Never give up Never surrender! Chapter 3 - Overhead You will get this Sequence of Events in a JobOrder Costing System Direct Materials Job No. 1 Direct Labor Manufacturing Overhead Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as work is 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 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. Tiger Co. List of costs: Budgeted Costs Direct mtls $ 1,500,000 Direct labor $ 380,000 Sales commissions $ 650,000 Salary of production supervisors $ 350,000 Salary of purchasing dept. $ 300,000 Indirect materials $ 50,500 Advertising expense $ 75,000 Training for production employees on new system $ 62,000 Training for accounting employees on new system $ 20,000 Rent (factory uses 75% of floorspace) $ 510,000 Utilities $ 100,000 Tiger Co. List of costs: Budgeted Costs Direct mtls $ 1,500,000 Direct labor $ 380,000 Sales commissions $ 650,000 Salary of production supervisors $ 350,000 Salary of purchasing dept. $ 300,000 Indirect materials $ 50,500 Advertising expense $ 75,000 Training for production employees on new system $ 62,000 Training for accounting employees on new system $ 20,000 Rent (factory uses 75% of floorspace) $ 382,500 Utilities $ 75,000 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 Job No. 1 Direct Labor Manufacturing Overhead Job No. 2 Job No. 3 Apply overhead to each job using a predetermined rate. Application of Manufacturing Overhead Based on estimates, and determined before the period begins. Overhead applied = POHR × Actual activity Actual amount of the allocation base such as units produced, direct labor hours, or machine hours incurred during the period. Tiger Co. List of costs: ACTUAL Costs Direct mtls $ 1,490,000 Direct labor $ 364,000 Sales commissions $ 650,000 Salary of production supervisors $ 350,000 Salary of purchasing dept. $ 300,000 Indirect materials $ 50,000 Advertising expense $ 75,000 Training for production employees on new system $ 60,000 Training for accounting employees on new system $ 20,000 Rent (factory uses 75% of floorspace) $ 500,000 Utilities $ 104,000 Tiger Co. List of costs: ACTUAL Costs Direct mtls $ 1,490,000 Direct labor $ 364,000 Sales commissions $ 650,000 Salary of production supervisors $ 350,000 Salary of purchasing dept. $ 300,000 Indirect materials $ 50,000 Advertising expense $ 75,000 Training for production employees on new system $ 60,000 Training for accounting employees on new system $ 20,000 Rent (factory uses 75% of floorspace) $ 375,000 Utilities $ 78,000 Job-Order System Cost Flows Mfg. Overhead Actual Applied Indirect Overhead Materials Applied to Work in Indirect Process Labor Other Indirect Costs Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied If actual and applied manufacturing overhead are not equal, a year-end 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 Actual $ 350,000 $ 300,000 $ 50,000 $ $ $ 60,000 375,000 78,000 $ 53,000 Applied $ 1,160,000 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 $ 1,213,000 Applied $ 1,160,000 Job-Order System Cost Flows Work in Process (Job Cost Sheet) Mfg. Overhead Actual $1,213,000 Applied 1,190,000 1,190,000 If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. MOH – Cost flows Mfg. Overhead $ Actual 350,000 $ 300,000 $ 50,000 $ $ $ 60,000 375,000 78,000 $ 1,213,000 $ 53,000 Applied Actual costs are Greater than Applied Rate: Is this Over or Under Applied???? $ 1,160,000 MOH – Cost flows Mfg. Overhead Actual $ 350,000 $ 300,000 $ 50,000 $ $ $ 60,000 375,000 78,000 $ 53,000 Applied $ 1,160,000 Overhead is UNDER applied Overapplied and Underapplied Manufacturing Overhead Tiger Co’s Cost of Goods Sold Unadjusted Balance $53,000 Adjusted Balance Tiger Co’s 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)