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Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Systems Design: Job-Order Costing
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-2
Learning Objective 1
Distinguish between process costing and job-order costing and identify companies that would use
each costing method.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-3
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Products are manufactured by orders. Many different products are produced each period. The unique nature of each order requires tracing
or allocating costs to each job, and maintaining cost records for each job.
Products are manufactured by orders. Many different products are produced each period. The unique nature of each order requires tracing
or allocating costs to each job, and maintaining cost records for each job.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-4
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing
or allocating costs to each job, and maintaining cost records for each job.
Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing
or allocating costs to each job, and maintaining cost records for each job.
Example companies:1. Boeing (aircraft manufacturing)2. Hyundai Construction (large scale construction)3. CJ Entertainment (movie production)
Example companies:1. Boeing (aircraft manufacturing)2. Hyundai Construction (large scale construction)3. CJ Entertainment (movie production)
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-5
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
A company produces many units of a single product.
One unit of product is indistinguishable from other units of product.
The identical nature of each unit of product enables assigning the same average cost per unit.
A company produces many units of a single product.
One unit of product is indistinguishable from other units of product.
The identical nature of each unit of product enables assigning the same average cost per unit.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-6
Types of Product Costing Systems
ProcessCosting
Job-orderCosting
A company produces many units of a single product.
One unit of product is indistinguishable from other units of product.
The identical nature of each unit of product enables assigning the same average cost per unit.
A company produces many units of a single product.
One unit of product is indistinguishable from other units of product.
The identical nature of each unit of product enables assigning the same average cost per unit.
Example companies:1. Kleenex (napkin, toilet paper)2. Coca-Cola (mixing and bottling beverages)
Example companies:1. Kleenex (napkin, toilet paper)2. Coca-Cola (mixing and bottling beverages)
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-7
Quick Check
Which of the following companies would be likely to use job-order costing rather than process costing?
a. Scott Paper Company for Kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
Which of the following companies would be likely to use job-order costing rather than process costing?
a. Scott Paper Company for Kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-8
Quick Check
Which of the following companies would be likely to use job-order costing rather than process costing?
a. Scott Paper Company for Kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
Which of the following companies would be likely to use job-order costing rather than process costing?
a. Scott Paper Company for Kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-9
Learning Objective 2
Identify the documents used in a job-order costing
system.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-10
Manufacturing Overhead
Manufacturing Overhead
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3
Charge direct
material and direct labor
costs to each job as the work is performed.
Charge direct
material and direct labor
costs to each job as the work is performed.
Job-Order Costing – An Overview
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-11
Manufacturing Overhead, including indirect
materials and indirect labor, are allocated
to all jobs rather than
directly traced to each job.
Manufacturing Overhead, including indirect
materials and indirect labor, are allocated
to all jobs rather than
directly traced to each job.
Direct Manufacturing Costs
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3Manufacturing Overhead
Manufacturing Overhead
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-12
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
The Job Cost Sheet
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-13
Measuring Direct Materials Cost
PearCo Materials Requisition Form
Requisition No. X7 - 6890 Date 3-4-05Job No. A - 143Department B3
Description Quantity Unit Cost Total Cost2 x 4, 12 feet 12 3.00$ 36.00$ 1 x 6, 12 feet 20 4.00 80.00
116.00$
Authorized Signature
Will E. Delite
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-14
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$
Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
Measuring Direct Materials Cost
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-15
Measuring Direct Labor Costs
PearCo Employee Time Ticket
Time Ticket No. 36 Date 3/5/2005
Employee I. M. Skilled Station 42
Starting Ending Hours HourlyTime Time Completed Rate Amount Job No.0800 1600 8.00 11.00$ 88.00$ A-143
Totals 8.00 11.00$ 88.00$ A-143
Supervisor C. M. Workman
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-16
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$
Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing OverheadTotal CostUnit Product Cost
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-17
Learning Objective 3
Compute predetermined overhead rates and
explain why estimated overhead costs (rather than actual overhead costs) are used in the
costing process.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-18
Why Use an Allocation Base?
