1. Accounting for Manufacturing Overhead
ACG 4361
Accounting for Manufacturing Overhead
Prepared by
Diane Tanner
University of North Florida
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2. Assigning Costs to Cost Objects
Three methods
Actual costing
Normal costing
Standard costing
Differ in how the 3 product costs are assigned to products or services
Actual Costing
Normal Costing
Standard Costing
Direct Materials
Actual
Budgeted*
Direct Labor
Manufacturing Overhead
Budgeted

3. How Costs Get Assigned to Products Under Actual and Normal Costing
Direct materials and direct labor
Traced to a product or service provided
Why traced? Because it is easy to determine which product/service to which the cost belongs
Manufacturing overhead (indirect costs)
Allocated to products and services
Why allocated? Because indirect costs cannot be easily identified with a specific product or service
By definition, direct costs are directly associated with a cost object
By definition, indirect costs are not directly associated with a cost object

4. Accounting for Manufacturing Overhead
When actual overhead costs are incurred
Debit to MOH expense
Credit payables, cash, accumulated depreciation, prepaids
Apply overhead to products
Debit WIP
Credit MOH expense
This chapter assumes a single rate though many companies use multiple cost pools with multiple rates– such as separate rates for variable and fixed MOH costs, or separate ‘plant-wide’ rates for individual factory areas.

5. Approaches to Allocating Overhead
Normal Costing
Overhead rate(s) determined at beginning of period
Budgeted MOH cost .
Budgeted activity
Applied during production
MOH applied
Budgeted rate × actual activity
Actual Costing
Overhead rate(s) determined at end of period
Actual MOH cost .
Actual activity
Applied at end of period
MOH applied
Actual rate × actual activity

6. Normal vs. Actual Costing Example
WatCo allocates overhead based on DL hours. The following pertains to 2018:
Estimated MOH costs = $210,000 Actual MOH costs = $210,600
Estimated DL hours = 5,000 Actual DL hours = 5,200
Normal Costing
Budgeted MOH cost
$210,000 = =
$42.00 per DL hour
Budgeted DL Hours
5,000
Applied = OH Rate × Actual DL hours
= $42.00 × 5,200 = $218,400
Actual Costing
Actual MOH cost
$210,600 = =
$40.50 per DL hour
Actual DL Hours
5,200
Applied = OH Rate × Actual DL hours
= $40.50 × 5,200 = $210,600

7. Criterion: Cause-and-Effect Relationship
Selecting an Activity
The denominator of the overhead rate is an activity
An activity is what causes the cost to be incurred
When a single or plant-wide cost pools for MOH is used, common activities include
Number of units to be produced
Number of direct labor hours to be used
Number of direct labor dollars to be incurred
Number of machine hours to be used
Based on management’s best guess of what causes costs to increase
Criterion: Cause-and-Effect Relationship

8. Over and Underapplied Overhead
Occurs due to estimates used in determining the manufacturing overhead rate that is used to apply MOH
Identified by looking at the balance in the MOH account
Debit balance
Underapplied
Not enough overhead was applied
Credit balance
Overapplied

9. Normal Costing: Applying Overhead Based on Units
McAlister Company provided the following amounts:
Estimated MOH costs = $50,000
Actual MOH costs = $49,500
Estimated units to be produced = 4,000
Actual units produced = 4,100
The company allocates overhead based on units produced.
Step 1: Determine the allocation rate (POHR) =
$50,000 ÷ 4,000 = $12.50/unit
Step 2: Apply overhead:
Applied = $12.50 x 4,100 = $51,250
MOH
49,500
51,250
1,750 overapplied

10. Normal Costing: Applying Overhead Based on DL Hours
McAlister Company provided the following amounts:
Estimated MOH costs = $50,000
Actual MOH costs = $49,500
Estimated direct labor hours = 12,500
Actual direct labor hours = 12,400
The company allocates overhead based on DL hours.
Step 1: Determine an allocation rate (POHR) =
$50,000 ÷ 12,500 = $4.00/DL hour
Step 2: Apply overhead:
Applied = $4.00 x 12,400 = $49,600
MOH
49,500
49,600
100 overapplied

11. Normal Costing: Applying Overhead Based on DL Cost
McAlister Company provided the following amounts:
Estimated MOH costs = $50,000
Actual MOH costs = $49,500
Estimated direct labor cost = $156,250
Actual direct labor cost = $153,600
The company allocates based on DL cost.
Step 1: Determine an allocation rate (POHR) =
$50,000 ÷ $156,250 = $0.32 per DL$
Step 2: Apply overhead:
Applied = $0.32 x $153,600 = $49,152
MOH
49,500
49,152
Underapplied 348

12. Normal Costing is Better than Actual Costing Because with Normal Costing…….
Overhead is applied during production
Which enables managers to know product and job costs as production occurs, i.e., on a timely basis
Waiting until the end of the period when actual costs are known makes information untimely
Useful for making decisions such as pricing, production changes, etc.

13. The End