Module+4000+III+A.++Applied+Overhead+Costing+Systems

=A. Applied Overhead Costing Systems JWF with student help =

** I/Costing Systems. It include two types: process costing and job order costing **


 * 1) ** Process Costing is used in many companies to produce many units of homogeneous or single products. To calculate the unit product cost, we use the formula: **


 * **Unit product cost **** = ** ||

** Total manufacturing cost **

** Total units produced **


 * 1) ** Job-Order Costing. ** It is used when different products or jobs are produced each period. In this method, direct labor and direct material are traced, overhead cost is used by predetermined rate , actual overhead cost are not traced.

** .Job cost sheet: is document which record the material, labor and manufacture overhead cost incur in a product **

Direct material cost: needed material to produce a product – type and quantities - are listed in a document is called a bill of materials. When it matched with the customer requirements- quantities, price, and shipment date, the production order is issued. Then the production department issue a form familiar with production order is call material requisition form which is a form included the specific type and quantities materials to produce a product and it will identifies the jobs for the cost of material.

** Direct labor: direct labor is traced by time ticket – is used to record the time worker spend on each job and task. The time spend on each job or task is calculated as direct labor **

Applying manufacture overhead: to assign manufacturing overhead to a particular job has some difficulties:

Manufacturing overhead is indirect cost, so it is very difficult to trace

Manufacturing overhead has so many different items to involve the particular jobs

The average cost per unit will vary from one period to the next period

So to solve these problems, manufacturing overhead is usually using by predetermined overhead rate begins to apply to product before the period. Manufacturing overhead is computed by following formula:

Estimated total manufacturing overhead cost

Predetermined overhead rate=

Estimate total amount of the allocation base

After computing predetermined overhead rate, it is used to apply overhead cost to jobs. The process is called overhead application which is computed following formula:

Overhead applied to A particular job = predetermined overhead rate X amount of the allocation

base Incurred by the job

__//**Example **//__ Example ABC company produces two kinds of soft drink: water and juice. The company used direct labor hours to assign overhead cost. The company estimated and actual data below Estimated overhead $400,000 Expected activites 80,000

Actual activities Water: 20,000 Soft drink 40,000 Units produce Water 40,000 Soft drink 80,000 1/ calculate the predetermined overhead rate and applied overhead 2/ calculate the overhead cost per unit

1/ Overhead rate=400,000/80,000=$5 per hour Applied overhead Water soft drink

5*20000 $100,000 5*40000 $ 200,000

2/ Overhead per unit(water)=100,000/40,000=$2.5 Overhead per unit(soft drink)=200,000/80,000=$2.5

__//**Notes: My MBA students will not be responsible for journal entries (JWF)!!! **//__

** II/Job Order Costing—The Flow of Costs **

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">The basic flow of costs in a job-order system begins by recording the costs of material, labor, and manufacturing overhead following schedule

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 0.25in;">A/ material cost

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Raw material is purchase and recorded. It is debited to raw material and credited to account payable

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Direct material is debited to working in process. And indirect material is credited to manufacturing overhead, then credit raw material

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 0.25in;">Model

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 3.25in; text-indent: 0.25in;">Debit Credit

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Raw material X

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;"> Account payable X

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;"> Work in process X

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 0.5in; text-indent: 0.5in;">Manufacturing overhead X

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 1.5in; text-indent: 0.5in;">Raw material X

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 0.5in;">B/Labor cost

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 0.25in;">Direct labor is debited in working in process; any indirect labor is debited on manufacturing overhead, and then credited to salaries and wages payable

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 0.25in;">Model

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 3.25in; text-indent: 0.25in;">Debit Credit

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 1in;">Workings in process X

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 0.5in; text-indent: 0.5in;"> Manufacturing overhead X

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 1in; text-indent: 0.5in;"> Salaries and wages payable X

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 0.25in;">C/ manufacturing overhead

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 0.25in; text-indent: 0.25in;">Manufacturing overhead is applied to Work in Process using the predetermined rate, and then it is credited to the Manufacturing Overhead control account.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Model

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;"> Debit Credit

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Work in process X

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;"> Manufacturing overhead X

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">D/ when product is finished. The cost of finished units is credited to Work in Process and debited to the Finished Goods

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;"> Debit Credit

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt; text-indent: 0.5in;">Finished goods X

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 0.5in; text-indent: 0.5in;">Work in process X

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">E/ when products are sold, the costs are credited to Finished Goods and debited to Cost of Goods Sold

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;"> Debit Credit

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 0.5in;">Cost of goods sold X

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;"> Finished goods X

** III/Under- and over applied Overhead **

** Cause **

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt; text-indent: 0.5in;">The predetermined overhead rate is determined before the period occurs and it is computed based on estimated data. Therefore, the overhead cost applied to work on process will be different for the actual overhead cost

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">**Disposition**

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">The under applied or over plied overhead is solved by two way

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Closed out to cost of goods sold

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Allocated among the work in process, finished goods, and cost of goods sold accounts

<span style="color: black; font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%;">VI/**. The Effect of under- and over applied Overhead on Net Operating Income** <span style="color: #4f81bd; font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%;">.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Manufacturing overhead is under applied, then lower overhead is applied to inventory than actual overhead cost, so the cost will be added to cost of goods sold which will be higher than actual. It will reduce net income

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt; text-indent: 0.5in;">Manufacturing overhead is over applied, then higher overhead is applied to inventory than actual overhead cost, so the cost will be subtract to cost of goods sold which will be lower than actual. It will increase net income

<span style="color: black; font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">V/Examples

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">ABC company is using the job order costing for the company. beginning of the year, the account inventory:

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Raw material : 10000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Work in process: 7000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Finished good: 20000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">The overhead cost is based on machine hour. The company estimate the machine will work 8000 hours and estimated total manufacturing overhead cost for the whole year is 40000. Below is the transactions

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">The company buy raw material in account 60000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">The raw material is used in production: direct material:20000, indirect material 10000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Salary pay for employees: direct labor: 40000, indirect labor:20000, administrative salaries: 10000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Because of demand the company estimate 8,500 machine hour during the year

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Prepare journal entry and close out manufacturing overhead cost?

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">A/Raw material 60,000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Accounts payable 60,000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">b/ Work in process 20,000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Manufacturing overhead 10,000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Raw material 30000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">c/ work in process 40,000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Manufacturing overhead 20,000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Administrative salaries 10,000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Salaries Payable 70,000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Predetermined estimated total manufacturing cost =Overhead rate*Estimated total amount of the allocation base =4000*<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">5

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;"> =8000

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Total manufacturing overhead applied=predetermined overhead rate* amounts of machine hours

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin: 0in 0in 0pt 4.5in; text-indent: 0.5in;">Allocated

=**=5***8500= <span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">42500

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Work in process 42500

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">Manufacturing overhead 42500

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt;">The entry close it out to cost of sold

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%; margin-bottom: 0pt; text-indent: 0.5in;">Manufacturing overhead 12500

<span style="font-family: 'Times New Roman','serif'; font-size: 16px; line-height: 115%;">Cost of goods sold