1. Prepared by Diane Tanner University of North Florida Chapter 4 Disposing of Manufacturing Overhead

2. Accounting for Overhead During the Period Actual overhead 2 Applied overhead Manufacturing Overhead Single MOH control account to post both actual and applied amounts 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. 3 Under and Overapplied Overhead  At end of accounting period  Actual overhead differs from applied overhead  Single account approach  A balance usually remains in the MOH expense account at the end of the period Not MOH enough was applied Actual > Applied Debit balance Not MOH enough 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

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  Disposition is based on materiality  If immaterial in amount  Close directly to cost of goods sold  Because this account will contain most of the MOH at year end  If material in amount  Allocate to work in process, finished goods, and cost of goods sold  Because these accounts contain all of the MOH incurred by a company

5. Methods of Disposing Over/Underapplied MOH 1)Dispose of/close to CGS 2)Proration approach  Prorates to the accounts that contain MOH  Based on the balances of these accounts, or  Based on the MOH amounts in the these accounts 3) Adjusted allocation-rate approach  Prorate to the accounts that contain MOH, and restate using actual rates 5 Assume balance is immaterial Assume balance is material

6. Disposition if Immaterial 6 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 Pearco: 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

7. Disposition if Material 7 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 under applied 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

8. 8 The End