Chapter 31
Managerial Accounting
Overhead Allocation
and Disposition
Prepared by Diane Tanner
University of North Florida
Assigning Overhead Costs to Products
 Manufacturing overhead cost is allocated to products
 Why is it allocated?
 Either impossible or not feasible to identify to a specific
product
 Allocation involves
 Determining a basis on which to distribute the cost
 Calculating a rate
 Assigning a portion of the estimated overhead to each
product
 A portion of the MOH costs are removed from the MOH
account and added to the other costs of the product
accumulated in the WIP account
DR Work in Process
CR Manufacturing overhead
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Predetermined Overhead Rate
 The rate at which manufacturing overhead is
allocated (applied) to products
 Referred to as ‘predetermined overhead rate’
(POHR)
 Determined ‘before’ the period begins
 At which time, the actual costs are unknown
POHR =
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Estimated Manufacturing Overhead Cost
Estimated Activity
Selecting an Activity
 The denominator of the predetermined overhead rate
is ‘estimated activity’
 Common estimated activities include




Number of units to be produced
Number of direct labor hours to be used
Number of direct labor dollars to be incurred
Number of machine hours to be used
 Based on management’s best guess of what causes
costs to increase
Often called a cost driver
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Allocating Manufacturing Overhead
 Allocating overhead means to assign a portion
of the overhead cost to a product
 Often called ‘applying’ overhead
 Each time the ‘activity’ occurs, the allocation
amount is added to the product cost
 Allocation amount
POHR × Actual activity
 Example
 Suppose the POHR is $2 per direct labor hour
 Each time one hour of direct labor is used, the company
will assign $2 of overhead to the specific product.
Under and Overapplied Overhead
A balance usually remains in the MOH expense
account at the end of the period
Possible balances in MOH
 Debit balance




Credit balance

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Underapplied = Not MOH enough was
‘applied’, i.e. not enough MOH cost was added
to products
Overapplied = Too much MOH was ‘applied’.
i.e., too much MOH cost was added to
products
Applying Overhead Based on Units
McAlister Company provided the following amounts:
Estimated MOH costs = $50,000
Actual MOH costs = $49,500
Estimated units to be produced = 4,000
Actual units produced = 4,100
The company allocates overhead based on units produced.
Step 1: Determine the allocation rate (POHR) =
$50,000/4,000 = $12.50/unit
Step 2: Apply overhead:
Applied = $12.50 x 4,100 = $51,250
MOH
49,500
51,250
1,750 overapplied
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Applying Overhead Based on DL Hours
McAlister Company provided the following amounts:
Estimated MOH costs = $50,000
Actual MOH costs = $49,500
Estimated direct labor hours = 12,500
Actual direct labor hours = 12,400
The company allocates overhead based on DL hours.
Step 1: Determine an allocation rate (POHR) =
$50,000/12,500 = $4.00/DL hour
Step 2: Apply overhead:
Applied = $4.00 x 12,400 = $49,600
MOH
49,500
49,600
100 overapplied
Applying Overhead Based on DL Cost
McAlister Company provided the following amounts:
Estimated MOH costs = $50,000
Actual MOH costs = $49,500
Estimated direct labor cost = $156,250
Actual direct labor cost = $153,600
The company allocates based on DL cost.
Step 1: Determine an allocation rate (POHR) =
$50,000/156,250 = $0.32 per DL$
Step 2: Apply overhead:
Applied = $0.32 x $153,600 = $49,152
MOH
49,500 49,152
Underapplied 348
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Disposing of Over/Underapplied
 Any balance at year end in the MOH account must be
‘closed’ or ‘adjusted’ to a zero balance
 Why?
 MOH is a temporary product account
 Not reported on the financial statements
Disposition is based on materiality
 If immaterial in amount
 Close directly to cost of goods sold
 Because this account will contain most of the
overhead cost at year end
 If material in amount
 Allocate proportionately to work in process, finished
goods, and cost of goods sold
 Because these accounts contain all of the
manufacturing overhead costs incurred by a company
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Disposition of MOH Example
Some balances of accounts prior to adjustment appear
below for Perco:
Cost of goods sold
Actual MOH costs
Estimated MOH costs
Applied MOH costs
Cost of Goods Sold
400,000
$400,000
49,500
50,000
51,250
Mfg. Overhead
Actual
Overhead
overhead
Applied
$49,500
$51,250
1,750
398,250
1,750
adjustment
1,750
overapplied
0
The End
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