Basic formula for process costing
Unit Product Cost = Total Manufacturing cost/Number of units produced
Four reasons why it is difficult to assign manufacturing overhead costs to units
1.
2.
3.
4.
They are indirect costs which are difficult or impossible to trace to a particular product or job.
Consist of many different types of costs such as grease, supervisor/production manager salary.
Manufacturing overhead costs tend to be relatively constant even though output may fluctuate.
The timing of payments of manufacturing overhead costs often varies.
Allocation process is used to assign overhead costs to products using ALLOCATION BASE. Allocation base is a measure such as Direct
Labour Hour (DLH) or machine Hour (MH)
DLH, MH and direct labour cost (DLC) are widely used allocation base. Units of product is used where the company has only a single product.
Predetermined overhead rate is an estimate, computed before the period begins and used to apply overhead costs to jobs throughout the
period.
Predetermined Overhead Rate (POHR) = Estimated total Overhead cost/Estimated total units in the allocation Base
Dr. Raw Material Account Purchases…. 25000
Cr. Accounts Payable …..
To record purchase of raw materials
25000
When Direct materials of 10000 and indirect materials of 5000 is requisitioned from the store
Dr. WIP ……….. 10,000
Dr. Overhead Cost 5000
Cr. Raw Materials Account…. 15000
APPLICATION OF MANUFACTURING OVERHEAD
Overhead costs are accumulated in the Manufactured Overhead Account and are transferred to the WIP Inventory account
When a job is completed the account entry to transfer the cost is
***Once the hours worked is known, use the predetermined rate to compute the manufacturing overhead and transfer to Work In
Process Inventory Account. If the total hours worked is 5000 and the POHR is $10 per hour. The entry is as follows
Manufacturing Overhead
2500
6000
2500
45000
6000
50,000
Work in Process Inventory
50,000
COST OF GOODS MANUFACTURED
Dr. Finished goods Inventory
Cr. Work in Process Inventory
xxxx
xxxx
COST OF GOODS SOLD
Accounts Receivable DR.
300,000
Sales Revenue
Cost of goods Sold
Finished Goods Inventory
300,000
150,000
150,000
SUMMARY OF COSTS FLOW
COMPUTE UNDERAPPLIED AND OVERAPPLIED OVERHEAD
The production manager of Turbo Crafters estimates manufacturing overhead cost of $300,000 for a total of 75000 machine hours.
The actual manufacturing overhead cost is $290,000 and the actual machine hours is 68000. Determine the overapplied or
underapplied overhead cost.
Step 1
Compute the predetermine overhead rate. = 300,000/75000 = $4
Step 2
Compute the applied manufacturing overhead = 68,000x4 = $272,000
Because the applied manufacturing overhead is less than the actual, there is underapplied overheard cost.
Underapplied overhead cost = 290000 – 272000 = $18,000
The production manager of Black & Howell estimates manufacturing overhead cost of $120,000 for a total of $80,000 direct labour
cost (DLC). The actual manufacturing overhead cost is $130,000 and the actual amount base is $90,000. Determine the overapplied
or underapplied overhead cost. Determine the overapplied or underapplied overhead cost.
Step 1
Compute the predetermined overhead rate. = $120,000/$80,000 = 1.5 = 150%
Step 2
Compute the applied manufacturing overhead = $90,000 x 1.5 = $135,000
Because the actual manufacturing overhead cost is of $130,000 is less than the applied manufacturing overhead cost of $135,000
The manufacturing overhead cost is overapplied by 135000 – 130000 = 5000