• Manufacturing overhead is applied/allocated to jobs that are in process.
• An allocation base (such as direct labor hours, direct labor dollars, or machine hours) is used to allocate manufacturing overhead to individual jobs.
• Manufacturing overhead is applied/allocated to jobs that are in process.
• An allocation base (such as direct labor hours, direct labor dollars, or machine hours) is used to allocate manufacturing overhead to individual jobs.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-19
Why Use an Allocation Base?
Why?Why?
We use an allocation base because:
1. Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary. And it is impossible or very difficult to trace these kinds of overhead costs to particular jobs.
2. Actual manufacturing overhead costs may not known when the job is completed. Using a predetermined rate makes it possible to estimate total job costs sooner.
3. Although output may fluctuate during the period, many types of manufacturing overhead costs (e.g., plant depreciation) are fixed.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-20
The predetermined overhead rate (POHR) used to apply overhead to jobs is
determined before the period begins.
Manufacturing Overhead Application
Estimated total manufacturingoverhead cost for the coming period
Estimated total allocation base for the coming period
POHR =
Ideally, the allocation base is a cost driver that causes
overhead.
Ideally, the allocation base is a cost driver that causes
overhead.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-21
Based upon the actual level of activity.
Based upon the actual level of activity.
Based on estimates, and determined before the
period begins.
Based on estimates, and determined before the
period begins.
Application of Manufacturing Overhead
Overhead applied = POHR × Actual activity
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-22
For each direct labor hour worked on a particular job, $4.00 of factory overhead
will be applied to that job.
For each direct labor hour worked on a particular job, $4.00 of factory overhead
will be applied to that job.
Overhead Application Rate
POHR = $4.00 per DLH
$640,000
160,000 direct labor hours (DLH)POHR =
Estimated total manufacturingoverhead cost for the coming period
Estimated total allocation base for the coming period
POHR =
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-23
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05Date Completed 3-5-05
Department B3 Units Completed 2Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8 4$ 32$
Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing Overhead 32$ Total CostUnit Product Cost
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-24
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05Date Completed 3-5-05
Department B3 Units Completed 2Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8 4$ 32$
Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing Overhead 32$ Total Cost 236$ Unit Product Cost 118$
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-25
Interpreting the Average Unit Cost
The average unit cost should not be interpretedas the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unitwere produced, so the incremental cost of
another unit may be somewhat less than $118.
The average unit cost should not be interpretedas the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unitwere produced, so the incremental cost of
another unit may be somewhat less than $118.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-26
Quick Check
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-27
Quick Check
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.
Pred. ovhd. rate $760,000/20,000hours $38
Direct materials $200Direct labor $15 x 10 hours $150Manufacturing overhead $38 x 10 hours $380Total cost $730
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-28 Journal Entries (may be skipped with a focus on T-accounts)
Understand the flow of costs in a job-order costing system
and prepare appropriate journal entries to record costs.
