Factory Overhead

Manufacturing Overhead

Job No. 1

Job No. 2

Job No. 3

Charge direct

material and direct labor

costs to each job as

work is performed.

Sequence of Events in a Job-Order Costing System

Direct Materials

Direct Labor

Calculating and Applying Overhead

1. Calculate a Predetermined Overhead Rate based on Budget Data

2. Charge Actual Overhead to the Overhead account

3. Calculate the applied amount of Overhead $$$$, charge to WIP

4. Post applied Overhead to the Manufacturing Overhead account (above) and WIP

5. Balance in Overhead account is equal to Over/Under Applied overhead

6. Transfer ending balance in Manufacturing Overhead out, leaving a ZERO balance in Manufacturing Overhead

Manufacturing costs that cannot be traced directly to specific units produced.

Manufacturing Overhead

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.

List of costs - BUDGETED:

Budgeted CostsDirect 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

List of costs - BUDGETED:

Budgeted CostsDirect 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 $ 510,000 Utilities – assume 75% as well. . . . $75,000 $ 100,000

Budgeted Cost Driver• For this problem,

assume a cost driver of Direct Machine Hours:

• Budgeted Machine Hours = 302,500 hours

• What is your Predetermined Overhead Rate?

What do you do with Actual overhead?

List of costs – ACTUAL, end of year:

Actual CostsDirect mtls $ 1,490,000

Direct labor $ 370,000 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 assume 75% as well. . . . $ 100,000

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?

List of costs – ACTUAL, end of year:

Actual CostsDirect mtls $ 1,490,000

Direct labor $ 370,000 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 $ 500,000 Utilities assume 75% as well. . . . $75,000 $ 100,000

Manufacturing Overhead

Mfg. OverheadActual Applied

$1,210,000

How do you apply overhead?

Apply overhead to

each job using a

predeter-mined rate.

Sequence of Events in a Job-Order Costing System

Direct Materials

Direct Labor

Job No. 1

Job No. 2

Job No. 3Manufacturing Overhead

Actual amount of the allocation base such as units produced, direct labor hours, or machine

hours incurred during the period.

Based on estimates, and determined before the

period begins.

Application of Manufacturing Overhead

Overhead applied = POHR × Actual activity

How much to Apply?

Tiger, Inc. has a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. expected to work 302,500 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

Mfg. OverheadWork in Process(Job Cost Sheet)

Direct

Materials

Overhead Applied

OverheadApplied to

Work inProcess

Direct LaborIndirect

Labor

Indirect Materials

Actual Applied

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

Job-Order System Cost Flows

Other Indirect Costs

Is it Over or Under Applied?

Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. expected to work 302,500 hours during the period but actually worked 290,000 machine hours during the period. Are you over or under applied? By how much?

Mfg. OverheadWork in Process(Job Cost Sheet)

1,190,000

Actual Applied

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

Job-Order System Cost Flows

1,190,000$1,210,000

Manufacturing Overhead

Mfg. OverheadActual Applied

$1,210,000 $1,190,00

$20,000 balance

Actual costs are Greater than Applied Rate:

Is this Over or Under Applied????

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)