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Chapter 3 - Overhead

Never give up Never surrender!. Chapter 3 - Overhead. You will get this. Sequence of Events in a Job-Order Costing System. Charge direct material and direct labor costs to each job as work is performed. Direct Materials. Job No. 1. Direct Labor. Job No. 2. Manufacturing Overhead.

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Chapter 3 - Overhead

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  1. Never give up Never surrender! Chapter 3 - Overhead You will get this

  2. Sequence of Events in a Job-Order Costing System Charge direct material and direct labor costs to each job as work is performed. Direct Materials Job No. 1 Direct Labor Job No. 2 Manufacturing Overhead Job No. 3

  3. Calculating and Applying Overhead • Calculate a Predetermined Overhead Rate based on Budget Data • Charge Actual Overhead to the Overhead account • Calculate the applied amount of Overhead $$$$, charge to WIP • Post applied Overhead to the Manufacturing Overhead account (above) and WIP • Balance in Overhead account is equal to Over/Under Applied overhead • Transfer ending balance in Manufacturing Overhead out, leaving a ZERO balance in Manufacturing Overhead

  4. 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. Manufacturing Overhead Manufacturing costs that cannot be traced directly to specific units produced. Examples:Indirect labor and indirect materials and indirect manufacturing costs (rent, utilities, etc.)

  5. Tiger Co.List of costs:

  6. Tiger Co.List of costs:

  7. Budgeted Cost Driver • For this problem, assume a cost driver of Direct Machine Hours: • Budgeted Machine Hours = 305,000 hours • What is your Predetermined Overhead Rate?

  8. Predetermined Overhead rate $1,220,000/305,000 hours = $4/per what? _________________

  9. 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?

  10. How do you apply overhead?

  11. Sequence of Events in a Job-Order Costing System Direct Materials Apply overhead to each job using a predeter-mined rate. Job No. 1 Direct Labor Job No. 2 Manufacturing Overhead Job No. 3

  12. Overhead applied = POHR × Actual activity Application of Manufacturing Overhead Based onestimates, and determined before the period begins. Actualamount of the allocation base such as units produced, direct labor hours, or machine hours incurred during the period.

  13. Tiger Co.List of costs:

  14. Tiger Co.List of costs:

  15. Job-Order System Cost Flows Work in Process(Job Cost Sheet) Mfg. Overhead Actual Applied • Direct Materials • Indirect Materials • OverheadApplied to Work inProcess • Direct Labor • IndirectLabor • Overhead Applied • Other Indirect Costs If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

  16. How much to Apply? Tiger, Inc. has a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. expected to work 305,000 hours during the period but actually worked 290,000 machine hours during the period. How much should Tiger apply?

  17. How much to Apply? Tiger, Inc. has a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. expected to work 305,000 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

  18. MOH – Cost flows Mfg. Overhead Actual Applied $ 1,160,000

  19. Is it Over or Under Applied? Tiger, Inc. had actual manufacturing overhead costs of: $1,213,000 Tiger, Inc. expected to work: 305,000 machine hours but actually worked: 290,000 machine hours

  20. MOH – Cost flows Mfg. Overhead Actual Applied $ 1,160,000

  21. Job-Order System Cost Flows Work in Process(Job Cost Sheet) Mfg. Overhead Actual Applied • 1,190,000 $1,213,000 • 1,190,000 If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

  22. MOH – Cost flows Mfg. Overhead Actual Applied Actual costs are Greater than Applied Rate: Is this Over or Under Applied???? $ 1,160,000

  23. MOH – Cost flows Mfg. Overhead Actual Applied $ 1,160,000 Overhead is UNDER applied

  24. Overapplied and Underapplied Manufacturing Overhead Tiger Co’s Costof Goods Sold Tiger Co’sMfg. Overhead Unadjusted Balance Actualoverheadcosts $1,213,000 OverheadAppliedto jobs $1,160,000 $53,000 $53,000 underapplied $53,000 AdjustedBalance

  25. 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)

  26. What affect does this adjusting entry have: • On COGS (increase or decrease) • On Net income (increase or decrease)

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