Use T-accounts to show the flow of costs in a job-order
costing system.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-29
Job-Order Costing: The Flow of Costs
The transactions (in T-account and journal entry
form) that capture the flow of costs in a job-
order costing system are illustrated on the following slides.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-30
Raw MaterialsMaterial
Purchases
Mfg. Overhead
Work in Process(Job Cost Sheet)
Actual Applied
Direct
Materials
Direct
Materials
Indirect
Materials
Indirect
Materials
The Purchase and Issue of Raw Materials
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3-31
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Raw Materials XXXXX Accounts Payable XXXXX
Cost Flows – Material Purchases
Raw material purchases are recorded in aninventory account.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-32
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Work in Process XXXXXManufacturing Overhead XXXXX Raw Materials XXXXX
Cost Flows – Material Usage
Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-33
Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
Materials
Direct Labor
Direct Labor
Indirect
Materials
Actual Applied
IndirectLabor
IndirectLabor
The Recording of Labor Costs
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-34
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Work in Process XXXXXManufacturing Overhead XXXXX Salaries and Wages Payable XXXXX
The Recording of Labor Costs
The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases
Manufacturing Overhead.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-35
Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
Materials
Direct Labor
Direct Labor
Indirect
Materials
Actual Applied
IndirectLabor
IndirectLabor
Recording Actual Manufacturing Overhead
OtherOverhea
d
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3-36
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Manufacturing Overhead XXXXX Accounts Payable XXXXX Property Taxes Payable XXXXX Prepaid Insurance XXXXX Accumulated Depreciation XXXXX
Recording Actual Manufacturing Overhead
In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to
the Manufacturing Overhead account as they are incurred.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-37
Learning Objective 5
Apply overhead cost to Work in Process using a predetermined overhead
rate.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-38
Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
Materials
Direct Labor
Direct Labor
Indirect
Materials
Actual Applied
IndirectLabor
IndirectLabor
Applying Manufacturing Overhead
OtherOverhea
d
Overhead Applied
OverheadApplied to Work
inProcess
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required: will be discussed later.
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required: will be discussed later.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-39
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Work in Process XXXXX Manufacturing Overhead XXXXX
Applying Manufacturing Overhead
Work in Process is increased when Manufacturing Overhead is applied to jobs.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-40
Accounting for Nonmanufacturing Cost
Non-manufacturing costs are not assigned to individual jobs; rather they are expensed in the
period incurred.
Examples:1. Salary expense of employees
who work in a marketing, selling,or administrative capacity.
2. Advertising expenses are expensedin the period incurred.
Examples:1. Salary expense of employees
who work in a marketing, selling,or administrative capacity.
2. Advertising expenses are expensedin the period incurred.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-41
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Salaries Expense XXXXX Salaries Payable XXXXX
Advertising Expense XXXXX Accounts Payable XXXXX
Accounting for Nonmanufacturing Cost
Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-42
Learning Objective 6
Prepare schedules of cost of goods manufactured and cost of goods sold.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-43
Finished GoodsWork in Process(Job Cost Sheet)
Direct
Materials
Direct Labor
Overhead Applied
Cost of
GoodsMfd.
Cost of
GoodsMfd.
Transferring Completed Units
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-44
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Finished Goods XXXXX Work in Process XXXXX
Transferring Completed Units
As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods
from Work in Process.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-45
Finished Goods
Cost of Goods Sold
Work in Process(Job Cost Sheet)
Direct
Materials
Direct Labor
Overhead Applied
Cost of
GoodsMfd.
Cost of
GoodsMfd.
Cost of
GoodsSold
Cost of
GoodsSold
Transferring Units Sold
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-46
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Accounts Receivable XXXXX Sales XXXXX
Cost of Goods Sold XXXXX Finished Goods XXXXX
Transferring Units Sold
When finished goods are sold, two entries are required: (1) to record the sale, and (2) to
record COGS and reduce Finished Goods.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-47
Learning Objective 8
Compute underapplied or overapplied overhead cost
and prepare the journal entry to close the balance
in Manufacturing Overhead to the
appropriate accounts.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-48
Problems of Overhead Application
The difference between the overhead cost applied to Work in Process and the actual overhead costs of a
period is referred to as either underapplied or overapplied overhead.
Underapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead rate is less than the total
amount of overhead actually incurred during the period.
Underapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead rate is less than the total
amount of overhead actually incurred during the period.
Overapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead
rate is greater than the total amount of overhead actually incurred during the period.
Overapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead
rate is greater than the total amount of overhead actually incurred during the period.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-49
PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor
hours actually worked on jobs.
How much total overhead was applied to PearCo’s jobs during the year? Use
PearCo’s predetermined overhead rate of $4.00 per direct labor hour.
PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor
hours actually worked on jobs.
How much total overhead was applied to PearCo’s jobs during the year? Use
PearCo’s predetermined overhead rate of $4.00 per direct labor hour.
