturing overhead to jobs on the basis of machine hours. In March,
Fisher Company estimated its total manufacturing overhead for next year to be $1,200,000 and its
total machine hours for the same period to be 200,000. During April, 10,000 machine hours were
worked on Job A, and 5,000 machine hours were worked on Job B.
i) Fisher Company incurred Selling and Administrative salaries expenses in the amount of $30,000
in April.
j) The Company also incurred depreciation expenses on office equipment of $7,000 in April.
k) Advertising expense in the amount of $42,000 was incurred in April, and paid in cash.
l) Other Selling and Administrative expenses (paid in cash) for April was $8,000.
m) Fisher Company completed Job A during April. The beginning Finished Goods inventory was
$10,000.
n) 750 of the 1,000 plates were sold to customers on account in April for total sales revenue of
$225,000. The associated Cost of Goods Sold was also recorded.
Required
1. Prepare journal entries to record the transactions for the month.
2. Prepare all necessary T-accounts and compute the ending balance in each inventory account.
3. Calculate the actual overhead and the overapplied/underapplied overhead for April. Prepare a journal
entry to close this balance into cost of goods sold.
4. Prepare a schedule of Cost of Goods Manufactured for April.
5. Prepare a schedule of Cost of Goods Sold for April.
6. Prepare an income statement for Fisher Company for the month ending April 30.