3-1
3-1
LEARNING OBJECTIVES
1. Distinguish between process costing
and job-order costing and identify
companies that would use each costing
method.
2. Compute predetermined overhead rates
and explain why estimated overhead
costs are used in the costing process.
3. Record the journal entries that reflect
the flow of costs in a job-order costing
system.
4. Apply overhead cost to Work in Process
using a predetermined overhead rate.
3-2
LEARNING OBJECTIVES
5. Compute under- or overapplied overhead
cost and prepare the journal entry to
close the balance in Manufacturing
Overhead to the appropriate accounts.
6. (Appendix 3A) Explain the implications of
basing the predetermined overhead rate
on activity at capacity rather than on
estimated activity for the period.
3-3
Job-Order vs. Process Costing
Characteristics of product & production
process:
ƒ
ƒ
ƒ
ƒ
Characteristics of accounting system:
ƒ
ƒ
ƒ
3-2
3-4
Exercise 3-1
3-5
Accumulating Costs in a
Job-Order Costing System
Manufacturing
overhead (OH)
Direct
materials
Applied to each
job using a
predetermined
rate
Tra
ced
dire
to e
ctly
ach
job
THE JOB
Direct
labor
tly
irec
ed d job
c
a
Tr
ach
to e
3-6
Overhead Application: An Overview
Overhead Pool
Job 1
Job 2
Job 3
3-3
3-7
Overhead Application Example
Ron Company applies overhead based on
direct- labor hours. Total estimated
overhead for the year is $640,000. Total
estimated labor cost is $1,400,000 and total
estimated labor hours are 160,000.
What is Ron Company’s predetermined
overhead rate?
3-8
Overhead Application Example
POHR =
Budgeted manufacturing overhead cost
Budgeted amount of cost driver (or activity base)
Why use a POHR in stead of actual overhead?
3-9
Exercise 3-10
3-4
3-10
Overhead Application Example
Ron Company’s actual overhead for the year
was $650,000 and a total of 170,000 directlabor hours were worked.
Using Ron Company’s predetermined
overhead rate of $4.00 per direct-labor hour,
how much overhead was applied to all of
RoseCo’s jobs during the year?
3-11
Ron Company
Overapplied/Underapplied
Manufacturing Overhead
Mfg. Overhead
Options for Overapplied/
Underapplied Manufacturing
Overhead
May be allocated
to these accounts.
May be
closed directly to
cost of goods sold.
OR
Work in
Process
Finished
Goods
Cost of
Goods Sold
Cost of
Goods Sold
3-12
3-5
3-13
Problem 3-20
Problem 3-22
3-14
Why Use Departmental O/H Rates?
z
z
z
3-15
z Problem 3-25
3-6
Appendix
3A
The Predetermined
Overhead Rate and
Capacity
3-17
The Capacity Issue
When estimated activity is less than activity
at capacity, two problems arise:
1. Unit product costs will fluctuate
depending on the budgeted level of
activity for the period. As budget
levels decrease, overhead cost per unit
(and unit product costs) will increase.
2. Products will be charged for resources
they did not use.
3-18
Problem 3-23
Case 3-32