Overhead Application Example
Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH×170,000 DLH = $680,000
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-50
PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor
hours worked on jobs.
How much total overhead was applied to PearCo’s jobs during the year? Use
PearCo’s predetermined overhead rate of $4.00 per direct labor hour.
PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor
hours worked on jobs.
How much total overhead was applied to PearCo’s jobs during the year? Use
PearCo’s predetermined overhead rate of $4.00 per direct labor hour.
Overhead Application Example
Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH×170,000 DLH = $680,000
PearCo has overappliedoverhead for the yearby $30,000. What will
PearCo do?
PearCo has overappliedoverhead for the yearby $30,000. What will
PearCo do?
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3-51
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Quick Check
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-52
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Quick Check
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160,000 = $50,000
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160,000 = $50,000
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-53
Disposition of Under- or Overapplied Overhead
$30,000 may beclosed directly to
cost of goods sold.
Cost of Goods Sold
Cost of Goods Sold
PearCo’s MethodPearCo’s Method
Work inProcessWork inProcess
FinishedGoods
FinishedGoods
Cost of Goods Sold
Cost of Goods Sold
$30,000may be allocated
to these accounts.
OROR
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3-54
Disposition of Under- or Overapplied Overhead
PearCo’sMfg. Overhead
Actualoverhead
costs
$650,000
$30,000 overapplied
PearCo’s Costof Goods Sold
Unadjusted Balance
AdjustedBalance
$30,000
$30,000
Overhead appliedto jobs
$680,000
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-55 Allocating Under- or Overapplied Overhead Between Accounts
Amount Percent of
Total Allocation of $30,000
Work in process 68,000$ 10% 3,000$ Finished Goods 204,000 30% 9,000 Cost of Goods Sold 408,000 60% 18,000
Total 680,000$ 100% 30,000$
Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods
Inventory, and Cost of Goods Sold is shown below:
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-56 Allocating Under- or Overapplied Overhead Between Accounts
Amount Percent of
Total Allocation of
$30,000 Work in process 68,000$ 10% 3,000$ Finished Goods 204,000 30% 9,000 Cost of Goods Sold 408,000 60% 18,000 Total 680,000$ 100% 30,000$
We would complete the following allocation of $30,000 overapplied overhead:
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-57 Allocating Under- or Overapplied Overhead Between Accounts
Amount Percent of
Total Allocation of
$30,000 Work in process 68,000$ 10% 3,000$ Finished Goods 204,000 30% 9,000 Cost of Goods Sold 408,000 60% 18,000 Total 680,000$ 100% 30,000$
GENERAL JOURNAL
Date DescriptionPost. Ref. Debit Credit
Manufacturing Overhead 30,000 Work in Process Inventory 3,000 Finished Goods Inventory 9,000 Cost of Goods Sold 18,000
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-58Overapplied and Underapplied Manufacturing Overhead - Summary
Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation
UNDERAPPLIED INCREASE INCREASECost of Goods Sold Work in Process
(Applied OH is less Finished Goodsthan actual OH) Cost of Goods Sold
OVERAPPLIED DECREASE DECREASECost of Goods Sold Work in Process
(Applied OH is greater Finished Goodsthan actual OH) Cost of Goods Sold
PearCo’s Method
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-59
Quick Check
What effect will the adjustment of an over-applied overhead have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
What effect will the adjustment of an over-applied overhead have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-60
Quick Check
What effect will the adjustment of an over-applied overhead have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
What effect will the adjustment of an over-applied overhead have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
3-61
Multiple Predetermined Overhead Rates
To this point, we have assumed that there is a single predetermined overhead rate called a
plantwide overhead rate.
To this point, we have assumed that there is a single predetermined overhead rate called a
plantwide overhead rate.
Large companies often use multiple predetermined overhead rates.
Large companies often use multiple predetermined overhead rates.
May be more complex but . . .May be more complex but . . .
May be more accurate because it reflects differences across
departments.
May be more accurate because it reflects differences across
departments.