Factory Overhead
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Transcript of Factory Overhead
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)