1. Prepared by Diane Tanner University of North Florida ACG 4361 Disposing of Manufacturing Overhead 1-5

2. Accounting for Overhead During the Period Actual overhead 2 Applied overhead Manufacturing Overhead Use a single MOH control account to post both actual and applied amounts Use separate accounts for the actual MOH and the MOH applied amounts Actual overhead Manufacturing Overhead Control Applied overhead Manufacturing Overhead Applied Two accounting methods Preferable

3. Under and Overapplied Overhead  At end of accounting period  Actual overhead nearly always differs from applied overhead when normal costing is used  Difference appears as a balance in the MOH expense account at the end of the period 3 Not enough MOH was applied Actual > Applied Debit balance Not enough MOH was applied Actual > Applied Debit balance Underapplied Overapplied Too much MOH was applied Actual < Applied Credit balance Too much MOH was applied Actual < Applied Credit balance **Assume a single account is used for MOH

4. Disposing of Over/Underapplied  Any balance at yearend in the MOH account must be ‘closed’ or ‘adjusted’ to a zero balance  Why?  MOH is a temporary account and is not reported on the financial statements  MOH is a product cost and must be reported as such  Disposition method is based on  Materiality  Consistency  Industry practices

5. Methods of Disposing of MOH  Write off approach  Use when immaterial in amount  Close directly to cost of goods sold  Why CGS? Because this account will contain most of the MOH at year end  Proration approach  Use if material in amount  Allocate to work in process, finished goods, and cost of goods sold  Why these accounts? Because these accounts contain all of the MOH incurred by a company  Adjusted allocation approach  Recalculate allocations using actual amounts (similar to actual costing)

6. Proration Approach  Allocate to work in process, finished goods, and cost of goods sold  Based on relative account balances, or  Based on relative amount of MOH each of these accounts contains Most common Why do we never allocate under or overapplied MOH to the Raw Materials account?

7. Write Off Approach 7 Mfg. Overhead Actual overhead $49,500 Cost of Goods Sold 400,000 398,250 Overhead Applied $51,250 1,750 Some balances of accounts prior to adjustments appear below for Pharmco: Cost of goods sold $400,000 Actual MOH costs 49,500 Estimated MOH costs 50,000 Applied MOH costs 51,250 1,750 overapplied 1,750 0 Adjustment

8. Proration Approach 8 Mfg. Overhead Actual $5,125 Applied $4,950 Balances prior to adjustments: Cost of goods sold $40,000 Raw materials 2,500 Work in process 4,500 Finished goods 3,000 Applied MOH costs 4,950 Actual MOH costs 5,125 Balances prior to adjustments: Cost of goods sold $40,000 Raw materials 2,500 Work in process 4,500 Finished goods 3,000 Applied MOH costs 4,950 Actual MOH costs 5,125 175 underapplied 175 0 Allocation: CGS $40,000  $40,000/$47,500 * $175 = $147 WIP 4,500  $4,500/$47,500 * $175 = 17 FG 3,000  $3,000/$47,500 * $175 = 11 Total $47,500 $175 Allocation: CGS $40,000  $40,000/$47,500 * $175 = $147 WIP 4,500  $4,500/$47,500 * $175 = 17 FG 3,000  $3,000/$47,500 * $175 = 11 Total $47,500 $175 CGS 40,000 147 40,147 WIP 4,500 17 4,517 FG 3,000 11 3,017 Adjustment

9. 9 The End