Chapter 20 Part three. Assigning Manufacturing Costs to Work In Process Assigning Manufacturing...

Chapter 20

Part three

Assigning Manufacturing Costs to Work In Process Assigning Manufacturing Costs to Work In Process

Assigning Manufacturing Overhead

Relates to production operations as a whole

Cannot be assigned to specific jobs based on actual costs incurred

Must be assigned to work in process and to specific jobs on an estimated basis through the use of a

LO 4 Indicate how the predetermined overhead rate is determined and used.

Assigning Manufacturing Costs to Work In ProcessAssigning Manufacturing Costs to Work In Process

Based on the relationship between estimated annual overhead costs and expected annual operating activity

Expressed in terms of an activity base such as

Direct labor costs

Direct labor hours

Machine hours

Any other activity that is an equitable base for applying overhead costs to jobs


Predetermined Overhead Rate


Predetermined Overhead Rate

Established at the beginning of the year

May use a single, company-wide predetermined rate

May use a different rate for each department and each department may have a different activity base

Formula for computing the predetermined rate overhead rate is


Assigning Manufacturing Costs to Work In Process Assigning Manufacturing Costs to Work In Process


• Assigned to Work in Process during the period to get timely information about the cost of a completed job

• Current trend is to use machine hours as the activity base due to increased automation in manufacturing operations



Example:At Wallace Manufacturing, direct labor cost is the activity base.

Estimated annual costs:Overhead costs $280,000Direct labor costs $350,000

The predetermined overhead rate is $280,000 ÷ $350,000 = 80%.

Overhead applied is $22,400 ($28,000 January direct labor costs X 80%) and recorded as follows:





The sum of the manufacturing overhead columns of the job cost sheets should equal the manufacturing overhead debited (i.e., applied) to Work in Process Inventory.



At the End of Each Month:

The balance in the Work in Process Inventory should equal the sum of the costs shown on the job cost sheets of unfinished jobs.

The formula for computing the predetermined manufacturing overhead rate is estimated annual overhead costs divided by an expected annual operating activity, expressed as:

a. Direct labor cost.

b. Direct labor hours.

c. Machine hours.

d. Any of the above.

Review Question

Assigning Manufacturing Overhead to Work in Process

Assigning Manufacturing Overhead to Work in Process


Assigning Costs to Finished GoodsAssigning Costs to Finished Goods

LO 5 Prepare entries for jobs completed and sold.

When a job is completed, the costs are summarized and the job cost sheet is completed.

Assigning Costs to Finished GoodsAssigning Costs to Finished Goods

The entry for Wallace Manufacturing to transfer its total cost to Finished Goods Inventory is

Units remain in Finished Goods Inventory until sold


Assigning Costs to Cost of Goods SoldAssigning Costs to Cost of Goods Sold

Cost of goods sold is recognized when a sale occurs

Example:On January 31 Wallace Manufacturing sells Job No. 101, costing $39,000, for $50,000.


Summary of Job Order Cost FlowsSummary of Job Order Cost Flows


Reporting Job Cost DataReporting Job Cost DataThe cost of goods manufactured schedule now shows manufacturing overhead applied rather than actual overhead costsApplied overhead is added to direct materials and direct labor to determine total manufacturing costs


In M Company, Job No. 26 is completed at a cost of $4,500 and later sold for $7,000 cash. A correct entry is:

a. Debit Finished Goods Inventory $7,000 and credit Work in Process Inventory $7,000.

b. Debit Cost of Goods Sold $7,000 and credit Finished Goods Inventory $7,000.

c. Debit Finished Goods Inventory $4,500 and credit Work in Process Inventory $4,500.

d. Debit Accounts Receivable $7,000 and credit Sales $7,000.

Review Question

Entries to Report Job Cost Data Entries to Report Job Cost Data


Under- or Overapplied Manufacturing OverheadUnder- or Overapplied Manufacturing Overhead

A debit balance in manufacturing overhead means that overhead is underapplied

Overhead assigned to work in process is less than overhead incurred

A credit balance in manufacturing overhead means that overhead is overapplied

Overhead assigned to work in process is greater than overhead incurred

LO 6 Distinguish between under- and overapplied manufacturing overhead.


Any year end balance in manufacturing overhead is eliminated by adjusting cost of goods sold.

Underapplied overhead is debited to CGS

Overapplied overhead is credited to CGS

LO 6 Distinguish between under- and overapplied manufacturing overhead.

Example:

Wallace Manufacturing Company has a $2,500 credit balance in Manufacturing Overhead at December 31. The adjusting entry for the overapplied overhead is:

Manufacturing overhead is underapplied if:

a. Actual overhead is less than applied.

b. Actual overhead is greater than applied.

c. The predetermined rate equals the actual rate.

d. Actual overhead equals applied overhead.

Review Question


LO 6 Distinguish between under- and overapplied manufacturing overhead .

Base Calculation

DL Cost $600,000 ÷ $500,000 = 120%

DL Hours $600,000 ÷ 50,000 = $12/DL hour

Machine Hrs $600,000 ÷ 100,000 = $6/Mach hour

Marquis Company estimates that annual manufacturing overhead costs will be $600,000. Estimated annual operating activity bases are: direct labor cost $500,000; direct labor hours 50,000; and machine hours 100,000. Compute the predetermined overhead rate for each activity base.

Chapter Review – Brief Exercise 20-6Chapter Review – Brief Exercise 20-6

LO 2 Identify the 3 broad functions of management.

Chapter 20 Part three. Assigning Manufacturing Costs to Work In Process Assigning Manufacturing...

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