Lecture 12

Lecture overview Application of Manufacturing Overhead The Need for a Predetermined Manufacturing Overhead Rate Over/underapplied FOH MCQs Test with Example

The Following data pertain to the Hudebia Restaurant Supply company for the year just ended. Budgeted Sales RevenueRs Actual Manufacturing Overhead Budgeted Machine Hours10000 Budgeted direct labor hours20000 Budgeted Direct labor rateRs. 14 Budgeted Manufacturing overheadRs Budgeted Machine hours11000 Actual Direct Labor hours18000 Actual Direct labor rateRs Compute the firm’s predetermined overhead rate for the year using each of the following common cost drivers: a) machine hours, b) direct labor hours, c) direct labor dollars. 2. Calculate the over applied or under applied overhead for the year using each of the cost drivers listed above

Let’s summarize the document flow we have been discussing in a job-order costing system. Job-Order Costing Document Flow Summary

Job Cost Sheets Materials Requisition Manufacturing Overhead Account Direct material s Indirect materials Materials used may be either direct or indirect.

Job-Order Costing Document Flow Summary Job Cost Sheets Employee Time Manufacturing Overhead Account Direct Labor Indirect Labor An employee’s time may be either direct or indirect.

Job-Order Costing Document Flow Summary Manufacturing Overhead Account Other Actual OH Charges Job Cost Sheets Applied Overhead Materials Requisition Indirect Material Employee Time Indirect Labor

Let’s examine the cost flows in a job-order costing system. We will use T-accounts and start with materials. Job-Order System Cost Flows

Raw Materials Material Purchases Mfg. Overhead Job-Order System Cost Flows Work in Process (Job Cost Sheet) Direct Materials Indirect Materials ActualApplied

Next add labor costs and applied manufacturing overhead to the job-order cost flows. Job-Order System Cost Flows

Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Overhead Applied Overhead Applied to Work in Process Direct Labor Indirect Labor Indirect Materials ActualApplied If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.

Finished Goods Cost of Goods Mfd. Cost of Goods Sold Job-Order System Cost Flows Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied

Overhead Application Example PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor hours. 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 SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor hours. 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.

SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor hours. 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

Work in Process Finished Goods Cost of Goods Sold $30,000 may be allocated to these accounts. Overapplied and Underapplied Manufacturing Overhead $30,000 may be closed directly to cost of goods sold. Cost of Goods Sold PearCo’s Method OR

Overapplied and Underapplied Manufacturing Overhead PearCo’s Mfg. Overhead Actual overhead costs $650,000 $30,000 overapplied PearCo’s Cost of Goods Sold Unadjusted Balance $30,000 Adjusted Balance Overhead Applied to jobs $680,000

MCQs Test What effect will the overapplied overhead have on PearCo’s cost of goods sold? a. Cost of goods sold will increase. b. Cost of goods sold will be unaffected. c. Cost of goods sold will decrease.

MCQs Test What effect will the overapplied overhead have on PearCo’s cost of goods sold? a. Cost of goods sold will increase. b. Cost of goods sold will be unaffected. c. Cost of goods sold will decrease.

MCQs Test What effect will the overapplied overhead have on PearCo’s net income? a. Net income will increase. b. Net income will be unaffected. c. Net income will decrease.

MCQs Test What effect will the overapplied overhead have on PearCo’s net income? a. Net income will increase. b. Net income will be unaffected. c. Net income will decrease.

Overapplied and Underapplied Manufacturing Overhead - Summary

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. MCQs Test

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. MCQs Test Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000 Underapplied Overhead $1,210,000 - $1,160,000 = $50,000

Lecture overview Problem Question Job-Order Costing Document Flow Summary Job-Order System Cost Flows Overhead Application Example Overapplied and Underapplied Manufacturing Overhead MCQs Test Questions

End of Lecture 12